FGM – The Implementation of our ESOP

By Scott Gessay, CEO, FGM, Inc.

The following article describes the process that FGM, Inc., a Northern Virginia , high-tech company, followed to establish their ESOP.

Introduction

It’s hard for me to believe that just one year ago I had only a small amount of knowledge about Employee Stock Ownership Plans (ESOPs). Over the course of this last year I had the opportunity to learn a tremendous amount about ESOPs to the extent of installing an ESOP at FGM, Inc. What I discovered during this learning period is that there is a vast amount of ESOP information that is free and easily available on the Internet. There are also numerous non-profit organizations that can help you get started with little or no investment. Lastly, there is a network of professional consultants, lawyers, and valuation firms that specialize in establishing and maintaining ESOPs. These organizations and professionals can effectively guide you and your organization through the entire process of establishing an ESOP in your company.

Company Background

Founded in 1987, FGM, Inc. is an innovative technology company specializing in software and systems development and integration. FGM’s vision is founded on being a premiere software and systems engineering services provider that exceeds customer and employee expectations through innovation and excellence. FGM focuses on the practical application of new and emerging technologies and has earned a reputation for striking a balance between leading edge and mature technologies. Our systems development and integration experience includes database systems, systems engineering, Internet and web-based systems, geo-visualization and mapping systems, information assurance, modeling and simulation, combat support systems, C4ISR systems, and import/export control systems.
FGM is an award-winning company that has been recognized for financial strength, fast growth, and community service. FGM ranks among the fastest growing companies in the Washington , DC metropolitan area and was awarded the FastTrack Revenue Growth Award (1999) and the Virginia Fantastic 50 (1999, 2000) among others. FGM has also been recognized as a great place to work by winning the 1999 Companies as Responsive Employers (CARE) award, by being selected as one of the 2001 Top 50 Tech Places to Work by Itrecruitermag.com and by being cited as one of the top 50 places to work in the October 2001 issue of Washingtonian Magazine. With currently 178 employees, FGM is headquartered in Dulles , Virginia , and has offices in Colorado Springs , Colorado ; San Diego , California ; and Honolulu , Hawaii .

Implementing the FGM ESOP

FGM established an ESOP in 2001 to achieve the following goals:

  1. To enhance corporate performance and job satisfaction by creating a corporate “ownership” culture.
  2. To reward employees with a benefit tied to corporate performance.
  3. To enable FGM to remain a private company with the potential to exist beyond the employment terms of the founding shareholders.
  4. To allow owners with management responsibilities in the closely held company to sell gradually and ease out of the business over a period of years. The period of time can vary from owner to owner based on their individual desires or needs.

The entire process of establishing the FGM ESOP took nine months to complete from research to adoption. The process really started in April when I began searching web sites for information on ESOPs. I was surprised by the number of useful sites I found including:

www.fed.org – The Foundation for Enterprise Development
www.nceo.org – National Center for Employee Ownership
www.esopassociation.org – The ESOP Association

Each of these web sites contained information about ESOPs from a number of different perspectives. After digesting all of the information I could find on the web, I was even more encouraged by the possibility of establishing an ESOP at FGM. However, I still had a lot of unanswered questions regarding the details about setting up an ESOP.

In April 2001, I contacted the Foundation for Enterprise Development (Foundation) through their web site. Within a day or two, Marshal Hyman, the senior tax consultant with the Foundation, contacted me. Marshal and I discussed FGM and ESOPs, and I found his ESOP knowledge and experience to be quite in depth and very practical. Marshal informed me that an appropriate next step was to perform an ESOP assessment for FGM, a service the Foundation performs at a reasonable fee. On April 19, 2001, I engaged the Foundation to perform an ESOP assessment for FGM.

In order to perform the assessment, the Foundation sent me a short list of data items they required for their analysis. In general, the items included a description of the company, financial data, business plans, ownership information, and forecasts. I met with Marshal to go over the data and to answer questions that he had regarding the company. On May 21, 2001, I received the FGM ESOP Assessment Report by email. The assessment report clearly provided us with:

  1. A feasibility study assessing the extent to which an ESOP could be implemented at FGM.
  2. A spreadsheet projecting the effects of the proposed ESOP on the financial condition of the company and the projected benefits for the ESOP participants.
  3. A report detailing proposed design options for an FGM ESOP, including an estimate of the amount of stock that the ESOP would purchase, proposed methods of financing, a system for allocation of shares among participating employees and related matters.
  4. An action plan setting out the remaining steps toward plan implementation, together with referrals to qualified professionals who could implement the plan.

The report concluded that the FGM ESOP was entirely feasible and Marshal offered to meet with the FGM owners to go over the report and answer any of our questions.

After reviewing the assessment report, I emailed it to the owners of FGM for review. I also took Marshal up on his offer to meet with the owners to review the report and answer questions. On May 30, 2001, Marshal briefed the FGM owners on the ESOP Assessment Report. Based on the findings of the report that FGM was financially capable of supporting a viable ESOP program, the owners elected to proceed by engaging a firm to determine a fair market value for FGM.

Marshal referred us to a number of professionals who could assist us in implementing an ESOP. I decided to contact Ron Gilbert of ESOP Services Inc (ESI). Ron is an experienced consultant who assists companies in implementing ESOPs. I would make the analogy that Ron is a general contractor for building ESOPs. On June 26, 2001, I made the decision to engage ESI to guide us through the ESOP implementation. ESI’s implementation plan was broken into two phases with Phase II being contingent upon a decision by the owners to proceed based on Phase I results:

Phase I A preliminary determination of the fair market value of the company. While the preliminary value is being determined, a review of the company’s objectives, financial position, and employee census is performed. Once the preliminary value is determined, the study proceeds with the development of detailed projections of the financial consequences of the ESOP.

Phase II ESOP design and installation, financing, employee communications, plan qualification, transaction structure, and 1042 investment consulting.

Working with Ron, we decided on July 11, 2001 to engage the firm Willamette Management Associates ( Willamette ) to perform a preliminary assessment of fair market value for FGM. Much like the Foundation’s assessment, we immediately provided both ESI and Willamette with financial and business data about FGM. Within three weeks we met with Scott Levine of Willamette to conduct a “due diligence” meeting to review the data we provided and answer any of his questions regarding FGM financial or business operations. On August 8, 2001, I received a draft of the preliminary assessment of fair market value for FGM. I forwarded this information on to Ron Gilbert to feed into his financial models. On August 20, Scott Levine met with the owners to present his assessment of fair market value and answer any questions regarding his methodology. The owners then met with Ron Gilbert on August 29 to review the detailed financial feasibility models that he developed based on our design plan and fair market value. Based on the results of the preliminary valuation and feasibility study, the owners elected to go forward and implement the ESOP.

At this point we were committed to moving forward with implementing the ESOP. In September, FGM engaged ESI to perform Phase II of its implementation plan. We began by working with an ESOP attorney, Larry Goldberg of Kirkpatrick and Lockhart to develop the ESOP document and trust agreement. The process with Larry was fairly simple in that we started by responding to a questionnaire that fed into a draft plan document. After a couple iterations of review and modification the plan document and trust agreement were finalized and adopted by the board of directors in November 2001.

In parallel with the development of the documents we began communicating the ESOP to the employees. The first communications was with the FGM management team at a strategic offsite meeting in October 2001. I followed up with making general announcements of the ESOP to the entire staff, which were followed with detailed meetings conducted by ESI in December that walked the employees through the ESOP plan summary document. The communication efforts were critical and we spent a lot of time and effort to ensure we got the right message out to employees about the ESOP. It was important to us to make sure everyone understood the business objectives and that the ESOP was a win-win proposition for FGM. In fact we created an area on our Intranet where employees could get more information about the FGM ESOP and ESOPs in general. The area also allows employees to post questions that are then forwarded to ESI.

Our first ESOP transaction took place January 2002. Ultimately, we elected to do a non-leveraged ESOP, which simplified the transaction. Larry Goldberg completed the transaction documents as part of the Phase II implementation plan and the assessment of fair market value was performed by Willamette . On January 29, 2002, every employee of FGM became an owner. We are now beginning to develop an employee ownership culture that will enable us to achieve our ultimate business goals.

Conclusion

Implementing FGM’s ESOP was a tremendous learning experience for me personally. I believe that working with organizations such as the Foundation and professionals with ESI, Kirkpatrick and Lockhart, and Willamette enabled us to implement a rock solid ESOP that allows us to achieve our ultimate business objectives.

The process that we followed allowed us to get smart on ESOPs and understand all the variables along the way. The process provided a number of decision points for the owners following both the initial assessment and preliminary valuation where if the results were not favorable the process could be abandoned with a relatively small amount of sunk costs.

If you are contemplating establishing an ESOP for your company I would highly recommend starting out by working with organizations such as the Foundation for Enterprise Development.

This article originally appeared on The Foundation for Enterprise Development website in May, 2002. The Foundation for Enterprise Development is a worldwide organization that, since May 2002, operates within the USA as the Beyster Institute for Entrepreneurial Employee Ownership.

Opinions expressed in this article do not necessarily reflect the views of the Foundation for Enterprise Development or ESOP Services, Inc.

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