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Store experiments with ESOP model

NEW MODEL Lumber Traders decided on an ESOP when the owners decided to sell. Pictured is Angeles Millwork and Lumber.

When asked to explain the advantages of a store being owned by its employees, Doug Smith, CEO of Port Angeles, Wash.-based Lumber Traders, put it this way: “Where else would you find entry-level employees working in the lumberyard who actually care about profits and losses?”

Smith is one of about 60 Lumber Traders employees who took over full ownership of the company—which consists of Hartnagel Building Supply, Angeles Millwork and Lumber Co. and a cabinet/millwork showroom—on June 30, four years after former owners Arnold and Debbie Schouten decided to sell the business.

The Schoutens looked at some outside buyers in 2004 but then decided on an employee stock ownership plan (ESOP). The employees collectively purchased the company from the Schoutens then, and over the next four years paid off the purchase price out of company profits. From 2004 to 2008, the Schoutens continued to helm the company, until they had been paid the full agreed-on price. After that, they retired.

Angeles is a supplier/contractor with an extensive framing department and rental services, while Hartnagel specializes in roofing materials, which has become 35 percent to 40 percent of the business. Lumber Traders is a member of the True Value co-op.

What exactly is an ESOP? It’s a qualified employee benefit plan designed to invest exclusively in company stock on behalf of the employees. According to Smith, who has been with the company 21 years and was promoted to CEO in July, to establish an ESOP, an organization should do its own research and enlist the assistance of specialists in the field who can help set up rules and guidelines to govern the plan.

Smith added that an ESOP is run just like any other business—except with a more defined chain of command and responsibility. “We have a clear organizational structure that starts with the customer, moves to the front line of sales, then to customer service and then to administrative and management levels,” he said.

When somebody leaves the company or is fired, they sell their shares back to the company through a repurchase agreement, while new employees start to receive shares of company stock after their first year. “It’s been a learning process for everyone associated with Lumber Traders, including our attorney and accountant. We’ve all had to learn the ins and outs of how an ESOP works.”

Major company decisions are made by the Lumber Traders board of directors, which meets quarterly and consists of Smith, Lonnie Linn, the long-time general manager of Angeles Millwork and Lumber Co., and three external members from various walks of the business and professional community. “It’s very important to us not to become stale in our thinking and approach to business,” Smith said.

There are about 11,000 ESOP businesses in the United States, but only a handful of them are hardware stores and/or lumberyards. Other employee-owned hardware and lumber businesses include Buse Timber and Sales outside Everett, Wash.; Ganahl Lumber, with eight locations in Southern California; Fairfax Lumber & Hardware in Fairfax, Calif.; Wagon Wheel Lumber & Hardware in Washburn, N.D.; and Concord Lumber, with seven locations in Massachusetts.

According to Smith, one of the biggest advantages of having an ESOP is the accountability factor—the fact that employees have a stake in the success of the business. “Everyone says, ‘We own this thing, and we need to make it work.’”

Lou Diamond, an attorney with the Washington, D.C.-based law firm Paley Rothman and an adjunct professor at the Georgetown University Law Center, believes in the concept because of the tax advantages and because employees who feel a sense of ownership will work harder and perform better, leading to increased production. However, ESOPs are not for everyone, according to Diamond.

“They are extremely complicated, and if you do something wrong either in formulating or executing the ESOP, the penalties are very heavy,” he said. “You have to monitor it carefully. And it must be administered by people who know what they’re doing.”

Greg Downing, a 58-year-old lumber industry veteran who was hired in June to head up Lumber Traders’ new hardscapes division, believes the concept is working for this company.

The message was particularly brought home when an employee asked him the cost of a palette of stone landscape product that was being unloaded. “I’ve had a lot of good employees over the years, but I’ve never seen a forklift operator ask about the value of a product,” he said.