How We Do It: June 2000, Employee Stock Ownership Plans

In this age of consolidation in the landscape industry, creating and implementing an Employee Stock Ownership Plan (ESOP) could be considered "bucking the trend." That’s what we did at Gardeners’ Guild, San Rafael, Calif.

To become an employee-owned company, Linda Novy, founder, president and chief executive officer, had to have a willingness to do so. Founded in 1972, the company grew from a one-truck operation to nearly 100 employees and $5 million in revenue by 2000. Seeing Gardeners’ Guild become a perpetual company – one that would continue to operate after her retirement – was always Novy’s goal. In the mid-1990s, after considering the pros and cons of the many exit strategies available to a sole owner, Novy determined that the best alternative for a smooth transition in ownership for both herself and the employees was an ESOP. The program benefits the company owner by carrying forward the same mission and core values the current team embraces and rewards the existing employee base with ownership and an incentive to stay with the company. In an ESOP, the owner also receives lump sum tax advantages and avoids the capital gains tax.

The process of becoming employee-owned began in 1997, and soon after Novy determined the company would need an experienced team to lead it through this transition. The first step was securing the services of a qualified, experienced ESOP attorney. Having an attorney to orchestrate all of the intricacies associated with an ESOP was imperative. Next, both buyer and seller needed to agree on a valuation company to conduct a fair market value appraisal of Gardeners’ Guild to determine the sale price.

To ensure an accurate valuation of the company’s stock, the valuation company required 10 years of financial history and five years of financial forecasts, along with other information about the company’s operations. Key staff members were interviewed about company philosophies, goals, hiring practices, clients – everything about who we were and how we operated. Not only did gathering this information produce a very thorough and professional valuation of our company, it provided us with a financial plan for the next five years.

Lastly, we secured the services of an ESOP administrator to handle the annual reporting of stock values to all of our future employee-owners.

Once this team was in place, the real work began. Not only did we have a business to continue running, but we also needed to invest time and resources in assembling the ESOP. This included creating a formal plan, submitting the plan to the IRS for approval, negotiating the initial stock purchase transaction, securing financing with a lender and providing ongoing communication and status updates to all future Gardeners’ Guild owners.

The initial transaction was completed Dec. 23, 1998, and the employees of Gardeners’ Guild became 40 percent owners. In addition, the stock purchase agreement allowed additional purchases over the next five to seven years, permitting the employees to own 100 percent of the company’s stock in the future. Today, 100 percent of the eligible employees are in the ESOP.

The creation of the ESOP has forced Gardeners’ Guild to operate differently. Although it’s a great benefit to the employees, the ESOP does not happen without a considerable amount of time and expense. The program has heightened our collective focus, made us budget in more detail, plan more proactively, invest more in employee-owner training and improve our cash flow management.

All in all, the transition to an ESOP requires Gardeners’ Guild to continually improve in all the various areas of business because the employee-owners are demanding it.

The author is chief financial officer of Gardeners’ Guild, San Rafael, Calif.