How garden center owners can transition to an employee stock ownership plan (ESOP)

Joe Wojciechowski has always loved the work.

He loved the physicality of greenhouse work and getting his hands dirty. The hard truth, though, was that after four decades, the 63-year-old owner of Ortonville, Michigan’s Wojo’s Greenhouse no longer had the time and energy necessary to manage strategic operations and participate in day-to-day duties.

Wojciechowski needed a way out without losing those aspects of the business he cherished the most. Not unlike many small business owners of his generation, Wojciechowski didn’t have a succession plan because his children had no interest in taking over the greenhouse.

Private equity or selling to a competitor were considerations. However, Wojciechowski’s primary motivation for Wojo’s Greenhouse centered on his employees and preserving the business’ unique culture. He believed selling to an outside interest, particularly private equity, would alter that culture, potentially diverging from Wojo’s values.

Wojciechowski emphasized the company’s deep community involvement, including significant donations and active participation in local fundraising efforts. He worried a more corporate structure to the operation could diminish the greenhouse’s community focus.

“We started with a vacant piece of land, and we’ve got a really good business with two retail locations,” Wojciechowski says. “And I believe the community would just be sad if we just closed the doors.

“People love to come here and shop,” he adds. “They love the flowers. And it’s just hard to say that we weren’t going to do it anymore. But I also know I’m not going to live forever.”

Wojciechowski’s sentiments mirror those of countless small business owners both in and outside of the horticulture industry. Small business owners often overlook succession planning, despite its critical importance.

A 2021 PricewaterhouseCoopers business survey found that fewer than a third of business owners had a succession plan or formalized strategy in place. Additionally, a Hadley Capital business succession planning report found that nearly 60% of baby boomer business owners lacked a succession plan. This is a significant challenge for small business owners without siblings or the next generation to take over operations.

At stake is the fact that small businesses — such as those in the horticulture industry — heavily rely on the owner’s expertise, relationships and leadership skills in day-to-day operations. If they exit the business due to retirement — or worse, an illness or untimely death — the business often struggles to survive, leading to its closure.

Attractive benefits of ESOPs

An employee stock ownership plan (ESOP) is a qualified retirement option that enables employees to gain ownership of the company through a leveraged contribution plan that primarily invests in employer securities. This approach allows small business owners to transition ownership, reward employees and enable participants to foster a stronger connection to the business.

Typically found in businesses with more than 20 but fewer than 100 employees, an ESOP offers a flexible and potentially less definitive path compared to selling to a strategic buyer, private equity or turning the operation over to family members. Instead, an ESOP allows for a gradual transition, enabling the original owner to retain some level of control and assess the benefits of employee ownership. For some small business owners, an ESOP is the most prudent course of action.

Richard Craft, CEO of Wealth Advisory Group, which assists clients with ESOP initiatives, explains that while the business may be valuable, an owner can’t easily use that value to fund their retirement. So, an ESOP provides a way for the owner to sell some or all of their ownership stake to the ESOP trust, a legal entity that holds shares of the company’s stock on behalf of the employees, who are the beneficial owners of those shares. This sale offers the owner cash (liquidity) while allowing the company to remain independent and often provides benefits to employees through ownership.

The ESOP structure provides numerous advantages, one of which is the ability to implement it partially, Craft says. Unlike an outright sale, where control is relinquished, or a family succession plan that offers no immediate financial return, an ESOP can be initiated with a smaller stake.

“The advantage with an ESOP is that you can do a partial ESOP … You can do it sort of as a test,” he says. “You have to do a 30% ESOP to get started, and (the owner) maintains control of the other 70%.”

Furthermore, the element of control remains with the original owner until their stake falls below 51%, Craft adds.

“You can start down this path of an ESOP, and you can get your employees involved in ownership,” he says. “But not everybody is an entrepreneur, and these are entrepreneurial businesses. So, it can keep you in control until you give up more than 51% (of the business).”

ESOPs offer businesses numerous tax and financial advantages to both the owner and the employees, says Darren Gleeman, managing partner at MBO Ventures, who advises small business owners exploring ESOPs. One of these advantages is that it allows the owner to avoid paying capital gains taxes on the transaction.

“Let’s say your horticulture business is worth $10 million,” he says. “If you sell to a private equity firm, you have to pay capital gains tax on that sale, and depending on the state, it’s approximately 30%. So, that’s $3 million, and you can’t get around that.”

When structured correctly, Gleeman says an ESOP offers the potential to defer capital gains taxes indefinitely. This allows an owner to reinvest those funds rather than immediately paying taxes, potentially fostering greater long-term financial flexibility and wealth preservation.

“That’s a big deal,” he says. “That’s a nice incentive.”

Since the employees don’t contribute their own money, an ESOP acquisition often relies heavily on borrowing. In Gleeman’s $10 million small business scenario, the ESOP might borrow $5 million, which is then paid to the owner. The remaining $5 million is structured as a “seller note,” essentially an IOU from the company back to the original owner. So, the owner still receives the full $10 million, but in the form of $5 million cash and a $5 million seller note.

Additionally, some ESOP structures may include deferred compensation arrangements or contingent payments tied to the company’s future performance, which could provide the owner with additional value beyond the initial sale.

Another decisive advantage is the ESOP can often deduct the full purchase price over a period of years, Gleeman says. This significantly reduces the company’s taxable income. Even if only a portion of the company is initially sold to the ESOP (such as 49% for $5 million in Gleeman’s $10 million scenario), that $5 million can still be tax deductible.

“The government incentivizes ESOPs because they provide a significant benefit to employees, giving them ownership in the company’s success,” Gleeman says.

Despite their many benefits, ESOPs involve numerous financial, legal and operational nuances. Those interviewed for this article strongly advise consulting with an expert team that can serve as a comprehensive guide through this complex process.

Success with ESOPs

One notable aspect of ESOP transactions lies in their stability.

ESOP experts recommend that before deciding on an ESOP, an owner must conduct a thorough feasibility study and consult with an experienced ESOP adviser to determine if it’s the right fit for their specific circumstances, financial situation and succession goals. Then, they must decide if their employees are interested in engaging in such an arrangement.

While ESOPs are typically set up by the company for the benefit of employees, successful ESOPs thrive on employee engagement and understanding, says business turnaround expert and consultant Renee Fellman. If employees are resistant or disengaged, the cultural benefits and productivity improvements often associated with ESOPs may not materialize, she says.

However, once a positive feasibility study is conducted, ESOPs have an exceptionally high rate of success, Gleeman says. This is mainly because the internal nature of an ESOP transaction eliminates the uncertainties and potential for owner withdrawal that can plague external acquisitions.

“The initial feasibility analysis for an ESOP involves a thorough assessment using real company data, providing a reliable valuation range,” Gleeman says. “Since all parties are working with the same transparent information, the likelihood of the deal falling apart due to valuation discrepancies is minimal.”

The primary hurdle that might prevent an ESOP transaction from moving forward is that the company may be too small to support such a structure viably. For instance, a company with only six or seven employees would likely not be a suitable candidate for an ESOP.

How Wojo’s Greenhouse transitioned to an ESOP

Instead of a partial arrangement, in late 2024, Wojciechowski sold 100% of Wojo’s to around 45 full-time and seasonal employees, who had to meet specific employment criteria to qualify. Prairie Capital Advisors acted as the financial adviser to Wojo’s Greenhouse throughout the ESOP transaction, providing expertise and managing the various phases, including due diligence and financing. PivotPoint Business Solutions also played a role in guiding Wojciechowski through the succession and exit-planning process and introducing the ESOP option.

According to Craft, an ESOP is not an inexpensive undertaking. He estimates that it costs between $50,000 and $100,000 to explore, construct and execute the agreement. Then, there are annual expenses of between $10,000 and $15,000 for yearly valuations and the ESOP’s administration.

“So, an ESOP is not just a whim,” he says. “Where I think it’s really critical is that you have a key employee base because you’re basically going into business with these people. They’re becoming shareholders. And while they may not be in control, because you still maintain control (in a partial ESOP), they have to be motivated by the ESOP structure. If you’ve got a bunch of rank-and-file people and nobody’s in leadership (roles), then making them owners is not really going to accomplish much. So, they have to have an entrepreneurial mindset (to be successful).”

Restructuring with ESOPs

Once an ESOP is in place, employees don’t have direct management control. Instead, a trustee is hired, and a board of directors is assembled to govern and provide critical oversight of the company. They are intended to work collaboratively to ensure the company’s success and the security of the employee-owners’ assets.

Like in any company, the board, a mix of the company’s management team and outside advisers, oversees the strategic direction of the company, with a primary focus on long-term success and stability. The board also appoints and supervises the trustee.

Board composition is often critical for ESOP success, notes Fellman, and that means a healthy dose of outside expertise.

“It’s really important, if possible, to have independent board members who have the skills the company needs: marketing, finance and accounting, logistics,” she says, adding these are the core business processes ownership had previously overseen.

The trustee is an independent third party who acts solely in the best interests of the employees or the ESOP’s participants. The trustee is the guardian of the ESOP’s assets. Some of their duties include setting stock prices, managing the ESOP trust assets, ensuring compliance and monitoring the company’s board of directors.

In addition, both Craft and Gleeman note that a successful ESOP will boost employee morale and productivity by aligning their financial futures with the company’s performance, thereby generating a greater sense of responsibility and pride among employees.

Wojciechowski has seen this mental transition firsthand. Despite some initial skepticism on his part, he says he has seen an entrepreneurial spirit emerge in the employees who are involved in Wojo’s ESOP.

Employees are more mindful of their actions and expenditures, even in areas like garbage disposal. For instance, a system where penalties were incurred from their trash removal vendor for exceeding designated garbage limits has led to a projected $15,000 reduction in the company’s annual garbage bill.

“Now, people are very conscious of what they do and how they spend (the company’s) money — even just garbage removal,” Wojciechowski says.

Since the transition, Wojciechowski’s commitment to the company has remained steadfast, underscored by a three-year agreement. His primary objective is to continue providing guidance and support to ensure the company’s success.

“If I left today — and I’m not trying to sound big-headed — I would be nervous for the future until I get enough people in the right spots. I have a three-year agreement. If it takes longer, and they want me around, I’ll be here. I don’t want to retire. I don’t want to work as many hours as I have for the last 40 years.”

Mike Zawacki is a Cleveland-based journalist and frequent contributor to the GIE Media Horticulture Group.