Drug Topics - January 7, 2008 - (Page 5)

www.drugtopics.com JANUARY 7, 2008 DRUG TOPICS 5 Of Interest to Students Want to be part owner of a chain? Consider an ESOP Fred Gebhart s there an ESOP in your future? Pharmacy owners and educators say an employee stock ownership plan, or ESOP, should be on every new pharmacist’s wish list. “ESOPs work well for both pharmacy employers and employees,” said Linda Garrelts MacLean, chair of pharmacotherapy at Washington State University College of Pharmacy. “If you own a pharmacy, an ESOP creates employees who act like entrepreneurs. And if you’re an employee, an ESOP gives you a head start on owning your own pharmacy.” ESOPs were originally created in the 1950s as a way for business owners to sell their company to employees, explained San Francisco, Calif., attorney John Menke. In 1974, the Employee Retirement Income Security Act (ERISA) added tax advantages that made ESOPs more popular. Menke created an ESOP that allowed Colorado pharmacist Jim Vincent to sell his three-store Shop-All pharmacy-grocery business to employees. Shop-All pioneered the grocery-pharmacy combo concept that has been adopted by major retailers nationwide. “As the new owners, my former employees are doing very well,” Vincent said. “I got to retire from active management and they got a thriving business without putting down a single red cent of their own money. It’s almost too good to be true.” The basic ESOP concept is straightforward, Vincent said. Employer and employees create a trust, which obtains a bank loan to buy the business over a set period, usually five to 10 years. The loan is backed by the assets of the business and is paid off by company profits. Employees pay nothing themselves, he added. Tax breaks granted by ERISA give the ESOP unique financial benefits. As the loan is paid off, the trust acquires stock in the company, Menke explained. Employees own the stock (and the company) through the trust. Ownership is usually based on W-2 earnings or some other formula. The selling owner remains in place to guide management during the transition period. At the end of the trust period, employees own the company and the former owner is out of the business. “If I were starting out in pharmacy today, I would absolutely look for an ESOP,” Vincent said. “It’s a plus for everyone.” I The problem is that not all ESOPs are created equal, cautioned attorney Richard Phenneger. He heads a national ESOP practice out of Coeur d’Alene, Idaho. Many large firms, including most major pharmacy chains, have an ESOP as part of the company retirement offering, he explained. But retirement plans only represent a few percent of company stock. Employees who participate in these ESOPs have a retirement program, not a pharmacy ownership program. “We’re talking ESOPs that have a third to 100% of a company and employees effectively run the show,” Phenneger said. It is the promise of store ownership that attracted third-year WSU pharmacy student Drew Yancy. He helped create a pharmacy business plan around an ESOP that won second place in the 2007 National Community Pharmacists Association’s annual Student Business Plan Competition. WSU teams have won first or second place every year since the competition began, said MacLean, who is team advisor. “An ESOP is a very practical business approach,” said Yancy, chief financial officer for the WSU team. “Everybody thinks like an owner and takes personal responsibility.” The key, Phenneger said, is that an ESOP requires open book management. Every employee knows the company’s current financial details. Pharmacy student Drew “When you open the books to employ- Yancy is a proponent of ees, efficiencies begin to appear because ESOPs. people are a little more careful and a lot more inventive about the way they do business,” Phenneger said. “When you give people a genuine piece of the action, it has a visible effect in the downstream operation of the company,” Phenneger said. “ESOPs are generally better places to work and more profitable places to work because employees are calling the shots for their own benefit, not for the benefit of outside owners. For every dollar employees can improve the bottom line, they create five dollars in value. An ESOP is the best means around to incentivize the work force,” Phenneger concluded. DT http://www.drugtopics.com

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Drug Topics - January 7, 2008

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