Ask an ESOP Expert: 7 Questions About Employee Ownership
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Ask an ESOP Expert
Neil Brozen has been involved in the ESOP community for nearly 20 years. He co-founded Ventura Trust to provide high quality ESOP trustee services after working for two institutional ESOP trustees for 11 years. Neil and Ventura have completed more than 250 ESOP transactions since 2016, and Ventura currently serves as the ongoing trustee for more than 160 ESOPs in 30 states. Expanding ESOPs sat down with Neil to learn from his long and continuing career.
What are the nuts and bolts of what a trustee does?
Nearly every ESOP formation transaction has an independent trustee who acts as the buyer of the company on behalf of the ESOP and its participants. The trustee negotiates the terms of the deal and must satisfy three key elements. First, the trustee cannot pay more than fair market value as determined by its valuation firm. Second, the terms of seller financing must be commercially reasonable. Third, the terms of the transaction, taken as a whole, need to be fair to the ESOP from a financial point of view. The trustee valuation company issues a fairness opinion that these terms have been met.
The board of directors of ESOPs can decide to sell the company to third parties. The trustee ensures that the proceeds received at closing are no less than the fair market value as determined by its valuation firm.
What else does the trustee do?
Every ESOP is a trust. A trust is an entity that holds assets for the benefit of another. There are family trusts for minor children, real estate trusts to manage property and many other trusts. Every trust is legally required to have a trustee.
Every ESOP is a trust that owns company stock for the benefit of the employee owners. The ESOP trustee can be an employee or group of employees (internal trustee), or it can be an independent person or company (external trustee). One of the most important duties of the trustee is to determine the updated share price of the company stock as of the last day of the plan year. The trustee also manages the ESOP bank account, makes loan payments and participant distributions.
The participants in an ESOP, as represented by the trustee, have the same rights as any other corporate shareholders for voting the shares. The annual vote to elect the board of directors is the primary voting activity. The trustee also monitors the board to make sure their policies and actions are consistent with the requirements of the ESOP as well as they are active contributors.
What is most rewarding about your role as trustee?
ESOPs can create significant retirement benefits for workers, and seeing significant account balances is very rewarding especially since the employee owners don’t contribute cash to the ESOP. The value of their retirements account increases with the growth of a company and the number of shares they have earned. At Ventura, we oversee ESOPs with thousands of employee owners.
I personally enjoy helping employee owners understand what the ESOP can mean for them. We usually participate in the roll-out meeting soon after the transaction has closed to begin this education. We teach participants about vesting, allocation of shares, distributions and the like. We also help them understand what it means to be employee owners and have a direct impact in increasing the value of the company and their retirement account.
What makes an ESOP successful?
A company that benefits most from having an ESOP is one that has a strong and supportive culture before it becomes owned by the ESOP. Their ownership stake offers an increased measure of pride in their work, pride in their company, and satisfaction from their role in its success. Creating this culture takes creativity and planning.
What else contributes to success?
Companies also must plan years ahead to pay participants their distributions when their retire or otherwise leave the company. This duty to buy back company shares is called their repurchase liability. ESOP professionals can assist the company in estimating their repurchase liability and failure to carefully plan may require a company to be sold to pay off the required distributions. The sale of a company may be a great idea, but no company wants to be forced into this position because of a lack of planning.
Do you have a favorite ESOP?
I enjoy working with all our clients and some provide particularly interesting stories. Taylor Guitar has manufactured guitars in southern California for over 50 years. They became a 100% ESOP- owned company in December of 2020. The sellers had a serious commitment to the employees for decades, and the sale to the ESOP was a highpoint of this generous culture. The owners accepted a bargain price, and immediately established an active ESOP committee to educate participants.
Taylor celebrates annual share price releases. They provide all ESOP information to participants in English and Spanish as they included all their Mexican employees in the ESOP program. We have an excellent partnership with the Taylor Board of Directors and are proud of the participant account balances.
Why did you get involved in Expanding ESOPs?
I love ESOPs. Too many people have too little saved for retirement. Social security is not enough. In an era when worker pensions are rare, ESOPs provide real retirement income. Plus, the workers earn this with their sweat equity, not with their cash. In ESOPs, ability to contribute is not an issue since they don’t contribute any cash. Their work and their support of the company is their contribution.