How i9 Sports divvied up the field
Perhaps you’ve explored a variety of new benefits to recruit and maintain quality employees in this ever-tightening job market, but have you considered giving your employees the company itself?
It may sound like a step—or several—too far, but Tampa Bay, Florida-based i9 Sports has done just that through an employee stock ownership plan (ESOP) recently implemented with the intent of fostering a literal sense of equity throughout the company’s ranks.
Brian Sanders is president and CEO of i9 Sports, a 140-unit youth sports league franchise founded in 1995, who believes this generous benefit has created a win-win situation for the company’s founder, its management team, as well as franchisees and employees.
i9 Sports puts kids on the playing field; now its employees can play, too, after ESOP.
It suited the founder’s needs, he said, “and it met our needs from an operational standpoint because it gives all of our employees more than that psychological ownership—they now have literal ownership in the business,” Sanders said. “At this stage in our development of the company, we’re on the upswing of growth, so it’ll only get better from here.”
After first hearing about ESOPs at a seminar, company founder Frank Fiume investigated the uncommon arrangement and determined it would be the perfect solution as he looked forward to a future where he was less financially tied to i9 Sports for his retirement income.
“By selling his shares to the trust, he gets a cash infusion that diversifies his portfolio,” Sanders said about Fiume. “All business owners at some point need to be looking for their exit and, in Frank’s case, he didn’t want to exit the business from a participatory standpoint.”
Learning everything required to set up an ESOP was more work than initially expected. Compared with a privately held company, those held by an ESOP require ongoing financial reporting and auditing, as well as an annual valuation of the company. Without a consultant’s “thought leadership and walking us through the finer points of how to go about it, I don’t think any individual could have figured this out—it is that complicated,” Sanders said.
i9 Sports chose to announce the news to its employees to maximize the surprise factor, rather than first explaining the details of the ownership change to the company’s franchisees. Sanders said there was no need to go to the franchisee council first, since “it doesn’t change or affect their world at all other than to the positive side.”
He believes such an arrangement wouldn’t work for a company with a complicated ownership structure or one that’s stagnant, on the decline or no longer facing an upward trajectory, which would negate the benefit of sharing ownership with employees.
Aside from financial benefits for its founder and increased employee morale, the company sees improved franchisee service as one of the primary benefits to sharing the risks and financial benefits with its approximately 50 employees.
Beefed-up retirement accounts
One hundred percent of the company was transferred to its employees, who become eligible for the no-cost perk after working 1,000 hours within a year. Because it’s a retirement benefit, they can’t cash in the shares until their retirement date. The company expects participants will have retirement accounts two to three times greater than non-ESOP counterparts.
Having completed the transition in February, the company’s executives were surprised they weren’t able to find examples of other franchisors with ESOPs.
“We were interested in seeing if there were other franchisors who’ve done this and, honestly, we couldn’t find many other franchisors that have gone down this path,” Sanders said.
“It left us wondering why they hadn’t because there just doesn’t appear to be any down side.”
‘Twice as hard to unwind’
Mike Bromelkamp, a principal with St. Paul, Minnesota-based Olsen Thielen—an accounting, consulting and tax firm—splashed some cold water on that optimism, likening ESOPs to an initial public offering due to the increased amount of ongoing reporting and oversight required from the point of inception.
“You’re taking on a bunch more technical requirements and you’re going to be responsible for your performance, and you’re going to have to be very transparent,” he said.
Bromelkamp added ESOPs can be a good deal—especially for the company owner that sees a windfall—but that a change in the company’s prospects can quickly create problems that are difficult to solve, and awkward for employee relations. “If things go swimmingly, there’s no problem,” he said. “If things don’t go well, it’s uncharted waters.”
While he’s never been involved in setting up an ESOP during his 40 years of accounting experience, likely because of their rarity, he added that unwinding them can be exceedingly challenging if the company’s leadership gets cold feet or circumstances change.
“If they thought it was difficult to set up, it is twice as hard to unwind,” he said. “You have stockholder rights, minority shareholder rights, people leaving all the time, stock buybacks due to death and termination, and if the value of the business goes down that can cause all kinds of problems.”