Second-Stage Entrepreneurs

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A Graceful -- and Profitable -- Exit

ESOP allows Dave Hill to retire with peace of mind.

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As he approached his 60s, Dave Hill, CEO of a Colchester, Vt.-based telecommunications-technology training firm, began looking for a way to transition into retirement. His primary concern was that Hill Associates would continue to thrive and provide a positive working environment for its 85 employees. Bottom line: He wanted to relinquish control and ownership with minimum change in culture, policies and processes.

Several options crossed Hill's desk, such as selling the company or joining a consortium to go public. At that time, the company was struggling to hit $10 million in revenue — too small for its own IPO. Another option to form a roll-up venture with several other small companies fell through. That was when Hill opted for employee ownership to guide his company into the new millennium.

"Employee stock ownership programs (ESOP) work best when the employees have a keen interest in protecting and growing the assets of the company," says Hill. "Hill Associates was a perfect candidate — our employees are our assets."

The company already had moved toward employee ownership: In 1993 Hill and his co-founders sold off 40% of their holdings to make it available for the employee population. Once the decision was made to convert to a full 100% ESOP, Hill Associates' management worked out an agreement with a local bank that would pay the owners as much money as they would have received from any one of the other options. They will remain active in the company for several more years, and the same management team will remain under new ownership.

Hill Associates opted for a leveraged ESOP in which the company borrows the money to make the stock purchase. It contributes 100% of the funds needed to pay back the loan, and shares are allocated to employees pro rata, based on their compensation.

Employees couldn't be happier, reports President Jerry Johnson. In an industry where retention is key, Johnson believes the ESOP will help Hill Associates retain valued employees.

Relief Settles In

The announcement of the ESOP ended tension for many workers. "There were a set of people who were genuinely concerned that we were going to be sold to some other company that would quickly come in and impose their own discipline and process, and that would be the end of Hill Associates as we knew it," says Johnson. "There was a tremendous sense of relief that not only were we at the end of the whole decision process, but it was also an ending that was what everybody was hoping for," he adds.

Employees are now taking a larger role in guiding the company into the future. They now nominate themselves for positions on the company's board of directors. Since the ESOP conversion last June, four employees have been newly elected to the 10-person board.

The company's annual revenues now stand at $15 million, and Hill is confident that his company will remain in the right hands as he phases himself out of the work force and into retirement. "I feel very good about this event," says Hill. "I'm absolutely certain that we're handing over the keys to this company to the best possible owners."

Writer: Julie Cook

This article was originally published in the May 2000 issue of The Edward Lowe Report.

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