As Sullivan Tire is transferred to worker control, here’s what to know about employee ownership

Employee stock ownership plans are a way for business owners to share their success with workers and preserve what they built after retiring

Time for a change: Sullivan Tire's 1,460 employees will own the company.John Tlumacki/Globe Staff

When Paul and Bob Sullivan Jr. decided to sell Sullivan Tire to their employees — a deal announced last week — the brothers started down a narrow path blazed by a California newspaper company 66 years ago.

Peninsula Newspapers is long gone, just one of thousands of publishers that have disappeared during the long decline of print media.

But the company — which owned papers in the Bay Area — lives on in a footnote to the annals of American capitalism: Founders George F. Morell and Dallas E. Wood established the first IRS-blessed employee stock ownership plan, or ESOP, in 1957, when both were in their 80s.

Peninsula, with the help of lawyer Louis O. Kelso, expanded on a pre-existing profit sharing plan to create a vehicle that would allow them to retire without selling to outsiders. They formed a trust that borrowed money and bought the company’s stock on behalf of workers, who could cash out when they retired.

The arrangement would allow Peninsula to “share its profits and ownership with employees [and] preserve its integrity and freedom from outside pressure,” Morell said in a story in the company’s Redwood City Tribune.

Kelso became an ESOP evangelist and ran an investment bank that helped many other companies turn workers into owners.

“If capital ownership is good for the rich, it is a thousand times better for the middle class and the poor,” Kelso once said.

Over the years the ESOP model like the one chosen by Sullivan Tire has been adopted by a small cadre of true believers in the merits and equity of employee ownership. Most are private business owners who want to share their success with workers and preserve what they built after retiring.

Less than 1 percent of mergers and acquisitions involve ESOPs, said Chris Mackin, president of Ownership Associates, a Cambridge consulting firm that specializes in employee ownership. A big obstacle: obtaining financing for ESOPs to pay owners for their stakes, according to Mackin.

The Employee Equity Investment Act, or EEIA, a bipartisan bill filed in Congress earlier this year, would provide federal loan guarantees to investment funds devoted to expanding employee ownership.

“Workers don’t have the capital,” he said. “Neither did soldiers coming back from WWII who wanted to buy a house. Federal loan guarantees built the home mortgage market. EEIA will do the same for employee ownership.”

There were 6,500 ESOPs in the United States in 2020, covering 14 million current and former employees, according to data compiled by the nonprofit National Center for Employee Ownership. The largest ESOP-owned company in the country is Publix, the Florida-based supermarket chain with 250,000 workers.

The center’s database lists just over 300 private companies in New England with ESOPs, the biggest of which is Abt Associates, the Cambridge-based consulting and research firm, whose plan covers 3,600 employees. Other large ESOP employers in the region include Cianbro, a construction company in Pittsfield, Maine; Hypertherm, a Hanover, N.H., engineering and manufacturing services firm; and Newport Restaurant Group in Warwick, R.I.

Nationally, supermarkets and engineering firms account for more than one-third of the 100 biggest ESOP companies. Reasons vary from case to case, but some independent grocers have used ESOPs to avoid being gobbled up by large chains. Engineering companies have turned to employee ownership to retain highly skilled workers.

Daniel Kenary, chief executive of Mass. Bay Brewing, used an ESOP to buy out his partner in 2014, when the Boston-based maker of Harpoon had about 200 workers. He’s been touting the benefits of employee ownership ever since.

“I was never in it for the big pay day,” he said of the decision to put a big chunk of stock in the hands of employees. “It struck me as the right thing to do — to be inclusive rather than make shareholders a lot of money.”

Kenary has pushed the state, so far unsuccessfully, to set up a government resource center similar to the nonprofit Vermont Employee Ownership Center, which helps owners and employees interested in pursuing ESOPs.

“I had to pay a consultant,” Kenary said.

So did Sullivan Tire. The company also hired an outside ESOP trustee, an adviser to help manage the program, and a firm to handle the initial valuation of the company and the updates that will be required annually. (An ESOP can pay only the fair market price for a company as determined by an outside expert.)

“The process took us two years if you can believe it,” Paul Sullivan said. “If you want to have it done right, you have to have the right people behind you.”

Sullivan said the ESOP approach was the best way to realize a fair value for the family’s stock while protecting the company’s 1,460 employees and all-in-the-family culture.

Tire and auto repair shops are consolidating quickly, and Paul, 72, and Bob Jr., 82, could easily have sold to another chain or private equity firm, most likely at a higher price. But getting absolute top dollar wasn’t the priority.

“Everyone has their way of doing business. This was our way to make sure the Sullivan brand continued,” Paul Sullivan said. “The amounts of money being thrown our way — it’s just not us.”