Two years ago, Kevin McPhillips was invited to speak at a conference of Pennsylvania chamber of commerce executives. Of the 64 chambers represented, only one understood the specifics of employee stock ownership plans.
It’s not a management buyout, he says. Instead, employees pay nothing, the business takes a loan from a traditional source like a bank to pay off the owner, and the company never pays taxes again on the profit for whatever portion is owned by the employees.
There’s a level of unawareness, which makes sense, says McPhillips, who had never heard of an ESOP in all the time he managed and owned businesses.
“If you think about who buys companies, it’s typically financial buyers or strategic buyers, and there really isn’t anything on employee ownership for either of those groups,” he says.
In fact, there are only 5,500 ESOPs nationwide, with 300 of those in Pennsylvania. In comparison, Pittsburgh alone has 61,000 businesses.
Smart Business Dealmakers spoke with McPhillips, executive director and CEO of the Pennsylvania Center for Employee Ownership, about employee ownership and what the PaCEO is doing to increase awareness of the potential options.
In Pennsylvania, York County is a mecca of employee ownership, McPhillips says. It’s not Philadelphia. It’s not Pittsburgh. It’s not even Scranton or Harrisburg.
“You might be surprised to find out that the numbers of employee-owned businesses in Pittsburgh and in Philadelphia are not necessarily more than other counties per capita,” he says.
The reason why York County is an outlier is a vibrant economic development group and chamber of commerce.
“We think this kind of grassroots chamber and business activity is one of the big drivers in why companies change,” McPhillips says. “If I’m running a business in Williamsport and I happen to be colleagues with two businesses that converted to employee ownership, I’m likely to investigate it.”
Until recently, the overall number of ESOPs was stagnant nationwide. That’s changed to a growth rate of close to 10 percent between 2016 and 2017, which are the most recent statistics available from the U.S. Department of Labor.
A national conference for employee ownership in 2018, for example, had to cut off registrants after 2,200. This growing interest is echoed in Pennsylvania.
“In the state of Pennsylvania, we’re seeing significant growth,” McPhillips says. “Between 2015 and 2016, which was when our nonprofit began, we saw 25 new ESOPs. If you consider that Pennsylvania only had about 290, that’s pretty good growth.”
Spreading the word
The PaCEO recently helped pass a legislative measure to improve the state’s benefits for converting to employee ownership, and McPhillips says the center’s website traffic has gone from 30 visits a month to about 400 a week.
Another unique initiative is happening in Pittsburgh. A citywide task force of elected officials, economic developers and banks is helping the PaCEO take a methodical approach to teaching the city about employee ownership.
Working with the Carnegie Library to develop a database of the 61,000 companies in Pittsburgh, the nonprofit determined about 21,000 are appropriate for approaching about employee ownership.
“Using the members of city council in the nine districts and partnering with about 20 community organizations, we’re going to systematically approach all 21,000 businesses,” McPhillips says. “This has never been done before, but we have very high hopes that it will result in significant activity as it applies to employee ownership.”
The reason why communities like Erie, which is also working with the PaCEO, are so interested in spreading the word is jobs.
“One of the things that happens with ESOPs and other forms of employee ownership is the businesses stay where they are,” he says. “They don’t get sucked up, stripped down and resold. They don’t disappear overseas. They stay where they are.”
A good example is what happened in a Central Pennsylvania town with LB Water. In 2002, the owners wanted to sell the 40-person company, but all potential buyers expected to move it out of Selinsgrove. The owners didn’t want that.
“They learned about an ESOP and they sold the business to their employees for the same amount they were offered by a private equity group,” McPhillips says.
Fast forward 15 years, the company had grown to 202 employees, and every one of the original 40 employee-owners would be able to retire if they wanted to.
“Those stories are not unique,” he says. “It’s not everybody’s experience, but the ability to create real futures and real retirement for people is extraordinary, and I don’t know anything else that really compares to it.”