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Employee Ownership: Pros and cons

9/2/2013

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PictureMatthew Diment
A Consultant Outlines an Option for Keeping a Brewery's Culture Alive After You Leave
By Matthew Diment

A growing concern for mature craft breweries is succession planning.  If there is no family to pass the business onto, what other options are there?  Often times the only buyer with enough cash is a large corporate entity such as Anheuser-Busch InBev.  While this type of buy-out can be successful, most brewery owners feel it does not agree with the culture they have established.  Another option with growing appeal is the Employee Stock Ownership Plan or ESOP.  This model has been successful with Full Sail Brewing and New Belgium Brewing, and more recently has been implemented at Deschutes Brewing and Alaskan Brewing.


In an ESOP, the company is sold to the employees through a retirement plan vehicle.  All or a portion of the company can be sold to the ESOP.  This helps serve a couple of purposes; one, it allows the owner to retire while keeping the brewery owned and operated by the existing employees and two, it aligns the employees’ motivations with that of the brewery – the more successful the brewery, the more retirement income for the employees.   

Another attractive ESOP advantage is the tax shield it provides.  An ESOP is a non-taxpaying entity.  If the company is organized as an S-Corporation or converts to an S-Corporation after the sale to the ESOP, neither the corporation nor the ESOP will pay any tax.  The value of the Company’s appreciation is deferred until an employee retires and takes a withdrawal, similar to a typical 401(k) Plan.  

In a company that is more than 50% ESOP owned,  there is always a concern that down the road an attractive buyout offer could come in from a competitor that the trustee of the ESOP will not be able to refuse without risk of a lawsuit from a plan participant.  Is there any defense against this?  Recently, there has been a move toward what are called Benefit Corporations.   A Benefit Corporation is a legal designation allowing a company to consider the impact of decisions on all stakeholders, including employees, customers, community, suppliers and the environment.  This gives companies a legal backstop to turn down a buyout offer.  Oregon has recently passed Benefit Corporation legislation which will be effective as of January 1, 2014.

An ESOP is not for every company, though.  The company needs to be able to survive without the former owner.  While that person may continue to be involved and an employee, in the long run, the strength of the company depends on its management team and employees.  Also, due to some punitive IRS anti-abuse rules, ESOPs are usually not advisable for companies with less than 20 employees.

Many breweries have a very familial feel to them and are often strongly independent.  An ESOP can embrace and foster this culture and show how much an owner cares about their company and their employees.  Conversion to an ESOP is not a decision to be made rashly, though.  There are a variety of nuances to these transactions and a company should always consult with their accounting and legal counsel prior to undertaking an ESOP conversion.

This information was provided by Matthew Diment, of Kernutt Stokes, CPAs and Consultants.  Matthew and a team of professionals serve breweries throughout Oregon.  For questions or more information, contact Matthew at 541.687.1170 or mdiment@kernuttstokes.com.  




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