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The Employee Ownership Update

Corey Rosen

December 1, 2008

(Corey Rosen)

Inc. Magazine Site Provides Useful Tool for Comparing Financial Numbers

A common perception that data on how well closely held companies perform is hard to obtain is more myth than reality. But it can be hard to know where to find it. Inc. Magazine's Web site now has a very helpful tool that makes that information readily available (http://www.inc.com/profitability-report/). Using data from industry professionals and surveys by Sageworks, the site provides data on 24 key financial measures, such as current and quick ratios, profit margins (EBITDA, gross margin, and net margin), return on equity, inventory days, debt-to-equity, profit per employee, and more. Aside from its use in corporate planning, the tool can be a very useful way to help employees understand how their company measures up to the competition on critical measures.

British Retailer Woolworth's May Be Employee Ownership Candidate

Woolworth's, the 30,000-employee retail chain in the United Kingdom, is facing severe financial difficulty and is now in the British equivalent of Chapter 11. Property magnate Ardeshir Naghshineh, who owns 10% of the retailer, wants to buy the company and turn it into an employee-owned business along the lines of the iconic retailer, the John Lewis Partnership, one of the country's largest retailers.

ESOP Valuations and the Downturn

Closely held ESOP companies will face the probability of declining stock value even if their business is holding up. ESOP valuation specialists tell us that the multiples they use to value businesses will drop to reflect the declining multiples paid for companies in general. While each industry will face a different scenario, that could mean a reduction of 25% or more in the multiples. Helping employees understand why their stock value is going down even when the company is making money is a critical task for ESOP companies.

Political Prospects for Employee Ownership

The new Congress and Administration will be under increased pressure to reduce employee holdings of company stock in retirement plans. Many financial advisors have been urging such restrictions in the last several weeks. Congress already has made changes to public company 401(k) plans to make it easy for employees to diversify their holdings, but further changes might put an absolute cap on company stock. That would most likely apply only to public companies; private companies generally do not hold much company stock in 401(k) plans. Whether ESOPs will be attacked on the same grounds is unclear. The data on ESOPs make it very clear that companies with ESOPs actually are more likely to have diversified retirement plans than comparable companies are likely to have any kind of retirement plans. ESOP participants have about three times the account balances of comparable employees in comparable non-ESOP companies, and the diversified portion of this is about the same as the total retirement benefits of comparable employees. In other words, the ESOP is gravy. While that gravy is undiversified, 100% an undiversified holding is better than a 100% diversified holding of zero. ESOPs also are more egalitarian in their allocation patterns than 401(k) plans because they are not based on employee deferrals, which tend to skew company matches towards higher-paid people. Getting these arguments in front of Congress will be essential in 2009.

Author biography and other columns in this series

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