A “no hassle” form of employee ownership
by Karen Kahn
The Employee Ownership Trust (EOT) is a relatively new concept in the United States, though it is a popular form of employee ownership in the United Kingdom. An EOT may be structured with a perpetual purpose trust managed by a trustee board and trust protector, similar to an Employee Stock Ownership Plan (ESOP), but it is not a retirement plan. In an EOT, employees of the firm share in the firm’s profits on an ongoing basis; they don’t have to wait until leaving the firm to reap the benefits of ownership.
EOTs offer business owners a private, flexible, easy-to-understand, and low-cost form of employee ownership.—Chris Michael of EOT Advisors
According to Chris Michael of EOT Advisors, 13 U.S. firms have transitioned to Employee Ownership Trusts. Among the most recent are Optimax Systems, Inc., based in upstate NY, and Bicycle Technologies International, in Santa Fe, NM, both of whom Michael assisted in making the transition.
Optimax Systems, Inc.
Optimax, founded in 1991, is the largest manufacturer of prototype optics in the United States. Its high-quality precision optics are essential for many emerging technologies being deployed in aerospace, defense, medical, and semi-conductors. The company has been growing at about 20 percent a year, and currently has annual revenues of around $50 million.
Optimax, since its inception, has been a worker-centered operation, with generous profit-sharing benefits, an empowering culture, and deep investment in education and skill building. The company hires many of its employees straight out of high school, teaches them the craft of making precision lenses, and supports them in continuous learning at work and at nearby community colleges and four-year engineering schools.
That culture stems from the leadership commitment of CEO Rick Plympton and Chairman Mike Mandina, who saw the Finger Lakes economy—driven by corporations like Kodak, Bausch & Lomb, and Xerox—collapse in the 1980s and 1990s. In the wake of those large firms, new, more nimble firms took hold, including Optimax.
In recent years, Plympton and Mandina, who are approaching their retirement years, have been considering the best way to ensure the business they have grown to over 300 employees continues to create quality jobs in the Finger Lakes region for years to come. After meeting Chris Michael at a National Center for Employee Ownership conference, Plympton says, they settled on the EOT, and converted to that structure in early 2020.
An ESOP didn’t seem like the right fit,” says Rick Plympton, CEO of Optimax. Employees only “get a piece of paper with the promise for cash later.”
Notably, Plympton says, he had looked at converting to an ESOP but it didn’t seem like the right fit. Most importantly, employees only “get a piece of paper with the promise of cash later.” In the Finger Lakes region, Plympton notes, many families have experienced the failure of that kind of promise—they are not enjoying the retirement that they anticipated. Though he doesn’t expect Optimax to fail, he also knows “it can happen.”
He became excited about the EOT, when Michael explained that if Optimax was owned by an EOT, it could be designed as a perpetual trust with one overriding purpose: to continue to grow and create good jobs for the region. The trustees would resist any sale of the company, and employees would share in the wealth in perpetuity.
Optimax remains a for-profit C-corporation inside the Trust, with independent leadership. The Trust has the authority to remove any leaders that are not honoring the values of the corporation; they can only sell the firm if it is insolvent. Any proceeds from a sale would go to debtors and nonprofits in the community (i.e., no individual can benefit), but that scenario is highly unlikely.
Optimax has long shared 25 percent of monthly profits with employees—about $1,000 per month per employee in recent years, says Plympton. The Trust continues that practice. Each dollar in profit will be divided with 25 cents going to employees; 25 cents going to taxes; and 50 cents going back to the business to finance growth.
Bicycle Technologies Incorporated (BTI)
In February 2021, after a year of extraordinary sales in the bicycle business, BTI also converted to an EOT. The company, founded in 1993, services bicycles and sells bicycle parts, from frames to accessories. Co-founder and owner Preston Martin says the move to create the EOT was “inspired by employee responses to an internal survey last summer.” The staff wanted to develop career pathways and avenues for greater compensation.
“The EOT honors and rewards the contributions of those employees who have stuck with BTI through highs and lows,” Martin told Bicycle Retailer and Industry News. “There has been a noticeable culture shift in recent months, with employee-members taking greater interest in our customers and suppliers, our systems, and bottom line.”
An EOT, like other forms of employee ownership, gives employees an incentive to improve the business. As profits go up, so do paychecks.
EOTs don’t have the same tax benefits as ESOPs, but there are advantages. Since they are not governed by the Employee Retirement Income Security Act (ERISA), they are much simpler to create. Martin says that the setup costs and annual administration fees are far less. In addition, the profit-sharing payments count as compensation to employees, so for the business, the payments are tax deductible.
BTI believes the EOT will help the firm continue to grow and succeed. Says Martin, “BTI had a remarkable year in 2020. With revenues up nearly 80 percent, the employee-members have a strong incentive to repeat that success.”
An Evolution of Capitalism
“EOTs offer business owners a private, flexible, easy-to-understand, and low-cost form of employee ownership,” says Michael of EOT Advisors. Michael has worked over the last six years to introduce the EOT concept in the U.S. and has been involved in all the transactions that have used U.S. trust law.
An EOT is established much in the same way as an ESOP. The corporation takes a loan for the trust and buys all or part of the equity owned by the current shareholder(s). The loan is paid back through corporate profits over time. In the case of Optimax, Plympton and Mandina donated a part of their equity; when they are ready to retire, the corporation will buy the rest of their shares at market value.
What makes the EOT easier to manage over the long-term is that “the EOT does not require third-party annual valuations, and it does not involve ongoing repurchase obligations (of shares from employees),” Michael explains. “It is a ‘no hassle’ alternative to the ESOP that many owners will appreciate.”
“What we are doing with the perpetual trust is an evolution of capitalism, where wealth generation is shared with the workers.–Rick Plympton, CEO Optimax Systems, Inc.
Plympton is truly excited about the EOT, and what it means for the future of Optimax and business more broadly. He says, “What we are doing with the perpetual trust is an evolution of capitalism, where wealth generation is shared with the workers. If we can get companies to do this across the nation, it will strengthen communities by reducing the wealth that is currently only going to the top 1 percent.”
“The EOT is a great way to ensure the longevity of corporations,” Plympton continues. “In an area like ours, lots of little firms grew up when the big ones failed. These firms, which developed unique technologies, are now being picked off by bigger entities; then the local divisions are closed, and we lose jobs.”
That isn’t what Plympton and Mandina wanted for Optimax, or what Martin wanted for BTI. “We may have been able to get more money for the firm had we sold to the highest bidder,” says Plympton, “but we would rather leave a legacy that continues to provide for our community.”
Karen Kahn is a communications consultant and the editor of Employee Ownership News.