Ask an ESOP Expert

CHRIS BUCH is a Shareholder at Vedder Price and a member of the firm’s Labor & Employment practice area in Chicago. He focuses on a variety of ESOP, executive compensation and employee benefits matters. Chris represents plan sponsors, ESOP trustees, selling shareholders, ESOP committees, lending institutions, private equity firms and other fiduciaries in connection with all types of ESOP matters. He regularly speaks on ESOP and executive compensation issues and has authored chapters and articles pertaining to various ESOP-related topics. Expanding ESOPs spoke with Chris about his nearly two decades working on ESOPs.

How did you start working on ESOPs?

Like everybody else, I always planned to be an ESOP lawyer, right? I came out of law school in the booming economy of 2009. At that time there really wasn't a ton of opportunities out there for new lawyers other than in bankruptcy or tax. For my first job, I thought I was interviewing for a tax position and it turned out I was actually interviewing for an ERISA position at Ernst & Young in their benefits consulting practice. I was there for about six months when I was staffed on a deal doing corporate transaction support, where a corporate lawyer from another firm said that their benefits group was looking to add a junior lawyer. While everybody and their brother were applying for jobs at the time, they said to me, you actually have benefits experience.

The first day I was there, I linked up with Greg Brown. Greg became my mentor, a partner and a friend for 15 plus years. But back then he introduced me to this thing called an ESOP. I did one discreet matter with him and it turned into another and another and another.? I started on plan design and discreet ERISA issues and eventually started to do and run ESOP transactions. My career has continued to go from there and really, it was because of that time with Greg that helped me get to where I am in the ESOP space.

What are the different ways companies come to the decision to form an ESOP??

There's a couple of different ways. I think I've seen more transactions titled “Project Legacy” in my career as an ESOP practitioner than any other M&A lawyer will ever see in their career. A lot of times you've got a selling shareholder who is ready to move on, but doesn't necessarily want to see their business stripped out for parts where a piece is being sold off here, a piece is being sold off there. They want to keep the business intact. They have a true general concern for their employees as well. And many times they want to find a way to continue their business in a similar form, while, of course, monetizing the business and retiring themselves. So, when a selling shareholder hears of ESOPs, it resonates with them, and they go down that path.

Other shareholders come to an ESOP by accident, where their accountant might have mentioned something in passing or their lawyers mentioned something in passing about it and they come to a transaction that way.? Others have tried the private equity path and/or strategic buyer path and failed or just decided after going through the process that they don't want to do it anymore.

So, much like my career started in ESOPs almost by accident or by chance, I think a lot of selling shareholders come to the ESOP conclusion by accident, by chance, because they just don't know of ESOPs or what they really are.? It’s one of the reasons I wanted to work more with this coalition--just providing that knowledge, providing that other alternative out there to business owners. Because if you don't know what's out there, you're not going to explore something. And bringing knowledge and information and dispelling myths about employee ownership is something that is important. I believe it will help owners come to the employee ownership decision in some way other than by accident, which is I think how many people are coming to it now.

What helps and hinders or helps or hinders a proposed transaction?

It's like anything else: preparation. A lot of the companies that might have thought about going the private equity path, have already put due diligence information together. For a company that's thinking about an ESOP for the first time, if they haven't gone through that process of a sale or thought about a process of a sale, it's about getting your ducks in a row. It's making sure that everything is papered as it should be, the financial information is together as it should be, and projections are prepared as they should be to move forward.

Beyond that, it's just understanding, the I's are dotted and the T's are crossed in advance of bringing in an investment banker to take the company to market as an ESOP. Talk to your trusted advisors or those that are in the ESOP space to help you with this process- there are a lot of people in the ESOP space that are willing to help.

Because if you're putting all of that information together while you're trying to do a transaction, it's like building an airplane midair. It just doesn't work. Or if it does work, it takes time or is sloppy. So, the preparation is the biggest factor that helps ESOP companies be successful on the front end.

What are some of the ESOP success stories you've been involved with?

A couple that come to mind are some of those success stories where you've got a company in a rural area and seeing that business transfer from a single shareholder or a couple of shareholders to the employees. In that situation you can see not only the human impact, where you've now got a town rallying around an employee-owned company, but seeing the economic impact of it as well. I mean, in that situation you may have dedicated employees working a shift on a factory line barely scrimping to cover their bills. Now, as an ESOP participant, those same individuals may actually have a great nest egg when they reach retirement.

I often recall one of my first introductions to ESOPs, before I even knew what an ESOP was. It’s actually about one of my dad's best friends from growing up. He didn't go to college. He went straight from high school to work at a company that was an ESOP. And he really worked hard his whole career. When it was time for him to retire, he retired with a seven-figure account balance. I remember seeing the pride on his face as he talked to my dad about it. He even beamed that it was “not bad for a kid who didn't go to college.” ?All of this was because of his hard work and his shared ownership in his employer through his ESOP.

What are some of the common traits of successful ESOPs?

I don't know if there's one trait that stands out, but they tend to mirror the traits of successful people in general in that there's a drive to succeed. There's a true ownership culture. There's the thought of the person, whether it's the secretary or the line worker or the guy who’s forging steel in the back to say, “I'm proud of this. I put my blood, sweat, and tears into this. I built it. I own this.” It’s showing the pride in their work and having that ownership mentality that really helps ESOP companies be successful.

I'd also be remiss if I didn't say some of that comes from the top, too. Having a good, strong management team in place—it doesn't necessarily have to even be the original owners. It can be the second generation, the third generation, or even an outsider who comes in, understands what the company's got to do, how to build it, how to look at things, whether it's eliminating waste or reducing inefficiencies. Having a top-down leadership is helpful in seeing ESOP companies succeed, just as much as a bottom-up approach is.

What are the factors on why we don't see more ESOPs?

There's complexities. It's not a simple, straightforward transaction where you just say, “I'm selling stock to this strategic buyer. They're giving me money and we're walking away.” An ESOP is an ERISA governed and tax-qualified retirement plan, so there are rules that need to be followed.

Sometimes people will look at those complexities and say, “well, I don't want to take the time to learn about it, or I don't want to take the time to have to go through all of these hoops, all these processes and procedures to do a transaction if I can just do it some other way.” Others might not understand the tax benefits that go along to some of the various selling shareholders in connection with the transaction. Some of it is ignorance, some of it is lack of education. Some of it is just complexities that we need to break through in some way, shape or form to make it a lot easier to form these ownership vehicles so that more selling shareholders will look at an ESOP as a viable opportunity and a viable exit strategy.

What are you most excited about expanding ESOPs? Why are you dedicating your time to it?

We have a retirement crisis here in the U.S. ESOPs can be part of the solution. I think it's a policy question of whether we as a country make the decision to invest in people, to invest in allowing companies to help their employees save for their retirements via ESOPs. There are opportunities for expanding tax credits to incentivize the creation of more ESOPs and really help solve a retirement crisis problem here in the country.

As I mentioned before, there’s a lack of awareness out there for what has turned out to be a great economic benefit for selling shareholders, their companies and their employees. The people involved in Expanding ESOPs are second to none. The minds in the room are those who truly want to see employee ownership expand and expand in a thoughtful way. And in a sustainable way.

Seeing the benefit of ESOPs, balloon from 6,500 to 7,500, 10,000 or more companies is something that I think would provide a great economic benefit not only to selling shareholders, their companies, and employees but to the whole country. This is something that's been underutilized and understudied. And I think now's the time to start looking at employee ownership in greater detail on a broader scale.