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Sweet marketing music

Tanner Montague came to town from Seattle having never owned his own music venue before. He’s a musician himself, so he has a pretty good sense of good music, but he also wandered into a crowded music scene filled with concert venues large and small.But the owner of Green Room thinks he found a void in the market. It’s lacking, he says, in places serving between 200 and 500 people, a sweet spot he thinks could be a draw for both some national acts not quite big enough yet for arena gigs and local acts looking for a launching pad.“I felt that size would do well in the city to offer more options,” he says. “My goal was to A, bring another option for national acts but then, B, have a great spot for local bands to start.”Right or wrong, something seems to be working, he says. He’s got a full calendar of concerts booked out several months. How did he, as a newcomer to the market in an industry filled with competition, get the attention of the local concertgoer?

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by Kevin Weise
June 2005

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Should you give stock to employees, and if so, how?

Available for a little more than three decades, an estimated 10,000 ESOPs are in place in United States’ businesses and about 8.5 million U.S. workers are enrolled in the plans, which allow employees to own stock in a company without having to purchase shares.

Rather than employees paying to participate in an ESOP, a company contributes funds to employee accounts as part of a trust that invests in the company’s stock.

Continuing to grow in popularity, employee stock ownership plans offer unique benefits to employees and businesses, but can also entail considerable costs and paperwork.

Is an employee stock ownership plan right for your business?

Rewarding tool

Employee stock ownership plans can serve as a great employee retention and reward tool, a great ownership transition vehicle and a great benefit plan for businesses.

Donlar, which specializes in commercial construction such as schools, churches and medical facilities, instituted an ESOP as a large piece of an ownership change to provide increased incentives for employees and to encourage employee loyalty.

“The money invested in our company stock encourages employees’ productivity because they know their personal performance contributes to the increased value of the company, which is directly reflected in employees’ ESOP accounts,” says Karl Anderson, controller for Donlar. Bremer Trust serves as both trustee and plan administrator for Donlar’s employee stock ownership plan.

Studies have also shown that employee-owned companies outperform their competitors with increased sales and productivity as well as employee retention and satisfaction.

Companies generally pursue ESOPs to allow for transition of ownership and business continuity. The following tax incentives are also notable:

• Business owners who sell their stock to a company ESOP can realize tax advantages if certain requirements are met.

• Companies can also deduct ESOP contributions within certain limits.

• Participants can enjoy tax-deferred savings. The funds in an ESOP are tax deferred until an employee retires.

• Business owners looking ahead to retirement may consider an ESOP as a step toward selling their business.

The negatives

While ESOPs provide a host of benefits, they can be expensive to initiate and maintain. First-year costs can reach $20,000 or more. 401(k) plans are much more common and therefore less costly to develop and operate.

Likewise, an ESOP shouldn’t be a company’s only retirement plan option. A 401(k) plan, for instance, allows employees to diversify investments so their retirement isn’t based solely on company stock.

Some larger companies offer a 401(k) pre-tax match in company stock and then allow employees to diversify the rest of their retirement savings. With the exception of diversification requirements, ESOP participants can’t access their balances until they leave the company or retire.

Employees at Donlar receive an ESOP statement once a year, so “I think they sometimes forget about it,” Anderson says. “We have the challenge of continually promoting the value of the ESOP to employees by providing information about our plan and its benefits.”

Donlar joined the ESOP Association and is involved in events organized by the Minnesota chapter to better understand how other companies promote their plans to employees.

“You’re also adding a whole new group of owners to the company,” he says. “Management really needs to understand this and buy into the concept for it to succeed.”

How to establish

Businesses considering employee stock ownership plans should first talk with an accountant and attorney to discuss start-up costs and ongoing administration, both governed by some complex rules.

If the company isn’t publicly traded, an independent valuation by an outside accounting firm is required prior to establishing an ESOP. This can cost an additional $5,000 to $10,000 annually.

In addition to banks, accountants and attorneys, the Minnesota Chapter of the ESOP Association is a resource for local businesses: www.mnesop.org

Employee stock ownership plans can also be used to leverage financing for an expansion, an acquisition or capital improvements. Companies considering an ESOP can move toward this plan in stages. An ESOP doesn’t have to happen all at once.

Bremer Financial Corp. is also an ESOP company. Employees own 8 percent of the company’s stock with the remaining 92 percent owned by the not-for-profit Otto Bremer Foundation.

“I think ESOPs present a great opportunity. They give our employees a chance to be owners in our company,” Anderson says. “Most employees wouldn’t have this opportunity without an ESOP. The plans are a great way to keep employees motivated and involved.”