Virginia’s business-friendly policies are well-known. In fact, it recently ranked fourth in CNBC’s “Best States for Business” analysis. But the state has another unique claim to fame: it is home to 299 businesses structured as employee stock ownership plans (ESOPs) — ranking Virginia sixth in the country. Only New York, California, Texas, Pennsylvania and Illinois have more ESOPs. This unusual ownership model is increasingly being leveraged to propel business growth, retain high-quality employees and operate independently within industries where consolidation is the norm.
In the last few months, several local businesses have announced or completed M&A deals: Bon Secours Health System moved forward with its merger to Mercy Health; Marsh & McLennan Agency acquired Insurance Associates; Citizens National Bank merged with Old Point Financial Corp., and Verizon Communications acquired Straight Path Communications. According to Deloitte, these industries — health care, technology and financial institutions — are among the hottest for consolidation.
But with the new corporate tax laws and tightening labor markets, many are considering the ESOP model to gain a competitive edge and achieve growth without consolidation. Our own firm, Graham Company, recently turned down acquisition offers to become a 100 percent employee-owned ESOP. Based on our professional and personal experience, here are some things to consider when determining if an ESOP model is right for your company:
Expect an ESOP to strengthen your culture – but not fix a broken system. It’s true that giving employees full or partial ownership helps them to think like owners – and boosts their productivity, engagement, and spirits. Research studiesshow ESOPs typically promote a strong culture and company identity, leading employees to work harder. In our own experience, Graham colleagues feel even more pride in the company and are eager to make an impact and share their ideas. This was demonstrated recently when one of our long-time executive assistants asked how she could use her skills to help our expansion efforts.
While an ESOP can enhance a company that is already strong, it is not a band-aid — and it can fail. If the company has a poor culture to begin with, it is not likely that employees will suddenly feel pride and motivation with a new ownership structure. The most successful candidates for an ESOP are typically businesses that have a strong culture, high-value employees, low turnover, expert management teams and strong cash flow.