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Succession plan includes Employee Stock Ownership Plan
An expert says QST Consultations was an “outstanding case for an ESOP.”
QST is a clinical research company specializing in clinical study design, data management, statistical analysis and medical writing services. It works with companies trying to get FDA approval of new drugs or medical devices.
“Today’s announcement marks an important milestone toward implementation of our corporate succession plan,” said Nancy Fitzgerald, CEO of QST. “Many companies opt to sell stock to an ESOP when the current owner is getting ready to retire or take an alternative role in the company. For QST, it was the perfect succession plan. John Quiring, QST’s founder and chief science officer, was pleased to share the wealth with the employees who worked so hard to make the company successful.”
Fitzgerald also is part of the succession plan; she was just named CEO in October, replacing Quiring in that role. Quiring is still working with QST, he said, and is now devoted full time to “the scientific aspects of the company.”
Quiring said Fitzgerald has been with the company for several years and is familiar with all phases of it. “I think I’ve put the company, from a business standpoint, in good hands,” he said.
The company also appointed a board of directors that includes Fitzgerald and Quiring. Patrick K. Gill, president and CEO of Grand River Bank, also has joined the QST board. Gill “brings over 30 years of diverse and successful financial experience to QST,” noted Quiring.
Quiring, who founded QST in 1974 when he was an associate professor of statistics at GVSU, said the firm is in the first phase of ESOP ownership, “and as we move through the next few years, we’ll begin to negotiate the sale of the remaining shares that I own.”
He said his goal is to put a majority of the stock into ownership by the employees, “possibly upwards toward 100 percent, but that remains to be determined.”
QST now employs 28 people full time, plus two part time and three individuals under contract. It serves clients throughout the U.S.
In 2009, QST began construction of a two-story office building in Allendale that it now occupies. In 2010, the Allendale Chamber of Commerce honored it as one of the outstanding businesses in that area.
Quiring said that during the recession, “we took a little timeout there to build this building and move into it, but our sales generally increased over that period of the recession and we did quite well.” QST revenues have grown about 20 percent per year, on average, for about 10 years, according to Quiring.
Jeff DeVree, a partner at Varnum Law in Grand Rapids who was hired to set up the ESOP for QST Consultations, said it was an outstanding case for an ESOP because John Quiring “was primarily interested in the long-term success of the company and having the company stay here and continue to grow here, continue to provide good employment here. So he was interested in it for all the right reasons.”
DeVree said there are some capital gains advantages for the owner of a company who sells his or her stock to an ESOP. Sale of stock to an ESOP can give the seller the ability to defer tax on the capital gains by reinvesting the proceeds of the sale in actual securities issued by other U.S. companies (but not through mutual funds.) If the replacement securities become part of an estate after the owner’s death, that tax on capital gain may be forgiven.
In recent years, according to DeVree, the tax was reduced on long-term capital gains, but now with the capital gains rate increased from 15 percent to 20 (effectively, 23.8 percent with Medicare funding tax), he said, “that’s going to be enough to generate some renewed interest” in setting up an ESOP.
DeVree said he believes an ESOP often is promoted primarily because of its tax advantage. “But I don’t think that’s the real benefit to ESOPs. My own view — and I may be in the minority — is that if the only reason you are doing this is for the tax benefit, you’re probably not going to be happy with it in the long run. You really have to do it for the right reason, and the right reason is that you believe in the concept of employee ownership.”
DeVree said studies show that ESOP companies tend to outperform non-ESOP companies. During the Great Recession, he added, ESOP companies were far less likely to lay off employees than other companies.
DeVree repeated a comment he said he has made many times: “One thing about ESOP companies is, they don’t lay off their owners and move overseas.” ESOPs, he said, “are a good tool for revitalizing the economy in Michigan.”
So why would a business owner primarily interested in the tax advantage be disappointed in an ESOP later? DeVree said that type of company owner might get “very weary of the administration that’s involved … the time and expense.”
An ESOP is distinctly separate from the company it involves. It represents the employees, with the stock ownership being part of the employee retirement plan benefit provided by the company.
“Because there is a great opportunity for abuse here, as you can imagine … the IRS and the Department of Labor watch these things very carefully,” said DeVree.
Setting up and maintaining an ESOP is very complicated, he said, requiring an experienced ESOP attorney, a good tax accountant and an experienced business appraiser, “because the stock (being sold to the ESOP by the owner) has to be appraised by an independent appraiser, both at the time you sell it to an ESOP and every year after that. So the valuation is really critical,” he said.
Financing also can be complicated, according to DeVree.
“What we often do is, rather than ask the lender to lend directly to the ESOP” (which would then buy the stock from the owner), “we will have the company borrow the money … and then the company will lend the money to the ESOP.” He explained it is done that way because lenders are more comfortable making loans to companies they know.
Another reason some business owners may not want to set up an ESOP is that “it’s a different kind of atmosphere” in which the owner “really has to act like an independent shareholder.”
A trustee is named as owner of the ESOP stock on behalf of the ESOP participants and beneficiaries “so the trustee really has to be a vigilant shareholder.”
For someone who started a company from scratch and made it valuable over the years, “it’s a difficult thing — now having a shareholder who has some clout, now attending shareholder meetings.”
“So once you have (an ESOP) in place, now you really have to manage the company differently. Before, if you were sole owner, you were managing the company for your own benefit, and now you have to manage it in part for the benefit of the new shareholder — the ESOP and all its participants. And that’s a different way of thinking,” said DeVree.