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July 22, 2013

Workers gain ownership stake in Sargent Corp.

On May 1, Herb R. Sargent, president and sole owner of Sargent Corp., sold the Stillwater-based heavy construction firm to its employees through an Employee Stock Ownership Plan. In simple terms, an ESOP is a trust that a company sets up on behalf of its employees, into which it directs a portion of its profits. The trust uses that money over time to buy the owner's shares.

Founded by his grandfather Herb E. Sargent in 1926 with a used dump truck and a strong work ethic as his assets, the company now has almost 400 employees working in seven states in New England and the mid-Atlantic regions. Its 2012 revenues were just under $100 million.

Sargent recently met with Mainebiz to explain why he's chosen to give his workers a direct ownership stake in the company. The following is an edited transcript of that conversation.

Mainebiz: What prompted you to implement an Employee Stock Ownership Plan?

Herb R. Sargent: The primary reason is that I'm in the process of planning for the company's succession upon my eventual retirement — and that's a fairly time-consuming process. Going into this process now — as opposed to waiting 10 years — brings with it a lot of operational stability [the plan rolled out May 1]. The management doesn't change. It allows us to begin to weave this ESOP notion into the culture of the company well in advance of the change in management. I believe it sets us on a more even keel for the future as we go forward to the eventual day when I retire.

MB: How did you explore ESOP to determine that it's truly the right way to go?

HS: This has been a fairly long process for me. We've been looking at ESOPs since 2008 — for the benefit of our employees, looking at what the succession plan might be looking ahead for the next 20 to 40 years or more. In 2008, I wasn't satisfied with [a]consultant's report. I think it focused more on me than the company, so we kind of canned it at that time.

Then I began to learn more about ESOPs. I did some more research myself. I was anxious to find a successful company in our exact line of work that had undertaken this approach to ownership. About a year ago, I did meet one out in Kansas City — Emery Sapp & Sons Inc. — and they invited me out to meet the employees. I got a great feeling from their employees. They're a construction company about the same size as us. Three of us from Sargent spent some time with a number of their employees in an open question-and-answer session.

In my mind, I was performing due diligence on behalf of my employees.

MB: Could you explain how you weighed the ESOP option against other possibilities, such as putting the company on the open market and seeing who might come forward to buy it?

HS: That's a good question.

Well, the options are: 1.) Selling it outside to someone else, 2.) Selling it internally to a small group of people, 3.) Liquidating the company, which forces everyone to be laid off and 4.) Selling it to employees.

Considering all those, the sale to employees was, in my opinion, the single option that really preserved many of the goals we had established. And those goals were:

  • To maintain the Sargent brand.
  • To maintain Sargent's impact with employees and the community, which we believe to be positive.
  • To provide opportunities for our people
  • To provide continuity and stability.

ESOP, the way we saw it, was the surest mechanism to achieve those goals.

MB: So employees now have a direct personal vested interest in the company's success?

HS: I think it will take time for a true appreciation to be realized over what it can be for our employees … for it to really take hold in their mindsets. It will take some time of building and actually seeing that value before they'll truly feel 'Yes, this makes a difference.'

MB: Prior to this change, Sargent was a family-owned business?

HS: Yes, I owned 100% of the stock.

MB: How did you arrive at a value for that stock?

HS: It's a process regulated by the Department of Labor's transactions arm. You have to get an independent appraisal of the value of the company. In our case, BerryDunn was the evaluator of the company. From that point on, it was a matter of deciding whether I was satisfied with that value and then it was a matter of whether the trustees were satisfied in paying that value.

MB: Can you explain what you mean by 'trustees'?

HS: It's a trustee group of three people representing the ESOP trust, and I'm one of those trustees. The trustees are charged to make decisions in the best interest of the employees and those decisions have to bear the weight of certain tests, such as, 'Can this be paid off in a reasonable timeframe?'

MB: How do you determine each employee's share of that overall value?

HS: There are a number of ways of doing it. The way we chose is to do it as a pro-rated portion of your salary versus the company's overall payroll. So an individual's personal salary percentage of the overall salary is what their percentage would be of the allocated stock.

MB: At what point does an employee become fully vested as an owner?

HS: Basically, employees fall into the same vesting schedule that had been in place with our 401(k) program. If someone is 80% vested on April 30, they're 80% vested in the ESOP on May 1.

You also asked if the value of the company grows every year. Our company is subject to various pressures from the business environment, just like a regular stock on the New York Stock Exchange. So it is possible the value of the stock could go down in a given year, but we envision that it will appreciate over time.

MB: But there are no guarantees …

HS: Right. Now, on the back side of this, employees don't invest any money individually; they're not allowed to invest any money. So they really start with a $0 personal investment and it builds beginning on May 1.

MB: When you say 'builds,' what do you mean? How does that equity accrue?

HS: Basically, the company's 'value' is required to be determined every year by an independent valuator. That value is what sets our stock price. So an employee is allocated the value of shares from the ESOP trust. The number of shares that's allocated is based on vesting and is a percentage of the overall payroll. The allocation is not at the discretion of the trustees. It's a formula that's applied. There's no input by the trustees over how that value is arrived at. We follow the procedures outlined in the ESOP agreement. It's a pretty cumbersome thing to explain, but it's a regulated process that must be followed.

MB: What was the reaction of your workers?

HS: I would say, overall, the reaction was very positive. The reaction of some of the older people, who were very close to retirement, was a little bit more ambivalent, because their value as they see it will not build as much. But even the older employees there — some people have been employed 30 or 40 years with the company — are glad to see there's a plan being made for the continuity of the company. And that's really what this ESOP is. More than anything, it's about continuity.

MB: To build on that notion, does ESOP change the culture of a company?

HS: Our people are incredibly good assets to begin with. So, improving their frame of mind toward the execution of our work is, in a way, splitting hairs. But the way they feel about what they do, I believe, will change somewhat dramatically when they begin to see the value that falls to them. I believe that their esteem about what they do and how they do it will continue to grow.

MB: How are things now, in terms of the business climate for construction companies like Sargent?

HS: Business has been challenging for us, like it's been for a lot of people the last two or three years. Well, actually, I guess it goes back to 2008. We've survived that reasonably well. We've not had to shrink our forces dramatically as a result of the recession.

Wind power definitely played a big role in our ability to keep people employed. For much of the early 2000s, over 50% of our work involved site preparation for big-box stores. That has now fallen to less than 10%.

We remain somewhat optimistic. For the next two or three years, we're not expecting to see any great amount of spending at any government level, even with renewed talk of bonds being issued. Primarily, it's because we believe governments are going to continue to be constrained budget-wise for many more years to come.

MB: What's been the reaction to the ESOP change among your peers?

HS: I've heard from every angle, I've been approached from every angle. Some people were surprised. I've had people approach me and ask, 'How does this work? Can you talk to me about this?' I can't say I've heard any negative reaction. I get some feedback from my employees about what they hear from other folks in our industry, and they're being congratulated for it.

MB: How do you think your grandfather, who founded the company, would have responded to the ESOP?

HS: I believe he'd recognize where I am. I'm at the point where I need to plan for both myself and the employees, and so I considered the succession plan of the company. And I have two children, 22 and 19, whose dreams I have great respect for. Their dreams are different from my dreams and I want to support them in what they want to do in every way I can. At the same time, I must be mindful of Sargent and its employees and its continuity.

So I believe that my grand-dad would support the decision that best achieves the goals we outlined.

MB: Is it a relief to have made this decision?

HS: Yes. It has been.

Just getting the continuity/succession thing done is a large relief. It's hard for me to allocate just how much time I had spent on that. But it does now give me the relief of feeling, 'Now, that's done.'

For me, personally, I'm more energized than I've ever been. And the reason is: I feel like this is a more noble cause than what we had before. In this scenario we are in now, I'm working to build wealth for the people who are out there working for us. I'm trying to get them a respectable retirement, which I've always championed — with the 401(k) we've been very aggressive with matching the employees' contributions — and to me this is just me saying, 'OK, I really meant it when I said I want you to have a respectable retirement.' I just feel better about it, I feel more energized, because I believe it's a nobler cause.

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