There was a little nervous tension in the air when Harpoon Brewery employees gathered for their mid-year meeting this summer. They had noticed about half a dozen unfamiliar men in suits milling about and wondered whether the new owner of their company might be among them. After all, as President and Co-founder Daniel C. Kenary said, “We don’t wear many suits at Harpoon.”

Any anxiety they may have had melted away when Kenary took the floor and asked his employees to meet the company’s new owners – and shake hands with the person to their left or right.

As of Aug. 1, Harpoon Brewery became minority owned by its employees, with 48 percent of the company’s shares vested in its new employee stock ownership plan.

“My partner Rich [Doyle] and I started the company 28 years ago when we were much younger guys,” Kenary said. “It’s kind of natural to have a conversation, as you approach your mid-50s, about what the future might hold.”

As they talked, it became clear that Doyle, who is still with the company part-time, wanted some type of liquidity event, while Kenary wanted to stick around at least a little bit longer.

They could have brought in a private equity buyer or a strategic buyer, or they could have sold the entire company, but Kenary and Doyle ultimately decided they wanted to establish an employee stock ownership plan, or ESOP for short.

In addition to providing liquidity for Doyle, along with a few other shareholders, the ESOP would also allow for continuity of management and build a solid framework for the future.

Besides which, Kenary added, “Rates right now are pretty darn attractive.”

Leveraging Ownership Culture

But Harpoon didn’t immediately have the cash it needed to buy back those shares from Doyle and others, so it turned to the Providence, R.I.-headquartered Citizens Bank for a loan.

Jerry Sargent, the Massachusetts president of RBS Citizens and Citizens Bank, worked with Kenary on the deal, and he said the resulting loan to the brewery would be classified under the commercial and industrial umbrella.

“It’s a bit unique in that – this is what we call a leveraged ESOP loan,” he said.

This is how the leveraged ESOP works: The bank makes a loan to the company. The company turns around and loans those funds, internally, to a trust it’s established to administer the ESOP. The selling shareholders get out on day one, and as the loan is repaid, those shares are released to employees.

“They’re not unusual, but they’re not as commonplace [as] other sorts of buyout loans,” Sargent said. “In this case, the selling shareholders were able to liquidate their holdings on the day we closed on the loans. In a non-leveraged manner, it could take a number of years to buy out the selling shareholder.”

And if that selling shareholder puts that cash into qualifying securities, Sargent said, he or she can also save money on taxes.

Michael Keeling, president of the ESOP Association, estimates the number of ESOPs nationwide hovers around 10,000, and he points to a few legislative changes that have helped boost that number over the years.

For starters, in 1974, lawmakers sanctioned the use of borrowed money for an ESOP or stock bonus plan to purchase its assets. Ten years later, Congress added a provision to the law that exiting shareholders could defer capital gains taxes if they invested those proceeds into qualified securities.

The real game-changer happened in 1998, when lawmakers allowed S-corporations to also create ESOPs, where previously only C-corporations had that right, Keeling said. But ESOPs are still not an especially common form of ownership in the United States.

‘Not For The Faint Of Heart’

The relative rarity of the ESOP ownership structure may be due, at least in part, to the complicated structure and myriad advisors, bankers and attorneys needed to make it happen.

“It’s not for the faint of heart,” Kenary said. “You need to get good advisors. It’s a complicated business, and it’s heavily regulated, which it should be, but you can’t just wing it. You’ve got to really do it right, and we had very good advisors.”

“What I think is really powerful with an ESOP is the impact of having employees and their future retirement and compensation linked to the performance of the business,” Sargent said. “It gives employees that opportunity to be an owner, to feel like a part of the work that’s being done every day.”

And it’s that ownership culture that made the ESOP so attractive to Kenary and Doyle, who had a mind to the legacy they’ll someday leave behind.

“The philosophical underpinnings here were crucial to the deal. The best thing for shareholder would have been to simply sell the company to a strategic buyer, but that wasn’t the only thing that was driving us,” Kenary said. “Of equal importance to me was setting this company up for continuing independence. We’ve portrayed ourselves as a great local brewery, and selling ourselves would have been in contradiction to that.”

Email: lalix@thewarrengroup.com