Many businesses fail to consider the benefits of an Employee Stock Ownership Plan (ESOP) until plans for a traditional sale fall through. After transitioning to an ESOP, business owners, shareholders, and employees may wonder why they never considered employee-ownership earlier. Even the ever-changing newspaper publishing world is taking advantage of the benefits offered by ESOPs.
Daily Herald Newspaper Now Employee-Owned
An ESOP is a qualified defined contribution retirement plan that invests primarily in company securities. Plan participants are employees who are allocated company shares to their ESOP account until they leave the company or retire. Upon retirement, workers can generally cash out based on the appraised value of the shares or the company will buy back the shares.
Chicago's Daily Herald newspaper is now in the hands of the employees after a debt-financed buyout establishing the company as an ESOP. In addition to the other benefits of an ESOP, the company will be able to avoid taxes on the profits as a pass-through entity. Taxes on the employees/ participants on their ESOP accounts are deferred until distributions are made.
Newspaper Remains Locally Owned
One of the motivations of selling to the employees was to keep the business local. According to the company's founder, the goal was to preserve an independent community newspaper. Keeping a local newspaper in the hands of workers who live and work within the community gives the community a stake in the newspaper. ESOPs also report higher productivity after transitioning to employee-ownership, which could be reflected in both output and quality of journalism. Local publishing may also be better able to adapt to the community needs over the one-size-fits-all approach of media conglomerates.
Exit Strategy for Founding Family
The paper's history dates back to 1898 when Hosea Paddock founded Paddock Publications. Ray Paddock began working for the family-owned company almost 50 years ago as a reporter. The newspaper's management still includes two Paddock family members. Sale to the ESOP will allow the founding family to exit the business on their own terms, complete with a ready buyer for market value. This can be a preferred option over the alternative of selling to a venture capital firm which might liquidate the company, leaving all the employees out of a job.
Newspaper's Challenging Business Atmosphere
The newspaper industry continues to face challenges in the world of online media and pseudo-media outlets, including Facebook and Google. Advertising and subscriptions have declined greatly over the years. However, by transitioning a newspaper to employee-ownership, the newspaper company can benefit from innovation and productivity that goes along with employees having a personal stake in the business.
Diversification may be the best option for the struggling publishing industry. The company has already expanded beyond the community publication to include acquiring smaller papers, a group of chamber of commerce guides, a business publication, and Spanish-language paper. The company also provides printing services for third parties.
Employee Ownership Counseling for California Businesses
If you have any questions about employee-ownership or ESOPs for your business, Butterfield Schechter LLP is here to help. We are a San Diego law firm focusing on employee benefits, ERISA, and ESOPs for businesses of all sizes and industries. Contact our office today with any questions on how we can help you and your business succeed.
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