ESOP benefits include more corporate tax deductions and employee retirement benefits, and businesses that are not destroyed by outside buyers.
When T&T Tinting founder and owner Tommy Silva turned 55 in 2016, he began thinking about retirement and the future of his company.
“I don’t have children, nephews, nieces, or anyone in the business that I can pass it on to. I’ve been in the business for over 35 years already.” ?” ”
Silva consulted Marko Mijuskovic, financial and succession advisor at WestPac Wealth Partners, to discuss exit strategies.
“The first thing we did was look at third-party sales,” he says. “There have been several companies on the mainland who wanted to buy T&T because of who we are. We carry more cars than any tint shop in Nevada, Arizona, Florida, or anywhere else.”
didn’t like their plan
Silva spoke with several entities, but after hearing their plans, was reluctant to pitch them. This included replacing the brands with which our customers were accustomed and having them have a lifetime warranty that would be void.
“You know, the deal was good, the money was good, but I couldn’t sign it. It didn’t work out well with me.”
Mijukovic then proposed an employee stock ownership plan, and Silva said yes. T&T said he began his ESOP process in 2017, with plans formalized in October 2021.
To help with the transition, Silva hired ESOP expert Terry Lee. He also helped transition his Roy’s restaurant chain and Teddy’s Bigger Burgers to employee ownership.
passionate about it
Brian Bowers is President of the Hawaii Chapter of the ESOP Association. His Bowers + Kubota Consulting Inc., a construction management, architecture and engineering design firm he co-founded, became his 100% ESOP in 2012.
“The more I learned about ESOP, the more passionate I became about it. has a great retirement plan and your company will be a tax-exempt entity, which hardly sounds right, but in reality it’s true,” says Bowers.
“I think it’s been a resounding success. The company has grown well over 10% annually since 2012.”
One reason Bowers supports the ESOP is the ongoing small business crisis. Baby boomers own about half of all privately held companies in Hawaii, and many owners have to come up with exit strategies so they can retire. This surge in retirees is part of a series of trends related to the aging of baby boomers called the “silver tsunami.”
According to the National ESOP Association, “Employee ownership, including ESOPs and labor cooperatives, has responded to the silver tsunami by providing viable succession plans that help preserve employment and preserve the local dollar. increase.”
An ESOP is a type of employee retirement plan in which all or part of a company’s shares are sold to a trust. Once an employee gets the rights, he usually gets ownership after 5-6 years of service. That stake increases the longer they stay with the company. When an employee retires, leaves the company, or dies, the ESOP will repurchase the employee’s stock at the then-current share price.
Transitioning to an ESOP is complex, and anyone considering it should hire an expert.
Employers can leave the company as soon as the ESOP is in place or they feel comfortable. “T&T Tinting is my baby and I will continue to be involved as a consultant to the new CEO (Kyle Horimoto) and management to help with big decisions such as future expansion,” says Silva.
change in attitude
Owning a stake in a business can change the way employees think, says Silva.
“The greatest benefit is that all employees will see the business as their own, not as their boss’s.” I’m going to make my bathroom look nice.I’ll make sure to make sure when I walk by everyone’s smiles.Everyone is involved in all aspects that were previously only done by the owner.”
Employee owners are motivated to make their businesses more profitable because increased earnings mean higher stock prices, which benefits them when they retire.
Alyssa Lau, employee and owner of Austin Tsutsumi & Associates, agrees. “We all have a role to play in her ESOP success, and when we all contribute to the company, we all benefit,” she said in her 2022 1 stated in the monthly newsletter.
Another employee-owner of the same company, Tyler Makabe, also gave a positive opinion. “The ESOP is like a reward for helping build the company. ATA’s success is truly in the hands of all of us, and hard work is not betrayed by anyone.”
preferential tax treatment
An ESOP is attractive not only because it protects a company’s existing workforce, culture and reputation, but also because it provides tax benefits. A 100% ESOP S Corporation is exempt from paying federal and state income taxes unless the state specifically imposes income taxes on the S Corporation. Hawaii is not.
“It’s one of the biggest things going forward for them[the employees]. Not for me as the existing owner, but for them as the new owner,” says Silva. “They are Chapter S corporations.
Another advantage is that eligible companies can obtain financing from existing profit-sharing plans. This can save you a lot of money on borrowing costs.
According to Silva, T&T employee owners plan to use their savings to grow and improve their business.
“We are in talks to expand our automotive paint protection division to do full color change wraps on cars, vinyl and everything else.
10.57 million employee owners
There are 6,549 ESOPs in the United States, employing 10.57 million people, according to the ESOP Association, which has chapters around the country. The Hawaii Chapter currently has 40 member companies.
A 2021 study conducted by the National Center for Employee Ownership on behalf of Employee-Owned S Corporations of America found that an ESOP has many economic benefits. The ESOP said it provided greater financial security to its employees heading into and during the pandemic compared to similar legacy companies. His job retention rate was also better for his ESOP.
“Adjusting for firm size, industry and region, the ESOP advantage amounts to an estimated $67,000 more assets in average account balance,” the study states.
Hawaii has 65 ESOP businesses. In addition to those already mentioned, HPM Building Supply, Electricians Inc., Ronald NS Ho & Associates, Aqua Engineers, Unitek, CC Engineering & Construction Inc., American Floor & Home, and Chart Rehabilitation.
“I want to educate people about ESOPs because I think companies should know that they are a viable ownership transition strategy. You have to consider that,” says Bowers.