Workers should act now to keep Franklin mill open
Published 8:36 am Saturday, October 31, 2009
There is no need for International Paper Co. to leave Franklin. For more than 20 years, Employee Stock Ownership Plans (ESOPs) have been one of the most viable tools used in succession planning for small- to medium-size businesses, and the sale of IP to an ESOP could very well be the only way to keep the business in town. When a willing seller and a willing buyer (the former employees of IP), and with proper leadership (the union, the mayor or the governor) come together to solve a common problem, the results can be mutually rewarding.
Assuming IP can make a profit (some folks say it’s profitable now) here’s how would work:
The company is appraised by a qualified business appraiser and since there would likely be insufficient funds available through local banks to fund the purchase, International Paper would be asked to lend the money to the ESOP. The ESOP would then use the money to buy the assets of IP that are needed to operate the Franklin business.
Generally, an ESOP can pay the seller more for its business than any other buyer — not a bad deal for IP. Normally a purchaser makes a profit, pays 40 percent income tax and uses the after-tax dollars to pay the principal portion of the note that the former owner (IP) now holds.
In the case of an ESOP, the new company (IP-ESOP) benefits because it is able to deduct for tax purposes the principal payments on the ESOP acquisition loan. This is a substantial tax savings for the new company and increases after-tax cash flow as compared to conventional financing.
These tax benefits also increase the company’s debt carrying capacity and thus enhance the company’s ability to obtain financing. Overnight, the value of the transaction (IP sale) increases 40 percent. Generally, this 40 percent is split in some ratio between the buyer and the seller; it’s a win-win proposition.
The employees are winners also. First and foremost, as in this case, the company would continue to exist and employees keep their jobs — for the most part.
A major benefit for the employees also is their ability to share in the equity growth of the company. Since the value of the company is dependent on their performance, employees may be more motivated to act in ways that maximize shareholder value — wage reductions if needed or even getting rid of the union. Shares of company stock are allocated to an individual’s retirement account annually, and if the stock increases in value, the employee’s retirement fund likewise increase.
The major benefit for the lenders in ESOP transaction is the reduced credit risk associated with the effective ability to deduct the principal. The tax savings increase after-tax cash flow and provide a greater chance that the company can meet its debt obligations.
The remaining essential ingredient is leadership. Some person or persons need to stand up to the challenge and save the mill. While this is a daunting task, it is no greater than the task that faced the Camp brothers over a century ago.