In 2020, after more than 70 years under family ownership, Tates Rents, the Boise, Idaho-based rental operation that serves both the construction and general tool markets, including a large base of do-it-yourself homeowners, switched gears. The Tate family sold ownership of the company to its employees through an Employee Stock Ownership Plan (ESOP).
“There were many options for succession, but preserving the culture and multigenerational legacy was important to the Tate family,” says Haley Hennessey, who became CEO of the company in 2019.
For the company, which has 135 employees, nine rental locations as well as a dispatch center that delivers and maintains its “heavy iron” equipment, the switch has offered many benefits.
“Employee ownership is an excellent fit for our company,” Hennessey says. “Our employees already took enormous pride in providing the very best rental experience for our customers. Matching that passion with a financial stake in the company makes for a dynamite culture where everyone is thinking like an owner, making good business decisions and treating people right every day.”
The overall transition took about “six months from start to finish,” Hennessey says. “However, I would say that much of the succession work was done before the family started the transaction. The Tate family had removed themselves from the day-to-day and made sure a leadership team was in place before selling to the ESOP. This is key to the ongoing success of an ESOP.”
The Tate family also was proactive by bringing in expert help to assist with a smooth transition.
“They had a sell-side adviser who specializes in ESOP transactions. He quarterbacked the process and got the rest of the team in place. We had an excellent team for the transaction and still use our original trustee and valuation firm,” she says.
That was essential for the ESOP to be a success, Hennessey notes.
“ESOPs are qualified plans, and in my opinion, ESOP experts are necessary to guide the process. There are plenty of hoops, but we had great advisers who made the process relatively seamless. As a 100 percent employee-owned company, we are exempt from income tax. That advantage more than offsets any hoops (and adviser fees),” she says.
Employees were receptive to the plan. The response has been “very positive,” Hennessey says. “But with any change there is some uncertainty. Employee sentiment has improved each year as the company stays true to its core values post-transaction and as the team watches their ESOP balances grow.”
For employees, “ESOPs can be a powerful tool in building retirement wealth,” Hennessey adds. “As our ESOP matures, I expect to see meaningful financial benefit for our employees. Employees do not contribute to earn stock. The plan is company-funded, so it’s a total win for employees.”
As far as the financial aspect, “all employees are eligible to receive shares after they’ve met the eligibility requirements. Each year they continue to meet those requirements, they receive an allocation of stock and continue to vest,” she says. “ESOPs can have different qualification requirements and rules, but the basics are governed by ERISA (the Employee Retirement Income Security Act of 1974). One of those regulated aspects is how shares are allocated. Each year, every employee receives the same percentage of compensation in stock. Said another way, the percent of payroll you represent is the percent of the stock pool you receive.”
As far as the structure, the employee-owned company has “a traditional board of directors with inside and outside directors to govern the company. This board is appointed by our trustee, who is in place to protect the interest of the employee owners. We also have an ESOP committee made up entirely of employees. This committee’s goal is to further the company’s understanding and engagement with the ESOP,” Hennessey says.
It’s not just employees who see advantages from an ESOP, she notes. “Customers benefit by way of our employees taking extra care in their work. Our team is always looking
for efficiencies and ways to innovate for a better customer experience,” she says.
Because the experience for Tates Rents has been “overwhelmingly positive,” Hennessey says she would encourage anyone in the succession planning process to consider this option.
There are organizations that can offer insight and assistance. “The National Center for Employee Ownership and The ESOP Association have great resources and data that illustrate the power of ESOPs. ESOPs are more efficient, outperform their peers and employees retire with significantly more wealth,” Hennessey says.
For those who might be considering going the ESOP route, she also suggests setting up their leadership team to operate independently of ownership. “That is important. The Tate family was purposeful in restructuring the company before the transaction and that is key to the sustainability of the company through transition,” she says.