Adopting an employee ownership plan requires education, expertise 

Within the last month, three Central Pennsylvania companies announced that they had or would be buying back part or all of their stock to give to their employees as part of new Employee Stock Ownership Plans, known as ESOPs. 

The announcement that your company is adopting an ESOP can be an exciting one. It means the potential of retiring with a drastic boost to your retirement fund after selling your stock back to the company. 

For an employer, it means securing a business succession plan, giving employees a sense of ownership and more. However, while a company can have a long list of reasons for adopting an ESOP, maintaining the plan and educating employees about ownership brings its own challenges. 

The initial decision 

Providence Engineering, a Lancaster-based engineering firm with 75 employees, announced in November that it would be going to employee ownership. For Providence leadership, an ESOP plan was one of three options on the table when discussing what the next phase of transition would look like for the firm. Providence could look for potential buyers outside of the company, look internally to be purchased by someone within the company, or it could take out a loan and give its stock to its employees. 

“At a point after really digging into the options, it became clear that for Providence, the best option was to ESOP the company,” said David Bernhardt, president of Providence Engineering. “It allows Providence to remain Providence. We didn’t get bought or sold, the brand remains and the culture remains.” 

As a professional services firm without many saleable, tangible assets, going ESOP spoke to Providence because it supplied an avenue to transition the company without having to bet on finding an interested buyer, said Bernhardt. 

“We don’t have a warehouse full of goods, a yard full of equipment or contracts that annually renew to help establish a sales price,” he said. “A professional service firm is built on good will– The good will of our team to help provide our service and the good will of our clients to provide us with opportunities to provide that service.  The value of that good will is only worth what someone is willing to pay.” 

ESOPs have been around since the 1950’s but began to see more use after the Employee Retirement Security Act of 1974 (ERISA). The law introduced an incentive for ESOP creation in the form of tax exemptions, which help a company with the funds needed to make contributions back into the company stock. 

“The federal government, Pennsylvania and most states stood up and said that if you adopt an ESOP, you don’t have to pay taxes on the part owned by employees,” said Kevin McPhillips, executive director and CEO of the Pennsylvania Center for Employee Ownership. “You get all of this extra cash to build the business.” 

In forming an ESOP, a company must have the capital on hand to buy whatever percentage of the company it is looking to give to its employees. Generally, a loan is needed to tackle that upfront cost, which affects the initial value of the stock now owned by the employees. 

The stock becomes a retirement benefit in line with something like 401-k. Employee owners can then watch their stock mature over the years and sell it back to the company when they leave. The stock maturates as the company increases in value, which can be found through an external ESOP trustee who works with a valuation firm to value the stock annually. 

Educating new employee owners 

The champaign has been poured and the company has celebrated the adoption of their new ESOP.  

That initial announcement may not convince every employee of the latent benefit they would receive upon retirement. If they check the worth of their stock in those early days, they may be surprised to see that their stock is worth hundreds- not thousands of dollars. 

“It’s not uncommon for an ESOP that the company took on all of this debt and that debt drives down the value of the stock,” said Trevor Bare, a partner and consulting actuary with employee benefit and investment advisory firm, Conrad Siegel. “There is this disconnect where we have this valuable, big company but they don’t see that reflected in the stock because most of the shares are held because of the outstanding debt.” 

Bob Whalen, CEO of Harrisburg-based HB McClure, helped lead the charge for the company’s transition into an ESOP in 2010. Since transitioning into an ESOP, the commercial, residential plumbing and HVAC services company has also transitioned the employees of the companies it has acquired, which Whalen said has made the company a more attractive buyer. 

Despite HB McClure’s 23 transactions, educating employees on the benefits of an ESOP has not gotten any easier, said Whalen. 

According to McPhillips, one third of employees understand the function of an ESOP and are excited by the concept, another third has a wait and see attitude and the final third believe the entire thing is a scam. 

“Educating the employees is a challenge. We would like to think that we can tell them that they are an owner of the firm, you snap your fingers, and their behavior aligns with how you want it to,” said Whalen. “The reality is, just like any other adoption curve, that happens over time. People want to see results before they are willing to buy into it.” 

In the new year, Providence will be introducing an ESOP committee, comprised of both Providence leadership and staff to allow the firm’s employees to learn about the ESOP process and explain it to their peers, rather than allow communication to come just from leadership. 

“It’s important. The message is received better from your coworkers and friends,” said Bernhardt. 

A national outlook for ESOPs 

The most recent data available from the National Center for Employee Ownership states that there were 6,501 ESOPs operating across the country in 2018 with total assets over $1.4 trillion. In Pennsylvania, that number was 252 ESOPs with assets over $8.3 billion. 

McPhillips anticipates that Pennsylvania may have become the state with the most ESOPs in 2020, but that data won’t be available for some time. “We are hearing from the business community that activity is brisk in Pennsylvania,” he said. 

The data also shows that the number of ESOPs nationally have continued to decline, dropping from a recent high of 6,717 in 2014. That is due to the double-edged sword that is an ESOP, said McPhillips. 

“Many times, these businesses are extremely valuable,” he said. “The company does very well, and you get offers for the business. Once the business is more than 50% employee owned, the trust has the authority to assign the Board of Directors. I’ve never seen them change the board, but they have the authority, and the trustee must make a decision of what is best for the employees.” 

Cashing out 

Even when forming an employee ownership plan, a company should take into consideration what it will look like when employees are ready to sell stock back to the company and receive payments from the company, which can take time to completely pay out. 

Conrad Siegel does not work with new companies looking to adopt an ESOP, but it does bring on ESOP clients and help with the ongoing administration of the plan. 

Securing a loan, planning out the initial ESOP strategy, and announcing the plan to employees is a months-long process but maintaining an ESOP lasts decades. 

“We help companies communicate this to employees, we manage it so its sustainable for the long term, we make sure everything is in balance so that the cash paid to former employees is matched by active employees,” said Bare. “We are not there are the start line, but we are there for the rest of the race.” 

McPhillips seconded Bare, noting that companies should look to other companies when deciding on going ESOP and work with organizations specialized in employee ownership. 

“If you are a real estate lawyer and you are trying to help with an ESOP, you are going to be costly and it’s going to be flabbergasting to you,” he said. “You need to work with experienced people.” 

Lancaster’s Providence Engineering approves ESOP, turns future over to employees 

Providence Engineering, a Lancaster-based engineering firm of 75 employees, is now employee-owned after adopting an Employee Stock Ownership Plan (ESOP) last month. 

The firm announced to its employees in October that it took out a loan to buy Providence’s shares from its previous owners and shareholders and divided those shares among the 75 team members. 

Providence was founded in 1992. Today the firm has expanded to seven offices throughout Pennsylvania. 

For a business-like Providence, operating under an ESOP provides an alternative business succession plan, one that will work perpetually now that it is in place. 

“The ESOP allows Providence to remain Providence,” said David Bernhardt, president of Providence Engineering. 

Bernhardt has no immediate plans of retiring but wanted to transition the company to an ESOP as early as possible to avoid the long challenge of transitioning that he has seen other companies go through, the company wrote in a press release on Monday. 

 “I didn’t want to wake up years from now and have this panic about what was going to happen with the company,” he said. 

Providence joins a growing list of Pennsylvania businesses shifting to employee ownership including Sheetz, Urban Engineers, RETTEW and more. Most recently, Lancaster-based Rhoads Energy announced that it created its own ESOP to give ownership to each of its 160 employees. 

Rhoads Energy to shift company ownership to its 160 employees 

Rhoads Energy is set to become an employee owned company next year. PHOTO PROVIDED.

Lancaster-based home heating company Rhoads Energy has created an employee stock ownership plan (ESOP) and will be giving company ownership to each of its 160 employees. 

Rhoads announced its new ESOP on Monday. The home heating company expects to begin transferring partial ownership to employees next spring. 

The ESOP benefit will be in addition to the 401(k) program that has been offered to employees for years. As part of the ESOP, employees will be given an account that holds shares of stock in the company, which will routinely contribute shares to employee accounts, Rhoads wrote in a press release. 

Each employee will receive stock that vests over the course of six years. 

Rhoads Energy, a full-service home heating company offering HVAC, petroleum and heating oil, has had 18 acquisitions since 2003. The company was founded in 1917. 

Shifting to partial employee ownership will ensure that Rhoads can continue its tradition of local ownership and control, said Michael DeBerdine III, CEO of Rhoads. 

“Since the very beginning, our company has focused on nurturing our connections with the community,” DeBerdine said. “The ESOP is a game changer because it rewards employees directly for our success, and because it spreads ownership to the people who live and raise families in the region we serve.” 

The shift to ESOP makes Rhoads one of two energy providers in the region offering employee ownership, according to the release. The benefit is also expected to help the company attract and retain talented workers. 

“The history of ESOPs shows that they drive employee engagement and creativity,” DeBerdine said. “We believe that the program will encourage our team members to think more like owners:  bringing fresh insight to challenges, looking for cost savings, and boosting profitability.” 

A York-based manufacturer’s employees bought the company 20 years ago, it was a brilliant decision

Travis Gentzler, president of Weldon Solutions, burns Weldon’s ESOP loan documents after the company paid off its ESOP loan in 2006. To his right is George Sipe, Weldon’s former president. Barry Eckard, a former employee now retired, stands to his left. PHOTO PROVIDED

When a deal to sell a York County-based manufacturer fell through, a group of employees worked together to make an offer to the company’s owners in a transaction that took only 45 days. This month, the company celebrates its 20th year as an employee owned company.

Weeks before the turn of the century, Tsugami Corp., the Japanese-based owner of York-based Weldon Machine Tool was on the tail end of downsizing the company and looked to sell it at a loss.

Tsugami transformed Weldon over its eight-year control, taking it from a machine tool maker to a parts and services company with less than half of the employees, said George Sipe, a former president of Weldon. Following the downsizing, Tsugami decided that it would detach itself from the American subsidiary altogether and began looking for a buyer.

They found one, Vermont Machine Tool in Springfield, Vermont, was set to acquire Weldon by the end of 1999 until their loan declined by their bank and the deal was canceled.

“In November [1999], we got news that their bank refused to give them a loan to make the purchase so that fell through,” said Sipe. “We were sitting there trying to figure out what in the world we would do. We knew what the offer was because we saw all of the paperwork that went back and forth between Vermont and Tsugami.”

Knowing Tsugami’s price for the company but unsure of what to do next, Sipe took his problem to the Commonwealth Forum, a monthly meeting of York-based businesses where members and their guests bring up issues they are dealing with.

Drake Nicholas, a Partner at Barley Snyder and a specialist in Employee Stock Ownership Plans, or ESOPs, told Sipe and his team about the benefits they would have if they could form an ESOP to buy Weldon.

Weldon employees pose in front of the company’s York headquarters during an open house in 2015. PHOTO PROVIDED.

“We could make it work for a number of reasons,” said Sipe. “As an ESOP, the company is deemed by the government to be a retirement plan and as such does not pay any federal income tax. That was important to us because in the first year we had a tremendous amount of inventory and machines that were almost finished but we had no buyers for.”

Weldon’s employees would ultimately form their ESOP in record time, according to Nicholas, allowing the group of 16 employees to purchase the company at the low price meant for Vermont Machine Tool and use the tax exemptions allotted to ESOPs to invest back into the business.

Today, the West Manchester Township manufacturer, now under the name Weldon Solutions, has grown from 16 employees to 40 and has expanded from manufacturing and selling CNC Grinders to also offering industrial automation solutions.

Travis Gentzler, Weldon’s current president, said forming an ESOP allowed the company to skirt the tax burden that would normally accompany such a deal, purchase the company and its assets and turn over the company’s current inventory to quickly increase the company’s stock price.

Weldon’s employees took their offer to Tsugami in November shortly after the deal with Vermont fell through. The Japanese company agreed to sell the company for the same price it offered to Vermont, but wanted to close the deal by the end of the year.

“It’s easily the fastest ESOP I ever did,” said Nicolas. “In this day and age you could never do an ESOP that fast with all the compliance issues involved. They had to close it quickly and everything just lined up.”

Gentzler said that those 45 days forever changed the retirement benefits and income for everyone associated with Weldon for the foreseeable future, growing to a sum of money 20 times what was paid for the company.

“If I look at the retirement balances for everyone involved in the ESOP 20 years later from those first days, it has created significant wealth for everyone,” he said.

ESOPs have seen a renewed popularity in recent years, particularly in the York area because its home to so many family-owned businesses, according to Nicholas.

Nicholas said that early in his career he worked mostly in private equity transactions and the minority of his work as an attorney involved ESOPs. Today, a majority of his clients are looking for help forming an ESOP, no matter the percentage of ownership.

“The piece of the puzzle with the ESOP is that the employees stay,” he said. “With Weldon, that is the most rewarding thing for me. Those are jobs that would have been gone. Those people would have had to find work somewhere else.”

Trola-Dyne acquired by Bucks County distributor


Custom lubrication and hydraulic manufacturer Trola-Dyne has been acquired by Bucks County-based Airline Hydraulics Corp. for an undisclosed amount.

York-based Trola-Dyne will continue to maintain its 21 employees at the company’s 26,000-square-foot facility, but will add Airline’s clients to its work load, said Jessica Nath, a spokesperson for Airline.

Airline is a distributor of fluid power, automation and machine safeguarding products. It also offers system engineering, servicing, repair and installation to its customers throughout the Mid-Atlantic and New England.

The distributor has operated its own 8,000-square-foot facility in York, next to Trola-Dyne, for the past 15 years. Airline employs 21 full-time employees at the facility, which offers sales support for the company’s customers in central Pennsylvania and Maryland.

As a part of the merger, Willard Macfarland, president of Trola-Dyne, will take on the role of general manager and will continue to oversee the former Trola-Dyne employees at its 7 Interchange Place facility.

“We are so pleased to be joining forces with Will and the great team at Trola-Dyne,” said Mark Steffens, CEO at Airline. “With Trola-Dyne’s industry expertise and tremendous customer synergies, we see a bright future for the combined entities.”

Along with continuing to work at the York facility, Trola-Dyne employees will be enrolled in Airline’s Employee Stock Ownership Plan once they become eligible.

“We are delighted to be a part of the Airline team and look forward to passing on the benefits of Airline’s broad product portfolio, engineered systems offerings and strong customer support capabilities to our customers,” said Macfarland.

Airline currently plans to operate both of the York facilities for the foreseeable future, with Airline’s smaller facility acting as a staging area for the larger Trola-Dyne facility.