When 30 salaried employees, led by president and general manager Tom Wonsiewicz, acquired the company in 1986, they imparted the philosophy that if you owned Lane shares, you walked in the door every morning and contributed to the company’s growth and success. Since then, the company has grown steadily to become the second-largest national producer of corrugated metal pipe, and one of the two major suppliers of metal and plastic drainage pipe in its market area. Lane also offers metal powder coating services, and currently has more than 300 employee-owners serving the Northeast and Mid-Atlantic states.

Lane’s 61 shareholders, most of whom were part of the acquiring group in 1986 (see inset), are an energetic group of employee managers/shareholders, with an average age of 57. Because the company allows for retirement age at 60, the demographics of the current ownership structure were becoming a growing concern for Lane’s board of directors. Wonsiewicz and board members recognized that with so many owners approaching retirement, the company needed a plan for recapitalizing and creating liquidity.

Initially, Lane and its board entertained several serious offers to buy the company. While not successful, they provided a clear indication of market value. The ESOP, however, offered a unique opportunity to extend the benefits of profitable growth to all employees while providing a way for senior employee-owners to cash out and benefit from their investment.

“When you look at Lane’s history, the legacy of employee ownership is clear from the founder through three ownership transitions,” explains Wonsiewicz. “The transition to an ESOP was not only a logical extension of the company’s ownership culture, iIt was the best vehicle for achieving our business perpetuation goals.”

A Five-Point Plan

Lane’s business perpetuation plan revolved around five key principles:

• Perpetuate the company by transitioning ownership to the current employee base of 300
• Responsibly finance the business perpetuation plan
• Provide fair value to all current shareholders
• Enable the continuation of the existing business with minimal disruption
• Create a successful ownership culture involving all employees

Transitioning ownership to all the employees of Lane was accomplished by selling or transferring 100 percent of Lane shares to an ESOP. However, Lane’s board of directors knew that in order for the ESOP to work, it would have to go into place without significantly impacting the current bonus and benefits structure. Therefore, the goal was to accomplish all five principles without reducing overall employee benefits. In fact, by carefully structuring the ESOP plan, the board was able to accomplish this goal while significantly increasing employee benefits. The contribution to the former profit sharing plan previously had an average of two to six percent of payroll. The contribution to the ESOP is projected to be in excess of 15 percent of payroll.

In addition, the ESOP enabled Lane to achieve all five principles while maintaining sufficient cash-flow and debt capacity for continued growth – including the construction of a new HDPE pipe manufacturing plant in Virginia.

Working closely with their corporate counsel and other advisors, and with ESOP Services, Inc. acting as “quarterback”, Lane’s board of directors structured a transaction that was win-win for all involved.

Lane began with an in-depth feasibility study of the ESOP financing and structure. The modeling concluded that the projected profitability, along with the current ESOP tax benefits (see “ESOP Highlights” below) provided by a 100 percent ESOP-owned S Corporation, would enable management to transfer ownership while ensuring that day-to-day operations remained “business as usual.”  The plan would increase employee ownership from 61 to more than 300, and would create a market for Lane shares with an ESOP providing fair value to all shareholders.

Next, the board created an ESOP trust that borrowed the funds needed to purchase Lane shares. Each year Lane makes a cash contribution to the ESOP. The ESOP trustee uses this cash to repay the debt incurred to purchase the shares. In addition, as a 100 percent ESOP-owned S Corporation, the income produced by Lane is not subject to federal or Pennsylvania state corporate income tax.

Each year, after payments are made on the ESOP debt, a portion of shares are released and allocated to participating employees. This provides participating employees with beneficial ownership by giving them rights to the economic value of the shares within the trust. The shares are held in the ESOP trust until the employee leaves the company, at which point the ESOP or the company buys back the shares.

With a portion of shares held directly by employees and the balance in trust through 401(k) purchases, Lane’s management team needed to first communicate about the transaction to a large group of shareholders, and then seek their approval to sell their shares, which would ultimately be financed through senior and subordinated seller notes.  With this complete, shares held in the 401(k) were then transferred to the ESOP.  Special provisions were required for 401(k) shares transferring to the ESOP, including establishing a floor price, distribution policy and liquidity plan.

and employees, were counting the days until retirement.  Wonsiewicz had even announced his retirement date.  With Lane’s attention to planning for business succession, their commitment to training managers and corporate officers from within, and a decentralized management that pushed responsibilities to the plant level (Lane has 11 locations), the board of directors ensured there would be minimal disruption to the existing business model.

The End Result

Lane effectively transitioned ownership for the fourth time; this time to employees through a leveraged ESOP.  The ESOP was implemented with little change to the company’s management, operating structure and plans for future growth.  Selling shareholders received fair value and full liquidity for their shares, and the opportunity to extend the benefits of a history of a successful ownership culture to all employees was successfully established.

In the long run, the ESOP will enable Lane to more fully engage all 300+ employees as owners, reaching beyond the previous ownership base of 61.  Each eligible employee, those that have worked at least 1,000 hours in a year, now has the opportunity to partake in the economic benefits of Lane’s projected growth.

Tax Free S Corporation Income
Stock owned by an S corporation ESOP is not subject to federal income tax. Code Section 409(p) prohibits ESOPs from allocating shares to a "disqualified person."

Tax Deductible Loan Payments Loan
Loan principal is tax deductible to the corporation when the corporation makes ESOP contributions that are used to repay ESOP debt.

“Tax-Free” Rollover of Stock Sold to the ESOP
Shareholders of closely-held C corporations may sell their stock to the ESOP, and under certain circumstances pay no capital gains tax, provided that the proceeds are reinvested in qualified replacement property (QRP) within twelve months after (or three months before) the sale to the ESOP. A three-year holding period is required.

Tax Deductible Dividends When Paid Through the ESOP
Dividends on C corporation ESOP stock "passed through" to ESOP participants or used to repay ESOP loans, may be tax-deductible to the corporation and are excluded from the contribution limit of 25 percent of payroll.