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A New Year Means New Transitions!

Paul Faletti
Written By: Paul Faletti, Jr.
Posted on January 05, 2018

For me, this is the time of year when I tend to focus on transition. We are moving from one calendar year to the next, from prior goals and objectives to new ones, perhaps even shifting to a new diet or exercise regimen; this new year provides us all with an opportunity for transition. For some in 2018, there will be even more significant changes such as transitioning their business to new ownership. Buy-sell activity was robust in 2017 and is forecasted to remain so in 2018, and not just within the retail automotive market. Major motivational factors are in place such as a healthy stock market (and thus, strong multiples), a baby boomer demographic that is migrating towards retirement, and industry disruptions that will require time, talent, innovation, and resources to overcome.

NCM is passionate about assisting dealers in their transitions, particularly when it comes to a change of leadership and cultivating responsibility to a successor. Our General Management Executive Program is designed to ensure that transitions of power within an organization are successful and build upon the foundation that already exists.

But what if you are interested in transitioning the entire business to a new owner or set of owners? If that's the case, typical transactional elements naturally come to my mind … What about a sale to a private organization, or perhaps selling to a public company for cash, stock, or a combination thereof? There are other considerations, of course. For example, would you sell to a competitor? How about to a party that might implement new policies, procedures, or decisions that would be to the detriment of your employees? Would you accept a premium for your business if you knew that the buyer would implement layoffs or treat your customers differently? Selling or transitioning a business is much more than just "getting to an agreeable number." There are numerous factors to consider and questions you must ask yourself before making a firm decision.

An option you may not have considered …

One question that I often ask NCM clients who are considering selling their business is, "Have you thought about selling your business to your employees?" Usually, I get quite a confused stare in return as I can see the owner thinking, "How could they afford to buy my business?" or "How would that even work?" Allow me to introduce you to the world of Employee Stock Ownership Plans, otherwise known as ESOPs. NCM is living proof of a great company that was successfully sold to its employees, utilizing the ESOP structure, and it has truly been a wonderful decision.

According to the ESOP Association, "business owners set up an ESOP by selling some or all of their shares to an ESOP trust. Participating employees accounts are credited with shares of stock, according to a set formula. The account balances for employees represent their beneficial ownership in the company." ESOPs are tax-exempt, defined contribution retirement plans that act much like a 401k with the exception that an ESOP is designed to invest primarily in the stock of the employer.

Benefits of an ESOP

For an owner, there are potential tax benefits that can be realized when selling to employees. It insures that your employees, who have worked hard for you to build your organization, are financially rewarded. Selling to an ESOP can also mitigate the concern of selling to a competitor or rogue company that may lay off your colleagues. For employees, an ESOP provides the opportunity for a retirement plan that is funded by the company within a more stable environment versus a sale to a new and unfamiliar new owner.

What I like most about ESOPs, and the benefits they can provide to employee-owners, is the culture and work environments they create. NCM is 100% employee-owned and has been for more than 25 years. When you are interacting with anyone at NCM, you are working with an owner of our business. This motivates our employee-owners to take pride in their work and make sure that they are not only performing at the highest standard possible, but holding their co-workers accountable to the same. We have a saying at NCM that each and every day, in everything we do, we must "think like customers and act like owners." Each of us has a responsibility to help build the retirement accounts of everyone in the organization.

The results are in

An analysis by the Employee-Ownership Foundation found that during the great recession, "12.1% of all working adults in the private sector report having been laid off in [2010], compared to just 2.6% of those respondents who says they own stock in their company through some kind of company-sponsored employee ownership plan."

A Washington State study found that "ESOP participants made 5% to 12% more in wages and had almost three times the retirement assets as workers did in comparable non-ESOP companies."

As the CEO of an employee-owned company, I can tell you that the benefits go beyond retention, income, and retirement statistics. ESOPs have a significant impact on employee morale and performance. Employee-owners treat the company like it's their company, because it is! As one colleague aptly described, "It's the difference between the way you treat your own car versus a rental car." When you feel personally invested in something you own, you have an active interest in seeing it succeed. This has been quantified additionally in a study conducted by Douglas Kruse and Joseph Blasi in 2000 concluding that ESOPs enjoy greater longevity as well as 2.3–2.4% higher sales, employment, and sales per employee annually than would otherwise have been anticipated.

Sound too good to be true?

Everyone is an owner with a retirement plan funded by the company resulting in a lower turnover rate and higher morale. What's not to like? The reality is that there are very few ESOPs out there right now. Of the roughly 28 million businesses in the US, there are only approximately 7,000 ESOPs. Why? First, as may be the case for many reading this blog, most people don't know they exist, let alone how they work. Second, ESOPs take time and resources to establish and manage, thus companies should be of a certain size to justify the expense and resources required. Third—to put it simply—ESOPs are often misunderstood and are, therefore, not even considered as an option for some.

Are ESOPs for car dealers?

While I can't provide you with advice for your particular situation, I can tell you that there are car dealers who have successfully sold to an ESOP and thrived. With a quick search on Google, you can find some great examples for yourself. Could this be an answer to the recruitment and retention challenges that have plagued our industry? Or even in your very own dealership?

As we enter this potential time of transition in 2018, I hope that those considering the sale of their dealership will at least take the time to investigate the Employee Stock Ownership Plan model. Consider transforming your employees into owners and discover the many benefits associated with this unique structure.

Learn more about how to make the best decisions for your business by enrolling in our GMEP program with the NCM Institute. This multi-session program will give you the skills necessary to make 2018 your best year yet!

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