April 13, 2022 •CSG Partners Staff
With drivers and administrative staff in short supply, transportation firms are battling for talent. Heightened competition has encouraged an industry-wide rethinking of employee benefits and incentive structures.
How Employee Ownership Impacts Transportation Firms
Transport Topics Radio – SiriusXM's weekly digest of trucking and logistics news – recently turned to CSG Partners for an overview of employee stock ownership plans. Managing Director George Thacker discussed ESOPs not only as retention tools, but as broader strategies for shareholder liquidity, tax efficiency, and corporate performance. The wide-ranging interview includes insights and stories from Thacker's extensive experience with industry clients.
The full broadcast is below. If you don't have time for a complete listen, please read ahead for a brief synopsis.
Key Takeaways from "ESOPs in the Trucking Industry"
Differentiation in Competitive Labor Markets
In a leveraged ESOP, the equity in a business is sold to a retirement plan. Stock inside that retirement plan gets allocated to employees over time. When an employee eventually retires, their stock is sold back to the business. The value of this equity can be life changing.
That represents a completely different incentive paradigm vis-a-vis most industry competitors. In terms of attracting and retaining talent, it's a meaningful leg up. Employee-owned companies also benefit from cultural advantages. When team members directly participate in the success of a business there's often a measurable positive impact in terms of attitudes, loyalty, and productivity. That drives bottom-line results.
Unique Liquidity Opportunity
Owners typically have most of their wealth tied up in their companies. An ESOP offers a way to sell their business without the downsides of a typical M&A transaction. In a traditional third-party sale, selling shareholders can expect to pay capital gains taxes on the proceeds. They generally lose involvement in the business, and loyal employees are often laid off. Although these owners are often looking for a financial exit, many also have a strong interest in doing something that benefits their management team and employees.
An ESOP offers a soft landing for selling shareholders while creating substantial tax benefits for both for the owner and the company. And, as mention, full-time staff gain equity in the business over time. It can be a win-win-win for everyone involved.
Transformative Corporate Tax Benefits
When a business is 100% employee-owned, and structured as an S corporation, it doesn't pay federal (and most state) corporate income taxes. That provides tremendous growth opportunities for trucking companies.
The enhanced cash flow can be to pay down debt and ultimately build up capital. Not only can these firms buy equipment, they're often in a position to go out and buy new businesses.
Private Equity vs. ESOPs
When a private equity firm buys a company, they're usually putting 40% of the purchase price down in their own equity. For the other 60%, they're leveraging up the target’s balance sheet. So, private equity is putting-in some cash, but they're using your own balance sheet to buy you. When selling shareholders are paid, their capital gains are subject to taxes. Often times, the cash that private equity is putting in is just going out the door as capital gains burdens.
In an ESOP sale, third-part financing (without personal guarantees) can be secured to provide sellers cash at closing. The transaction can be structured to defer and potentially eliminate capital gains taxes on the sale proceeds. So financially, the outcome can much better for the owner, let alone the company and its employees. The business remains independent, and instead of layoffs or management team changes, employees become shareholders.
Our friends at Transport Topics Radio and SiriusXM have graciously made this content available to all.