In it together

Will Raap wanted something different for his business. Soon after he founded Gardener’s Supply Company in 1983, he realized that he wanted his company to be defined by a mission; one that brought people together and empowered them be a part of its success. Raap’s commitment to that mission, and the commitment of the Gardner’s Supply Company family, led to the IGC adopting an employee stock ownership plan (ESOP) in 1987.

Today, Vermont-based Gardener’s Supply Company is 100 percent employee-owned and operates two retail locations in Burlington and Williston, and is in the process of acquiring a third location in Lebanon, N.H. The company employs around 250 people, though not all take part in the ESOP, as employees must work a certain number of hours to buy shares, according to President Jim Feinson.

The employees who do own stakes in the company are in turn motivated to take on the role of a part-owner, he adds.

“On a day-to-day basis, we have a workforce that are very engaged. [Team members] are very informed, and they’re very aligned,” Feinson says. “We do a lot to educate our employees about how the business works and about how what they do makes a difference to the total results of the business. So, you end up with a workforce that is very committed and working very hard for the good of the community and themselves.”

Feinson describes this engagement as being a crucial part of GSC’s “ownership culture,” the overarching philosophy that encourages staff to take an active role in the company’s success.

Building something great, together

From the beginning of Gardener’s Supply Company, Raap believed that a fully-committed team of employees was crucial for success.

“My view, from a philosophic sense, was that a business can work best particularly if it’s a mission-driven business,” Raap says. “It can work best if people feel fully engaged in the mission at all levels. We started out as a hard goods company trying to find new ways for people to garden successfully, and that mission can be applied toward growing healthier food, getting better exercise, working with the nature around your house — all of those things have benefits to them. To unlock those benefits as components of selling products for people to garden with felt like the kind of business I wanted to be associated with.”

However, a mission alone won’t cut it — building a business takes capital. Most new businesses require investments from outside parties to get off the ground, but this money from external shareholders often comes with strings attached. Raap sought a way to fund the fledgling company while minimizing outside influences.

“My thought was, if we can find engaged, motivated and committed people and make them feel like they are connected to the success of the business through ownership, we’re going to unlock more enthusiasm for the mission we have, and that is going to allow us to raise less outside money to try and support the growth,” he says.

By selling shares of the company to employees, Raap started to cultivate an ownership culture among his staff while building capital for the company, and effectively created Gardener’s Supply Company’s ESOP. Also, by having the ESOP in place, Raap had a succession plan in place for when he approached retirement. In 2008, he transferred majority control of the company from himself to the ESOP and the company became 100 percent employee-owned.

“One of the advantages of an ESOP is that you don’t have to do succession all at once,” Feinson says. “Employees can essentially acquire more of the company or the owner can sell to the employees over time. It was about nine years ago when the ESOP was still a minority shareholder, Will was still the majority shareholder, and he decided to go the rest of the way. We did a transaction called a leveraged ESOP, where we borrowed money to buy out the rest of the shares from Will.”

What goes into an “ownership culture”

Raap and Feinson maintain that one of the keys to the successful employee ownership model at Gardener’s Supply Company is the commitment shared by all stockholders. Everyone involved in the company, no matter their position, takes individual responsibility for the success of the group.

“They really think and act like owners,” Feinson says of the GSC workforce. “Not only do they want to do a good job in their own job, but if they see other areas where the business can be improved, we have a very participatory culture so they’re making suggestions and we’re listening to those suggestions, so it creates this culture of continuous improvement in the business. In both good times of seizing on opportunity and even in tough times, we really pull together.”

As for how a company can go about establishing an ownership culture, Raap says there are a lot of moving parts involved, but transparency and collaboration are major components.

“It’s your organizational framework and systems associated with it. It’s the leadership it’s committed to and whether or not it’s fulfilling that commitment. It’s hiring people who understand what the mission is and are attracted to it,” Raap says. “People still have to fill boxes, answer phones, design catalogs and choose products and do financial statements and all that stuff, but you’re part of a larger framework. That framework makes you feel informed, and there’s a transparency that is built into the process.”

While an ownership culture can enable an ESOP to take shape and allow employees to take charge of the direction of their company, it can also have the benefit of attracting driven and team-oriented people to fill the company’s rosters. Feinson says GSC’s reputation as an employee-owned company helps to recruit quality candidates.

“We find that having this ownership culture and being known for it and having people engaged in this way helps us attract great employees, and they stay here a long time,” he says. “That’s a tremendous value to the business.”

How it works

When established by a private company, an ESOP functions as a non-profit third party that holds employee-owned stocks in a trust. The company contributes to the ESOP, which in turn buys the shares on behalf of the employees. There is no out-of-pocket cost to the employees for the benefit.

“When you’re doing the transaction to buy [company] shares from the owner, there is legal counsel and usually there is a trustee,” Feinson says. “In an ESOP model, the shares are actually held by a trust for the benefit of employees. So, we’re not direct owners. Instead, a trust is like a 401K that holds our investment.”

In the event an employee-owner decides to retire or otherwise depart the business, the company is obligated to purchase that employee’s shares from the ESOP at their current value.

“Annually, you have to have an appraisal that a third party [performs], so there is a fair reckoning of what the value of stock is,” Raap says. “So, as people acquire stock and they might choose to leave or retire, that valuation is managed fairly.”

One significant advantage of the ESOP model is the tax shield it provides. When a company such as Gardener’s Supply Company becomes majority employee-owned, it effectively becomes an S corporation and is taxed differently from an LLC.

“In an S-Corp, the profits are not taxed at the corporate level — they pass through to the shareholder, who pays the taxes,” Feinson says. “In this instance, the shareholder is an ESOP, which is a nontaxable entity. So, the corporation doesn’t pay taxes, and the ESOP doesn’t pay taxes. So, in that period of time, the company doesn’t pay any federal income tax.”

This tax credit offsets the cost when S corporations like Gardener’s Supply Company buy back shares as employees exit the business.

“When the employee then leaves, like taking money out of a 401K, they pay the taxes,” Feinson says. “In the meantime, 100 percent [employee-owned] ESOPs that [operate as] S-corps are tax-free entities, and that’s an incentive that Congress designed to encourage employee ownership. It’s a great sharing of wealth, not with just a few shareholders, but the employees broadly all become shareholders and all become capitalists and all get the benefits of increasing the company value.”

Buyer beware

Despite the positive aspects of an employee stock ownership plan, it’s not a business model that’s right for everyone. Feinson emphasizes the amount of administrative oversight and due diligence required to legally and effectively establish an ESOP.

“Usually there is a trustee, and sometimes that’s an outside trustee who is looking out for the shareholders, and that person might be paid,” Feinson says. “And then there are just the transaction costs in running the plan and doing due diligence, so it can cost $50,000-$75,000 to set up a plan. Then there is some additional benefit administration — that can be a third-party administrator. There might be $10,000 or $20,000 a year in costs to run the plan. In a big picture, they’re not huge costs, but they’re something that folks will want to be aware of.”

For any retailer curious about the employee stock ownership model, Feinson recommends seeking out guidance and resources from organizations such as the National Center for Employee Ownership and the ESOP Association, as well as their regional and local chapters and affiliates.

Raap cautions that more traditionally managed and owned companies may have difficulty adjusting to the more participatory structure of an ESOP model. The change can be jarring for both employees and owners.

“It’s hard to turn a switch overnight,” Raap says. “The cultures in [ESOP] businesses have to be consciously cultivated and transformed. Some people like to be employees — they like to go home at night and say, ‘I don’t have anything else to worry about.’ When you’re actually an employee-owner at some level, you have a bit more responsibility and engagement. The process of building a healthy employee ownership culture takes time.”

Despite the challenges, the team at Gardener’s Supply Company is confident that employee ownership has shaped the retailer for the better and that the ESOP model has proven to be an attractive option across the green industry and beyond. Feinson says that consumers — garden center shoppers in particular — are becoming more conscious of the organizations they buy from. He believes this can be a strength for ESOP-run companies.

“Increasingly, I think consumers are concerned about where they do business and they like to keep it local,” Feinson says. “They like a business that shares their values. So, for owners who are committed to their community and want to see their business stay in the community … it’s a benefit not only in attracting and retaining employees and creating a great culture, but it helps us attract and retain new customers. It’s a win in a lot of ways.”

Raap thinks alternate ownership models like ESOPs could help the next generation of garden center owners differentiate themselves in an industry under regular threat of disruption from Amazon and big box stores.

“It’s an old industry trying to figure out how to operate in today’s new world,” Raap says of IGCs. “The independent garden centers that are left are going to have to do it differently than their parents did it. How you capitalize on your business and how you foster employee engagement are just a couple of the thresholds of transformation and change that are going to have to be negotiated by the independent garden center world.”