THOMASVILLE, N.C. – As more Baby Boomers retire over the next decade, the topics of succession and how to carry on a business are becoming more important across many industries, including furniture.
When crafting their exit strategy, business owners will consider the obvious options, such as mergers, acquisitions or passing down the company to their next of kin. These routes will work for many, and each has their share of pros and cons.
But there’s another less-explored option that may be becoming more popular in the industry: Selling the business entirely to employees. Over recent years, many furniture companies have opted for this path, including Norwalk Furniture, Steve Silver, WG&R, Kentwood Office Furniture and Wisconsin’s KI furniture, one of the country’s largest employee-owned firms.
Another is case goods and contract furniture manufacturer Whitewood Inds., a privately owned company that was sold entirely to its employees in 2018 through an Employee Stock Ownership Plan, or ESOP.
Jorge Mata and Ron Feibel founded Whitewood in 1982 as a supplier for ready-to-finish furniture stores. Over the past three decades, it diversified by adding finished furnishings, custom finish capabilities, as well as designing and manufacturing hospitality and contract furniture.
In 2017, the two began thinking about transferring ownership.
“We were both in our 70s, and we decided to hire a financial advisor to give us the various options for exiting the company,” Mata told Furniture Today. “The ESOP solution we felt was the best in order to maintain the legacy we had created.”
Mata said he and Feibel wished to ensure the company’s long-term financial stability and wanted employees to become financial participants in the success of the company. An ESOP was the obvious choice.
Whitewood first borrowed money to pay Mata and Feibel off. That loan is then paid off by the company using generated profits. Employees, who are considered owners simply by being employed at the company, couldn’t personally contribute to the purchase of the company nor can they purchase additional shares. The only way to attain ownership is by being an employee. Employees, however, must be with the company for one year and be at least 21 years old to be eligible.
Five years later, Mata reflects on the decision. Was it the right move?
“Absolutely,” said Mata, who is still in the same leadership position, along with Feibel. “It was the best solution to help us achieve our goal. It allows long-term employees to participate and take ownership of the company they were so instrumental in growing.”
An advantage to the ESOP model is favorable tax incentives on the sale, including low corporate income tax. Another upside is that a business gets to remain independent and culturally distinct. Employees will likely feel more engaged, as they’re more incentivized to care that the company does well.
But there are downsides. ESOPs can be complicated and expensive, particularly for a small business. Owners must also reconcile trusting employees with a higher level of responsibility.
For Mata, the only downside was its complexity. “The only drawback I can think of is that it was very much a regulated transaction,” he said. “It’s very important to maintain proper documentation and follow the guidelines set forth by the Internal Revenue Service and the Labor Department.
Mata predicts ESOPs will continue to gain steam.
“I think as companies become more familiar and knowledgeable with ESOPs, their popularity will continue to grow,” he said. “Fewer kids are willing to take over their parents’ business, and the owners are looking for an exit strategy.”