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Promoting Growth (and camaraderie) Through an ESOP

As a member of the wrestling and football teams in school, Bob Whalen quickly realized the value of collaboration — and the fact that individual athletes can come together to create a winning entity that rewards everyone involved.

So years later, as the young president and CEO of a heating, ventilation, air conditioning (HVAC), plumbing, and electrical servicing contractor, now known as HB Global, LLC, Whalen took that teamwork insight and transformed his Harrisburg, Pa.-based business into an employee stock ownership plan (ESOP). Today, all of his workers accumulate company stock each year and realize monetarily the fruits of their labor. 

“We believe we can make all of our employee owners millionaires if they spend a career with us — and we’re on the right track with where we need to be,” Whalen said in January. 

That’s not just public relations fluff. Whalen has taken a determined and assertive path to growing the company rapidly in order to make this happen. Since 2010, the year his ESOP was created, his company has completed 23 acquisitions, most notably of IT Landes and Son, Inc., a mechanical contractor in Harleysville, Pa. (acquired in 2014), and of Florida-based Nash Plumbing & Mechanical, LLC (purchased in 2017). IT Landes brought Whalen’s company into the nearby Philadelphia market, and Nash gave entryway into Florida. Today, HB Global conducts business in 20 states, the Caribbean, and other international locations, and has operating divisions in 10 states and the U.S Virgin Islands. 

Smartly, employee-focused HB Global uses the ESOP as a tool to attract certain sellers, mainly those who stress about much more than a healthy exit. “In the real world many business owners care about the price, but they are also focused on other value drivers that matter to them,” noted Edward Renenger, a Reading, Pa.-based attorney with Stevens & Lee, PC, and president and CEO of affiliate SES ESOP Strategies, a firm comprised of attorneys and investment bankers focused solely on ESOPs. “They are worried about their name on the side of the building, or their legacy, their community, and employees,” he continued. “An ESOP is a vehicle that can accomplish all of those goals while still getting them a fair value for their business.” Renenger has worked with HB Global for a decade on numerous deals, primarily in the ESOP arena. 

Why the ESOP Works

Whalen came up with the idea for an ESOP, not long after he was hired by HB McClure, a then-93-year-old Central Pennsylvania HVAC company. Previously an employee benefits consultant, he joined HB McClure in 2008, buying a minority interest with a plan to soon acquire 100% of the business from owner Bob McClure. That transition occurred in 2010, and the tax-free ESOP structure made for a more efficient deal, and one that helped employees as well, he said.

“I didn’t have this grand plan when I came in 2008 to become an ESOP company, but it perfectly aligned with what we were trying to do culturally,” Whalen said. “My personal passion has become creating value for our employee owners.”

After completing numerous acquisitions over a several-year span, the parent company, HB Global, LLC, was created in 2017 to encompass its newly acquired entities. “The ESOP has become a cultural glue to help bind together the people from these various businesses that were acquired,” echoed Renenger about HB Global. “It gives them a common goal and common purpose, and one that can create value over time.”

Simply put, an ESOP is a tax-exempt retirement plan, like a profit-sharing plan, except that an ESOP must invest primarily in employer securities. Congress created the structure “specifically to encourage ownership of the company for the benefit of the employees,” Renenger explained. 

According to the National Center for Employee Ownership, roughly 6,500 U.S. companies currently sponsor an ESOP. Under HB Global’s plan, employee owners don’t make financial contributions, but receive an amount equal to 12% of their salary in stock from the company. When they turn 50, workers can convert that money into cash or reinvest into various investment options. When they leave HB Global or retire, they can also turn that accrued stock into cash, paid over a five-year period, Whalen said. New workers hired through acquisitions become employee owners one year after transitioning to HB Global. 

Whalen admits employees are initially a bit skeptical and take a “show-me attitude” when becoming part of an ESOP, until they see their account balances growing. For the original HB McClure workers, who stayed with the company once Whalen took over, their median balance has mushroomed to over $200,000 each, he said. The ESOP also provides connectivity at all HB Global divisions between employee owners, including Whalen, who strive to strengthen the company for everyone’s advantage. “We really have high retention levels once employees have gotten past the five-year point with us,” he noted.

An ESOP also exempts acquirers like HB Global from taxes when doing deals, creating some flexibility in the process in both asset and stock transactions. Most ESOP-initiated deals resemble typical M&A transactions, with one difference: the value drivers, such as concerned care of the seller’s employees. If a seller is looking for a personal tax benefit, though, the deal can still be structured in such a way to benefit the seller, with some additional complexities. “HB Global is creating real wealth for all of its employees and has a huge tax shield to be able to accomplish that,” Renenger said. “There’s no question it’s been a beneficial structure for them.” 

Overall, an ESOP is an especially attractive structure for some sellers — many of them original owners — who want to ensure their workers won’t lose their jobs post-deal.  Whalen claims HB Global has never laid off employees for cost-cutting purposes once it acquires a company, even if some positions, like accountants, are duplicated. 

“If you lay off one person as part of an acquisition, you’re likely to lose the trust of every single person who works for that entity,” he said. “What we give up in small synergistic cost savings we more than gain in the trust.”

Deals, Deals, and More Deals 

In 2011 then-HB McClure completed its first three deals of Pennsylvania businesses: CW Fritz in Lemoyne; Freedom Propane in Mechanicsburg; and Derry Oil Company in Harrisburg, according to HB Global’s website.  Since then, the acquirer has snapped up targets every year, the last two being Nash Mechanical, a Phoenix-based business, and The Bell Company, a mechanical and plumbing contractor with various subsidiaries throughout the East Coast. 

Today, the confident HB Global looks for certain things in a seller: healthy companies, and owners who want “to take their financial chips off the table, and want to take care of their employees while they do it,” Whalen said. “They recognize the importance of their employees who helped them get there — and we give them the mechanism to do both of those things.” An ESOP provides that balance – allowing sellers to be rewarded for their years of hard work, while protecting their staff in the process. And ESOP-structured deal values are comparable to traditional M&A transactions, Renenger noted. 

In 2022 and beyond, Whalen indicates no slowdown in deal activity. The company is “constantly scouring the marketplace for what’s out there,” as ways to diversify its consumer offerings, enlarge its geographic footprint, and produce value for its employee owners, including new hires through acquisitions, he said.

Clearly, HB Global can become an even greater powerhouse in its space if it continues at this assertive clip. The company had roughly 195 employees when Whalen stepped in 14 years ago, and today, has more than 2,000. In 2017, the business brought in $80 million in revenues, and this year it is budgeted to do over $500 million in work, he said. Whalen’s goal is for HB Global to become a billion-dollar corporation by 2027. And he plans to continue to promote teamwork through the ESOP structure well into the future. 

“We want this to be a multi-generational solution,” Whalen said, “so I have and the company has no desire to sell ourselves to somebody else.” 

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