Iowa's ESOP success is getting Nebraska's attention

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Posted: Thursday, November 21, 2013 12:00 am

When it comes to encouraging the formation of employee-owned companies, Iowa leads the nation, with a package of tax and other incentives that has begun to attract attention from Nebraska lawmakers.

In Iowa, businesses owners who sell their companies to their workers through an employee stock ownership plan, or ESOP, get a 50 percent tax deduction on capital gains earned from the transaction. The state also offers cash grants to companies facing accounting, tax and legal bills during the exploratory phase of starting an ESOP, upfront costs that can sometimes daunt and deter.

The incentives have come to pass during the past two Iowa legislative sessions, and Gov. Terry Branstad is a big supporter. The rationale: that it is better for a sale-minded business owner to sell to employees and keep the ownership in the state, as opposed to favoring an out-of-state buyer who might move the operation, cut jobs or deploy the profits elsewhere.

“ESOPs can help keep companies — and the jobs they provide — in local communities,” Branstad has said. “ESOPs are more than just an employee benefit plan, they are a transition plan for business owners and a growth strategy for communities.”

Now, the attention Iowa is showering on ESOPs is garnering some interest in Nebraska.

“Anything that keeps jobs and adds jobs to Nebraska, I am in favor of it,” said State Sen. Burke Harr of Omaha, who sponsored a bill that became law in the last legislative session that extends tax benefits to existing Nebraska ESOP participants. The law exempts ESOP dividends and capital gains from taxable income.

Nebraska Gov. Dave Heineman is well aware of employee-owned companies and their impact, spokeswoman Jen Rae Wang said, and happily signed the tax legislation sponsored by Harr and others. She said the governor keeps close tabs on the economic development efforts of neighboring states and “continues to look for ways to spur investment, employment and capital spending.”

Most ESOPs, according to the National Center for Employee Ownership, are used to provide a market for the shares of a departing owner of a profitable, privately held company. The key characteristic is the establishment of a financial trust, either with a direct cash contribution by the company or via a bank loan, that acquires the owner's shares on behalf of the employees.

Shares in the trust are handled in myriad ways. In some cases, employees are offered the opportunity to purchase the shares. In others, they are simply a retirement perk, awarded every year. In some cases, ESOP shares are eligible for purchase as part of a 401(k) plan, others not.

“There is a saying in the industry: When you've seen one ESOP, you've seen one ESOP,” said Jerry Ripperger, vice president of consulting for the Des Moines-based Principal Financial Group, which says it is the largest administrator of ESOPs.

One thing is certain. When an employee leaves or retires, the company has to buy the stock, based on a per-share valuation by an outside consultant; only then are taxes due on ESOP assets.

Iowa and Nebraska are home to many such companies; the Iowa-Nebraska Employee Ownership Association says it has 200 member companies employing about 35,000 people. Prominent ESOP firms in the area include Omaha-based engineering, architectural and consulting firm HDR Inc. and West Des Moines-based grocer Hy-Vee. There are about 10,000 ESOPs in the country, with about 10 million employees, according to the Washington-based ESOP Association.

“It is by far the best route for founding stockholders to realize the value they have built up over time,” said Andy Fletcher, chief executive at Bailey Lauerman, an Omaha advertising agency and an ESOP company. “It is a good way to transition ownership from one generation to the next.”

The firm, which employs about 65 people, established its trust in 2003 as founding principals contemplated retirement. Charles Smith, an executive at First National Bank of Omaha who works with the bank's ESOP clients, said at least one or two companies a year in the metro area convert to the Bailey Lauerman ownership model. He said people who work together and own the company develop a shared discipline.

“Every cent you save goes in your pocket,” Smith said.

At HDR Inc., the ESOP covers the 857 workers in Omaha and 8,521 worldwide, said CEO George Little. He said the ESOP was formed in 1996 when the employees, with the aid of loans and large contributions from key executives, bought the company from its French parent firm.

Now, Little said, 90 percent of the employees own shares and are eligible to buy them via their 401(k) accounts with pre-tax contributions. He said having so many co-owners as co-workers keeps the top executives accountable.

“We get a lot of questions about what we are doing and why we are doing it,” Little said.

When it comes to incentives to encourage ESOP formation, Iowa is the leader by a large margin. Indiana offers subsidies to banks that lend money for ESOP formation, while a few other states have information clearinghouses for companies exploring the idea.

“But no one else has anything near what Iowa has,” said Ripperger, of Principal Financial Group.

State Sen. Brad Ashford of Omaha, another sponsor of the Nebraska law that extended tax benefits for ESOP participants, said the Iowa incentives are jam-packed with merit and have his full attention. Selling to an ESOP, he said, is the perfect vehicle by which the owners of the state's private businesses can be compensated for what often amounts to a lifetime of work, while preserving a company's culture and keeping it based in the Cornhusker State.

“I support ideas that promote the efficient and expeditious transfer of assets,” Ashford said. “That is what creates economic vitality.”

Jim Winterscheid, vice president of finance and human resources at Omaha's Travel and Transport, an ESOP travel agency with 1,000 employees nationwide, said he has no doubt the company would have been bought by a large national rival years ago if not for the ESOP. The employee trust has acquired all other outstanding shares over the years, and now owns 100 percent of the company started by former Omaha World-Herald reporter Lawrence Youngman in 1946.

“If not for the ESOP, we would have been gobbled up long ago,” Winterscheid said. “As it is, we have people who will retire with a six-figure amount in their account, and we are hoping one day we will have people with seven figures.”

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