Boomers opt for ESOPs as a succession planning tool

Unicast Co., a client of SES Advisors Inc., is a gray-iron foundry based in Boyertown that has operated since the 19th century. Under the ownership of Louis “Lou” Monaco Jr., a seasoned foundry executive, the company has thrived the last 30-plus years.

Monaco Jr., in his mid-60s, knew he had several good choices to cash out of his investment in Unicast. He decided to sell to the folks he knew best, his employees. To accomplish this, he used an employee stock ownership plan, or ESOP.

ESOPs are a way to sell a company internally to employees. ESOPs enjoy several valuable tax benefits, including the possibility for a selling shareholder to defer capital gains tax on sale of shares to an ESOP and the ability of a 100-percent ESOP-owned company to operate tax-free as an S-corporation.

Moreover, ESOPs allow an entrepreneur to control the destiny and preserve the legacy of a company and to provide significant wealth creation opportunity for employees. Monaco Jr. believed the success of Unicast was in good part because of the people who worked there every day. He thought that the dedication of the employees ensured the long-term success of the company.

His personal hero was his father, a laborer at Westinghouse, who died in his 50s, leaving his widow, Monaco Jr’s mother, with only a small pension. Monaco Jr. had always intended that the people who worked for him would have more opportunity and reward for years of loyal service.

He learned about ESOPs not long after arriving at Unicast. He believed for a long time that this would be his preferred liquidity and succession strategy, assuming he could get fair value for his ownership. Unicast established the ESOP as a retirement plan in 2001, initially funding small contributions of company stock. The ESOP remained a small shareholder for many years yet developed significant cash resources through company profit distributions.

Meanwhile, Unicast received offers from both private equity and strategic acquirers. While these offers provided a price benchmark and the promise of mostly cash at a closing, Monaco believed the outside proposals did not offer the combination of benefits that the ESOP could: fair market value in the sale, flexibility in structure, the ability to retain governance control, a variety of tax benefits and control over the timing of his involvement and retirement with Unicast.