Good Beer Hunting

The DL on ESOP, Pt. 1 — Examining the Pros and Cons of Employee Ownership Beyond the Headlines


In May, Great Lakes Brewing Co. became the latest in a small-but-growing number of breweries offering an Employee Stock Ownership Plan to allow for staff to invest in the company. This kind of transition has occasionally taken place across the country for several years, with New Belgium Brewing—a GBH underwriter—as one of the more well-known examples. Other breweries to shift their ownership structure to ESOP have included Odell Brewing, Modern Times, and Harpoon.

Seemingly universally embraced by professionals in the industry and beer enthusiasts alike, announcements like the one from Great Lakes are meant to highlight a commitment to the “small and independent” mantra of the Brewers Association. By following such a path, companies say, they can guarantee financial viability for years to come.

While that may be true, there’s more to an Employee Stock Ownership Plan than the simple explanation of “this plan turns staff members into owners.” Like any investment, there are considerations to be made before deciding it’s right for you.

In simplistic terms, an Employee Stock Ownership Plan (ESOP) works exactly how it sounds. It’s a defined contribution plan for employees designed to invest primarily in stock of the employer. Then, after an employee leaves the company, the stock can be sold back to the employer, subject to some restrictions. While employees are owners through the ESOP and—typically—able to vote on major corporate matters through an ESOP trustee, the original remaining owners usually retain certain levels of control in day-to-day matters, management, and sometimes in a majority of shares.

According to the National Center for Employee Ownership, there were nearly 6,700 ESOPs in the U.S. in 2015, the most recent year of data available. That total covered about 10.8 million active employees who earned an average of almost 12% annual contribution to their accounts. An average annual return for a 401(k) plan is historically expected to fall in the 8-10% range.

From an industry perspective, beer falls within the two most common fields that use ESOPs: service (28%) and manufacturing (22%). Since 2010, an average of 229 new ESOPs have been created each year.

The formation of ESOPs can act as a way to build liquid assets (money) outside of traditional investment opportunities, which, in the beer industry, have typically included buyouts from larger breweries or private equity.

Plans like this are often cited as a way for breweries to give back to their employees, especially long-tenured ones, and provide an attractive form of cash flow that can help a business immediately with various forms of debt or reinvestment into the company. There have been several instances within beer that have shown both these things, explicitly or within broader context of business decisions.

In the case of Great Lakes, co-owner Dan Conway noted in a company release that “many recognize our company as having a family-like culture—we’ve just expanded the size of the family.” The brewery is also growing, with the announcement including reference to possible expansion plans in Cleveland’s Flats neighborhood, and the ESOP acting as “a strong foundation for the next 30 years and beyond.”

As Schlafly Beer co-founder Dan Kopman told BeerAdvocate in 2015, part of the reason his company decided to sell 20% of the brewery to employees was to quickly raise money and take advantage of a shifting local marketplace in St. Louis. Until Anheuser-Busch's 2008 sale to InBev, "it was considered a civic duty to drink Budweiser in St. Louis," he told the magazine, noting that “he didn’t want to go into debt to take advantage of the Budweiser brand diminishment.”

However, the spirited language in these announcements can at times gloss over the business realities of why such a move might be good for a business. ESOP isn’t done solely to give power back to employees, though that is certainly part of it— there are real considerations related to corporate finance and succession decisions. Providing investment into a company that can then build on itself helps original owners as well as staff who buy-in to an ESOP, but there are also considerations toward undiversified risk as employees end up heavily invested in relatively illiquid stock of the employer. Stainless steel and canning lines aren’t likely to have high-end resale to make up for lost money, after all—just ask Green Flash.

While the voices shared through brewery announcements of ESOPs may present a slightly extra-positive view of these situations, not only do these programs offer an incentive for recruitment and retainment of employees, they have real business incentives, too. Some of those could include:

  • Consolidated ownership: An ESOP offers immediate money to buy out an owner in a situation where an investor may want to cash out. Rather than negotiating a deal among current owners or outside investors, an ESOP can liquidate a collection of ownership shares which are subsequently allocated to employees. In some cases, owners cite this move as a way to maintain independence. When Harpoon announced its ESOP in 2014, co-founder Dan Kenary told Brewbound it would provide “liquidity for shareholders that were looking to sell, continuity, and a framework for future stability.”

  • Expansion: A quick influx of money raises capital that can be used to support new equipment or opportunities for growth. Rather than seeking a loan specifically for assets, for example, a leveraged ESOP could provide that pool of money. In this case, a loan is taken out for the purchase of employer stock from the company or an existing shareholder, and the stock is then held by the ESOP for allocation to employees as the loan is paid off. Craft beer’s recent ESOP company, Great Lakes, announced in March it would buy eight acres of land for expansion for an undisclosed price. The purchase was a portion of 20 acres already bought by an investor group that took out $5 million in loans for the entirety of that space.

  • Increased Cash Flow: There a number of tax benefits associated with an ESOP, particularly leveraged ESOPs, that can reduce the employer's tax liability. Also, making retirement contributions in employer stock, rather than cash, can aid in cash flow as well.

But just as there are positives, there are potential risks, as with any kind of investment. Compared to other retirement options, ESOPs create substantial undiversified risk for employees, whereas a 401(k) could spread money across different kinds of investments to better create future potential for return. If you’ve ever heard a financial planner talk about the value of diversification, this would be the opposite. To aid with this, employers could combine traditional retirement plans with an ESOP.

This is of importance in beer, where breweries can easily suffer from being young, undercapitalized, or over-leveraged (or any combination) in an industry that is wildly capital intensive and competitive. That’s a lot of risk, especially considering that a company must plan for the long term when vested employees can take their money due to retirement or leaving the company. Stock re-purchase obligations can be costly down the road if not considered from the start.

ESOPs are typically presented as an opportunity for greater democracy, but they don’t always guarantee it. An ESOP trustee acts as the shareholder of record, who is commonly appointed by the board of the company, and employees aren’t often given controlling power over decision-making. They may have a voice among others (who is appointed as their representative), but don’t get to drive the direction of the company in an “everyone gets a vote” kind of way.

Alternatively, if an ESOP does provide significant employee ownership, that doesn’t deny changes in the future. The example of Full Sail Brewing is a good one: after going ESOP in 1999, the company became 58% owned by its staff. They then voted—98% in favor—in 2015 to take on significant private equity as a way for employee owners to cash out.

In covering that sale, New School Beer suggested a potential reason stemmed from the loss of a contract brewing agreement to produce Henry Weinhard’s at Full Sail, which shifted to SABMiller facilities instead. A strong financial future was less clear without that guaranteed money coming in, so accepting the purchase removed future risk. “That investment had allowed Full Sail to reinvest back into its brewery, keep its debt low, and sustain growth,” Ezra Johnson-Greenough wrote at the time.

In addition to all this, leveraged ESOPs could also carry with them risk taken on by employees in the form of a bank loan. When a company issues shares of stock, it’s common to borrow money from a lender to finance the transaction, then shift that loan to the ESOP to purchase stock. That places responsibility for the repayment onto the ESOP, which repays the loan with contributions from the company to allow the release of ESOP shares to employee participants.

This also sets an elongated timeline where establishing a form of ESOP doesn’t automatically mean employees become owners right away or have the ability to make serious money as soon as they’re issued stock.

If an employee leaves a company with an ESOP, access to their vested stock may be restricted. Any ESOP distributions that are not rolled over to another qualified retirement plan are included in gross income and may be subject to any early withdrawal penalties, just like other retirement plans. If an employee leaves before the ESOP’s specified normal retirement age or while an ESOP loan is outstanding, distributions can be restricted. From an employer point of view, this offers protection from a large chunk of money leaving the company at one time. Planning is still needed to meet this obligation, however.

“A qualified retirement plan is an expense line item for a business that should be managed with rent and salary and everything else,” says Rocky Fioro, COO of Prairie Capital Advisors, which has worked with Odell and Harpoon on their own ESOPs. “This is a significant expense.”

Great question.

As the U.S. beer industry has evolved, one of the beneficial outcomes for entrepreneurs is that the number of business models and ways to run a company have changed as well. In every individual case, what’s best for a brewery, its ownership, and employees will vary by initial investment, market demand, and many more variables. Placing a label of “good” or “bad” on a potential ESOP can be as subjective as preference for the styles of beer being made at these companies.

As mentioned several times over in a recent GBH series focusing on salaries, recruitment and creating a successful brewery, culture plays a large role in beer. Creating a workplace where staff feel valued and integrated into the business can pay big dividends, even if it’s not through an ESOP. In part two of this series, we’ll talk to some of staff members who have been involved in brewery ESOP programs.

—Bryan Roth

The DL on ESOP, Pt. 1 — Examining the Pros and Cons of Employee Ownership Beyond the Headlines

The DL on ESOP, Pt. 2 — Insight and Expertise on Employee Ownership