ESOP: FromMaverick ToMainstream

ALTHOUGH EMPLOYEE STOCK ownershipplans (ESOPs) have been around for threedecades, as early as 10 years ago they were con-sidered more maverick than mainstream.Today, however, a number of bankers, account-ants, attorneys and consultants are openingtheir eyes to the advantages of ESOPs.

In the December 2005 issue of Inc. maga-zine, “The Ultimate Employee Buy-in” articleadvocates ESOPs as viable—and profitable—alternatives for owners who wish to sell theirbusinesses but want them to remain largelyintact. Written by John Case, co-author ofEquity: Why Employee Ownership Is Good forBusiness, the article includes case histories andinterviews with employees of businesses thathave transitioned to ESOPs.

When comparing companies that haveESOP structures to those that don’t,researchers Joseph Blasi and Douglas Kruse ofRutgers University concluded ESOPs are >>

>>Trends, tips and tidbits for fast-forward thinking industry pros

F E B R U A R Y 2 0 0 6 PPB 23

For comprehensiveinformation on

employee stock own-ership plans, visit

The ESOP Associationat www.esop

association.org.

fastfact

nEXT>>

fastforwardBY BRITTANY GLENN

linked with greater stability of employment,higher productivity, faster job growth andhigher survival rates among companies.

Currently, about 10,000 U.S. companieshave ESOPs—and there is one among thiselite group we can call our own. LarryZavadil, founder and president of Glenwood,Minnesota-based distributor AmericanSolutions for Business (UPIC: AMER0005),transitioned the company into an ESOP in2000 and has seen steady and impressivegrowth in the company’s share value eversince: 53-percent share growth in fiscal yearone, 48.7-percent growth in fiscal year two,91-percent growth in fiscal year three and19.35-percent growth in fiscal year four.(The most recent growth rate was not nearlyas significant as the previous year due toASB’s investment in a new enterpriseresource planning (ERP) technology systemin 2005.)

Under the plan, shares in the corporation

are purchased annually with corporate profitsand distributed to qualifying sales associatesand employees. American Solutions forBusiness has 200 employees at its headquar-ters in Glenwood, plus 530 sales associatesacross the nation and 150 “indirect” employ-ees (support staff hired by salespeople whoare added to ASB’s payroll system). All ofthese employees receive company sharesunder the ESOP.

ASB Chief Operating Officer CraigMcLain says Zavadil decided to go the ESOProute as a result of the death of a close per-sonal friend and coworker, Dusty Dupree.“Dusty had grown up in the industry withLarry, and he was one of the first salespeopleto join ASB,” says McLain. “Dusty was diag-nosed with cancer and passed away in just afew months. That was a real eye opener forLarry—he realized there was no successionplan for his company. And Larry is not a bigadvocate of family-run businesses. While his

company hasbeen his dreamand his passion,he feels his kidsneed to get theirown dreams andhave their ownpassions.

“So he startedto look at theoptions,” contin-ues McLain. “Hedecided takingthe companypublic was not agood idea sincethe investmentmarket reallydoesn’t under-stand this indus-try. Wall Streettends to evaluatethings on 90-daywindows, and inthis industry youneed to haveenough time >>

24 PPB F E B R U A R Y 2 0 0 6

>>fastforward nEXT

In 2005, an estimat-ed 82.5 millionworkers telecommut-ed more than eighthours a month. By2008, the numberof telecommutingemployees is pro-jected to be 100million.

Source: GartnerDataquest

fastfact

At American Solutions for Business, teamwork comes naturally for sales associates. In its fifthyear as an employee-owned company, ASB reported to employee owners a 19.35-percent growthrate in the company’s share value for 2005. Surely this has something to do with the notableamount of cooperation and camaraderie among ASB employees.

26 PPB F E B R U A R Y 2 0 0 6

>>fastforward nEXT

to implement decisions and steer the shipwithout the pressure of Wall Street breathingdown your neck.

“He explored the idea of selling the com-pany but just about every conversation he hadbegan with, ‘well we’ll move the company to(fill in the blank)’ and Larry was born andraised in Glenwood. So the ESOP looked likethe most logical transition plan since it gavehim a way to reward the people who built thecompany and build a nice exit strategy at thesame time.”

That’s not all—having an ESOP nearlyguarantees employee loyalty and dedicationto productivity, saving money and increasingthe bottom line. After all, the bottom lineaffects their own wallets. According to ASB,the move to an ESOP has empowered

employee-owners to make decisions that ben-efit the company.

McLain provides an example. “A couple ofyears ago, one of the major issues the salesforce faced was the increasing number ofclient bankruptcies and preference claims(monies paid to the salesperson within a 90-day period preceding the client’s bankruptcyfiling that would also have to be surrenderedregardless of the client’s receipt of the mer-chandise). This was a very problematic issuefor the sales force. We looked at purchasinginsurance, but this was cost prohibitive.

“We have a sales steering committee,which is comprised of two designees per geo-graphic region and ensures the companyunderstands the wants, needs and concerns ofthe sales force,” explains McLain. “The com-mittee brainstormed and developed a greatidea—our very own bankruptcy protectionprogram. Salespeople who elect to participatein the program pay a very small portion oftheir profits into a pool. If or when a cus-tomer files bankruptcy, those who participate

in the program have bankruptcy protectionup to $100,000 in losses per incident, perclaim.”

At ASB, the turnover rate has been lessthan five percent—including corporate head-quarters, sales and indirect sales staff—for thelast three years. And according to ASB VicePresident of Sales and Marketing Rose Virnig,who was the seventh sales associate hired bythe company, there’s no reason an employeewould want to leave.

“The ESOP is a great recruiting tool forus,” says Mike Stai, ASB vice president ofinternal audit, ESOP management. “It givesus an advantage that other distributors can’toffer in our industry.”

“Because we’re based in Glenwood,Minnesota, where our cost of doing business

is not as high as, for instance, New York Cityor Los Angeles, we offer very generous splitsto our salespeople—overall, a 70/30 split (70percent of a sale’s profit is allotted to thesalesperson with 30 percent to the company),”continues Stai. “And we don’t ask our sales-people to sign a non-compete. We just say, ‘Ifyou find Utopia, let us know.’”

“Compared to companies with quota sys-tems in place, we have a very simple system—but it’s worked very well through theyears,” concludes McLain.

In November 2005, ASB was ranked thirdamong the top 100 distributors by BusinessForms Systems and Labels magazine with morethan $231 million in overall sales. And,according to Counselor’s 2005 State of theIndustry, ASB was ranked 22 among the top40 distributors, with $55.5 million in promo-tional products sales.

If Utopia is defined as an environmentthat creates happy, productive employees andsubstantial corporate profits at the same time,ASB may have found the path to paradise. >>

At ASB, the turnover rate has been less than five percent—including

corporate headquarters, sales and indirect sales staff—for the last three years.