As the year 2000 came to a close, I realized that as much as I loved my work, I couldn’t do it forever. I thought about my company and its 40-plus employees. Would the business be able to continue without me? I didn’t want to sell the company to a stranger, and I had no heirs to eventually take over. How would those faithful, hardworking employees who helped build the company survive as a sustainable entity?
After much investigation, I decided to sell the company to my employees using an ESOP (Employee Stock Ownership Plan) as the vehicle. Harrell Remodeling is now 26% employee-owned and will eventually be 100% employee-owned. Though we have not been immune to the recent challenges, we’ve not only survived, we’ve thrived: Our expanded culture of employee ownership has had a lot to do with that.
An ESOP, a type of qualified employee benefit plan, is the most tax-favored method of ownership transition. A company sets up a trust for company stock, which is funded by the company from tax-deductible pretax earnings. Owners can defer taxation on gains by reinvesting in other securities. Owners can sell all at once or in installments, and they have the option to define their future role.
ESOPs are not for everyone. They are complex and generally only make sense in profitable companies with 15 or more employees. But for the right situations, ESOPs can be just the right tool. For more information visit the National Center for Employee Ownership at nceo.org/succession. http://www.nceo.org/succession
—Iris Harrell is 74% owner of Harrell Remodeling,in Mountain View, Calif.