Paul Halverson founded Chartwell Financial Associates in 1995, after working for two other business-valuation firms following graduation in 1987 from the University of St. Thomas. Chartwell focuses on valuing companies and providing sale options for private companies, many family-owned. That includes transfers to family members and management; outside buyers and Employee Stock Ownership Plans (ESOPs). ESOPs, basically, are government-qualified employee retirement plans whose asset is the company. Vested employees sell their shares back to the company upon retirement or departure. Chartwell also advises ESOP trustees. Halverson, 53, is a member of the ESOP Association and also the National Center for Employee Ownership.
Q: Why did you start Chartwell?
A: I started Chartwell in 1995 with the vision of providing business valuation and ownership-transition consulting services to privately held companies.
With the vast number of private companies started and owned by baby boomers, it was evident these companies would need independent, unbiased advice on their options to effectively transition their business.
Q: What is the focus and size of the company?
A: We focus on our objective of providing advice that is unbiased as to the outcome on valuation and ownership transition to privately held companies. Today, we have over 65 team members located in six [markets]: Minneapolis, Chicago, Portland, Orange County, Raleigh and New York.
Q: What percent of your business is ESOPs and is this a growth business?
A: I was introduced to my first ESOP-owned company in 1987 and we have been very involved in the industry. Congress created ESOPs with the belief that if employees own a stake in the company they will be more engaged and more productive, and we will have better companies.
There have been studies that show that. Congress also thought it would be a good economic policy as the employees would benefit from the fruits of their labor by creating value in their retirement account [the ESOP].
To encourage owners to consider an ESOP as a transition strategy, Congress provided certain tax benefits for owners and companies to become ESOP-owned. Roughly half of Chartwell's projects are connected to ESOPs. Whether it is a company considering setting up a new ESOP, helping an existing ESOP be more successful, or selling an ESOP-owned company to the next owner.
Q: What is the size of the ESOP market?
A: There are approximately 6,500 ESOP-owned companies in the United States. We see the market for ESOPs growing, given the flexibility in using an ESOP as a transition vehicle.
Q: Who are some of the Minnesota ESOP companies with which you have been involved?
A: Minnesota is home to hundreds of great ESOP companies. There are approximately 280 ESOP companies in Minnesota. Chartwell serves approximately 100 of them.
The Star Tribune recently reported on the sale of Lifetouch [to Shutterfy for $825 million], which was a 100 percent-owned ESOP company [for 40-plus years].
Our Minnesota ESOP clients include API, Chuck & Don's Pet Food, Coborn's, Padilla, Nina Hale and Walman Optical.
Q: What makes a successful ESOP?
A: One of the keys to a successful ESOP is developing a skilled management team that can perpetuate the business after the entrepreneur retires. Since the ESOP buys the company with the future cash flow of the business, it is also important to have a profitable company with steady cash flow to have a truly successful ESOP. It helps to be growing and profitable.
A company also needs some scale to make an ESOP work. We like to see companies with [at least] $10 million of revenue and/or 50-plus employees.
Q: As I understand it, the biggest tax advantage is that the profits of an ESOP-owned company aren't subject to federal income taxes as long as the funds are used to buy out the owner. I'm familiar with situations in which owners, who wanted the company to go to the employees, made it work by taking less than they may have gotten from a third party, and cashed out over several years; effectively helping finance the sale so as to not encumber a small business with too much debt. That occurred in the recent sale of Midwest Plastics by its longtime owner Jim Dow.
A: An ESOP can be great for [employees and] owners who want to sell … over time and stay employed at the firm. As you know, in most strategic deals or [private equity buyouts], the owners generally exit shortly after the transaction. That does not … have to be the case.
A downside is ESOPs are a U.S. government regulated retirement plan. So there are processes, procedures and protocol that must be followed. These come at a cost in terms of dollars and investment of time. Having the U.S. government look over your shoulder is not something all entrepreneurs find appealing.
Q: What's the future of ESOPs and Chartwell?
A: We think ESOPs are a great ownership model in the right situation. They are not for every business or for every business owner seeking liquidity. But in the right situation, the outcomes can be phenomenal.
In terms of Chartwell, we are extremely optimistic. We have coast-to-coast coverage and an amazing team. With the baby boomer generation hitting the peak of transition ages, we have an incredible opportunity in front of us.