How Can a Driller Ever Retire? ESOPs May Help
One thing that the drilling industry has not progressed on is the future. Yes, we have higher safety standards, better environmental regulations, Tier-4 engines, and we can drill deeper in a shorter amount of time than ever before. But what about the true future? We need better recruiting tools for young professionals to want to be part of the industry. At the end of our careers there has to be an endgame in place for the owner, employee and business.
An employee stock ownership plan (ESOP) can strengthen the future of many drilling companies. At the end of 2014, more than 7,000 companies participated in an ESOP and over 13.5 million employees took part in the benefits. An ESOP is created when a sole owner, or family of owners, wants to sell a portion of their company’s shares to their employees. The ESOP creates a way to sell slowly or transfer ownership of a company to its employees. The major benefit of an ESOP is that the people who helped build the company are taken care of. The owner gets to transition gradually out while leaving in place the people that know and care the most about the business’ future.
In June, I had the opportunity to sit down with one of my favorite forward thinkers in the water well industry, Gary Shawver. He has always pushed the industry to do better and innovate. Shawver Well Drilling Inc. is an ESOP-participating company. Shawver is one name on a very short list of water well drillers that I know to have semi-retired from this business. Shawver Well Drilling is in its third year as an ESOP. It all started in 2011 when Shawver and his general manager attended the National Ground Water Association show in Las Vegas and sat in on an ESOP lecture.
This is my interview with Shawver and several of the employees at Shawver Well Drilling, who offer their perspective on the company’s move to an ESOP structure.
Gary Shawver, Transitioning to Retirement
Q. Were you thinking retirement at the ESOP Workshop?
A. I was not thinking retirement at all. I did not have a real plan for retirement, but I knew then that I needed to start working on an exit plan sooner than later. I see so many people try to get out of the business and have no plan in place. I was very confident that our general manager at the time would step up and lead the company.
Q. Did you go out and find an ESOP professional to help start the process?
A. First thing I had to decide was if I was going to make it an ESOP. ESOPs are highly regulated by the Labor Department. You learn that you cannot sell the company for more than it appraised for, no blue sky. I knew what assets we had and I knew dollar volume, but you do not know what your company is worth. It is one thing to have it on paper, but what is it really worth? So I went to our accounting firm and said we are exploring ESOP. I needed to know if I could live with what the company would appraise for that they come up with when I sell it to my employees. Our accounting firm had a colleague that was a qualified ESOP appraiser; you cannot just have anybody appraise the business. The individual has to understand the appraisal parameters for ESOP regulations. So the appraiser came back with a value that qualified for ESOP regulations. We were ready to go to the next step.
Q. So thinking about my father’s company and what a business is worth, is it customer-based or do they go back to prior year sales?
A. They go back five years — revenue and what your ratios are for five years. It is about how your business did in those five years; did it slowly increase or decrease ? There is a fixed method they use, and they have to document the appraisal very carefully.
Q. So who operates a plan?
A. You have to have a plan administrator. They basically help you put the whole thing together because the plan has to meet the parameters of the Labor Department.
Q. How did you find a plan administrator?
A. Our accountant put us in contact with a plan administrator. The appraiser came and sat down with us and discussed the ESOP. He then went back and did some work on our ESOP. We then had a conference call where he said, “Gary, I want you to think about a 100-percent ESOP sale,” as I initially had not contemplated selling the whole company. “If you do not want to do it after I outline it to you, then you do not have to do it.” But after he went through the why of a 100-percent sale, I decided to proceed in that direction.
Q. Is the process difficult?
A. One of the reasons why he wanted me to do 100 percent was that if you do 33 percent, which is the minimum amount you can do for an ESOP, then when you go to sell it fully you have to go through the entire process again. The process is pretty spendy. To go through the process again, you have to hire an ESOP attorney, ESOP plan administrator, ESOP appraiser. Also, most ESOPs are financed by the owner because very few lending institutions want to finance an ESOP. If a lending institution does make a loan, they do it at a higher interest rate because there is no one person they can tie a loan to like they can to an individual proprietor or a corporation. So I stayed the financer of the company, and ESOP regulation allows me to stay CEO and chairman of the board until 50 percent of shares have been paid to me.
Q. When did the ESOP go into effect?
A. We started the process of putting all the documentation together in May 2012, and started our ESOP in September 2012. So after 75 years of family ownership (the company was started by George Shawver in 1937) it became a wholly owned employee stock owned plan!
Q. What happens when you start an ESOP?
A. Labor Department regulations allow you some options, and you have to pick the right options that fit the company. We need to know what would be the right investing for our employees. Next, we had to go with a trustee. A trustee works on the behalf of the employees. You can have an inside trustee like myself or the general manager, or you can have an outside trustee. We opted for an outside trustee because we wanted a neutral person. Next, we got an ESOP attorney and she reviewed the entire plan and made sure we complied with all rules and regulations.
Q. Is it smart to find a quality ESOP company to help with the process?
A. Well you have to have a plan administrator. The Labor Department requires a plan administrator as, in essence, an ESOP is a retirement plan for the employees. What the plan administrator does is administer the plan from here on out. They ask a question like, how are you going to allocate stocks each year? How many shares are going to be given to each employee? This is set up by your plan. Every year you have to have a new appraisal, and that appraisal sets the value of the stock to be distributed to each employee that year. You have to have a plan administrator with an ESOP just like you would have a plan administrator with a 401(k).
Q. Does your company still have a 401(k)?
A. Yes. It was something we had to decide with our plan. We did not have to, but we decided to do both to give our employees an option and to not have all their eggs in one basket.
Q. How many years before the ESOP will buy you out?
A. We sat down and looked at the cash flow and how many years it would take to buy me out. After we had looked at that number, we doubled it. I opted for a longer time frame because of possible new equipment needs and some years might not be as good as others. All businesses have to go in their cycle. Some plans are set up 7.5 years and even some for 30 years. I opted for a 15-year plan.
Q. How often do you inform the employees about the ESOP and how well it is doing?
A. Twice a year.
Q. What happens if an employee leaves the company?
A. If an employee leaves the company, the company is obligated to buy the stock back. There is a clause that says if someone leaves the company before the debt is paid off, the company does not have to buy the stock back before paying off the debt. However, the stock will go up in value in that time, so we have opted to buy the stock immediately back.
Q. How did you make the transition from full time to part time and out of the office?
A. When we were putting the ESOP together I had taken the summer off to build a home. It was a great time to see how the company would get along without me. I had fully planned to return full time after the summer. After the house was built, I could not get mentally re-engaged to full time. So after two and half months I said, “Call me if you need me.” I was enjoying my new interests and doing other things I had not had time for before. So after 36 years, I finally decided it was time to move on.
Q. What else would you like to say about ESOPs?
A. Couple other things to think about. You need about eight or nine employees to really make an ESOP work. You can do it with fewer but the rules change. Anything over 15 employees is an ideal. It is pretty imperative that the company be out of debt. Most ESOPs are going to be sold on contract. A company’s line of credit is typically backed by the owner. If you are going to do this, you need to have a good accounting system. You have to have a system that stays on top of what is going on, especially when working with the Labor Department. A family-owned business where there were other children involved in the business can become an ESOP with the family members still owning a majority of the stock. This, I think, is a good way for a family business to transition and make it attractive for the employees that work there as well.
One other feature that an ESOP has is that it pays no state or federal income taxes. The taxes are paid by the employees when their stock is sold when they leave or retire. That is how the government gets their revenue and, in the interim, it is a way to help finance the sale as well.
Dana Lentz, Human Resources Specialist
Q. What do you think about the ESOP?
A. I think if someone were to approach me about the ESOP, I would start and end by saying it is a great thing for all involved. It helps the older generation retire and feel good about who the company is left to and offers employee hiring and retention benefits, as it is a retirement plan that the competition cannot match.
Q. How did the transition to ESOP go?
A. The transition to process the ESOP has been a whirlwind. Although overwhelming at first, with the right third-party companies in place, they can easily walk a person through all aspects of the process and put everything into layman’s terms if need be. Initiating and maintaining an ESOP may feel like a daunting task, but the option should not be ignored simply out of fear.
Q. As a young professional in the industry, do you see the benefits?
A. As a young person in the industry, working for a small company that is 100-percent ESOP has many benefits. As a participant you own stake in the company, decisions made on a day-to-day basis truly do make a difference, and at the end of a hard-working career you will have earned a solid retirement that cost you nothing but your loyalty and dedication.
Ryan Budke, General Manager
Q. As general manager, how has the ESOP helped Shawver Well Drilling?
A. The employees have more ownership. They are more efficient about the process and more cost conscious. If a car can be taken home instead of a truck, they do it.
Q. What is the process of buying new equipment?
A. It is a process that we are always working on. With an ESOP, you are buying the owner’s shares, paying out to employees, thinking about cost of living increases and other operating costs. So there is a lot to consider when we decide to buy equipment. The board and trustees will come together and discuss the purchase and move on from there.
Q. How do the employees get informed?
A. We inform them of new equipment at our midyear meeting. We meet twice a year to discuss last year’s financials and our ESOP progress. Our employees understand that our image is important. We keep our equipment painted, our trucks clean — our image is everything. So if we need to paint a rig or purchase equipment, they understand the need to do so.
Q. Anything else you would like to add about ESOPs?
A. It was a perfect way for Gary to step away and keep his legacy together. We all take pride in knowing that this is our company, and the future is ours. ESOP has given us great employee retainage. It is also great to tell our customers we are an ESOP company and explain to them how that works. We are employee-owned, and that is pretty cool.
Taking a Step Back
It is important to understand all the rules and procedures for ESOP. It may not work for every company, but it appears to be a win for Shawver, who can step back from the company with some peace of mind, and for his employees.
“Gary Shawver could have sold our company to someone else, and our dedicated long-term co-workers would have never had anything in return other than a job,” said Ron Cunningham, Shawver’s estimator/project manager.
“I am very appreciative of the fact that Gary chose the ESOP. I think with the concept of the ESOP, Gary also understood that all of us have made this company successful over the years. Therefore, that alone offers up a very good feeling of satisfaction for the work that we all have done. We have also preached ownership throughout the years. Now, with the ESOP, the feeling of ownership has increased solely judged by the comments and actions of our co-owners.”