When you read pool and spa trade
publications, including
AQUA, or attend
conference seminars, succession is
a hot topic. “‘Do you have a solid
succession plan in place?’ is what
I always hear,” says Rene Huston,
president of Patio Pleasures in Sun
Prairie, Wis.
But for Patio Pleasures, the subject
of succession has been a puzzling one.
“In our business, there are four of us,
which provides a level of complexity —
you have four different visions of what
a succession plan may look like,” says
Huston. Patio Pleasures is also family
owned and while some of their kids
have worked a little for the company,
others have not, so Huston and
partners Tom Tritt, Adrianne Morgan
and Brett Huston did not have a lot of
confidence in the second generation
taking over.
Then, the team started to look at
an Employee Stock Ownership Plan
(ESOP), and they liked what they saw.
With the help of ESOP Partners — a
company that guides business owners
all throughout the United States as
they launch successful ESOP plans —
Patio Pleasures officially announced its
transition to an ESOP, effective June 1,
2024.
Georgia Spa Company of Auburn,
Ga., recently celebrated the same
milestone.
When Josh Kemerling, CEO,
observed friends in the pool and spa
industry selling to large corporations,
he feared Mark Stevens, founder, would
do the same. “I have been with Mark
since day one in 2004,” Kemerling
says. “He had mentioned giving me
the first right of refusal to purchase the
business, but as Georgia Spa Company
grew, especially during the pandemic,
I realized I was not going to be able
to afford this. We’ve grown this out of
reach for me.”
That’s when Kemerling sent Stevens
an email where he proposed three
options: (1) Kemerling and others form
a group to purchase the company, (2)
Stevens semi-retires and Kemerling,
along with an executive team, takes
over the business, or (3) they consider
an Employee Stock Ownership Plan.
Stevens initially expressed doubts
about the ESOP process; however,
after attending a conference hosted
by the National Center for Employee
Ownership (NCEO) titled “Is an ESOP
right for you?” and getting some
guidance, he became convinced the
ESOP route was the right one.
The company proceeded and on
May 2, 2023, during a company-wide
meeting, Stevens surprised employees
by revealing he had sold the business to
them through an ESOP.
Throughout the extensive process, both Patio Pleasures and Georgia Spa
Company learned a lot. “It’s a whole
different language,” says Stevens. “It
was initially way over my head, and
that was a hurdle to overcome — the
complexity of it all.”
“Two years ago, if you had asked me
about an ESOP, I would have looked at
you and said, ‘I don’t know what that is.
Tell me more,’” adds Huston.
It’s true that as pool and spa
companies consider if an ESOP is
right for them, the process can be
overwhelming, and it’s hard knowing
where to start. As such, we spoke with
Matt Middendorp — a consultant at
ESOP Partners who helped guide Patio
Pleasures every step of the way — to
gain a basic understanding of an ESOP
and how a company can come to
realize if it’s right for them.
IS AN ESOP RIGHT FOR YOU?
The first thing to establish when
deciding if an ESOP is right for you,
is to determine if you are in the right
place to even be considering one, says
Middendorp.
“I tell companies they are in the
right place for an ESOP if (1) they are
starting to think about what’s next
for their successful business, and the
name on the door means something to
them; (2) the company’s accountant,
attorney or banker suggested an ESOP
might be worth considering; (3) you’ve
built a successful business and want
to reward your employees who have
helped you get there; or (4) you’re
competing against an ESOP company
for customers and for new hires, and
they are beating you at both. After
you have determined if you check one
or more of these boxes is when you
should look into it.”
For Patio Pleasures and for Georgia
Spa Company, it was really No. 3 that
was the motivating factor. “Our team
is such a big part of our success and
a big part of our family,” says Huston.
“We thought, what a cool opportunity
to set them up for great retirement
success and wealth.”
“A lot of these companies that I
work with, where an ESOP is right for
them, want to keep jobs in their local
community,” adds Middendorp. “They
want to give back to their employees.
A lot of them have their names on the
football field or high school basketball
arena — they’re ingrained, and they
want that to continue. That really
doesn’t happen in most circumstances
when a business is sold.”
WHAT DOES A SUCCESSFUL ESOP
COMPANY LOOK LIKE PRE-ESOP?
(courtesy of Middendorp)
- Strong balance sheet and cash flow
- Enough taxable income to make
tax savings worth it - Minimum of 15 to 20 employees
(guideline, not a rule) - Able to convert to an S-CORP or
C-CORP - Effective communication between
management and employees - Has a succession plan in place or
intends to put one in place before
the owner transitions out
WHAT IS AN ESOP?
There are several people involved in
an ESOP transaction: the seller, the
company (aka, your baby) and the ESOP
trust. “How this works is, the seller is
selling the company to an ESOP trust,”
says Middendorp. “The ESOP trust is
overseen by the trustee, who is usually
someone the seller hires.”
An ESOP can be viewed three ways…
As a business transition tool — An
ESOP is not necessarily an exit strategy,
as not every business owner who sells
their company is looking to get out. In
fact, most of them stay for years and
years. “For some owners,” explains
Middendorp, “an ESOP is a strategic
plan that allows their business to evolve
and meet their goals.”
For instance, when Patio Pleasures
celebrated its 20th anniversary this
year, the company was asking what’s
next. “We’ve got so much more we
want to accomplish yet in this industry,”
says Huston. “For us, we still have a
very strong commitment for at least
five years to make sure the company
continues to grow.”
An ESOP will help to contribute to
the company’s growth. According to
the NCEO, companies grow 2.3% faster
post-plan than they would have expected
to pre-plan. ESOP companies also see
a 4 to 5% improvement in productivity,
on average, in the year the ESOP is
adopted. And they grow on average 2.3
to 2.4% more per year.
Why? “Companies can attract better
talent, and they improve employee
retention,” says Middendorp. “ESOP
companies are also 4X less likely to lay
somebody off. It also helps that their
retirement portfolio is typically two or
three times more working under an
ESOP.”
As an employee ownership vehicle —
You can align the financial goals of the
company with the financial goals of your
employees. “Employees can consider,
when they contribute to the success of
the company, there is a direct benefit to
them through the ESOP trust. That kind
of alignment just doesn’t happen under
any business plan,” says Middendorp.
Huston agrees. “The reality is that
when you operate as an owner, you are
100% tied to the investment and to the
liability and success of the company.
You make decisions differently than you
would if you were an ordinary employee
who is not tied to that final outcome. As
an ESOP, everyone shares in that owner
mentality, and is more aware of how the
success and profitability of the company
can benefit everyone on a much greater
scale.”
As a qualified retirement plan —
An ESOP is provided at no cost to
employees, and employees don’t have
to put their own pre-taxed dollars into
the retirement plan. “An ESOP is also
the only qualified retirement plan that
is allowed to borrow money,” says
Middendorp.
An ESOP can also help older
employees transition into retirement,
specifically those who work in the
pool and spa construction and service
sectors. “These are people who have
worked in the construction industry
for a long period of time,” explains Middendorp, “and when they hit 50, 55
years old, their bodies just can’t keep
doing it. They also may recognize they’re
probably not saving enough. An ESOP
can help them transition into retirement,
and allow them to take the next steps in
their life comfortably.”
Another benefit: “The portion of an
S-Corporation owned by an ESOP is
generally not subject to state and federal
income taxation. If you are an S-CORP,
and you are 100% employee owned,
you no longer pay state or federal
income tax as a business, and that’s not
a small thing,” says Middendorp. “It’s
proportional. If you are 30% employee
owned, you get 30% of that benefit. If
you are 60% employee owned, you get
60%, on up to 100%. For any business
owner, what would you do with that tax
money for your business? It’s something
to think about when you are thinking
about your goals and accomplishments
as a business owner.”
3 STAGES OF ESOP
EXPLORATION
STAGE 1: I THINK I WANT TO ESOP.
Where does the thought process start?
“You may have something going on in
your business, and/or want to level-up
your business, depending on what your
motivations and goals are, you may have
something you want to figure out,” says
Middendorp.
Next, you hear about ESOP and,
being curious, you may attend a
session. You may connect with an ESOP
professional and begin to gain clarity
and confidence that this could be what
you’re looking for, so you decide to
formally create a decision-making tool
known as a feasibility study. (ESOP
Partners puts together this no-cost initial
assessment which gathers information
needed to make key decisions about
corporate structure, the sales transaction
and financing, plan design, regulatory
compliance, ongoing administration and
more.)
“I think this is where some people
may get cold feet,” explains Stevens.
“Before you consider the feasibility
study, I recommend having three pieces
in place. (1) Get educated, and hire a
consultant. (2) Ask yourself, ‘Are you
willing to let people come in and take an
unbiased look at all your operations —
and not get offended when they say you
need to be doing something differently?
(3) Do you have a management team
in place where your business could run
without you? If not, you may need a few
years before you proceed.”
The feasibility study looks at all kinds
of company data, says Huston. “They
look at how many employees you have,
how many hours they work, how much
money they make, and you can’t have
too many family members on payroll. It
can’t be too top-heavy where four people
make the most amount of payroll, and
the rest makes a lot less.”
This decision-making tool then allows
a company to ultimately say yes or no
— let’s proceed or I’m not interested in
moving forward.
STEP 2: I KNOW I WANT TO ESOP.
After a company determines an ESOP
is right for them, it’s time to set one up.
Three tracks happen all at once, says
Middendorp.
“You hire your professional team
— your trustee, the person you are
negotiating with to sell the company.
They represent the ESOP trust, who
buys the company from the seller and
negotiates the sales price. How often
do you get to hire the person you are
negotiating with for the sale of your
company? It’s a pretty neat concept.
“Next, you hire an attorney who
specializes in ESOPs, someone who
aligns with your personality and goals,
as they will be instrumental in ensuring
the process goes smoothly. And finally,
you create the ESOP itself, and decide
how the ESOP trust is going to run.”
At this stage, Huston says, you
determine some important specifics.
“For example, we chose that employees
must have a minimum of 1,000
hours a year to qualify for the ESOP,
and they must be 21 years of age to
qualify for our vesting schedule. We
also went back and said that for our
prior employees, who have been with
us for at least six years, we are going
to fast track their vesting schedule to
show that longevity has its rewards;
these people are automatically 100%
vesting from day one. So there’s a lot
of different things you can do, and
these decisions were all made with the
guidance of ESOP Partners.”
Negotiations are then executed to
make sure the sellers get the return they
were expecting. “Now, that may sound
like a small thing,” says Middendorp,
“but ESOP negotiations are very
different from what you might have seen if you’ve ever sold a business or
been part of a due diligence process,
selling to private equity or selling to
a third party. The goal of an ESOP
negotiation is to find the fair market
value of a company. Two groups of
people come together to find the right
price versus two groups of people
coming together with very different
goals, trying to best each other. With
an ESOP negotiation, it happens more
quickly and with much less angst.”
STAGE 3: WE ARE AN ESOP.
At this point, the ESOP is operational,
and employees are getting onboard.
Management should be able to
understand and answer all questions
employees may have. “It is important
to create an employee ownership
committee, who walks through a
certification process, to oversee that
ESOP culture and help to drive it forward
— they are ambassadors with knowledge
and can spread good information. The
last thing you want is people running to
Google searching ESOP and finding the
wrong information.”
For Georgia Spa Company, this
stage was the most fun, as it’s when
they made the announcement. The
company shut down all six of its retail
stores, across all departments, and
gathered offsite at a country club where
they normally hold company celebration
dinners. The executive team had worked
hard on goodie bags and had purchased
a large cake.
“When Mark started the meeting, he
said, ‘There have been a lot of rumors
recently that I sold the business,’”
says Kemerling, as the rumor mill was
flying leading up to the meeting. “He
said, ‘At the end of the day, I have sold
the business, and I’m here today to
introduce you to the new owners.’”
He recalls that everyone was looking
around, wondering who it could be.
Stevens then asked employees to stand
and said, “‘Look around, you now own
this business.’ And you could hear a pin
drop. Once employees realized it wasn’t
a payroll reduction — that we were
giving them the business — there was a
lot of excitement.”
Kemerling looks back on that day and
still gets goosebumps and is filled with
emotion. “I look at 20 years of history,
and that’s certainly a big day where the
sun was shining on us, and we were
smiling from ear to ear.”
FOR THE RIGHT STORY, A
HAPPY ENDING
As great as it feels to reward the people
who helped you climb the ladder,
Middendorp says that, in the end, it’s
about the potential tax benefits of selling
to an ESOP that really sets your business
up for long-term success. “But ESOP is
not an option for every business owner,”
he says. “Ultimately, it needs to line up
with your goals and the goals of your
business. You need to understand where
your business is, and where you are
trying to get to.”
“You also have to understand that,
if you are looking for an immediate
payout, and you’re ready to retire or step
away sooner rather than later, that this
may not be the right fit for you,” adds
Huston.
That’s not to say it can’t be done, as
Stevens was able to semi-retire; he now
serves as chairman of the Board. “But
that’s because Mark already worked
very little on the business side, and for
the past 10 years or so, only worked on
the accounting side,” says Kemerling.
“He hadn’t sold a hot tub in 15 years,
and hadn’t delivered one in 19 years.
We’re very fortunate he looked at the big
picture of those he left behind.”
“I had friends who were pushing
me to go the other direction,” says
Stevens, “and I had the opportunity to
sell a couple different ways — but this
route, ESOP, was right for me. Not only
to preserve the company culture, but
because I had a longer exit runway. I
was able to take advantage of an ESOP
ending.”
He encourages people in their 40s to
be thinking about how they’re going to
exit the business in 10 or 15 years.
“Why not?” he says. “Don’t wait until
you feel you have to sell the business
just to sell the business. Put those pieces
in place now, and get everything cleaned
up, because ultimately, this is how we
should have been running the business
for the past 15 years. It’s so much more
enjoyable. You’re not constantly putting
out fires. You’re not constantly doing
things that every business owner hates.
You’re doing the stuff that you enjoy —
and that’s growing a business, and it’s
thriving, because everyone has a piece of
the puzzle.”
For more information on employee stock
ownership, contact Matt Middendorp at
[email protected].
