In the News: ESOP Companies Acquiring Companies, Cost to Establish an ESOP
Tech Image (Buffalo Grove, IL) / SmithBucklin Corp. (Chicago, IL)
Sale Gives PR Firm the Benefits of Becoming Employee-Owned, one in a series of ESOP articles in the Wall Street Journal, discusses how Tech Image, a 17-employee technology public-relations firm, contemplated selling to an ESOP before ultimately selling to a company that was 100% employee-owned.
Tech Image explored establishing an ESOP but came to the conclusion that it would cost too much (see below). They ultimately decided to sell their company to 100% ESOP-owned, Chicago-based SmithBucklin Corp.:
"At first, Mr. Nikolich was torn. He worried about "losing our identity" as part of the much larger company and didn't want to change the firm's business model. He was concerned that if the deal didn't go through, he would have a contentious relationship with a client. And, he didn't want employees to think he was reneging on his promise to not take the money and run.
The deciding factor: SmithBucklin was employee-owned."
The article discussed how ESOP companies such as SmithBucklin are using the tax advantages gained by being ESOP-owned to acquire other companies.
"As employee-owned companies have grown in number and become established in the past 10 years, more are buying up other companies, partially because of big potential tax breaks, says Martin Staubus, director of consulting at the Beyster Institute, which focuses on employee ownership at the Rady School of Management at the University of California in San Diego."
How much does it cost to establish an ESOP?
The article discussed how the cost of establishing an ESOP persuaded the company to look at other options and ultimately sell to a third party:
"But he quickly learned that the cost of setting up an employee stock-ownership plan could top $100,000 -- more than his 17-person company could handle…… the process required huge chunks of time and money spent with accountants and lawyers."
I plan on writing a separate post on the cost of establishing an ESOP, because the cost to establish an ESOP for a smaller company appears to be grossly overstated.