Schunk: ESOPs invaluable tool for a company's future

To quote Winston Churchill, "I have nothing to offer but blood, toil, tears and sweat."

Investing that sort of equity into a business can drive an owner in any number of directions—mostly toward retirement, often via a buyout by a private equity firm or a merger or acquisition with a larger fish in the sea.

In these scenarios, the almighty dollar tends to reign supreme.

But how much is enough?

That is a question that Ken Baker, CEO of hose and tubing manufacturer NewAge Industries Inc., asked during my interview with him on the virtues (and vices) of Employee Stock Ownership Programs.

The rhetorical inquiry was not referring to the market value of a company. Rather, Baker was weighing the sale of a company that can come at the expense of its legacy—its history and importance in a community, its values and the continued employment of its workers.

The viability of the company itself can be tenuous at best after it is purchased.

As Baker and other majority shareholders of companies have come to realize, an ESOP is a structure that can leave a company on more stable footing; bring a community more confidence that a business is staying put; and put in place a legacy of employee ownership.

At their core, ESOPs are retirement plans, essentially placing deferred corporate income tax money into a trust for the benefit of employees. But as another option to define the future of a company, they can be an invaluable tool.

There are hurdles, however.

Even a simple ESOP has a starting cost of about $40,000, and to even get to that point a shareholder has to be willing to sell off their stock to begin an ESOP trust (rather than wringing "every last dollar" out of a sale, as Baker put it).

Finally, for an ESOP to work, a company must be profitable, and it behooves employees to educate themselves about the nuts and bolts of company finances.

"It sounds predictable, but I know it to be true," said Tom Rimel, president of the 45-percent ESOP-owned Stockwell Elastomerics. "Realizing the benefits of an ESOP is a journey—not a destination. The ownership culture will continue to develop over time just like businesses evolve over time."

NewAge has 280 employees and is 100-percent ESOP-owned.

Baker has been with the company since he was 6 years old, sweeping floors as a janitor at NewAge. Since then, he has put his heart and soul into the company, and the company is returning the favor. "We have 32 millionaires at this company," he said, referring to the value of individual ESOP accounts.

As it turns out, all the blood, sweat and tears can push some owners and shareholders toward the cash, while others—especially the leaders of closely held, private family firms—see legacy as the determining factor.

So how much is enough?