The ESOP holding company: an answer to the failures of private equity
As governments look for better ways to peer inside the growing private equity machine to better regulate certain industries, a profoundly different model for acquiring and sustaining companies is emerging: the Employee Stock Ownership Plan holding company.
The concept of the ESOP holding company generated a modest but audible amount of buzz in employee ownership circles earlier this year when South Burlington-based Benoure Plumbing, Heating & Air Conditioning, a residential and commercial mechanical contractor, was purchased by Empowered Ventures, a 100% employee-owned holding company based out of Indiana. Benoure’s founder, Robert Benoure, Sr., found in Empowered Ventures a buyer offering a rare deal: fair compensation for the company his family built and the assurance of Empowered Ventures’ “do no harm” approach, which eschews meddling in the company’s operations and management in favor of trusting and empowering the company to continue leading itself into the future.
Similar results often come from acquisitions where ESOP companies purchase a privately-held business and roll them into their employee-ownership structure. To name a local example, the employee-owned tree services company Davey Tree purchased Woodstock-based Chippers, Inc. in 2021, changing little about the company while making the Chippers employees participants in the Davey Tree ESOP. The president and CEO of Chippers at the time, Mundy Wilson Piper, said it was crucial to her that both the present and future staff would have “the opportunity to become employee owners and their jobs would remain local” while clients would continue to “work with the same Chippers team members they have come to know and rely on during our 35 years in business.” As evidenced by Davey Tree, employee-owned companies tend to exhibit their employee-centric values when purchasing a business, serving as conscientious and capable stewards of their newly acquired assets and employees.
The ESOP holding company, however, has a couple notable advantages over the acquisitive ESOP company. Firstly, as a separate entity, the holding company is able to channel its resources into identifying and vetting new prospects as well as providing support via management expertise and investment capital to the companies in its portfolio. Additionally, the holding company can greatly decrease the level of risk for its employee owners by purchasing a mix of companies operating in different sectors, making their equity more resistant to industry-specific market swings.
In contrast to acquisitive employee-owned companies, private equity firms have returns on capital rather than stewardship top of mind when making decisions at every step from purchase to exit. They aren’t particularly worried about the sustainability of the growth strategies they pursue, nor the benefits or drawbacks to employees, some of whom may end up out of a job as these new owners look to cut or reduce expenses while chasing “cost optimization.” Like flipping a house, their goal is to buy cheap, spend as little as possible making it appear more valuable, and sell to the highest bidder, walking away with as much profit as they can. Some negative externalities are expected and tolerated so long as they don’t cut into those profits.
A small number of private equity firms have recently sprung up looking to balance attractive returns for investors with positive outcomes for the companies being acquired (Apis & Heritage Capital Partners, for example), but these remain the exception. The ESOP holding company offers a promising alternative, aiming to hold ownership of the companies they acquire over the long-term, supporting their growth from a healthy distance, and giving all employees at those companies an equity stake in the full ESOP portfolio. If there’s a different model that could hope to compete with the momentum of private equity acquisitions, this may be it.
