Learn about this business structure and why it is so important to Community IT’s employee owners.
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October is ESOP Employee Owner Month
An Employee Stock Ownership Plan, or ESOP, is a legal structure used in the U.S. to create an employee-owned company. Essentially, an ESOP is a type of retirement plan that invests primarily in company stock, holding the assets in a trust for the staff.
Community IT is 100% employee-owned. This structure means our staff participates in the company’s success. Not all ESOPs are 100% employee-owned. Our CEO Johan Hammerstrom walks through the decisions and concerns of our founder, David Deal, that the mission of the company always remain focused on serving nonprofits with well-managed IT. The best way to preserve that mission when he sold the company in 2012 was to sell it entirely to the staff.
Being an ESOP is fundamentally important to Community IT because it ensures we maintain the stability and focus required to serve the nonprofit sector best. This structure guarantees we control our own destiny, allowing us to prioritize long-term, excellent service to nonprofit organizations over external pressures like seeking to be acquired or maximizing short-term profits for outside owners.
Further, it enhances our culture by aligning the incentives of our passionate employees with our mission, empowering independent decision-making and ensuring that clients benefit from a dedicated, resourceful, and stable team that is invested in the organization’s lasting success.
Join CEO Johan Hammerstrom as he explains what October being ESOP employee owner month means to Community IT, our clients, and our dedication to providing excellent outsourced IT services.
Interested in the ESOP structure advantages and how to become an ESOP? Contact Johan directly, he is always happy to talk about our ESOP.
Presenters
Johan Hammerstrom’s focus and expertise are in nonprofit IT leadership, governance practices, and nonprofit IT strategy. In addition to deep experience supporting hundreds of nonprofit clients for over 20 years, Johan has a technical background as a computer engineer and a strong servant-leadership style as the head of an employee-owned small service business. After advising and strategizing with nonprofit clients over the years, he has gained a wealth of insight into the budget and decision-making culture at nonprofits – a culture that enables creative IT management but can place constraints on strategies and implementation.
As CEO, Johan provides high-level direction and leadership in client partnerships. He also guides Community IT’s relationship to its Board and ESOP employee-owners. Johan is also instrumental in building a Community IT value of giving back to the sector by sharing resources and knowledge through free website materials, monthly webinars, and external speaking engagements. He always celebrates October as ESOP employee-owner month.
Carolyn Woodard is currently head of Marketing and Outreach at Community IT Innovators. She has served many roles at Community IT, from client to project manager to marketing. With over twenty years of experience in the nonprofit world, including as a nonprofit technology project manager and Director of IT at both large and small organizations, Carolyn knows the frustrations and delights of working with technology professionals, accidental techies, executives, and staff to deliver your organization’s mission and keep your IT infrastructure operating. She has a master’s degree in Nonprofit Management from Johns Hopkins University and received her undergraduate degree in English Literature from Williams College.
She was happy to have this podcast conversation with Johan about October being ESOP employee-owner month.
Ready to get strategic about your IT?
Community IT has been serving nonprofits exclusively for twenty years. We offer Managed IT support services for nonprofits that want to outsource all or part of their IT support and hosted services. For a fixed monthly fee, we provide unlimited remote and on-site help desk support, proactive network management, and ongoing IT planning from a dedicated team of experts in nonprofit-focused IT. And our clients benefit from our IT Business Managers team who will work with you to plan your IT investments and technology roadmap if you don’t have an in-house IT Director.
Being 100% employee-owned is important to us and our clients. It is an important aspect of our culture as a business serving nonprofits exclusively for almost 25 years.
We constantly research and evaluate new technology to ensure that you get cutting-edge solutions that are tailored to your organization, using standard industry tech tools that don’t lock you into a single vendor or consultant. And we don’t treat any aspect of nonprofit IT as if it is too complicated for you to understand.
We think your IT vendor should be able to explain everything without jargon or lingo. If you can’t understand your IT management strategy to your own satisfaction, keep asking your questions until you find an outsourced IT provider who will partner with you for well-managed IT.
More on our Managed Services here. More resources on Cybersecurity here.
If you’re ready to gain peace of mind about your IT support, let’s talk.
Transcript
Carolyn Woodard: Welcome everyone to Community IT Innovators Technology Topics Podcast. I’m Carolyn Woodard, the host, and I’m excited today to talk to our CEO, Johan Hammerstrom, about ESOP Month. So, Johan, can you introduce yourself?
Johan Hammerstrom: Yes. Thank you, Carolyn. I’m Johan, CEO of Community IT, and happy to be here.
Carolyn Woodard: And I said ESOP, but, and it’s ESOP Month, but what is an ESOP?
Johan Hammerstrom: ESOP stands for Employee Stock Ownership Plan, and an ESOP is a specific form of employee ownership. Employee ownership is an arrangement by which the employees of a business have some ownership stake in that business. People may be familiar with worker cooperatives, which is a different form of employee ownership. I think they were particularly popular in the 70s, and particularly at, you know, health food stores, grocery stores.
Carolyn Woodard: Yeah, I think there’s some pretty famous ones people would know, though, like Cabot Dairy is a co-op, Land of Lakes, I think, is also a co-op. It kind of makes sense in that case where it’s like a dairy that’s produced, lots of dairies get together and are producing something, and they all own the company. They vote on what the direction is going to be and where they’re going to go. But an ESOP is not a co-op.
Johan Hammerstrom: An ESOP is not a co-op, and I’m not as familiar with worker co-ops, so I don’t want to speak at length about how they work. But typically, employees have a vote in the direction of the company and share in the equity of the company, sort of directly.
Carolyn Woodard: But an ESOP, like you have explained it to me a couple of different times, it came from this tax reform back in the day. But I would be interested, I think people might be interested in for Community IT, we had a founder who was the owner, and he quote unquote, “sold” the company to the employees over a period of time.
Can you talk a little bit about that journey? Why did he decide to pass on ownership that way?
What is an ESOP/Employee-Owned Company?
Johan Hammerstrom: ESOPs are a specific form of employee ownership that, as you mentioned Carolyn, was passed into law in 1974 as part of ERISA, which is the Retirement Savings Act that established 401Ks, 403Bs, sort of all of the contemporary forms of retirement that we have were included in ERISA in 1974.
I think prior to that, you know, most retirement plans were pension-based plans, where large entities, like corporations or other types of businesses, would save money for their employees and then pay it out, you know, in a pension, sort of a defined benefit plan. And if you didn’t work for a company that had a pension system, you’re kind of out of luck. You had to save your own money for retirement or count on social security, you know, at the time. So 401Ks were established as a way of incentivizing employees to save for their own retirement and then also providing some options for employers to contribute to the employee savings.
It may sound strange that ESOPs were formed as part of this Retirement Savings Act, but it actually makes sense when you understand the structure of an ESOP, which is basically a form of beneficial ownership for anyone who works for an ESOP. There are a lot of ESOPs. Ben and Jerry’s, they were actually an ESOP as well.
Carolyn Woodard: So my son works at Wawa, Wawa is an ESOP?
Johan Hammerstrom: Yes, Wawa is an ESOP. It’s a large one. Only one or two percent of all businesses in the United States are ESOPs. It’s a pretty small percentage of businesses. But many of our listeners may have worked at an ESOP in the past, or may be working for an ESOP now. And when you work for an ESOP, you get a share of the value of the company, the worth of the company.
In most traditional businesses, small businesses especially, there’s a founder who starts the company, and they typically own 100 percent of the company. And the employees get paid a salary, but they’re not sharing in the wealth that’s being created as part of the company. The ESOP structure is intended to create a way for employees to share in the wealth that’s being generated by the business.
Succession Options for Business Owners
Carolyn Woodard: So, can you talk a little bit about our founder, David Deal?
Johan Hammerstrom: Oh, yeah. Yes. Thank you.
Carolyn Woodard: When he came to want to, he started a different company, and he wanted to pass on ownership. He could have sold the company. There’s a couple of different paths to getting out from being the owner of a company, but he chose to transfer it through this ESOP process.
Johan Hammerstrom: So, if you’re a small business owner, and you’ve founded a company, and you’ve grown it, and it’s worth something, typically you’ve invested a lot of your own money, certainly a lot of your time in building up the company, and you want to get a return on that investment.
And there are a number of different ways for small business owners to do that. One of the more common ways, one possibility is you just keep the business, and then you maybe aren’t involved in the day-to-day operations, but you’re overseeing it, and you’re drawing money from the profits of that business.
Carolyn Woodard: Like Succession, like who’s going to take over?
Johan Hammerstrom: Yeah, Succession. Succession is kind of, I don’t know, I mean, it kind of plays fast and loose with certain business concepts. Succession is interesting because Waystar is a publicly owned company. Logan Roy is always concerned about, and Kendall, they’re always concerned about what’s happening with the stock. And so that’s a feature of a publicly owned company.
But Succession also sort of deals with Waystar as if it’s a family-owned business. And that’s kind of the second thing that happens with small businesses. The owner will give the business to their children to run the business. And that’s not uncommon for businesses to sort of be inherited by offspring. That typically doesn’t happen. I mean, that doesn’t happen with publicly owned businesses. And that was kind of the central tension in some ways of Succession is it’s publicly owned business.
Another common way for owners to kind of realize the value of their investment of time and money is to sell the business to somebody else. And there are a lot of people out there who are interested in just buying and running businesses, individual sort of independent business owners who are just interested in finding good businesses, buying them and then building them up.
So that’s one possible buyer. If you’re in an industry that’s consolidating, which is the case in some ways with the industry that we’re in, a larger business that does similar work to your business, might be interested in buying the business and paying the owner to acquire the business.
Carolyn Woodard: I have a friend here who was a business owner and wanted to retire. And she actually spent a couple of years looking for someone to buy her business and ended up not being able to find anyone. So, she just closed it.
Johan Hammerstrom: Yeah, that happens too. If you can’t find someone to buy your business, you end up just closing it, liquidating the assets and being done with it.
ESOP Journey: Sell the Business to the Employees
But in some cases, owners will sell the business to the employees, which is kind of somewhat, it’s not a super well-known path, you know, for a business owner to go down.
Usually small business owners, when they’re looking to sell their business, are looking to get acquired or they’re looking for an investor, you know, maybe private equity. If it’s large enough, we’ll come in and purchase the business from them.
But it’s possible for the small business owner, or even large, you know, it’s possible for the business owner to sell the business to the employees. It doesn’t happen very often, which is why there’s only, you know, one to 2% of all businesses or ESOPs, maybe it might be less than that.
But when it does, it creates a great opportunity for the employees of the business to share in the wealth that’s being generated by the business. So that was a decision that our founder, David Deal, an original owner, made back in 2005. And interestingly enough, the main reason that he made that decision is he was worried about succession. He was worried about what would happen to him, what would happen to the company if something were to happen to him, if he were unavailable to run the company, it would pass to his wife. She didn’t want to run a small IT business that focused on nonprofits in Washington, DC. What would she do with the business?
We actually came out of another larger company in the late 90s, and we saw what happened to that business when it was acquired. And we were concerned that our mission of working with nonprofits wasn’t going to survive if we were acquired by a larger firm.
And so David Deal was very focused on creating a succession structure that would allow for the long-term governance and ownership of the business, while also maintaining the integrity of our mission to work with nonprofit organizations. And he looked around at a lot of different structures for doing that.
And the one that he felt was the best was the ESOP employee ownership structure.
ESOP Employee Ownership Structure
Carolyn Woodard: And that, if I recall, that took place over several years, that the shares, as they’re called, and they’re not publicly traded shares, but they’re like the how the value of the company is divided up would then be passed a few a year for several years over to the employees, kind of like vesting in a public company, but not the same.
Johan Hammerstrom: It’s actually very similar. So in order to be an ESOP, you have to be a corporation. Prior to becoming an ESOP, we were an LLC, a limited liability company, that was solely owned by David Deal. You can have LLCs that have a couple of owners. But LLCs don’t have shares in the same way that corporations do. And so in order for the ESOP structure to work, the company has to be a corporation because it has to have shares of ownership in the corporation.
So we became a corporation in 2005.
We had shares created as part of our becoming a corporation. And David Deal ended up at the, on day one, he owned like 95% of the shares. So another thing that just because a business is employee owned, doesn’t mean it’s completely owned by the employees.
You can have ESOPs that are still 90% owned by a single owner. 90% of the shares are owned by a single owner. And 10% of the shares are owned by not the employees directly, but by a trust that all ESOPs have an ESOP trust that’s formed, that holds the shares on behalf of the employee owners.
So for many years, from 2005 to 2012, the Community IT Incorporated was still a majority owned by David Deal. And then in 2012, he sold all of his shares to the trust, to the ESOP trust, and at that point, we became 100% employee owned, which tends to be, you know, you go to, you talk to other ESOPs and go to ESOP conferences, and that’s what everybody’s looking to be, is 100% employee owned. But there are plenty of good reasons why a corporation might be partially owned by other types of owners and partially owned by the ESOP trust.
Carolyn Woodard: And can you talk a little bit about, just to wrap up, now that we are 100% employee owned, and I know we have internal board members from employees that serve terms, helping with the direction and strategy of the company.
But are there other benefits to being a 100% employee owned ESOP as an MSP, as serving nonprofits exclusively?
I know that you’ve talked in the past about, right now, with MSPs generally, there’s a lot of acquisition going on. And we have some clients that come to us because the MSP they were using for outsourced IT got acquired, and the quality of the support went downhill, the prices might have gone up.
Can you talk a little bit about why it’s so important to us, and our culture, and our mission, that we are 100% employee owned?
Johan Hammerstrom: One of the great benefits if you’re working with an MSP, one of the great benefits of working with 100% employee-owned ESOP, is that in general, the business is interested in its long-term sustainability.
And oftentimes what you see among smaller MSPs, MSPs that have, say, 80 staff or fewer, they’re often owned by a small group or a single owner, a small group of owners or a single owner. And they’re generally interested in maximizing the return on their investment, which right now means selling to a larger MSP or selling to a private equity firm.
And I think oftentimes in those sales, at least based on our experience, the end result is a reduced quality of service for the customer, or sometimes a change in what the MSP is focused on. A change in pricing, a change in staffing, and those changes can be very disruptive to the service that’s being delivered.
Because we’re committed to working with nonprofit organizations in the nonprofit sector, the fact that we’re in ESOP means that we’re not interested in being acquired. We want to continue to operate as Community IT and continue to improve the quality of our services.
Carolyn Woodard: And I think that if you, as a more commercially oriented MSP, if profit is your number one reason for being, then you’re going to try and maximize your profits. And that might not be the best decision for your clients, always.
Johan Hammerstrom: Yeah, and I think there are a lot of great MSPs out there. And I think it is worth, when you’re looking to select an IT support provider, I think it’s worth finding out who owns the business, what are their incentives and priorities, how are they running the business. Because that, like you said, Carolyn, that goes, it has a big impact on how well they’re going to be providing support over a long period of time.
And I think in most cases, when organizations are looking to hire an MSP, they’re looking for a long-term partnership. They don’t want to have to change their IT support provider every year. They’re looking for someone who’s going to be a good partner for them for a long period of time. And so understanding the long-term viability of the tech partner that you’re hiring is an important part of the selection process.
Carolyn Woodard: When we definitely talk a lot, we were just talking about congratulating our staff. We have several staff members who have been with us for over 15 years, over 20 years, and that, I think also the ESOP structure helps that happen.
Our people are really committed to this company, and that allows us to invest in our staff, and their knowledge, and their professional development, and their understanding of nonprofits, of the clients, that we only work with nonprofits. So when you hire an MSP with that kind of experience, and longevity of the staff, they’ve seen a lot of the challenges that you’re encountering. And so they probably have a lot of experience with helping you get through it in the best way for your nonprofit.
Johan Hammerstrom: The company is owned by an ESOP trust, which has a trustee. He loves the example of, he comes and speaks at our annual company meeting every year. And he asks, okay, how many of you rented a car in the last two years? All people raise their hands. Okay, who went and washed that car? Who went and got that car washed? And all the hands go down. It’s like, why didn’t you wash your rental car? Because you didn’t own it.
So there’s just a level of care and concern that comes from owning something that our employees feel about the company, about Community IT, and especially about the work that we do.
They’re not, they’re working for themselves. They’re working for, they are the ones who own the company. And so they have a more deeply vested interest in the quality of the work that we do.
Carolyn Woodard: I think that’s a great place to leave it for Happy ESOP Month. A great explanation of what an ESOP is and how Community IT became an ESOP and just all of the benefits, both for us as staff, as staff owners, and for our clients.
Johan Hammerstrom: Thanks, Carolyn.
Carolyn Woodard: Thank you. Thanks, Johan.
Photo by Christina @ wocintechchat.com on Unsplash