Daniel Goldstein, president and CEO of Folience, testifies on behalf of The ESOP Association before the House Small Business Committee Hearing on the Challenges and Benefits of Employee-Owned Small Businesses on Feb. 12. CREDIT ESOP ASSOCIATION
By Dave DeWitte
dave@corridorbusiness.com
The story of a Corridor ESOP company’s role in keeping a rural Iowa town’s one major manufacturer humming when its owner was ready to retire went to Washington last week.
Folience CEO Daniel Goldstein testified last week to the House Small Business Committee at a hearing exploring benefits of employee ownership, including ESOPs (employee stock ownership plans) and worker cooperatives.
The Cedar Rapids-based company is one of a thriving group of ESOP companies operating in the Corridor. It has diversified in recent years beyond local media, moving into ambulance production (Life Line Emergency Vehicles in 2017) and livestock trailer manufacturing (Cimarron Trailer in 2018).
ESOPs are owned by employees who receive shares in a trust. When they retire or leave, they can sell back their shares, supplementing their retirement. When ESOP companies keep employees engaged by sharing information about financial performance and opportunities, they can be a powerful motivational tool to boost customer service and profits.
Folience’s acquisition of Life Line Emergency Vehicles was the main reason Mr. Goldstein, a board member with the ESOP Association, was invited to testify. He requested several specific Small Business Administration (SBA) actions to make such deals easier.
Sumner-based Life Line has a workforce of 180, or about one-eighth of the town’s population. The business began as a father-and-son venture run by James and Terry Leichner in 1985.
After the death of Terry Leichner in 2000, his widow, Connie Leichner, stepped in to lead the company, making further investments to improve technology and expand. She led Life Line well into her seventies, but was eventually ready to retire.
Mr. Goldstein doesn’t know where Life Line would be today had it not been acquired by Folience in 2017. Often, he said, the only buyers for such companies are competitors who want to consolidate production elsewhere, or private equity firms seeking strategic investments that take the profits with them.
Since Folience’s acquisition, Life Line had its best sales year in history in 2019, Mr. Goldstein told the CBJ, and employees are now owners who have a stake in the company’s financial success.
“The story that gives some hope and shows how employee ownership can save jobs, save companies and save communities is that Life Line Emergency Vehicles found a new home with Folience, so that those employees remain with that company, that company remains in that community, and that community continues to have the tax base of that company,” he told the CBJ.
Mr. Goldstein testified that many such transfers never come to pass due to a “deep chilling effect” from the lack of clarity in U.S. Department of Labor regulations concerning the Employee Retirement Income Security Act (ERISA), more than 40 years after it became law.
Since an ESOP is a form of retirement plan, the rules stipulate that an ESOP must pay no more than “adequate consideration” to acquire a company, and is prohibited from paying a premium that favors the seller.
The DOL also doesn’t provide clear steps or metrics for determining what is adequate consideration, Mr. Goldstein testified, yet aggressively prosecutes cases in which the trustee for the ESOP may have paid more than adequate consideration, to the detriment of the ESOP shareholders or employees.
“Once exposed to the lack of clear guidance, many [business owners] turn away out of fear that some ignoble misstep will bring unending Department of Labor scrutiny,” Mr. Goldstein said.
Those fears include the possibility that federal actions could force them to unravel a buyout years after it took place, he said.
The tragedy of that, Mr. Goldstein said, is the vast number of employees who miss out on a chance to become employee owners. That is more critical than ever, he said, with the current “silver tsunami” of business owners who are ready to retire and need to transfer their businesses.
It was clear from the questioning of Mr. Goldstein and others testifying that committee members are also concerned about whether the SBA is following congressional intent in implementing the Main Street Employee Ownership Act of 2018, which was intended to help employee-owned firms overcome barriers to accessing capital.
One of the provisions of the act allows the SBA to make loans under the delegated lending authority of its Preferred Lender Program, allowing for a more streamlined loan application process and expedited approval. Another allows for the SBA to make loans directly to the ESOP company, rather than to the ESOP plan that owns the company, through the employee trust.
“Accessing the SBA lending programs has been nearly impossible due to the SBA policy,” committee Chair Nydia Velazquez, D-New York, sponsor of the Main Street Employee Ownership Act, said in introducing the hearing.
Mr. Goldstein urged support for the SBA to streamline lending for qualified employee trusts of a small business, such as ESOPs, to buy stock in that business. He also urged the SBA to increase education and outreach about ESOPs as an option for transitioning companies, saying it’s done by some SBA districts, but not in others.
While regarding the invitation for Folience to testify as an honor, Mr. Goldstein said it’s not because the company is more successful than other ESOPs in the region.
“There are plenty that are bigger, better, more profitable – just as wonderful – but our story works well and the ESOP association chose us to be the poster child for this because of the stories we can tell that fit in with what we’re trying to get the Small Business committee to focus on,” he said.
Iowa’s First District Representative, Abby Finkenauer, praised the ESOP movement in her introductory remarks to the House Small Business Committee, on which she sits.
“It’s good for businesses. It’s good for employees and it’s good for communities like the one I represent in northeast Iowa,” Ms. Finkenauer said. She noted that ESOP companies have deep roots in their communities, have good wages and benefits, and are more likely to stay in their communities.
Ms. Finkenauer cited several prominent businesses in the district, including VGM Group in Waterloo, Timberline Manufacturing in Marion and Folience. An ESOP leaders group that is coordinated by the Cedar Rapids Metro Economic Alliance has identified at least 15 ESOP companies operating in the area, and is working to share best practices and explain their economic impact. CBJ
