By Jill Nagy
Altek Energy Systems’ president is selling the company to the employees and it will not cost them a penny, he said.
Mike O’Connor, currently the owner and a co-founder of the company, created an employee stock ownership plan (ESOP) that will hold the company’s shares on behalf of the employees. As people retire or otherwise leave the company, they will receive the value of their shares.
Shares will be allocated among the employees based upon the amount of time they have been with the company and how much they earn. Their shares will vest over a five-year period.
O’Connor said the new corporation will be what is known as a Subchapter-S corporation. Subchapter-S corporations do not pay corporate income tax. Rather, their earnings are allocated to the shareholders and taxed as regular income.
As a conventional corporation, Altek pays $400,000-500,000 in taxes a year, O’Connor estimated.
After 40 years with Altek, O’Connor said he sees the transition as a graceful exit strategy. It will leave the company intact and allow him to remove cash from the company. He also foresees considerable tax savings.
Thanks to what he terms “very conservative” money management, Altek had sufficient cash reserves for O’Connor to receive a down payment. For the rest, he will hold a note and the company will pay him, out of its earnings, over the five-year transition period.
He plans to stick around for a while, as an employee of the ESOP, but also plans to travel, spend more time with family, and perhaps spend part of the year in Hilton Head, SC., where taxes are lower and the winters are milder, he said.
In the meantime, he said, “I enjoy working.”
Creation of an ESOP gives employees an added incentive to keep the company prosperous. The value of the shares depends upon the financial health of the company.
While proceeds from the ESOP will constitute an important part of employees’ retirement funds—in addition to providing a nest egg for O’Connor—it will not be their sole retirement plan. O’Connor said the company already has a “phenomenal” 401-K investment plan into which both employees and the company contribute. That will continue, he said, but the company’s matching share will decrease.
The ESOP corporation will be managed by a board of directors consisting of O’Connor, the company comptroller and an outside business person. That board can be enlarged to four or five members, but O’Connor thinks that a three-member board is large enough for a company the size of Altek.
Altek, located in Waterford, has between 60 and 70 employees, varying with the season. They do heating, air conditioning, plumbing and construction work and have a fabrication shop, mainly manufacturing ductwork. O’Connor founded it with two other employees but has been the sole owner since 1994.
They do about $10 million worth of sales annually. He owns the building housing Altek and rents it to the company. That arrangement will continue, he said.
Planning for the ESOP conversion began about 10 years ago, O’Connor estimated. He investigated other exit strategies and consulted with a peer group of similar companies. Things were set back somewhat by the 2008-09 recession. Now that he has made the decision and set the prices in motion, “I can highly recommend it as an exit strategy,” he said.
