December 22, 2022

A Christmas Carol, the ESOP Version

NCEO founder and senior staff member

Lots of us love Dickens’s A Christmas Carol. The tale of Ebenezer Scrooge’s dream-tormented epiphany about what really matters in life has resonated deeply with people of all ages ever since it was published.

The large majority of business owners who sell to an ESOP never were Ebenezer Scrooges. When it came time to decide what to do with their businesses, preserving the legacy of the company and rewarding the people who built it are usually at the top of their priorities, not a Scroogean-bottom. But one of the great ideas behind ESOPs was that altruism, while a wonderful thing, is a tough way to drive large-scale social change. Instead, ESOPs provide a way to link business owners’ financial interests—even those of Ebenezer Scrooge—with the common good. So let’s imagine how that might happen this Christmas season.

Chapter One

Ebenezer Scrooge was not an easy man to like—or to work for. His most loyal employee, Bob Cratchit, knew that well. In his 27 years as Scrooge’s CFO, he’d only had 10 days off and was often at work late at night and on the weekends. He threatened Scrooge with quitting just about every Christmas when Scrooge insisted that the 24th was not a day off, but he had invested so much of his life in Scrooge’s Screws and Bolts that he just couldn’t do it. He worried too that in today’s economy, if he left the job, it would take a while to find a new one, and while Scrooge only offered the minimum health insurance required for employers of more than 20 people in his state, his son, Tim, had health issues that made even a short break in insurance risky. And anyway, Bob felt loyal to the other 48 employees at the firm. He’d been able to act as a kind of buffer between Scrooge and the workers, often preventing Scrooge from insisting on overtime with no extra pay (“you’ll get sued,” he told Scrooge) or keeping injuries from the doctor to avoid worker compensation costs (“the sharks are in the water on that one,” Cratchit warned). So he toiled on.

The company was making money despite the awful morale, largely because Scrooge had invented and patented really great screws and bolts that were essential components of some high-tech machinery. But Scrooge was getting older. He wasn’t married (hardly a surprise) and his only sibling had died the year before. He thought about working till he died, but with his brother’s demise, he worried about his own mortality and wanted to sell the company.

He had offers from a private equity firm, Byer & Flippem, and from a consolidator in his field, International MegaBolt (IMB). Both offers were at a nice premium. He had been calculating his return on equity every night, over and over. It was his favorite thing to do.

Chapter Two

One night a few days before Christmas, Scrooge had a dream—or maybe a nightmare. A man in a shirt festooned with the IMB logo came to paint a picture. Soon he was splashing paint all over the living room wall. There was IMB, a huge complex of offices and factories. And there was Scrooge’s Screws and Bolts, a tiny square in the far-right corner. Ebenezer was standing outside the headquarters door, looking lost and forlorn because no one was there to let him in. All he had built was reduced to just a small cog in a big wheel. “Bah,” he said, “this is humbug. Treat my company—MY COMPANY—like a nothing!”

He woke in terror and went back early to work.

Chapter Three

The next night, December 23, he had another dream, this one even worse. Byer of Byer & Flippem came in, grinning almost lecherously, bearing a silver tray with an oversized check with an oversized number. In the dream, Scrooge eagerly grasped it, and suddenly the room became eerily lighted and dark clouds rolled in. The hands on his old grandfather clock started moving at warp speed, and the calendar on his wall magically turned to four years later. He saw Byer gloating to Flippem about how Screw and Bolt could be sold again, at great profit to the firm. Cratchit, of course, had been fired—they had their own CFO—along with some other long-time employees. “Bah,” Scrooge cried. “Humbug. I built this company and now you make all this money off of me, me, Scrooge! Out of my house.” Scrooge awoke and went to work early again.

Chapter Four

On Christmas Eve, Scrooge had his last dream. This time it was not a nightmare. A former owner of a supplier he once met at a screw and bolt industry conference appeared. Scrooge had brushed him off at the time—some nonsense about employees becoming owners. How absurd. But now the owner was back, and he was carrying this room-sized spreadsheet. In his dream, Scrooge could literally walk through the numbers. It seemed too good to be true. Scrooge could get a good price and defer paying any taxes on the sale by selling to this thing called an ESOP. Scrooge hated paying taxes. As he got to the end, there he was in Florida, out of this terrible cold, living on the beach and reviewing his investments. Cratchit had become the CEO, much to the surprise of both, and the company was doing quite well. This pleased Scrooge more than he would have guessed, he had to admit.

And so it was that Ebenezer Scrooge learned the real meaning of Christmas, or at least what an ESOP was.