ESOP Holding Companies as a Diversification Strategy

The CEO of Bowling Green, Kentucky-based Houchens Industries announced his retirement this month.  Houchens is an “ESOP holding company” which has 40 businesses and 16,000 employee owners and total annual revenue of more than $3 billion.  As noted in the article, the Company started in 1917 as a grocery store, but has since “diversified into manufacturing, insurance, hardware, food service, retail, pharmacy, construction, recycling, trucking and more.”  This is a truly remarkable success story and a strategy that is being pursued more and more often in the ESOP world.

The “diversification acquisition strategy” normally starts with a successful 100% ESOP-owned operating company.  Successful ESOP-owned S Corporations pay no income taxes on profits, so they often have a lot of cash on hand.  With the goal of investing the cash in a way that is likely to increase the ESOP share price, the Corporation begins buying other successful businesses to wrap into the ESOP model.  This is normally accomplished by having a “holding company” be the ESOP sponsor so that all of the businesses can contribute to the share value of the ESOP (and all of the employees of the businesses can participate in the ESOP).  But the distinction with the “diversification acquisition strategy” is that the holding company is looking to buy companies that are not correlated with the same industry.  Similar to how a healthy investment strategy might look in a personal investment portfolio, the holding company is looking to avoid having too much risk in any single industry. This is probably why Houchens owns so many different companies in different industries.

Here in Wisconsin, OwnersEdge Inc. has implemented a similar strategy.  There are currently five (5) affiliate companies listed on their website, and CEO Lisa Reardon has stated publicly that they would like to increase that number.

Of course, the ESOP holding company strategy is not limited to this sort of diversification strategy.  DeWitt often sets up holding companies to own affiliate companies being sold to the ESOP from the very beginning of an ESOP’s existence.  It is a convenient way of consolidating multiple entities up into one share value for a new ESOP.