California Ceramics Company Goes ESOP
As described in this Business of Home article, iconic California ceramics company Heath considered several options before determining that selling part of the Company to its employees using an ESOP was the best option. What made this transaction a bit unique was the communication between the C-suite and the other employees about the existing owners’ intentions:
ESOPs are often conducted at the C-Suite level, and employees are notified after the deal is a fait accompli. In Heath’s case, [the existing owners, Robin Petravic and Catherine Bailey] told their staff at the beginning of the process. This allowed employees time to acclimate to their new roles as owners. It also allowed the couple the freedom of transparency. In order to fund the ESOP trust, they were setting aside roughly $500,000 of excess profit per year for three years, and openness allowed them to “explain to [our employees] why that money isn’t going to new equipment or cash surplus.”
Heath’s owners decided to sell parts of the Company over a period of years to the ESOP, as opposed to selling 100% of the Company in a single transaction. The latter strategy allows for a company to operate in a tax-free environment (as an S Corp with no taxes on profits), but the former method allows a company to control the debt service associated with the transaction. Neither option is right or wrong, nor good or bad. Which option would be best for a given company depends on a number of factors including existing debt, forecasted profitability, and the tax planning strategies of the existing owners.