|Select Machine - a Worker Co-op|
PRESS RELEASE – October 13, 2005
Worker Cooperatives: A New Twist
First Use of Little Known Tax Incentive Helps Employees Buy Their Company
Kent State’s Ohio Employee Ownership Center achieved a precedent-setting milestone on September 30 by advising and facilitating the 9 employees of Select Machine, Inc., in Brimfield, OH, to purchase part of their company from the owners through the use of an employee-owned cooperative with the sellers taking advantage of a tax incentive never-before used.
Dr. John Logue, Director of the OEOC and Chair of the Political Science Department at KSU, stated, “It is amazing that even though the tax incentive, known as a “1042 Rollover” for its section in the IRS Code, has been available since 1984 no one has ever applied the incentive to the purchase of a company through a worker cooperative. Thousands of Employee Stock Ownership Plans (ESOP) have taken advantage of this incentive, but never a worker cooperative, until now.” Essentially the 1042 Rollover allows the seller to defer the tax on the capital gain when they sell at least 30 percent of the company to either an ESOP or a worker cooperative.
Mark Stewart, an attorney at the Toledo, OH, law firm of Shumaker, Loop and Kendrick, provided the legal framework for the conversion of the company to a cooperative and for the purchase transaction. Logue continued, “With Mark Stewart’s considerable assistance, we have developed a model that should be transferable to many other companies. The employee-owned cooperative offers an attractive alternative to those owners of companies that are too small for the ESOP option and do not have family members available, willing and capable of taking over the business.”
Doug Beavers, one of the selling owners of Select Machine, expressed his thoughts directly, “We did not set out to establish a precedent or develop a model. We wanted to do what was best for the employees of our company and for ourselves. We chose the employee-owned cooperative because it made sense.”
Select Machine was founded in 1994 by Doug Beavers and Bill Sagaser and employs 9 people full-time plus two part-time. The company manufactures, sells and distributes machined products and equipment for installation on construction and demolition equipment.
In an employee-owned cooperative, all employees have the option of joining the cooperative. Those electing to join purchased the shares of the selling owners via notes payable from future profits of the cooperative. Beavers and Sagaser sold 40% of their shares in this transaction and will themselves be members of the co-op. They intend to sell the remaining 60% of their shares as soon as the debt to purchase the 40% has been repaid.
Beavers complimented the folks at the OEOC, saying, “The OEOC staff provided us with much insight into this transaction. We would not have been able to accomplish our objectives without their assistance.”
Logue concluded, “We are excited about the model that has been created and hope to see 3,000 to 5,000 employee-owned cooperatives formed similarly throughout the nation in the next 20 years.”
The OEOC is a non-profit program based at Kent State University providing information and technical assistance to people interested in exploring employee ownership as well as developing and delivering training material and sponsoring conferences and programs for employee-owned companies. With their assistance, 71 companies employing over 14,000 employee-owners have formed ESOPs and created over $300,000,000 in equity for those employee-owners.