Founded in 1982, Huntsville-based Gleason Research Associates Inc. has built a specialized niche as a defense contractor in missile systems and engineering services. Over the years, the company has developed a strong reputation in the government contracting industry and employs about 140 workers, many with highly specialized skills.
But in the past few years, the company founders, physics Ph.D. Thomas Gleason and engineering Ph.D. Robert Yates, became ready to retire. By late 2012, Gleason had retired and Yates had passed away, and the company, owned by their families, continued to thrive. “The Yates and the Gleasons were not interested in running a company, but they were very concerned about the employees and their families and our contribution to the industry, ” says Chuck Vessels, president of GRA.
After considering several methods for allowing the owner families to cash out of the business, Vessels decided that an employee stock ownership plan was the ideal option. Not only would an ESOP provide a way out for the owners, but also it would allow the company to maintain its culture and guarantee that employees’ jobs would stay local to Huntsville and the company’s other sites, rather than placing decisions into the hands of an out-of-town buyer.
With the help of New York investment banking firm CSG Partners, along with a host of other advisors, Gleason Research converted ownership to an ESOP earlier this year. “Our culture has always been very much focused on employees and their families, ” Vessels says. “With an ESOP, we’re able to protect that and provide additional benefits to them as owners of the company.”
Weighing the Options
Before deciding to take the ESOP route, GRA considered other ways to allow its owners to divest their investments. For instance, over several years, various investment bankers approached the company about potential mergers and acquisitions. “Dr. Gleason and Dr. Yates were satisfied with what they had done, but they were concerned about the culture of a potential acquirer, ” Vessels says. “We all knew people who had been at companies that were acquired, and we had a feeling we knew what was coming. Being engineers, we don’t like risks.”
GRA leaders wanted to ensure their employees that their jobs would stay in their present locations and their company culture would remain constant. When one investment banker asked Vessels if he’d considered an ESOP, Vessels was sure it wasn’t the right answer. “Everything I’d heard was that ESOPs are confusing and nobody ever knew where the money was, ” he says. “The banker told me to get open-minded and learn about the new rules. After his presentation, I realized he’d given us the perfect answer to meet all our needs.”
ESOPs have been around since 1974, but they have not been used as much in Alabama as in other parts of the country, says George Thacker, managing director at CSG Partners. Negative anecdotal evidence against ESOPs, such as what Vessels had heard, is fairly common — “if there’s only one ESOP in town and it wasn’t set up well, people think ESOPs are all bad, ” he says. “But you can’t confuse a strategy with company issues. For instance, I know hundreds of IPOs that haven’t gone well, but that doesn’t mean that an IPO is a bad strategy.”
Currently, ESOPs have become increasingly more common in the government contracting industry, perhaps because merger and acquisition activity has slowed. “In the past 24 months, we’ve closed six ESOPs for government contracting companies, ” Thacker says. “For businesses that are dependent on highly capable or specialized talent, an ESOP can be an ideal scenario, because it provides talented employees with an equity stake in the business without them having to put up any money.”
Making It Happen
An ESOP is essentially an additional retirement plan for employees, as well as an ownership vehicle that guarantees employee input in company decisions. When a company is 100 percent owned by an ESOP, and the ESOP is structured correctly, the company does not have to pay federal income taxes, says Thacker. The company then uses its tax-free cash flow to pay down its debts and to continue growth and hiring, boosting the local economy.
To create the ESOP, Gleason Research relied on CSG Partners to bring together all the necessary parties — such as bankers, lawyers and appraisers — and handle negotiations. CSG located capital for the deal with bank financing and additional lenders. It also ran the transaction from beginning to end, Thacker says.
The company put that cash into the ESOP, and the ESOP used the money to pay the owners and their families for their stakes in the company. Employees who are vested in the company receive shares of the ESOP, providing them an ownership stake that they can sell back to the ESOP upon retirement. While GRA is scheduled to pay off its loans for the ESOP within five years, Vessels is “convinced we will pay it off early, ” he says.
All About ESOPs
ESOPs began in 1974, and today, approximately 9, 000 privately held companies have implemented them. Investment banks that organize ESOPs say interest in the structure is increasing.
“We’ve seen a trend over the past five to seven years, ” says George Thacker of CSG Partners. “The aging baby boomer demographics have really fueled a growth in owners looking at it as an option. In addition, higher income tax rates have dramatically increased the number of transactions, and, as people become more familiar with ESOPS, that’s another factor.”
ESOPs in general are governed and regulated by the Department of Labor under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code.
“There is substantial compliance required to make sure employees are protected, ” Thacker says. “In addition, with Gleason and all of our transactions, there is a third party trust company that solely represents the interests of the employees.”
As aging companies face growing pains and founding owners reach retirement age, they often look for ways to divest assets while protecting their employees.
“When a company sells in a M&A, it risks changing culture, impact on employees and loss of jobs to the community, ” Thacker says. “But all across the United States, in big cities and small towns, ESOPs are being implemented, wherever there are companies facing the same issues.”
Nancy Mann Jackson and Dennis Keim are freelance contributors to Business Alabama. Both are based in Huntsville.
Text by NANCY MANN JACKSON