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For Owners Looking to Sell, an Option That Keeps Their Company Intact

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In early 2000, Michael and Lynn Terry started a business selling horse trailers that were lighter than their competitors’ and customized to each client’s needs. Nearly two decades later, their company, Cimarron Trailers, with tens of millions of dollars in sales, employed over 130 people in Chickasha, Okla., and their trailers were sold at 30 dealerships across the country.

And they wanted to retire.

But as the couple, who met in high school, contemplated a sale, they faced a conundrum: They had offers from dealers and competitors to buy their business; they also had an offer from a private equity firm for a price so high they were shocked. But none of those offers guaranteed that Cimarron would continue as a business with its 130 employees working in its community.

“We thought, this has got to go on,” Mrs. Terry said. “We’re one of the bigger employers here in Chickasha.”

So the Terrys went with a less lucrative option a couple of years ago — selling their company to their employees. But it ensured that their company would stay in Chickasha and their employees would continue to have jobs. It also allowed them to be paid for the company they created and retire in their community.

“Was it easy? No,” Mrs. Terry said. “But it was the best for the future of Cimarron going forward.”

Employee-owned companies are still a small segment of the U.S. corporate landscape. The number has stayed at about 6,500 for the past decade, said James J. Bonham, president and chief executive of the Employee Share Ownership Program Association, the trade group for employee-owned businesses. But he said there were now some 10.5 million employees who own stakes in the companies they work for, through employee share ownership programs, or ESOPs, as they’re known.

For families who own businesses and are wondering about their next step, selling to employees is an opportunity that analysts say owners should consider. It keeps the company intact, it has tax benefits for the company and the owners, and it allows the owners to sell without worrying that the business might be gutted and sold off in parts.

Yet it does have downsides. It’s a complicated structure, which comes under the regulatory scrutiny of the Labor Department, since employee ownership stakes are held in their retirement plan until they leave the company.

“It’s a complicated transaction,” said Jere Doyle, family wealth strategist and senior vice president at Bank of New York Mellon, the wealth management firm. “If you talk to 100 people, you might get eight or 10 who go through the transaction.”

But he said it’s a structure, given its tax benefits, that could increase in popularity if federal tax rates begin to rise. “ESOPs may become more popular next year if the Democrats hit the trifecta and raise the capital gain rates to 39 percent,” Mr. Doyle said.

When a family sells a company to a competitor or an investment fund, they run the risk that the identity of their company will die with the sale. It may become a division of someone else’s company or worse, it may be combined with something else and sold off, never to exist again.

An ESOP allows the company to continue in its own right, guided by the employees who are the new owners. “If I sold my company to my competitors, do you think Ray Baker’s name would ever be said again?” said Ken Baker, the chief executive of New Age Industries, the flexible tubing company his father, Ray, started in 1960 and his brother operated until he took it over. “We have a bust of my father in the lobby. His legacy and my brother’s legacy continue on.”

ImageMichael and Lynn Terry cut the ribbon at Cimmaron Trailer in a photo taken when they opened the business in Chickasha in 2000.
Credit…Nick Oxford for The New York Times

The Terrys initially thought their daughter and son-in-law might take over the business, but when that did not happen, they thought about how some of their key employees, like Ben Janssen, the current president, could continue to run it.

In their case, Cimarron was bought by another ESOP, called Folience, which made the transaction quicker.

“There was a template in place,” Mr. Terry said. “Folience gets together once a month to talk about their failures and successes. We didn’t have that.”

For the employees, owning the company gives them a boost to their retirement income, as long as the company continues to grow. With an ESOP structure, the money that goes into it is tax-free, increasing the amount put away for the employee-owners.

John Stover, 71, who retired from New Age after 35 years as the director of sales, said he saved twice as much for his retirement in the 15 years New Age was an ESOP than he did in his previous 20 years at the company plus five years at another company. But he said he was skeptical at first.

“We didn’t understand its potential,” Mr. Stover said. “We said let’s give it a chance. And the ESOP did what it’s supposed to do — create an atmosphere where you’re not just a worker anymore, you’re a part-owner of the company, and it would behoove you to work harder.”

During the pandemic, employee-owned companies performed better in retaining jobs for workers than nonemployee-owned companies, according to research conducted by Rutgers University’s School of Management and Labor Relations and the Employee Ownership Foundation. They also maintained salaries and wages at a higher rate.

Money from the sale goes to the person who started the business. But the advantages come in many forms, including deferred taxes on the money put into an ESOP and the timing of the payout. Mr. Doyle said more sophisticated structures allowed sellers to roll over some or all of the sale proceeds into securities, known as qualified replacement property. If the seller doesn’t need the money, any capital gains in those securities will be erased at death and heirs will inherit the portfolio free of capital gains or income tax.

Mr. Baker sold New Age Industries to employees over time. When he sold his first 30 percent stake to the ESOP in 2006, the shares were valued at $45. By the time he sold the fourth and final tranche — 51 percent in 2019 — the shares were worth $649.

“We’re 100 percent tax-free now, both federal and state,” Mr. Baker said. “That translates to a lot of dollars for a company our size. We saved $14 million this year.”

He said the company used the extra money to hire employees, buy equipment and continue to grow.

There are negatives to this ownership structure.

For one, the seller is not going to get the highest price when the employees buy the company. Nor will those employees see the company’s value skyrocket the way it could if a competitor bought it.

“We pay fair market value,” said Daniel Goldstein, the chief executive of Folience, the ESOP that holds Cimarron Trailers as well as an ambulance manufacturer and a newspaper publisher, both in Iowa. “ESOPs are prohibited from paying a premium.”

That lower value ensures that employees are not overpaying for what will be the bulk of their retirement savings. It can also mean that these companies will later become ripe targets for the private equity funds that their founders avoided the first time around.

“There’s also a lot of public information available so private equity companies can come in with an offer that’s X times higher than last year’s value,” Mr. Bonham said. “They know the valuation on the Department of Labor’s Form 5500 is very conservative.”

That federal regulation is the rub. Because the assets held by the ESOPs are retirement funds like any 401(k), the Labor Department has oversight. The companies need to bring in outside auditors annually so the employees know the values of their shares.

To sell again, though, the employees need to agree to the sale. Mr. Bonham pointed to New Belgium Brewery, the maker of Fat Tire beer, which became an ESOP in 2000 but was bought by a private equity firm at the end of last year.

“The employees all made a terrific amount of money and still have their jobs,” he said. “If you don’t work at an ESOP and your company is sold, you get nothing.”

Not all families are comfortable with this prospect. Mr. Baker said he has put provisions in the ESOP agreement requiring a supermajority of employees to agree for the company to be sold.

“I’ve put fences and walls around the company,” he said. “I want the company to be around for 100 years and be employee-owned.”

The Terrys say they are glad they took that road.

“I had a sense of pride about Cimarron,” Mrs. Terry said. “I stay close to several of the employees. I’m so proud of them for taking it and running it.”

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The Trump campaign celebrated a growth record that Democrats downplayed.

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The White House celebrated economic growth numbers for the third quarter released on Thursday, even as Joseph R. Biden Jr.’s presidential campaign sought to throw cold water on the report — the last major data release leading up to the Nov. 3 election — and warned that the economic recovery was losing steam.

The economy grew at a record pace last quarter, but the upswing was a partial bounce-back after an enormous decline and left the economy smaller than it was before the pandemic. The White House took no notice of those glum caveats.

“This record economic growth is absolute validation of President Trump’s policies, which create jobs and opportunities for Americans in every corner of the country,” Mr. Trump’s re-election campaign said in a statement, highlighting a rebound of 33.1 percent at an annualized rate. Mr. Trump heralded the data on Twitter, posting that he was “so glad” that the number had come out before Election Day.

The annualized rate that the White House emphasized extrapolates growth numbers as if the current pace held up for a year, and risks overstating big swings. Because the economy’s growth has been so volatile amid the pandemic, economists have urged focusing on quarterly numbers.

Those showed a 7.4 percent gain in the third quarter. That rebound, by far the biggest since reliable statistics began after World War II, still leaves the economy short of its pre-pandemic levels. The pace of recovery has also slowed, and now coronavirus cases are rising again across much of the United States, raising the prospect of further pullback.

“The recovery is stalling out, thanks to Trump’s refusal to have a serious plan to deal with Covid or to pass a new economic relief plan for workers, small businesses and communities,” Mr. Biden’s campaign said in a release ahead of Thursday’s report. The rebound was widely expected, and the campaign characterized it as “a partial return from a catastrophic hit.”

Economists have warned that the recovery could face serious roadblocks ahead. Temporary measures meant to shore up households and businesses — including unemployment insurance supplements and forgivable loans — have run dry. Swaths of the service sector remain shut down as the virus continues to spread, and job losses that were temporary are increasingly turning permanent.

“With coronavirus infections hitting a record high in recent days and any additional fiscal stimulus unlikely to arrive until, at the earliest, the start of next year, further progress will be much slower,” Paul Ashworth, chief United States economist at Capital Economics, wrote in a note following the report.

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Black and Hispanic workers, especially women, lag in the U.S. economic recovery.

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The surge in economic output in the third quarter set a record, but the recovery isn’t reaching everyone.

Economists have long warned that aggregate statistics like gross domestic product can obscure important differences beneath the surface. In the aftermath of the last recession, for example, G.D.P. returned to its previous level in early 2011, even as poverty rates remained high and the unemployment rate for Black Americans was above 15 percent.

Aggregate statistics could be even more misleading during the current crisis. The job losses in the initial months of the pandemic disproportionately struck low-wage service workers, many of them Black and Hispanic women. Service-sector jobs have been slow to return, while school closings are keeping many parents, especially mothers, from returning to work. Nearly half a million Hispanic women have left the labor force over the last three months.

“If we’re thinking that the economy is recovering completely and uniformly, that is simply not the case,” said Michelle Holder, an economist at John Jay College in New York. “This rebound is unevenly distributed along racial and gender lines.”

The G.D.P. report released Thursday doesn’t break down the data by race, sex or income. But other sources make the disparities clear. A pair of studies by researchers at the Urban Institute released this week found that Black and Hispanic adults were more likely to have lost jobs or income since March, and were twice as likely as white adults to experience food insecurity in September.

The financial impact of the pandemic hit many of the families that were least able to afford it, even as white-collar workers were largely spared, said Michael Karpman, an Urban Institute researcher and one of the studies’ authors.

“A lot of people who were already in a precarious position before the pandemic are now in worse shape, whereas people who were better off have generally been faring better financially,” he said.

Federal relief programs, such as expanded unemployment benefits, helped offset the damage for many families in the first months of the pandemic. But those programs have mostly ended, and talks to revive them have stalled in Washington. With virus cases surging in much of the country, Mr. Karpman warned, the economic toll could increase.

“There could be a lot more hardship coming up this winter if there’s not more relief from Congress, with the impact falling disproportionately on Black and Hispanic workers and their families,” he said.

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Ant Challenged Beijing and Prospered. Now It Toes the Line.

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As Jack Ma of Alibaba helped turn China into the world’s biggest e-commerce market over the past two decades, he was also vowing to pull off a more audacious transformation.

“If the banks don’t change, we’ll change the banks,” he said in 2008, decrying how hard it was for small businesses in China to borrow from government-run lenders.

“The financial industry needs disrupters,” he told People’s Daily, the official Communist Party newspaper, a few years later. His goal, he said, was to make banks and other state-owned enterprises “feel unwell.”

The scope of Mr. Ma’s success is becoming clearer. The vehicle for his financial-technology ambitions, an Alibaba spinoff called Ant Group, is preparing for the largest initial public offering on record. Ant is set to raise $34 billion by selling its shares to the public in Hong Kong and Shanghai, according to stock exchange documents released on Monday. After the listing, Ant would be worth around $310 billion, much more than many global banks.

The company is going public not as a scrappy upstart, but as a leviathan deeply dependent on the good will of the government Mr. Ma once relished prodding.

More than 730 million people use Ant’s Alipay app every month to pay for lunch, invest their savings and shop on credit. Yet Alipay’s size and importance have made it an inevitable target for China’s regulators, which have already brought its business to heel in certain areas.

These days, Ant talks mostly about creating partnerships with big banks, not disrupting or supplanting them. Several government-owned funds and institutions are Ant shareholders and stand to profit handsomely from the public offering.

The question now is how much higher Ant can fly without provoking the Chinese authorities into clipping its wings further.

Excitable investors see Ant as a buzzy internet innovator. The risk is that it becomes more like a heavily regulated “financial digital utility,” said Fraser Howie, the co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.”

“Utility stocks, as far as I remember, were not the ones to be seen as the most exciting,” Mr. Howie said.

Ant declined to comment, citing the quiet period demanded by regulators before its share sale.

The company has played give-and-take with Beijing for years. As smartphone payments became ubiquitous in China, Ant found itself managing huge piles of money in Alipay users’ virtual wallets. The central bank made it park those funds in special accounts where they would earn minimal interest.

After people piled into an easy-to-use investment fund inside Alipay, the government forced the fund to shed risk and lower returns. Regulators curbed a plan to use Alipay data as the basis for a credit-scoring system akin to Americans’ FICO scores.

China’s Supreme Court this summer capped interest rates for consumer loans, though it was unclear how the ceiling would apply to Ant. The central bank is preparing a new virtual currency that could compete against Alipay and another digital wallet, the messaging app WeChat, as an everyday payment tool.

Ant has learned ways of keeping the authorities on its side. Mr. Ma once boasted at the World Economic Forum in Davos, Switzerland, about never taking money from the Chinese government. Today, funds associated with China’s social security system, its sovereign wealth fund, a state-owned life insurance company and the national postal carrier hold stakes in Ant. The I.P.O. is likely to increase the value of their holdings considerably.

“That’s how the state gets its payoff,” Mr. Howie said. With Ant, he said, “the line between state-owned enterprise and private enterprise is highly, highly blurred.”

China, in less than two generations, went from having a state-planned financial system to being at the global vanguard of internet finance, with trillions of dollars in transactions being made on mobile devices each year. Alipay had a lot to do with it.

Alibaba created the service in the early 2000s to hold payments for online purchases in escrow. Its broader usefulness quickly became clear in a country that mostly missed out on the credit card era. Features were added and users piled in. It became impossible for regulators and banks not to see the app as a threat.

ImageAnt Group’s headquarters in Hangzhou, China.
Credit…Alex Plavevski/EPA, via Shutterstock

A big test came when Ant began making an offer to Alipay users: Park your money in a section of the app called Yu’ebao, which means “leftover treasure,” and we will pay you more than the low rates fixed by the government at banks.

People could invest as much or as little as they wanted, making them feel like they were putting their pocket change to use. Yu’ebao was a hit, becoming one of the world’s largest money market funds.

The banks were terrified. One commentator for a state broadcaster called the fund a “vampire” and a “parasite.”

Still, “all the main regulators remained unanimous in saying that this was a positive thing for the Chinese financial system,” said Martin Chorzempa, a research fellow at the Peterson Institute for International Economics in Washington.

“If you can’t actually reform the banks,” Mr. Chorzempa said, “you can inject more competition.”

But then came worries about shadowy, unregulated corners of finance and the dangers they posed to the wider economy. Today, Chinese regulators are tightening supervision of financial holding companies, Ant included. Beijing has kept close watch on the financial instruments that small lenders create out of their consumer loans and sell to investors. Such securities help Ant fund some of its lending. But they also amplify the blowup if too many of those loans aren’t repaid.

“Those kinds of derivative products are something the government is really concerned about,” said Tian X. Hou, founder of the research firm TH Data Capital. Given Ant’s size, she said, “the government should be concerned.”

The broader worry for China is about growing levels of household debt. Beijing wants to cultivate a consumer economy, but excessive borrowing could eventually weigh on people’s spending power. The names of two of Alipay’s popular credit functions, Huabei and Jiebei, are jaunty invitations to spend and borrow.

Huang Ling, 22, started using Huabei when she was in high school. At the time, she didn’t qualify for a credit card. With Huabei’s help, she bought a drone, a scooter, a laptop and more.

The credit line made her feel rich. It also made her realize that if she actually wanted to be rich, she had to get busy.

“Living beyond my means forced me to work harder,” Ms. Huang said.

First, she opened a clothing shop in her hometown, Nanchang, in southeastern China. Then she started an advertising company in the inland metropolis of Chongqing. When the business needed cash, she borrowed from Jiebei.

Online shopping became a way to soothe daily anxieties, and Ms. Huang sometimes racked up thousands of dollars in Huabei bills, which only made her even more anxious. When the pandemic slammed her business, she started falling behind on her payments. That cast her into a deep depression.

Finally, early this month, with her parents’ help, she paid off her debts and closed her Huabei and Jiebei accounts. She felt “elated,” she said.

China’s recent troubles with freewheeling online loan platforms have put the government under pressure to protect ordinary borrowers.

Ant is helped by the fact that its business lines up with many of the Chinese leadership’s priorities: encouraging entrepreneurship and financial inclusion, and expanding the middle class. This year, the company helped the eastern city of Hangzhou, where it is based, set up an early version of the government’s app-based system for dictating coronavirus quarantines.

Such coziness is bound to raise hackles overseas. In Washington, Chinese tech companies that are seen as close to the government are radioactive.

In January 2017, Eric Jing, then Ant’s chief executive, said the company aimed to be serving two billion users worldwide within a decade. Shortly after, Ant announced that it was acquiring the money transfer company MoneyGram to increase its U.S. footprint. By the following January, the deal was dead, thwarted by data security concerns.

More recently, top officials in the Trump administration have discussed whether to place Ant Group on the so-called entity list, which prohibits foreign companies from purchasing American products. Officials from the State Department have suggested that an interagency committee, which also includes officials from the departments of defense, commerce and energy, review Ant for the potential entity listing, according to three people familiar with the matter.

Ant does not talk much anymore about expanding in the United States.

Ana Swanson contributed reporting.

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