The Power of an ESOP To Grow and Sustain a Business

In Good Times and Challenging Times

 Like most businesses, the Coronavirus has greatly affected the day to day operations of Minneapolis headquartered H2I Group. However, the 100% employee-owned company has not been YET significantly affected from an employee engagement and productivity standpoint. As an employee-owned company with no outside investors to answer to, H2I has been able to navigate the company through these challenging times and manage the potential business threats they are faced with. Thus far, no employees have been laid off, their sales and revenues are still on track to hit near term forecasts, and the H2I management team is confident they will weather the storm. Like most companies, there are still potential challenges in the coming months as to sales, revenue and profitability. But the question of the day is – does their employee ownership model make their success in these times possible? 

In 1924, Haldeman-Homme (now H2I) was founded by W.W. “Duke” Haldeman. Through his vision and that of William Langford and John (Jack) Homme, the company grew from 4 employees and one field of products to its current status as an employee-owned company with more than 300 members and a nationwide reach with over 75 product options in 6 different markets with 15 offices around the country. They have reinvested in the business and it has grown from $60 million in revenue in 2014 to the current target of approximately $230 million in fiscal year 2020 – 2021. In recent years, much of this growth has come because of the company’s employee-owned S- Corporation status though their Employee Stock Ownership Plan (ESOP) which was started in 1977. In 1987 the ESOP purchased the final block of outside owned shares of stock and H2I became 100% owned by its employees at that time. 

An ESOP is a tax-exempt retirement plan in which shares of the company are earned each year by the employees simply through their hard work. As an S-Corporation, federal taxes on profits at H2I are not paid at the corporate level, but instead flow through to the company shareholders. However, since the shareholder of H2I is a tax-exempt entity (the ESOP), the result is that the profits of H2I are exempt from corporate income tax. Instead the taxes are paid by employees when they terminate employment or retire and ultimately are given the opportunity to sell their shares of company stock they earned. For H2I and many other S-Corporation ESOPs, this elimination of corporate income tax creates increased cash flow, which can subsequently be used to generate further shareholder value. H2I Group President -CEO, Ron Johnson shared that “The ESOP tax structure has allowed H2I Group to expand and diversify our business and product lines by acquiring complimentary businesses which ultimately benefits our employee owners. Part of our success during this challenging time has come because of our ability to acquire well run companies at their fair market value and bring them into our employee ownership culture.” “Over the last 10 years H2I Group has partnered through M&A with 7 new companies with over 100 new employees coming to H2I Group through the 7 mergers. We have had zero (0) voluntary employee turnover within these newly acquired business. These new, talented employee owners have greatly helped our business reach our aggressive growth objectives over the last several years and have allowed us to stay on a very sustainable course into the future.” 

Sue Crockett, the Executive Director of the Minnesota Employee Center for Employee Ownership, recently caught up with two former owners of companies acquired by H2I to share their experience of selling to an ESOP and what it has meant to them and to their employees. 

Hicks-Ashby 

After weathering the recession from 2009 through 2012, Jim Baldwin started to look for a merger opportunity for the company that he had purchased majority ownership a few years before, Hicks- Ashby. Founded in 1948 and headquartered in Lenexa, Kansas, Hicks-Ashby was a provider of product and service solutions to the Science Laboratory, Academic, Government, Corporate Library, Commercial/Industrial and Healthcare markets in the states of Missouri, Iowa, Nebraska and Iowa. 

When discussions with Haldeman-Homme started, Jim did not realize the company was employee-owned. “Even after I learned that Haldeman-Homme (H2I Group) had an ESOP, it did not influence my decision to merge because of my lack of knowledge and the associated benefits of an ESOP organization. But since the merger it is now apparent to me that being an ESOP was one of the top benefits that the organization provides.” 

When asked what it meant to Jim and his employees at Hicks-Ashby to sell to an ESOP, Jim was quick to respond, “It creates a sense of security, knowing that they have a stake in the business as it grows. It provides a sense of ownership and, most importantly, increased financial security in retirement. It makes me feel better knowing that I have given my former employees the opportunity to work for a successful organization and to build their retirement funds to a higher level.” 

Academic Specialties 

For several years, Dan Moran had been familiar with H2I Group through interaction at conferences and other events. Dan was attracted to H2I’s financial strength and similar business. “I always genuinely liked that they all talked the same talk and fought the same fight from the top down. H2I had the same goals as I did.” 

Moran founded Academic Specialties Texas in 2003, selling athletic products like bleachers and lockers. He grew the business to $7.5M and 16 employees, but states, “Being a small company you may have a vision of where you want to go but you don’t have the financial wherewithal to achieve it.” He gave his employees year-end bonuses based upon operating income but was not able to provide them with any benefits. While the bonuses were appreciated, they did not convey the sense of being a direct result of the employees’ efforts. 

Moran stresses the operational security of being part of a larger company. “As a small company, you’re always concerned about payables and receivables. You hesitate to take on too large a job because, if it goes south, it can take down your company. The backing of a larger, financially secure company can open markets. After joining H2I, we have added 15 employees and revenue has increased from $17 million to $63 million in the South and Southeast Division that he now runs. Selling to an ESOP was a win/win!”. For H2I, besides expanding in Texas, the acquisition of Academic Specialties resulted in very profitable new Divisions, operating in Florida, Georgia, North Carolina, South Carolina, Virginia and Maryland using the same product lines that Dan had started selling back in 2003. 

When asked what has it meant for his employees to be in an ESOP owned company as compared to what a non-ESOP company may have done for them, Dan replied “Being an employee owner encourages and inspires my former employees to be more responsible and hold themselves and their associate owners more accountable and it gives them a greater sense of security that they would not get from a Non-ESOP firm. It also gives them the opportunity to be part of a growing thriving organization.” 

The Future for Employee-owned Companies 

While the fate of the approximately 6,500 employee-owned companies during the coronavirus pandemic is currently unknown, history would suggest that the current success stories like that of H2I will be common. According to statistics reported by the National Center for Employee Ownership, during the recession of 2010, 12.1% of private sector employees who had no access to employee ownership at their workplace were laid off compared to 2.6% of those of employees who had employee ownership available at their company, a 365% difference and an estimated savings to the US government of $15 billion. In addition, according to a 2017 study done by Fidan Kurtulus and Douglas Kruse, between 1999 and 2011, public traded companies with some form of employee ownership were 20% less likely to close. 

Transitioning a company to an employee ownership model is not the answer for every selling shareholder and their employees. However, the success stories like those of H2I, Hicks-Ashby, and Academic Specialties happen across the United States hundreds of times per year and the results typically are very favorable for everyone involved. For H2I, an ESOP has given them the opportunity grow their company, retain jobs in the local communities they serve, and create wealth for their employees. In today’s business environment, these are welcome signs of encouragement. 

For more information on the different forms of employee ownership available to you and your employees in Minnesota, contact Sue Crockett of the MN Center for Employee Ownership at scrockett@mnceo.org