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?
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:
“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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