Employees at Onex Inc., an industrial furnace manufacturer in Erie, Pa., always looked forward to hearing about the company’s latest developments, both immediate and long-term, at weekly meetings.
The husband and wife team now running Onex, Drew and Ashleigh Walters, lead those meetings. Drew held a 20% stake as vice president since 2012, and Ashleigh ran day-to-day operations as general manager since 2013. In 2018, Drew and Ashleigh acquired a majority, controlling interest in Onex from Drew’s father. Despite these changes at the top, employees had come to rely on the couple’s leadership style.
Onex employees have always known Ashleigh and Drew had their best interests at heart ... even during a pandemic. Ashleigh and Drew have also known, when push came to shove, they could always count on Onex employees owning up to their mistakes as a way of taking ownership of their responsibilities to the company. As Ashleigh says, this is an “ownership culture” that fosters trust in a close-knit, family-oriented environment.
Ashleigh and Drew wanted to continue this culture in their planning for business succession. As Generation Xers, they did not want to wait much longer to put a succession plan in place that would ensure continuity for Onex and the community at large. They also weren’t convinced their two young sons would be interested in taking the reins when it came time for them to retire, especially since the odds are stacked against passing ownership to a third generation. Decision time was upon them.
On Friday, August 21, 2020, during the weekly meeting, Ashleigh and Drew made an announcement. They were selling Onex – not to a third party and not to a private-equity group but to the employees themselves. They weren’t selling part of the company; they were selling all of it. And the funding for the plan would come from future tax-deductible company profits, not employee purchases.
“Tears filled the room when the announcement was made,” Ashleigh said. How was this even possible? It sounded too good to be true, but it wasn’t. Through the adoption of an Employee Stock Ownership Plan (ESOP) on July 15, Ashleigh and Drew had headed off their succession challenge – the very challenge they saw Drew’s father wrestle with some years earlier.
Too many businesses fail to plan their succession, whether it’s a matter of time or a matter of complexity. Whatever the reason, it sneaks up on them. When succession plans are even discussed, ESOPs are often a last resort. They shouldn’t be. They should be considered right alongside other options. In fact, when compared to other options, ESOPs often come out on top when factoring in all the pros and cons of each approach.
What often stands out during these discussions is the owners’ desires to preserve the legacy they have built. Who do I want owning my family business? Will some other buyer move the business out of state or, worse, out of the country? Will they lay off employees? Will they sell off assets to another party? When considering all these factors, an ESOP, which Congress has favored with exceptional tax benefits, is more often than not a company’s best option, especially a family-owned enterprise like Onex.
More about Employee Stock Ownership Plans (ESOPs)
The sale is financed by tax-deductible annual cash contributions to purchase shares for the ESOP trust or, more commonly, a bank loan and/or seller note the ESOP can use to buy a block (or all) the shares. Purchases can be all at once or gradual, for as little or as much of the stock as desired. For the employees, no contributions are required to purchase the owners’ shares. The owner can stay with the business in whatever capacity is desired. The plan is governed by a trustee who votes the shares. The board appoints the trustee, however, so changes in corporate control are usually nominal unless the plan is set up by the company to give employees more input at this level.
Stock is held in the trust for employees until they leave. At least all employees with 1,000 hours or more in a plan year must be included. Their accounts vest over up to six years. Contributions allocated to employees are based on relative pay or a more level formula and then distributed after the employee terminates. ESOPs cannot be used to share ownership just with select employees, nor can allocations be made on a discretionary basis. They only work for profitable businesses, and they work best in companies where owners really value their employees.
For many companies, ESOPs are the perfect fit.
Jon Adams is a freelance writer doing research on employee ownership. Adams got his start in employee ownership in 1988 while working with the National Center for Employee Ownership (NCEO) on a graduate research project on ESOPs.