Put your money where your mouth is!

Retirement? But 90% of net worth is in the company….

Box Built Australia manufactures timber crates and boxes at Acacia Ridge in Brisbane. The company was formed by two founding directors in 1955 and currently has 30 employees.

The oldest director and shareholder, at 55, wanted to ease out of the business and enjoy semi-retirement with his wife. The problem was turning his equity into a retirment fund.

An Employee Share Share Ownership Plan (ESOP) was the mechanism used in this case. The Employee Buyout (EBO) is a process for transferring ownership of a company from a previous owner to the majority of eligible employees, requiring a staff collective capable of buying at least a controlling stake in the business. Typically the employees do not have the funds to take up the shareholding or they cannot borrow the required funds from banks etc.

The standard mechanism is the leveraged ESOP which enables employees to own shares in the business that employs them and simaltaneously makes them the financing vehicle. The funds are borrowed from an external lender and the company can potentially obtain income deductions for the interest payments, as well as repayments of the principal loan amount.

The buyout transaction is accomplished out of future corporate earnings rather than current employee savings, with employees making contributions to the ESOP trust to repay the loan from pre-tax earnings.

At Box Built no existing employee or director had the required funds, but some employees wanted to buy to departing director’s shares with the owner’s support.

How did they do it?

• An ESOP trust was set up with the suport of Mybridge Pty Ltd and the ANZ Bank offering to provide finance to the level of 100% of the value of the stake.
• The remaining directors/managers provided the loan guarantee and the exiting owner/director provided ‘collateral’ as security. The ESOP trust borrowed the funds and was required to buy the departing owner’s shares outright, giving these funds to him.
• The existing directors/managers remain shareholders while those fulltime employees who have been participating in the ESOP since 1 July 2005 will become owners of the business over time.

Employee ownership will consolidate as Box Built contributes bia profits and salary sacrifice schemes to pay thye loan off over a maximum of 5 years. Employees involved via salary sacrifice extra shares each year and performance based rewards are also given in the form of shares.

The existing directors share the ‘risk burden’ while the employees benefit without having to dip into their savings. Employees, after 12 months, can trade back the shares for an agreed value if they wish. This ensures the company is seen as valuing what it is doing and that the shares are truly worth something.

Gary Davis, Finance Manager at Box Built, says “Gone are the days where you run your business at break even while taking out planty of cash and then selling it as a going concern. Before an ESOP can commence, the company has to take itself seriously:

• it must have an investment in sound systems, good staff, good products and services;
• it must be able to demonstrate its ability to repay an ESOP loan through its cashflow and profits;
• good employees and cahsflow go hand in hand with financial ethics and information, good communication and integrity in decisionmaking.

“From the retiring owner’s point of view, it is living the great Aussie statement of ‘putting your money where your mouth is’. The ESOP generates more stability, care and trust among staff and leads to tremendous improvement in productivity and growth.”

For more info:
Australian Employee Ownership Association

The Mercury Centre Alan Greig Director, Ownership Strategies

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