The team at Ritchie Trucking’s Fresno division makes up about 35% of its 150-employee company. In January, the company completed its transfer to 100% employee-ownership.
Written by Edward Smith
When people think of employee-owned businesses, large companies such as grocery chain WinCo — with scores of locations across the western U.S. — spring to mind, said Poncho Baker, the new CEO of Ritchie Trucking in Fresno.
But for owners who want to see their business and life’s work continue, and for workers looking for job security and a larger stake in what they’ve helped build, transferring ownership via an employee-stock ownership program (ESOP) can mean keeping the integrity and the culture of a business alive.
Bruce Lackey had wanted to retire for a number of years before his company became employee-owned, said Baker, attorney and former Klein DeNatale Goldner law firm partner who had been general legal counsel for Ritchie Trucking for 22 years.
Lackey had thought of selling the business to an outside company.
“That was given serious consideration,” Baker said. “Then I think he looked at other companies that had sold to bigger companies, and there was no security for the employees.”
Any one of Ritchie’s eight locations employing a total of 150 people could be shut down, which concerned Lackey and his wife, Pam, Baker said.
“Bruce and Pam were really the type of owners that thought ‘how can we reward the people who made us successful?’”
That was when the decision was made to sell Ritchie’s Trucking to its workers, with the transfer of ownership completed in January. The process took about a year.
Ultimately, ESOPs are a retirement program for a company’s employees. By way of a loan or other fundraising method, a body of workers buys out the previous ownership. The process can be expensive. Attorneys and accountants need to be hired, and documents need to be drawn up. Both sides need to determine the value of the company before they can agree on the price.
They also need to decide how to divide up the stocks among employees.
At Ritchie Trucking, stock is divided up at the end of each year based on the percentage of payroll each worker is paid, Baker said. After six years, employees become vested in the company. For employees who have been with the company for a number of years, the concession was made that veteran employees would earn two years toward investiture each year.
The company handles logistics for big-ticket items like appliances for major retailers. They also do trucking and are expanding into deliveries directly to customers.
So, for the 1,290 appliances moving in and out of Ritchie Trucking every day, employees see a return when the company is profitable. This has created a culture company-wide where employees have taken it upon themselves to cut costs where they can to increase profitability.
Where once Ritchie Trucking was supplying hundreds of Keurig coffee cups to their employees for free each day, the employees took it upon themselves to begin charging a quarter for one, potentially saving the company thousands of dollars a year, Baker said.
“When you have 150 employees, that’s a cost no one ever really thought about, because they’re not paying for it,” he added.
Getting employees involved in the ownership process is key.
In an ESOP, companies no longer reward employees for doing specific parts of their job, per se, according to Patrick Mirza, director of communications for the ESOP Association. Rather, they are rewarded for helping the company grow.
When United Airlines attempted an employee-ownership program in the 1990s, trading future wages and benefits for pilots and machinists in exchange for 55% of company shares, animosity grew between the employees, their unions and their leadership, according to a 2017 article in Forbes.
“Management did virtually nothing to help employees understand the business of which they were now owners, or to encourage a culture of ownership,” the article stated. United declared bankruptcy in 2002, ending its ESOP program.
At Bland Co., a construction and solar company based in Fresno that went to employee ownership in 2017, half of the workforce is made up of young people, said Jack Darrah, CEO. Explaining the value of longer-term payouts versus short-term advantages can be difficult to people who have to pay rent or fill a gas tank.
Instilling in employees that sense of ownership is critical, especially in the formative years, said Darrell Hefley, president of Fresno-based fire alarm and suppression product supplier Jorgensen Co., which went to employee-ownership in 1994.
The level of involvement does not come naturally, Hefley said. Committees are often formed to create transparency and educate workers on how much the success of the company relies on doing their job, especially in an ESOP.
“In a lot of cases, a lot of employees in a company like ours probably when they hear the ESOP, as much advertising as we did, as much information as we tried to impart, I don’t think it’s still a real thing for a lot of them,” Hefley said.
“Ownership has its rewards, but it also has risks,” said Mirza, whose association held a conference for ESOPs in Washington D.C. last week.
“Employee owners have to understand that.”
Benefits are largely hinged on the success of the company, and if employees don’t know why their stock didn’t perform so well a particular year, it could mean unhappy workers.
Mirza attributes the difficulty in ESOP formation to why the number of employee-owned businesses has remained static. Mirza estimates 7,000 companies nationwide.
What has grown though, he said, has been interest in the model.
The government has given its nod to ESOPs by way of tax breaks to both buyers and sellers. With certain C-corporations, business owners who decide to sell their companies to their employees get to do so without paying capital gains. And for S-corporations, they largely operate without paying taxes on the company, enabling those companies to invest back in themselves.
Big names like Bernie Sanders and Kirsten Gillibrand have both backed legislation in favor of ESOPs. In a rare bipartisan move, the Main Street Employee Ownership Act of 2018 was passed by both houses of congress and signed by President Donald Trump, making access to loans from the Small Business Administration easier.
In California, SB-553 would give ESOP companies a 3% bonus in the bidding process for state contracts. The bill failed in committee, but is currently in reconsideration, according to California Legislative Information website.
With a number of business owners approaching retirement, Mirza sees ESOPs growing.
“We have a great opportunity here with a bunch of business owners who are probably approaching retirement,” he said. “If they find out about ESOPs, if they know about ESOPs — do the research and find out when they’re a good solution — there’s a good opportunity for us to add a lot of ESOPs in the future.”