Is ESOP right for your company?

Ask yourself this: What good would it do to have your employees own your tree care company? Sounds like a nightmare, right? According to Larry Ryan, there are tremendous advantages, both philosophical and financial, to setting up an ESOP.

ESOP stands for employee stock ownership plan, and he says it has transformed his company, Ryan Lawn & Tree, headquartered in Kansas City, Mo. It’s costly at first, but it can pay big dividends (literally) later.

Photos courtesy of Ryan Lawn & Tree.
When the company is owned by the employees, everybody pitches in to help on even the dirtiest jobs. That includes Company President Larry Ryan, seen working on this service project.

Ryan has a degree in forestry and worked in tree care early in his career, but says it was really the restaurant business that gave him the incentive to go ESOP. His first work experience in tree care was with a company that had terrible employee relations, and out of disillusionment he got a job in the food industry.

“It seems strange, but that’s where I learned business, in the food industry,” he says. Because restaurants are often so marginal financially, they have to pay particular attention to accounting, marketing and, especially, employees. Most of the workers are entry-level, and they come and go rapidly if they aren’t treated well. When he started his own landscape maintenance company in 1987, he was determined to do it right.

He did OK, but it wasn’t until he sold his business, or a percentage of it, to his employees in 1998 that his company really took off. It took off in morale, in customer service and in cash flow, and it grew like crazy. It might not work for everybody, he says, but it works for people who are imbued with an entrepreneurial spirit combined with a sense of cooperation. Those two traits can create a great company, because those kinds of people thrive in customer service. In tree care, the client is what it’s ultimately all about.

Ryan Lawn & Tree has been gradually becoming more tree oriented, and the acquisition of other companies as an ESOP will facilitate that and help grow the company.
Employee/owners in an ESOP are motivated to be more productive and save money by treating the equipment well.

First, some facts. An ESOP is a formal designation for a closely regulated method of effecting employee ownership. According to the National Center for Employee Ownership (NCEO), this can be done to save a struggling company, but usually it is “a kind of employee benefit plan” where a healthy company sets up a trust fund for employees, and the company contributes to the fund with cash or stock. Employees earn money from the trust account and may be paid according to job category or other guidelines; the entire process is closely controlled by the Internal Revenue Service.

Both public and private companies may be ESOPs, and there are specific requirements, such as having an outside company evaluate share management every year. When employees leave or retire, the company must buy back the shares that participants have accumulated, which is part of the return on their labor investment as part owners. Go to the NCEO Web site at www.nceo.org/index.html to find out more details about this complex process.

Many types of businesses have become ESOPs, and Ryan says he got the idea from his community bank. In talking to the employees in that ESOP, he found the spirit of cooperation and inspired responsibility very attractive. His company was already an S corporation, and although a company doesn’t have to be incorporated, he found that to be a good start as far as tax benefits go.

Tree climbing has become a forte of Ryan Lawn & Tree after the acquisition of a Springfield, Mo., company that had a lot of expertise in that area.

However, that was a minor reason for going ESOP. Ryan felt that having employees personally invested in the business would be an ideal way to have the company become a beneficial part of their lives. He feels that employee treatment, motivation and energy are what makes good customer service, and the fit was perfect for tree and lawn care workers. The better the employees feel about the company, the happier their world is.

The other major reason was that he saw it as a great way to grow the company. “We treat everybody as an owner,” Ryan says, and that gives them great incentive to be productive, and be happy doing so, since productivity improves the health and profitability of “their” company. Profit-ability also leads to reinvestment in the company, as well as an increase in the price of stock shares, and that leads to the opportunity for growth. Ryan says that as president, he limits the amount of money he earns, and the money that remains in the company can be reinvested. Which makes everybody happy.

Part of this equation is that such a company—one that is highly profitable for its employees and is growing its image in its service area—attracts more good workers. Ryan Lawn & Tree now hires mostly college-educated staff, especially in its tree division, where about 40 certified arborists are employed. Total staffing is now at 102 employees.

“Today, we’re really selective about who we hire,” Ryan says, “and I think we are the employer of choice” in this field in his service area. He recruits on college campuses, but he constantly gets calls from employees of other green industry companies who are intrigued by this company model. Having great employees is essential to this type of organization.

A related benefit of having dedicated employee/owners is that when a worker is committed to the means and goals, he will also assist in cutting the cost of doing business. “We really have worked to save money,” Ryan says, because that gives them more to reinvest. Workers who use their tools and trucks with tender loving care, for example, are benefiting themselves in the long run.

In addition, at Ryan Lawn & Tree, every employee is trained to do every job called for at a client’s home or business. The company emphasizes this, because it leads to good morale, as well as increased productivity. Ryan also encourages employees to move from job to job within the company to learn all aspects of what it takes to keep clients happy, and as a means of finding the job that makes them happy.

The company hires “permanently” for these reasons. Realistically, Ryan knows that not everybody will stay with the company or be able to buy into this cooperative spirit, but he wants people who will want to retire here. That’s why, in addition to hiring based on many other characteristics, such as pride in work, dress and family values, he places great emphasis on personality. A cooperative spirit is what keeps an ESOP at a high-efficiency level.

The company also has many other employee benefits. Even an entry-level job at Ryan will start at about $30,000 per year, and within five years that can graduate to about $45,000 or more. That is in addition to the accumulation of shares. This is possible because of high productivity.

Another benefit is that approximately 90 percent of the health care costs for the employee and his family are paid by the company. That adds up to an average of $500 per month for every employee, Ryan estimates, but he looks at these kinds of benefits as a form of social responsibility to not only the employee and the company, but to the nation as a whole. The company also provides 401 (K) plans and three weeks’ paid vacation, as well as providing the signature red Ryan trucks to about 60 percent of staff.

Ryan’s motivated to build a thriving business. His goal for the company is to have it be at $100 million in sales by the year 2030. The company already has six offices in Missouri, Kansas and Oklahoma, and sales have gone from $4 million, when he set up the ESOP, to over $10 million in 2006. Future expansion will be at least partly through the acquisition of smaller companies, and Ryan says the Kansas City and St. Louis markets are targets, as is the possibility of setting up new branches as far away as Texas and Illinois.

This illustrates another good point about ESOPs. They not only facilitate the hiring of good people, they enable the company to buy out other good companies. Ryan points out that his Springfield, Mo., branch came about after the company purchased a local tree care company. The owner, Tim Crews, felt it was advantageous to be part of Ryan Lawn & Tree’s ESOP.

Now, Crews runs that branch and is a great asset, Ryan says, because of his expertise in climbing and other skills that he is teaching to the rest of the employees. The company started as a lawn mowing company and is gradually moving more to tree services, which now makes up about 40 percent of revenue. New employees of an ESOP can acquire stock after they have been employed a year, and the amount they get is regulated and based on their salary as a percentage of the total salary pool.

Growth is facilitated because of the increased cash flow possible in an ESOP. No federal taxes are paid on the percentage of revenue from the ESOP, and that money can be plowed back into the company. In addition, stock values increase. Ryan’s has risen to $142 per share from the original $51.

One downside, Ryan says, is the cost of the ESOP. They’re pretty expensive. It cost him about $10,000 to set up, and that figure has escalated to triple that today. In addition, it costs him about $10,000 annually to maintain the designation. He says it saves him 10 times that, however, when he adds up tax benefits and other savings.

Another potential downside is that the original owner can gradually lose control of the company. Ryan sold only a portion to employees in order to keep his job and maintain his philosophy, and that is now at about 66 percent and increasing. The trick is to maintain that original philosophy so that his ideas will still be inclusive and cooperative, and he will still be desirable as an employee.

“There will come a point where they can fire me,” he says. However, they will owe him a lot of money if they do, and he will retire feeling good about his success.

Don Dale is a freelance writer and a frequent contributor. He resides in Altadena, Calif.