Sale to employees

Sale to employees

Succession planning is a difficult task, but one company's recent employee stock ownership transaction may be the best solution in this economic environment, despite the costs involved.

Selling your company to employees isn't as easy as it sounds, and it's become even tougher in this economic environment.

But Naples-based Pelican Wire Company recently did just that, overcoming recalcitrant banks and the large expense of such a deal. It's a noble goal, but it's a costly and time-consuming lesson in planning for succession that may give pause to others considering the same thing.

Despite the obstacles, Pelican was ultimately successful. It's a testament to Ted Bill, who achieved his father's vision of selling his company to the employees, giving up a promising management career with Walt Disney Co. to return to Pelican Wire as his father was suffering from cancer. Larry Bill died in April, leaving his wife Theresa and his son Ted, who has since become president of the company.

Pelican's 47 employees now own the company, which notches $10 million in annual sales at its 33,000-square-foot facility in Naples. "This is a good program, but by golly, it's too much money and too much time," says the younger Bill.

Larry Bill had been thinking about a way to give his employees more ownership in the business, but he wanted to retain control. "He always struggled with how you do that," Ted says.

Larry Bill was busy running and growing the specialty wire company and didn't have the hours to spend going over a succession plan. The process of establishing an ESOP, says his son, would have been too much for him. "He would have gone nuts," he says.

Perhaps the biggest challenge was getting the financing for the deal. In most ESOPs, the trust that runs the plan borrows money to buy the shares of the company. In normal times, this isn't a problem unless the company is in financial straits. But with the credit markets frozen, getting financing was nearly impossible, even for a profitable company such as Pelican.

The company manufactures insulated wires for special uses, such as airplanes, medical instruments and the construction industry.

"If the idea is to take a lot of money off the table right now, that is harder to do," acknowledges Will Steward, an investment banker with PCE Investment Bankers in Winter Park who assisted in the deal. "Financing is the biggest question mark in an ESOP transaction."

Back to family business

Ted Bill, 38, had not planned to return to work for his father's business. Larry Bill had grown the business from his basement in Wisconsin in 1968 and moved to Naples in 1975, but Ted went to work for Disney in Orlando and earned a masters in business administration from the University of Central Florida. "I didn't have any interest in coming back and running machines," he says.

But when his father became ill, Ted had to think about his mother, Theresa, who owned a quarter of the company (Larry owned 50% and Ted owned the remaining 25%). He took on the task of creating the ESOP and selling the company to it, fulfilling his father's wish.

For a time, Ted tried creating the ESOP when he got home from work at Disney, staying up late every evening. But that didn't work because of the full-time demand of the transaction. It was important to devote all his energies to the project because documents between the parties had to be constantly revised. "You don't know who's throwing what in there," Bill says. "It's a real delicate thing."

Because of complex regulations, every party in the transaction has to have its own attorneys and financial consultants. That creates a small army of lawyers and advisers who rack up expenses. In all, Ted Bill estimates the company spent $500,000 to create the ESOP.

Because of the credit crisis, banks refused to finance the entire transaction and restricted the Bills' access to the money for years afterwards. "It didn't make any sense," Bill says. "The financing part was very difficult."

So Ted and Theresa Bill opted to finance the deal themselves by holding the note for a decade while the ESOP gradually buys their shares. "We didn't need the cash," says Ted Bill, declining to cite the specific terms of the deal.

Still, selling the company to the ESOP was better than selling it to an outsider. Several rivals had expressed interest in buying Pelican Wire, but they couldn't guarantee the jobs of current employees or even that Pelican would remain in Naples. "That didn't sit well with us," Bill says.

And their offers were inadequate, he adds.

Think as an owner

Before the Bills sold Pelican to the ESOP, employees had a Simple IRA, an employer-provided retirement plan. But only a dozen employees were participants. The company had a profit-sharing plan, too, but employees viewed that more as an end-of-year bonus pool. "It was difficult to connect that to day-to-day work," Bill says.

Sometimes, employees earned "spot" awards for specific achievements, but there was no rhyme or reason to these awards. "There was a lack of consistency," Bill says. "It was almost after the fact."

With an ESOP, the Bills believed employees would recognize that their contributions meant more for their retirement, though it's too early to tell because the program just started in October.

"I don't know that everyone understands it yet," Bill says. "I would say the biggest change is attitude." Older employees who have been with the company for a long time have shown renewed vigor, he says. Employees are vested in the ESOP over a five-year period, which encourages newer employees to stick around.

Bill says his job now is to provide employees with information on which they can make decisions and improve the company's earnings. He expects business to be flat next year.

For example, how can the company reduce the amount of scrap metal it produces and reduce waste? Bill says he can now share financial data such as the cost of metal that used to be kept from employees in the past.

Although the Bills could have deferred taxes by selling the company to their employees, they chose not to because doing so would have precluded them from participating in the ESOP themselves. Bill says that will keep him and his mother aligned with the interests of employees. "I have no regrets," he says.

REVIEW SUMMARY

Company. Pelican Wire Company

Industry. Specialty manufacturing

Key. Selling your family business to employees is a noble goal, but the process is costly and time consuming.