Stocking up

Entrepreneur, April, 1997 by David R. Evanson

After nearly 20 years in sales and sales management for a large manufacturer of printed forms, labels and electronic printing systems, Jim O'Brien was getting antsy. The business plan he was writing in his head was getting more and more detailed. And when the future of the company he was working for began to seem less than certain, O'Brien, along with five fellow salespeople - Paul Hoffman, Jeff Porter, Mike Ryan, John Talaga and Sue Sharkey (pictured, left to right) - made the jump to form Print Management Partners Inc., a Des Plaines, Illinois, company that, not surprisingly, brokers printing services and also offers electronic printing and forms-management services.

O'Brien's business plan showed the company needed about $500,000 during the first year of operation for office equipment, an inventory of forms, and to fund receivables. In theory, Print Management Partners was ready to roll, but O'Brien wasn't ready to hold the grand opening until he knew the business could be funded.

"I thought it would be a big mistake for us to launch headlong into the business without any funding," he says. "At the time, the biggest asset I had was the 401(k) plan from my previous employer, so naturally, my first thought was to see what could be done with that." In fact, all the newly minted Print Management partners had 401(k) plans, and, in the aggregate, these had more than enough assets to fund the business. The trick was unlocking the funds.

"The way I saw things was that a 401(k) plan can buy stock in any company," says O'Brien, "so why not directly from my own - or, better yet, through an Employee Stock Ownership Plan [ESOP] established by Print Management Partners? This was the safest investment we could make because we understood the business inside and out and had control over its destiny." But everybody O'Brien talked to, including investment bankers, brokerage firms, attorneys and financing consultants, said it couldn't be done because 401(k) plans are restricted to purchasing shares in publicly held corporations.

Of course, O'Brien and his partners could have liquidated their 401(k) plans. But, he says, there's a steep penalty right off the top, and the distribution from the liquidation must be reported as income in the year in which it is received. A good-sized distribution will push the recipient into the higher end of the thirtysomething-percent tax bracket. No, thank you!

The litany of no's gnawed at O'Brien. After all, an ESOP was the most democratic way possible to run a company. How could laws be on the books to prevent employees from furthering the cause of their own company?

But one day, instead of hitting the brick wall, O'Brien walked right through it when he talked to attorney Greg K. Brown, an ESOP specialist in the Chicago office of law firm Oppenheimer, Wolff & Donnelly. With little fanfare, but a great deal of confidence, Brown said the deal could be done.

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Brown counseled O'Brien that while the transaction could be done from a legal perspective, it would require assembling a highly specialized team of financial professionals for all the moving parts. Looking back on the transaction, O'Brien says putting this team together took no small amount of time and skill.

The first decision - which attorney? - was easy since Brown was an ESOP specialist and the only lawyer who had assured O'Brien the transaction could be completed. Brown's task was to serve as the architect of the ESOP. He not only had to draft the documentation that created the ESOP but also had to define and engineer the relationship of the ESOP to the 401(k) plans held by each of Print Management's founders.

Next, O'Brien needed an evaluation specialist. Specifically, if the ESOP was going to purchase common shares from Print Management Partners, it needed a qualified opinion about what those shares were worth. For public companies, this is not an issue since the shares are valued every day by the trading that occurs in the market. But with a private company like Print Management Partners, it's not so cut and dried.

O'Brien selected Greg Heebink of Brownstone Associates Inc., a financial consulting company in Milwaukee. While competence is certainly a factor with any evaluation specialist, so too is chemistry because the valuation consultant must rely on input from the company's officers and shareholders to do his or her job correctly. If they can't see eye to eye, the job can't be done. With Heebink, the chemistry was good.

Next, O'Brien needed a brokerage firm to act as the custodian for the ESOP stock. O'Brien chose Smith Barney. For this old-line brokerage firm, O'Brien's deal represented a perfect way to make some money the old-fashioned way. After all, Print Management's current and future employees would need to either establish or roll over their 401(k) plans somewhere - and if Smith Barney was already the custodian of the ESOP, it would have an edge in getting Print Management's 401(k) business, too.

Finally, O'Brien needed a good accountant. "Who doesn't?" you say. But with an ESOP in the picture, the tax issues are even more complex. "We wanted a partner on board who could help us think through the strategic issues on an ongoing basis," says Brown. Incidentally, O'Brien also needed a 401(k) administrator to keep track of employees' stock purchases. Accountant Jeff Weidner of The Accountants Group Inc. in Lincolnshire, Illinois, also an ESOP specialist, filled both roles.