I began my career at what is now a publicly owned investment management firm that trades on the New York Stock Exchange. It was a typical large corporation with several hundred employees. It was a fine place to work, but most employees had no sense of ownership — no skin in the game. I then moved on to a firm that was client-owned. Again, no sense of employee ownership, but an entirely different ownership structure and culture. Today, I work at a firm with an employee stock ownership plan (ESOP). And it’s a firm from which I hope to retire. 

An ESOP is a qualified defined-contribution employee-benefit plan designed to invest primarily in the stock of the sponsoring employer. In short, our employees become the owners of our firm, M. Griffith, through the ESOP. We have skin in the game with what I believe is an unmatched ownership structure and culture. Our employees have a sense of ownership, and you can see and feel that throughout the firm in attitudes, interactions, and responsibilities. 

A surface-level understanding of employee ownership would likely begin with a thought of not wasting paper or turning off the lights to your office when you leave. Simple cost savings. I’ll admit, these were my first thoughts upon learning about our ESOP. The truth is that our ESOP provided more of a mental eye-opener once I really grasped the concept. I can see this same revelation occurring in my colleagues as well. The revelation is that we are now actual owners of our firm. Our ESOP enables us to directly share in the current and future economic rewards of ownership. The ESOP creates a direct link between employee productivity and employee benefits as it rewards employees for their efforts and they will automatically share in the growth of the company. Few ownership structures offer these advantages. 

The great advantage of an ESOP is to provide a market for the shares of a departing owner of a profitable, closely held company. The owner can essentially “keep things intact” during the ownership transfer — whether immediate or gradual — and not worry about any outside manipulations. Unlike a sale or merger, an ESOP enables the selling business owner to sell any portion of his or her stock — allowing an owner to keep control until he or she is ready to fully retire. A sale or merger usually requires the owner to sell 100 percent control immediately. 

There are other benefits available to both the selling owner and participants as well. 

1. If the ESOP acquires 30 percent or more of the outstanding stock of a privately held company, any capital-gains tax on the transaction is deferred indefinitely, provided that the seller reinvests the proceeds in “qualified replacement property” within 12 months of the date of sale (for certain business structures). 

2. The ESOP enables the company to repay principal with tax-deductible dollars (for a leveraged ESOP).

3. Dividends paid on stock held by an ESOP are fully tax-deductible, provided that such dividends are either passed through or used to make principal or interest payments on an ESOP loan.

4. An ESOP enables owners to provide for business continuity for the business that they have grown and nurtured over many years. Unlike a sale or merger, an ESOP enables a company to retain its separate identity rather than become a branch or division of a larger company.

5. An ESOP can be used to make acquisitions of other companies with tax-deductible dollars. In addition, the sellers can receive their proceeds tax-free under tax-code provisions.

Many ESOPs are used as a supplemental employee-benefit plan, which will typically be a better incentive plan for employees than other alternatives. This enables the company to attract, retain, and motivate key employees. An ESOP is designed to enable employees to benefit from the ownership of capital through the investment of their talent and energy. Several research studies have shown the numerous benefits of ESOPs for business owners and their employees, many of which are realized while the owner is still actively engaged in the business. Some include: 

– A 2000 Rutgers study found that ESOP companies grow 2.3 percent to 2.4 percent faster after setting up their ESOP than would have been expected without it. Businesses that combine employee ownership with employee workplace-participation programs show even more substantial gains in performance.

– A 1997 Washington State study found that ESOP participants made 5 percent to 12 percent more in wages and had almost three times the retirement assets as did workers in comparable non-ESOP companies.

– A National Center for Employee Ownership (NCEO) study found post-ESOP sales were 4 percent per year higher, while employment growth was 3 percent per year higher.

– A return-on-assets study conducted by Northwestern University found that public ESOP companies generated an increase in this measure 2.7 percent per year better than what would have been expected based on pre-ESOP experience. 

– Companies with ESOPs and other broad-based employee-ownership plans account for well over half of Fortune Magazine’s “100 Best Companies to Work for in America” list year after year.

– Many owners take advantage of the tax-deferral provisions under IRS code (any capital-gains tax on the transaction can be deferred indefinitely provided a few criteria are met).

– Contributions to ESOPs are tax-deductible to the sponsoring corporation up to certain limits.

These studies, and many more, show that sales, employment, and productivity all grow faster in companies after they set up their ESOPs than would have been expected based on their performance relative to comparable companies prior to setting up their plans. The research also shows that ESOPs are more likely to survive as independent companies which helps to prolong the mission and vision of the founding owner.

I have just touched the surface on the many benefits of creating an ESOP for a business. Numerous resources are available to learn more. What is unique is that both owners and employees alike reap the rewards associated with having an ESOP. As someone who has worked at firms with several ownership structures, I believe it is hard to beat an ESOP.           

Matthew D. Savery, CFA, CFP is the chief investment officer at M. Griffith Investment Services, Inc. M. Griffith is celebrating its 70th anniversary this year and its 5th year having an ESOP. Contact Savery at
msavery@mgriffithinc.com

Often when purchasing a company, certain assets pose issues not easy to discern. For example, a purchaser can buy real estate through a purchase contract and perhaps even personal property such as furniture and furnishings, fairly easily. When purchasing real estate, title insurance can be ordered, surveys re-dated, and abstracts renewed. Information on mortgages can be obtained from a county clerk’s office and assurances can be given of non-default status.

One major asset exists, however, that is not so easy to determine currently — the status of leases. But there are tools that can help, as follows; and requiring them in a purchase offer can be essential. These are some, but by no means all of such tools.

1. Past breach of lease. If a purchaser is taking a lease amongst other assets, it is critical to know that the lease is not in breach, and that there will be no future landlord or tenant action. But how to find this out? There would be no public filing regarding a breach particularly if no lawsuit has yet been brought by or against either party.

The tool here, is an “estoppel letter” where the seller, tenant, and the landlord each state, under oath or not, that there has not now nor ever been a breach. Having given such assurance, the assuring party is then estopped from asserting a current breach into the future. Of course, it would have been astute for the purchase contract to require an estoppel letter if and when demanded during the lease term. Careful drafting of leases may even attach a sample estoppel letter in acceptable form, as an exhibit.

2. Assignment of subletting clause. A purchaser must also study a lease to determine what rights the landlord has regarding assignment or subletting. There are many variations of this so the assignment and subletting consents need to be carefully examined. For example, it is possible that if this is a store in a chain of branch stores, that there may be a lease clause simply stating that if all or a significant number of related locations are to be sold, the landlord need only be given notice and its consent is unnecessary. Other typical such clauses may or may not require that landlord consent, be reasonable or not and prompt or not. The number of days when landlord consent is required to an assignment or sublet may also be stated.

3. Use clause. A purchaser must study the use clause in every lease. I was once confronted with a purchaser who wanted to open a car dealership. The lease prohibited car dealerships because the landlord had also been a car dealer. Often, leases require only that any Use be permitted by zoning. Sometimes a non-compete clause will determine prohibited competitive users even in an extended geographic radius.

4. Attornment clause. For a person purchasing a landlord position, it’s important to determine if the lease contains an “attornment clause” requiring the current tenant to be governed by the new landlord (purchaser) as the original landlord had been.

5. Internal and external. Every provision in each lease must be examined including, for example, whether or not the landlord’s approval of a new tenant as an assignee rather than as a sub-tenant excuses the current tenant from further liability.

If so, or if not, a purchaser of the landlord’s position should request updated financials of all successor tenants. Hopefully, when the lease was first drafted (or in the purchase contract), provision was made for requiring financial statements on demand. Otherwise, the current tenant (or landlord) may not be compelled to provide one. Knowing what items of equipment and personality go with the departing tenant or remain after the sale are often referenced in the lease.

6. Physical examination. Purchasers are benefited by a physical examination not only by the purchaser itself, but also by a building engineer or inspector. It may be that costly repairs need to be made for safety or government compliance, which might be used to offset the purchase price. It would be helpful to check with the applicable zoning or building department to determine if the building qualifies or perhaps has ever been cited under environmental, federal, state, and local legal and administrative guidelines.

All told, there are many important leasehold analyses that need to be examined when purchasing property that includes a lease. The tools to discover problems prior to purchase may not be obvious, but they exist in your attorney’s lexicon.             

Barry M. Shulman is a partner in the Business Department of the law firm Mackenzie Hughes LLP in Syracuse. Contact him at bshulman@mackenziehughes.com or (315) 233-8211.

Many affluent professionals and business owners put estate planning on hold. Only the courts and lawyers stand to benefit from their procrastination. While inaction is the biggest estate-planning error, several other major mistakes can occur. The following four blunders can lead to major problems.

Failing to revise an estate plan after a spouse or child dies

A death in the family is truly a devastating event, and the grief that follows may be so deep and prolonged that attention may not be paid to this. A death in the family commonly requires a change in the terms of how family assets will be distributed. Without an update, questions (and squabbles) may emerge later.

Going years without updating beneficiaries

Beneficiary designations on qualified retirement plans and life-insurance policies usually override bequests made in wills or trusts. Many people never review beneficiary designations over time, and the estate-planning consequences of this inattention can be serious. For example, a woman can leave an IRA to her granddaughter in a will, but if her ex-husband is listed as the primary beneficiary of that IRA, those IRA assets will go to him per the beneficiary form. Beneficiary designations have an advantage — they allow assets to transfer to heirs without going through probate. If beneficiary designations are outdated, that advantage matters little.

Thinking of a will as a shield against probate 

Many people think if you have a will, you do not have to go through probate or the court system. However, that is not true. A revocable living trust is designed to avoid probate. However, for the revocable trust to be effective, your assets must be retitled into the name of the trust. If they are not retitled into the trust and are held in your name alone with no beneficiary designation, then the assets will be distributed in accordance with the terms of your will. Before an executor is appointed or any assets can be collected and distributed, your will must go through probate and the court system. An individual can clearly express “who gets what” in a will, yet end up having the courts determine the distribution of his or her assets.

Supposing minor heirs will handle money well when they become young adults 

Some multi-millionaires go no further with their estate planning than making out a will. When a will is the only estate-planning tool directing the transfer of assets at death, assets can transfer to heirs aged 18 or older in many states without prohibitions. Imagine an 18-year-old inheriting several million dollars in liquid or illiquid assets. How many 18-year-olds (or 25-year-olds, for that matter) have the skill set to manage that kind of inheritance? If a trust exists and a trustee can control the distribution of assets to heirs, then situations such as these may be avoided. A well-written trust may also help to prevent arguments among young heirs about who was meant to receive this or that asset.

Too many people do too little estate planning. Avoid joining their ranks, and plan thoroughly to avoid these all-too-frequent mistakes.           

Jennifer L. Alfieri, J.D., LL.M., is trust counsel for Tompkins Trust Company. Contact her at (607) 273-0037 or email: jalfieri@tompkinsfinancial.com