Reflecting on the 18 months since their company sold 100% of its common stock to employees by creating an employee stock ownership plan (ESOP), Regent Surgical Health CEO Chris Bishop and Chairman/Founder Thxomas Mallon joined JPMorgan Chase eecutives for a panel discussion on the shift at Becker’s recent 16th Annual Future of Spine + The Spine, Orthopedic and Pain Management-Driven ASC Conference. The discussion explored three benefits of an ESOP transaction:
Explaining that Regent had an $8 million offer on the table from an outside interest at the time they chose the ESOP, Mallon explained: “I looked at them and said, ‘That sounds pretty good, but….’ Well, if you run the numbers on the ESOP, your upside on the five-year time horizon is $17 million. Now, do you want to be in charge of your own destiny? Do you want to maintain your culture? Do you want to continue serving your current customers? Or do you want to turn it over to the man and work for an international healthcare corporation where you are just a little sliver of what they do? Regent management had the good sense to say that we’d rather row our own boat.”
Another advantage of an ESOP is the efficiency gained when employees begin to think of the organization as their own. “We were in a conference room one day and I was talking about flying to New York the next day to pitch a project,” said Bishop, “and one lady raised her hand and said, ‘Why are you flying? Why can’t you take the bus? Wouldn’t that be a lot less expensive?’ That’s the mentality — she didn’t care before if I flew first class or coach. These folks are starting to think of Regent as ‘mine.'”
JPMorgan Chase executives on the panel shared advantages of the financial structure of an ESOP, explaining that because the transaction is financed at 100 percent debt, the tax code provides benefits to companies that are 100 percent ESOP-owned and elect to be taxed as an S-corporation, allowing them to operate effectively tax-free because the ESOP is exempt from federal, and in most cases, state income taxes. In an S-corporation, the earnings pass through to the shareholder for income recognition and the ESOP is not a taxpayer. Alternative sales, private equity, or any other type of sale are taxable, so they would need to deliver a premium of 25 to 30 percent to equal the value associated with an ESOP.
If you would like to learn more about Regent’s decision to become employee-owned, and the company’s experience with the new structure to date, contact Chris Bishop.