At one Arizona company, the employees are the owners
The landscape industry includes many employee-owned businesses, but most are one-man startups or smaller partnerships, where the owners are the workers. At The Groundskeeper (www.groundskeeper.com), which has offices in five states and more than 750 employees, the workers are the owners.
Employee ownership gives the Tucson, Ariz., company several advantages, says Anil Hiremath, CEO of The Groundskeeper. “It creates a more stable work force of more experienced employees,” he explains. What’s more, the employees have a stake in the success of the company.
The Groundskeeper was founded in 1976 in the Tucson area by Jack Hasbrouck. When Hasbrouck was ready to get out of the business, he began to explore exit strategies. The most common approach taken by a sizable, well-respected firm is to sell out to a large, national landscape company looking to make inroads in that location. However, Hiremath says that while there’s nothing wrong with selling out to another landscape firm, Hasbrouck thought a better approach would be to sell the company to the employees. “One thing about an ESOP (employee stock ownership plan) that’s compelling for an owner is that he is actually passing on ownership to the people who helped him build the company,” Hiremath points out.
The ESOP was put in place in 1990, when employees began purchasing the first 20 percent block of the company from Hasbrouck. The process was completed in 2007 with the purchase of the last 20 percent block. Hiremath says this is typical of the way ESOPs usually work. “The company actually takes on a loan for the amount that the owner wants to sell for. Typically, you don’t do 100 percent because it’s just too difficult to afford it, so usually it’s done in 10 or 20 percent blocks,” he explains. “There’s a current valuation done. After your corporate audit is complete, it goes to a third-party valuation company that performs an analysis and sets a share price. At that point, 20 percent is purchased based on the share price at that time.”
The same process is repeated as subsequent blocks are purchased; each block is then usually paid down over a period of three to five years. In the case of The Groundskeeper, it took 17 years to completely buy the owner out.
In the past five years, The Groundskeeper has expanded from offices in Arizona and Nevada to include Utah, New Mexico and Texas. The company focuses primarily on landscape maintenance, mostly commercial, and has annual revenues of approximately $40 million. Hiremath says that while expanding its market territory, The Groundskeeper also had to contend with the massive boom-then-bust in the local housing market, as well as the challenging national economy. “In Arizona and Nevada, we were pretty hard hit, but the fact that we have good vehicles in place to retain good employees has helped,” he says. “In addition to the ESOP, we also have a pretty good insurance plan in place where the company pays 80 percent of the employees’ insurance premiums. For employee retention, it’s a pretty big thing. It gives us a more stable workforce.”
Hiremath says there are pros and cons for owners of landscape firms considering starting an ESOP. “It’s a very time-consuming and expensive process to start up, but it’s also very tax advantageous for a founder to create their own ESOP versus selling out to a third party. With an ESOP, it’s a tax-free transfer, so for each 20 percent block we purchased, the founder did not have to pay taxes on that money. The government wants to create a situation where more people have an ownership in companies,” he says.
Because it is a retirement plan, there are government regulations that must be met, and then there is the constant chore of tallying the accounts of employees. “You have a lot of employees coming and going all the time, and every year you have to figure out how much you have to pay [in what’s called a repurchase obligation] the folks who left the prior year,” Hiremath explains. “You have to constantly keep juggling that process.” If the repurchase obligation for an employee is over $10,000, the company can split payments over five years (though it can cash them out all at once); if it’s under $10,000, the employee is cashed out in a single distribution. Fortunately, there are third-party administrators who can administer ESOPs.
“We try to get employees who leave to look at the tax laws and encourage them to roll it over into an IRA tax-free, but people often do tend to take the money out and pay the taxes and penalties,” says Hiremath, comparing the process to a 401k. “Sometimes, people need the money, and even after they pay the taxes and penalties, they still look at it as money they didn’t have before.”
Once an employee leaves, their stock goes back into the ESOP plan and is reallocated based on the current participants. Employees don’t actually purchase the stock, they accrue it at no cost based on their length of service. At The Groundskeeper, employees have to stay with the company for one year to qualify for the plan. At that point, they gradually become vested at 20, 40, 60, 80 and 100 percent levels over the following five years. So, an employee with six years of service would be fully vested in the ESOP. The actual amount the employee accrues is based on that longevity, as well as a points system based on their rate of pay. “That encourages employees to both stay with the company and to take on more responsibility, because the more money you make, the more ownership you accrue,” says Hiremath.
Many customers also appreciate that fact that The Groundskeeper is employee-owned. It’s a fact the company works hard to publicize and promote, says Hiremath. “Whenever we have a big sales presentation, we really do emphasize to the client that they will be getting better-trained, longer-tenured employees on their job site versus using a company that doesn’t use an ESOP,” he explains. “It certainly is a selling point.” While some commercial maintenance accounts are simply looking for the lowest bid, he says others really understand how an ESOP builds better workers: “They realize they might pay a little more, but they can then expect a little more.”
Hiremath says it’s also important to constantly remind the employees that they have a stake in the company’s success. “It’s an ongoing annual challenge for us to reiterate to employees what the ESOP is, and how they accrue points. It can be a tough concept to get your arms around. Every year, instead of mailing out certificates to our employee-owners, we go to each branch and have a big barbecue or party, and we actually call people up starting from the lowest number of years to the highest. For the newest folks, when they see their peers who have been with the company 16 or 18 years, and they hear about the amounts they’ve accrued, it’s pretty powerful.”
Because the share price of the stock in the ESOP—and, therefore, the value of each employee’s account—is determined by the financial success of the overall company, it’s easier to convince employees of the importance of doing a good job, and always looking out for the company’s best interests. “I’ve seen supervisors in the yards telling crews that if they don’t take care of their trimmers and mowers, it’s a repair or replacement cost that we’re going to have to incur, and that will come directly out of the company’s ESOP. So, we try to tie it to the little things on a daily basis as much as we can,” says Hiremath.
Patrick White is a freelance writer and editor who has covered every aspect of the green industry in the past 13 years. He is based in Middlesex, Vt., and is always on the lookout for unusual stories.