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Thursday, February 18, 2010

It's been a big week for Bob

The fellow who sells us the oats for our oatmeal has made a big splash by turning his company, Bob's Red Mill, over to an employee stock ownership plan (ESOP) on his 81st birthday. The move has drawn quite the national spotlight. I keep thinking, "There must be a catch," but maybe there isn't. Maybe Bob is just a cool guy.

Comments (12)

The "catch" likely is Catch 1042. As in, 26 USC 1042(a): "Nonrecognition of gain". Good times.

Bob is the real thing, I frequent there for all my baking goods, He is frequently there, also I heard he and his wife speak at a small business workshop at CCC. Great couple, really have their heads on strait to what is important in life.

Hurrah for Bob. LD - please explain your comment. Are you saying that Bob has done this for his own personal gain, or do I misunderstand.

I'm just saying that ESOP transactions aren't necessarily purely altruistic.

Let's say he sells his interest in the company's stock in 2010. Ordinarily, he'd pay personal income taxes on the sale proceeds (in excess of his basis, of course) in 2010.

Instead, he has the ESOP buy the stock from him: he can defer taxation by taking the cash proceeds from the sale and investing them in (historically cheap) US stocks and bonds in a 1042 transaction.

So, if he'd sold to someone else, the sale would generate taxable income in 2010. By going ESOP, he can avoid taxable income on the transaction in 2010.

Sure, the transaction makes for good press, and it has the potential to work in the employees' favor, but make no mistake: there's a big tax advantage to selling to an ESOP over selling to an outside third party.

Also: ESOPs don't always work out so well for the employees. Remember what happened to Albany's Oregon Metallurgical Corporation (Oremet).

Bob's a very cool guy, and does numerous things to keep it local, support his employees, and make really high-quality, healthy food products. He did this becuase he wanted to see the product of his effort stay that way, instead of being bought by a much larger corporation.

He wouldn't have been nearly as successful as he has been were he not a savvy businessman. And there is the potential for shenanigans using ESOPs--the billionaire Sam Zell used an ESOP as part of his strategy to take over the Chicago Tribune before running it into the ground.

But in a time of unrelenting bad news for working stiffs, I think Bob deserves some kudos for not selling out to some out-of-state conglomerate.

Yay for Bob- keep local jobs local. Value and trust your employees. Good for Bob!

In addition to every other thing that's great about this deal, it means the supply of the best gluten-free bread mix ever should be secure for my daughter for many years to come.

I laughed when I read the article about this trasaction and how great a guy Bob is for doing it. In addition to the tax benefits to Bob explained above, the ESOP transaction adds massive debt to the company balance sheet without any corresponding increase in tangible assets. The company will have much difficulty in obtaining loans or operating capital for many years (an ESOP transaction usually takes 10 years or more to complete the stock transfer and pay off the underlying loan).

In addition to the tax benefits to Bob explained above, the ESOP transaction adds massive debt to the company balance sheet without any corresponding increase in tangible assets.

That cynical representation of an ESOP entirely misses the point--that the employees will own the company, not another corporation. Really. In other words, employees will each see an increase in *their* "tangible assets".

And, after having been aprt of two ESOPs, I cann tell you that they're not some sort of scam or judo manuever to strangle finances. Lastly, ESOPs are *very* common in the US, have been for a long time, and work well. Thousands of companies in the US run well and profitably as ESOPs.

Why all the bizarre cynicism? Or do you not know a thing about Bob and Bob's Red Mill? Maybe you're just looking for something to tear apart?

Bob could have sold for much more if he'd sold to a large public company, and if it were a stock-for-stock transaction, he wouldn't pay income tax on the sale. He genuinely wanted his employees to own the business, and that's why he did this.

Bob is not "giving" the company to the employees via an ESOP, he is SELLING the company to the employees. Yes, an ESOP is great - eventually. And I agree it is not "some sort of scam or judo manuever to strangle finances." However, #1) Bob is not giving it away, and #2) adding leverage to the company balance sheet is no small matter.

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