The ESOP Exit Plan

The nitty-gritty of how spa retailers set up ESOPs

Random Thursday night dinners are how ESOPs happen. 

At least, that’s what Vince Wuebker, owner of HotSpring Spas & Pool Tables 2, will tell you. 

If not for that dinner five years ago in North Dakota, Wuebker still wouldn’t know what an ESOP — Employee Stock Ownership Plan — is. 

He probably wouldn’t have his ideal exit plan, either.  

Wuebker is friends with Jim Van Fleet, an avid golfer and founder of Mainely Tubs — and a huge proponent of ESOPs. Van Fleet called him up and said he planned to golf in all 50 states, and North Dakota was one of the last locations where he needed to tee off.

Oh, and would Wuebker be free for dinner? Just a casual affair. The result of that meeting: hardcore pivoting, extreme business analysis and goal setting. 

As of Jan. 13, Wuebker’s business is an ESOP, which is an employee benefit plan that allows employees to own part or all of the business in the form of stock shares. 

“It’s more than a retirement plan; it’s creating your future,” he says. 

ESOP benefits 

When it comes to exiting the spa retail business, options abound. Ultimately, for owners who have put countless hours and investments into a business, it’s an emotional decision to let go. 

“ESOPs in general provide a very flexible option for the owners to transition the value of the company over time to their team,” explains Phillip Hayes, partner at Berman Hopkins CPAs & Associates, LLP. “Many times, an owner is not looking to exit the business immediately. They have also invested heavily into the company not just financially but in multiple ways to contribute to a strong culture with excelling business processes.” 

With nearly 90 employees and seven locations in the Atlanta area, Georgia Spa Co. transitioned to an ESOP in May 2023.

Hayes, who recently helped Georgia Spa Company create an ESOP, says that exit plans involving a buyer often feel disruptive. 

“A financial buyer would look to absorb what was built into their system, culture and processes,” he says. “This would disrupt and change everything for the employees. In a sense, all of that hard work gets washed away with the new buyer.” 

That’s not the case with an ESOP. 

For those who want to do right by employees while also feeling like they’ve gotten a fair price, an ESOP may be the answer. It’s like a “401(k) on steroids,” Van Fleet says, because it preserves the company and offers tax advantages.

“This kind of transaction offers a win-win-win all the way around,” Van Fleet told The SpaRetailer Podcast back in 2018. “For the selling shareholder, for the employees, as well as the customers. That’s what I like best about it.” 

To qualify for an ESOP, revenue must be about $10 million annually. For perspective, Van Fleet had over $9 million in revenue when he explored the ESOP route.

Aside from offering a retirement plan, ESOPs can improve morale and keep hardworking employees loyal. Van Fleet also had established leaders in areas including finance, sales and administration, ensuring his company would succeed. 

Most ESOPs are financed with loans that use company assets as a bargaining chip. The organization borrows money from a lender and lends proceeds to a trust, which is used to buy the owner’s shares.

Mark Stevens, left, founder of Georgia Spa Company and Josh Kemerling, right, now CEO of
the company.

Plan well before retirement 

Like other exit strategies, creating an ESOP involves more than signing paperwork, shaking hands and exchanging keys. It goes much deeper and can take years to execute.

“I think a lot of owners wait too long to start thinking about strategy,” says Mark Stevens, founder of Georgia Spa Company. “They’re great firefighters. They work in their business every day putting out fires.” 

That mindset is an issue because many owners feel they don’t have the time to invest in looking at an ESOP, Stevens says. The time and effort put into business building is precisely why looking ahead to retirement and creating an exit strategy needs to be at the forefront of spa retailers’ minds, he says.

A negative reputation for business exits hasn’t helped either. 

“For so long, a lot of these owners have been beat down and [told] ‘You’re not going to really be able to sell; nobody buys these things,’ ” Stevens says. 

Setting up an ESOP isn’t for the faint of heart, but it’s suited for retailers who take their business to heart. According to AEGIS, a trust company, the average ESOP creation takes between six to nine months, with the longest creation period taking up to two years. 

For experts like Hayes, it averages about six months and includes 10 major steps. The first two steps, which include a valuation and feasibility model, involve proving the ESOP concept will work well for the company.

ESOP creation time is based on factors like the company’s size, how organized company information is, how quickly a company can make decisions and the lenders’ willingness, according to AEGIS. Organized bookkeeping can make the process that much smoother.

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“The company that has no management structure, is loosely governed and gets whatever it gets in the marketplace for sales any particular year is not a good candidate for an ESOP and for this kind of transaction,” Van Fleet says.

One of the first steps Van Fleet took was spending $25,000 on an evaluation to get a sense of the value and marketability of the company. That, he says, guided him to better understand his options for an exit strategy and directed him toward an ESOP. 

“When we are successful, everyone shares in that success,” he says. “[My employees] created a value in this business, and they needed to share in that. Part of my goal was to see if their jobs could be protected.”

Creating a solid ESOP team 

Over the next decade, an estimated 2.5 million baby boomer business owners will start the process of transferring business ownership, according to The ESOP Association. Given that it’s a lofty process, it’s best to make this business decision surrounded by experts.

When it comes to hiring advisers, it’s essential they have ESOP expertise, Hayes says. This includes sell-side advisers, an ESOP company attorney, a transaction trustee, an independent valuation firm and an ESOP attorney for the trustee. 

Even if an ESOP isn’t in the cards, Van Fleet advises those in the pre-retirement period to pay attention to all business operations to increase value.

“There has to be some understanding between family members, between business partners, between buyers and sellers, whether ESOP or private, of what the value of the underlying enterprise is,” he says. “To start to pay attention to that, which I did 10 years ago with real seriousness of purpose, is a critical path.”

Wuebker says that was one of his smartest moves in getting his ESOP going. Before he met with Van Fleet, he posted an ad on Craigslist for a financial expert. Jeromie Kirk responded, took one look at Wuebker’s books and told him, “This isn’t going to fly if you want to sell your business.” 

Wuebker felt convinced he could sell his way out of it until the fateful meeting with Van Fleet, which Kirk also attended. 

“Jeromie came out [of that dinner] with ESOP on his brain,” says Wuebker, noting his financial expert also said it was the only way to retirement. 

After seeing Mainely Tubs employees at a San Diego conference wearing shirts emblazoned with “100% employee-owned,” it clicked for Wuebker.

Mainely Tubs employee owners spread awareness about cardiovascular health for women during “Go Red Day.”

CEOs turned ‘employees’ still lead 

Now that Wuebker’s business is officially an ESOP, he has to remind himself he doesn’t have to work six days a week. He’s now an equal partner in a business where he often worked 12-plus hour days for years. An ESOP structure has taught him that he “can’t be everywhere at once” and to trust the leadership he’s put in place. 

“I’m there to guide; I’m there to be a source of knowledge, but my primary role is the vision of the company and [to act as a] guide for the ESOP,” he says. 

With the pressure off him, Wuebker admits he tries to “disappear” by noon most days and heads home. 

“I feel like it’s in their hands tomorrow,” he says. “I try to stay out of their way.”

He also admits, that despite his years of experience, sometimes the reward is letting his invested employees make the difficult decisions. But he will also stand firm if he believes a decision is unwise. 

“I’ve been wrong 10,000 times; I could write a book,” he jokes. “It’s very hard to not interject and say, ‘Just do this.’ You listen and sometimes you have to just say, ‘No, I’ve done this, and there’s no other way.’ ” 

‘Ramp exit’ versus a ‘cliff exit’ 

For those who have invested the time to become an ESOP, it’s about having a graceful exit plan. For many company founders, it’s challenging to hand off a business and say goodbye to employees. 

 Lenders also want to see a successful business, so they’ll ask high-level management owners to stay in their positions for a set amount of time to ensure a smooth transition.

“They said, ‘If we’re going to loan you this kind of money, we think it’s important for you to hang out for a while,’ ” Van Fleet says. “That fit perfectly for me because I didn’t want a cliff exit, I wanted a ramp exit. This transaction lends itself to that and allows me to continue to nurture people along to be really good at what we do.” 

For owners-turned-employees, ESOPs can be a mind-boggling — yet exciting — way to see the company they started grow into an organization that has all it needs to succeed — without a founder at its helm. 

“The employees win, I win and, more importantly, the customers win,” Wuebker says. “We built something great here in North Dakota, and that legacy’s going to continue.”

His final thought for retailers thinking about an ESOP: He wishes he would have sat down with Van Fleet and other business associates much sooner. He pushed it off until he realized he wasn’t getting younger and the company wasn’t going to prepare itself for his departure. 

“Stop for a minute; let’s talk ESOP, what it means for you and the company and the customers,” he advises other retailers. “It’s easier than you think.”