Brookfield-based insurance brokerage Diversified Insurance Solutions has been sold to its employees through an Employee Stock Ownership Plan.
Jim McCormack, who co-founded the company with Skip Hansen 35 years ago, was the majority owner with 85 percent of the shares. David Stark, who owned about 10 percent, and Tom Jocz, who owned about 5 percent, as well as a few smaller shareholders, all sold their shares in the 100 percent ESOP transaction, which was effective Jan. 1.
In an ESOP, which is a qualified retirement plan, the company stock is technically purchased by a trust, and then distributed to employees on an annual basis.
McCormack, who will continue to serve as chairman of Diversified, was frequently approached about selling his business, which is why he started thinking about strategic options. He decided to go the ESOP route because he wanted the company to remain locally owned and managed.
“We have always had the mission and vision of staying independent,” McCormack said. “We think it’s very important for our associates, our clients and our other constituencies, including our carriers, that we’re able to make decisions locally without following someone’s rules that are out of Chicago or Baltimore or wherever it might be.”
Consolidation in the insurance industry over the past five years has led to many local and regional brokers being bought up by national and international insurance brokers, he said. Keeping Diversified privately held was important to McCormack.
He also wanted to recognize his 75 employees’ loyalty and hard work. Employees have skin in the game when it comes to company performance, since they are directly affected, which some owners find leads to excellent performance. They can share in the upside when the company does well.
“It’s time to reward those individuals who are going to take us forward into the future and continue to allow us to grow and hopefully prosper and serve our clients the way that we need to serve our clients and take care of our associates the way we need to take care of our associates,” he said.
Karl Cumblad, chief financial officer and chief operating officer at Diversified, and Chris Lie, chief executive officer, led the charge to explore the company’s options. Cumblad said the management and ownership also considered an internal management perpetuation scheme that would allow leaders to buy into the company over time.
“The success was such that the organization got large enough to make that possibility pretty remote, just because the price tag got too large,” Cumblad said.
Cumblad and McCormack wouldn’t reveal the price tag.
An ESOP also has tax advantages – since Diversified is an S Corp that is now owned by a trust, it is tax-exempt. Not having to distribute earnings means the company will have cash flow to assist in its growth plans.
“At least in early years of an ESOP, the cash flow that’s generated is used to pay down debt,” Cumblad said. “This is a long-term plan. It’s an eternal plan. In the long run, that is paid down and cash flow becomes more accessible.”
Once the debt is paid down, the employees’ share value will increase, he said.
Appleton-based ESOP consulting firm ESOP Partners helped Diversified determine whether an ESOP would work. Diversified’s track record, vision, strategic focus and the ability to plan for succession helped it successfully execute the tranasaction, Cumblad said.
“The backbone of our economy is businesses the size of this one and larger and smaller,” he said. “Many of them have gotten there on the sweat and tears of an individual many years ago and at some point, as they build value and create culture and develop their legacy in their company, they need to find a way out. For some, motivation is pure profit. When those motivations are different than that…many owners in his situation, I believe, have that same pride in the organization they built and the desire for that organization to continue after they’re no longer involved.”