Production Supervisor Leon Smith and employee Robert Coloumbe at SteelPro Inc.’s workshop in Rockland. SteelPro has recently become the latest Maine company to become employee owned. - Photo by Andy O’Brien
Production Supervisor Leon Smith and employee Robert Coloumbe at SteelPro Inc.’s workshop in Rockland. SteelPro has recently become the latest Maine company to become employee owned. - Photo by Andy O’Brien
All last fall, policymakers, social service agencies, academics and business groups grappled with Maine's aging demographics at a series of workshops in Augusta. Maine has the oldest population of any state in the country, with a median age of 43.5 years, and the state's proportion of residents over 65 is second only to Florida's. As young people have deserted the state in search of economic opportunity and with over 18,000 baby boomers turning 65 each year, much attention has been directed at how Maine will retain its workforce. Economist Charlie Colgan famously predicted that without 60,000 new arrivals in the next 20 years, Maine is doomed. Colgan also added that he didn't think this would actually happen because depressed wages would eventually have to rise to be competitive in the national labor market.

Lost in the debate, however, is the fate of hundreds of Maine businesses as their owners retire. Although the Maine Department of Labor keeps data on workforce demographics, little information is available on what is certainly a substantial population in Maine of baby boomer bosses.

In an op-ed in the New York Times last July, political economist Gar Alperovitz outlined the looming problem in stark terms. "Many, with no obvious succession strategy, will simply sell their companies.... All too often the result will be consolidations, plant closures and lost jobs for the people who helped build and sustain their companies for decades," wrote Alperovitz.

While policymakers in Augusta have yet to discuss that issue in any detail, the idea of transferring businesses to employees through an employee stock ownership plan (ESOP) or by establishing worker self-directed enterprises (or "worker cooperatives") is attracting attention nationally as well as in Maine.

Citing figures by a researcher at the Rady School of Management at the University of California, San Diego, Alperovitz estimated that every year 150,000 to 300,000 businesses owned at least in part by boomers become candidates for employee takeovers. This means that over the next 15 years, retiring boomers could help create two to four million new worker-owned businesses in the U.S. Here in Maine, it's a concept that has become appealing to more and more retiring business owners.

Local Companies Go for the ESOP

For the past decade SteelPro Inc. owner Chris Beebe had been considering retirement, but he wanted to make sure that his 35 employees were taken care of. The 35-year-old company, which fabricates metal for customers ranging from the biopharmaceutical to the pulp and paper industries, had reportedly been performing well. However, it was uncertain what would happen to the workers if he sold it. SteelPro has low employee turnover and some of the workers have been there for over 20 years. Beebe had gradually been pulling himself away from day-to-day company operations for the past four years, and the current management team had been pretty much running it already.

But if it were sold, a new owner might simply merge it and shut it down. So Beebe decided to create a buyer himself by financing the sale of SteelPro to his own employees. He did that by setting up an employee stock ownership plan (ESOP).

"The owner Chris Beebe has always been very good to his employees and concerned about their welfare," said SteelPro's Vice President and Chief Operating Officer Craig Wells. "With an ESOP, you're doing something nice for the employees, but at the same time you're creating a willing buyer. So it really ends up being a win-win situation for the owner and the employees.

SteelPro is now one of over 30 ESOP companies in Maine, including Allen Insurance and Financial, Rockland's Prock Marine, Moody's Collision Centers, Johnny's Selected Seeds, and the 4,000-employee Cianbro Corporation. There are currently 11,300 employee stock ownership plans for over 13 million employees, according to the National Center for Employee Stock Ownership Plans.

In order to set up an ESOP, the company directs a portion of its profits to a trust. The trust then uses that money to buy the owner's shares back either immediately or over time. The shares then stay within the ESOP, so that when employees retire or leave employment, the ESOP buys those shares back and then reissues them to the employees that are still in the company. If an employee leaves the company before retirement, they can fold the plan into an individual retirement account.

"Obviously the incentive for the employees is that, literally, they have an ownership stake in their client base," said Allen Agency President Michael Pierce. "If you look at the ESOP companies, there's generally less turnover and there's more of a vested interest in the clients and customers because there truly is the financial as well as the ownership ties."

Jill Lang, the company's marketing and communications director, agrees.

"It reinforces the sense of really being on a team," said Lang. "It makes everyone that much more conscientious about the money we spend as a company. And the potential of an additional nest egg from the ESOP is definitely an added bonus."
There's also an incentive for the employer, as the law defers all capital gains taxes if the owner sells more than 30 percent of the company to the ESOP. ESOPs are most commonly set up by S corporations known as "pass through entities" because they spread income and losses out amongst the shareholders. The company is exempted from corporate taxes, and income taxes are paid by the shareholders.

Eric Altholz, a benefits attorney with the Portland law firm Verrill Dana, says that while there are only a handful of ESOP companies in Maine, he has noticed a change in the past few years.

"It is growing in Maine, but it hasn't been a huge spike," said Altholz. "The difference now is that consultants are able to make ESOPs work for smaller companies. It used to be a mid-size or larger company device, but, depending on employer and the demographics of the workforce, it can work for smaller companies."

As Altholz notes, ESOPs can be very expensive to set up and more costly than a 401k plan, which can be a barrier for smaller businesses. In addition to the legal costs of setting one up, the company must be annually appraised to determine the values of shares. Altholz estimates the upfront costs of setting up an ESOP can be anywhere from $50,000 to $74,000. Due to tax laws that limit employer contributions to ESOPs to just 25 percent, Altholz says that the most successful ESOP companies generally either have a small number of highly paid employees or a large workforce. Often in cases in which the owner wants to cash out of the business, creating an ESOP involves borrowing by leveraging against future earnings of the company, so Altholz recommends having a young enough workforce to handle the cost.

Supporters and Critics

ESOP advocates argue that ESOPs not only increase productivity and worker retention due to the employees' sense of ownership in the company, but they also produce higher financial rewards than conventional companies. A 2010 study by Georgetown University found that in 2008 ESOP companies performed better than non-ESOP firms in areas of job creation, worker wages, revenue growth and providing retirement security, particularly at a time when many companies were cutting jobs and pensions. The study stated that nearly 60 percent of American workers do not have any assets in a work-related retirement plan, and half of all workers do not even have access to an employer-sponsored retirement savings plan. According to the National Center for Employee Ownership, ESOP participants have three times the total retirement assets as comparable employees in non-ESOP companies.

However, critics point out that employees' retirement can be left vulnerable if the company experiences a downturn. Altholz said that unlike other benefits plans, which are typically diversified in a group of stocks, bonds and securities, ESOPs depend on the success of the company.

"If the company does great, it's fantastic because the employee is making a contribution to the growth and success of the company and working hard, but good companies sometimes go through bad spells," said Altholz.

Altholz added that there are some protections built into ESOPs to mitigate that risk and many companies also offer a qualified retirement savings plan like a 401(k) in addition to the ESOP. By law, all employees 55 and older or with 10 or more years of participation in the ESOP are allowed to diversify their ESOP accounts.

For Maine's Retiring Baby Boomer Bosses?

Although properly setting up an ESOP to conform with tax laws and the federal Employee Retirement Income Security Act (ERISA) can be costly and time consuming, Altholz says that for the right candidate making a business succession plan, it can be an effective solution.

"You see it a lot in family-owned businesses where you see one or two generations that have really built up the business, but then the newer generation just doesn't want to stay and operate it. But a core group of employees who have been there forever may become kind of heirs to the business," said Altholz.

Pierce of the Allen Agency says he agrees that with changing demographics and the number of small, closely held and family-owned businesses in Maine, ESOPs can be a viable alternative to traditional business successions. With 25 years as an employee-owned company, which was formed as a succession strategy upon former company President David Montgomery's retirement in 1989, it's a model he says has worked so far.

"I think there is a sense of family in some of these smaller communities, so people do feel good will to the employees who have worked for them for years and want them to financially benefit as well," said Pierce. "It's certainly something we've tried to instill in folks from a work ethic and an ownership interest."