Pictured Above: Earl Livingston (left) is retiring after 43 years in the farm equipment dealership business. He passed the leadership torch for running Livingston Machinery Co. to Shawn Skaggs (right) effective July 1, 2016.
It’s a tough situation laying in a hospital bed and realizing the business you’ve spent most of your life building might go away if you’re unable to return to work. In 2008, that was the reality for Earl Livingston of Livingston Machinery in Chickasha, Okla., after he suffered a stroke and wasn’t sure he’d make it back. Livingston says he had a trust and a life insurance policy, “but the truth of the matter was that if I would have died when I had the stroke, my family would have had to sell the dealerships to pay the taxes.”
He recovered and started searching for a way to keep the business viable after he was gone, which led to an employee stock ownership plan, or ESOP. That, in turn, led to the purchase of a competitor, an enhanced product offering and Livingston’s retirement. Seven years of preparation allowed the last three events to happen seamlessly in the past 12 months.
“After the stroke, I was looking for the perfect succession plan,” Livingston says, “and the local bank was employee owned. I’d had experts explain ESOPs to me, but they talked in terms and words I didn’t understand and I didn’t think it was for me.” The search ended when the dealer’s 401(k) plan administrator put Livingston in touch with Steve Allison, a Fort Worth-based business succession planning specialist and veteran of creating employee stock ownership plans for construction equipment dealers. Livingston says, “He had my kind of background and talked my lingo. I learned more about ESOPs in 30 minutes with him than in the time spent with all other experts combined.” Allison in turn directed Livingston to John Kober of Morgan Lewis, one of the nation’s top ESOP attorneys.
Getting an ESOP Started
With the team assembled, Livingston says setting up an ESOP was easier than expected, “You have to get an outside unbiased evaluation of the value of the company, which must be approved by the IRS. A funding source is required to loan the ESOP money to purchase the business, with no personal guarantees, but there are many lending institutions sold on the concept that are eager to participate. After the program is in place, an independent trustee must be hired to oversee the integrity of the ESOP and to make sure the seller is ethical and accurately representing the company.”
“The process is pretty simple, it does take a few months and is expensive, but once you have it in place the annual cost of the trustee and attorney fees is a fraction of the tax savings. We had to provide exact inventories, current and past financial statements, total sales and profit percentages; a lot of information, but nothing a banker or supplier wouldn’t ask for.” As the company prospers and the loan to establish the ESOP is paid down, each year the stock prices are reevaluated. When the business has good profits the stock prices gain rapidly.
Success Serving a Niche ‘Nobody Else Wanted’
If you live in a big hay producing area, you’re likely familiar with Earl Livingston. The founder of Chickasha, Okla.-based Livingston Machinery Co., Livingston retired after 43 years in the business, on July 1 of this year. Livingston targeted large square baler customers servicing a 15-state territory beyond the scope of many dealers.
A native of Gould, Okla., Livingston attended Southwestern Oklahoma State University full time, while working 52 hours a week, which prepared him for the hay business. “I’d get off at 11 at night and have a class at 8 a.m., so I had to do my homework after work and before school.”
After graduation, Livingston worked for Case Corp. and managed a company store in Paris, Texas. Later, while managing Chickasha Tractor and Equipment, Livingston was exposed to large square balers at Hesston’s initial product introduction. “I was so impressed that I ordered five that day, without consulting the owner.” The owner was less impressed with what he called an “albatross,” says Livingston, but he sold those five the first year, 11 more the following year and thousands more since then.
In 1987, Livingston branched out on his own by selling and servicing used equipment. Searching for a new equipment line, and passed over by New Holland and Case IH, he became a Hesston dealer in 1990.
Livingston earned a lot of success with overnight baling customers, partly because he doesn’t sleep much. “I never go to bed before 12 a.m. seven nights a week,” Livingston says. “I get up before 5:30 every day and my phone rings between those times. We used to average 10-15 customer calls a night, nearly every night during hay season.”
Livingston’s commitment to the big baler business came out of necessity. “I learned that since we weren’t a Deere or Case dealer, with no ‘mainline’ tractor to sell, I was going to have to be different. So I serviced a niche that nobody else wanted, the 24-hour hay customer and we totally built our business on round-the-clock service. We found a lot of competitive customers were receptive to us.”
Today, while Livingston remains on the board of directors of the company he founded, he has officially retired, from day-to-day activities.Read more on Earl Livingston's Career as a Farm Equipment Dealer
The tax advantages of ESOPs are considerable (for a full explanation, see “Exploring the Possibilities of Employee Stock Ownership Plans,” Farm Equipment March 2015). Livingston’s ESOP formed an “S Corporation,” with income belonging to shareholders and that’s where taxes are paid when stock is redeemed. Essentially, the corporation becomes tax-exempt. Livingston Machinery became more profitable after the development of the ESOP, and the move provided cash to fund acquisitions and new stores. Livingston added its Muleshoe, Texas, location in 2014, and another in Stillwater, Okla., in 2015, to the existing stores in Chickasha, Fairview and Altus, Okla. The latest acquisition, earlier this year, was actually triggered by the development of the ESOP.
Who’s Buying Who?
Shawn Skaggs, formerly Livingston’s executive vice president, took over as president following Earl Livingston’s retirement, says not everyone immediately embraced the ESOP. “Since the new company was employee-owned and governed like a publicly traded company, there was no longer an owner to sign personal guarantees, which concerned some of our suppliers.” One felt strongly enough about the ESOPs radical departure from their corporate policy that they suggested it might be time for Livingston to sell the company to a neighboring dealer, Warren Cat.
Livingston and Skaggs reluctantly entered into negotiations to sell to Warren even before the ESOP was official. Skaggs says, “After the third round of negotiations failed, we had no desire to be acquired and so we developed an aggressive program to ensure our future. That plan included strategic acquisitions, developing our management team and increasing focus on specific products and markets.”
Skaggs says the dealership needed a track tractor and application equipment to round out their product line. “When market conditions were unfavorable for Warren, who had both, we mentioned that we might be interested in buying their agricultural division. A few days later they called and talks began. The negotiations ended up being a 9 month process, but we eventually found a solution that worked for both parties.”
The ESOP’s cashflow helped fund the acquisition, but Livingston was not purchasing any real estate or buildings, only used inventory and parts. The Warren Cat agricultural division purchase included the addition of the Challenger, RoGator and TerraGator product lines. Livingston then opened a new store in Dalhart, Texas, on Feb. 1, 2016, to fill the gap left by Warren’s departure from agriculture.
Seamless Succession Plan
With the Warren acquisition under his belt, Earl Livingston announced earlier this year that he would be retiring from Livingston Machinery Co. effective July 1, a move that the creation of the ESOP enabled with minimal disruptions. Skaggs says when the shares are assigned a value in 2017, Livingston and retirees over the age of 65, will be paid a cash distribution. Their shares will go back to the company to be gradually distributed to employees through a repayment agreement with the ESOP.
Paying exiting employees for their stock can provide a challenge for cashflow planning, but Skaggs says there are protections in place in the unlikely event of a mass personnel departure. The company has the option that allows it to wait up to 5 years before paying non-retiring employees for their shares, and they can be paid over a period of 5 years. That provision, required by the IRS, minimizes the possibility of a group of employees using ESOP proceeds to start a new competing business.
Skaggs says employee ownership has helped motivate staff to change culture, ensuring a bright future. “In a non-ESOP, employees assume the boss is getting rich, whether he is or isn’t, and their main focus is taking home a paycheck. It took a little time for employees to realize what the annual statements mean, at first it was just a piece of paper with some numbers on it. As time went on, they realized that the program would have real potential to help their retirement and that they would see money out of it someday. Now, they’re not only watching their actions to make sure the business makes money, they’re also watching what their coworkers are doing.”
Building Better Awareness
Once the employees figured out they owned the business, they want to know where the company stands all the time. Skaggs admits, “We have to communicate better. When one person owns the business, everyone’s not asking ‘How are we performing?’ ‘How does the profit look?’ or ‘What’s the company worth?’ Now that people have realized that it’s their business, they want to know those things. So we need to communicate on a regular basis. In the middle of hay season or wheat harvest, it’s hard to do, but I have to remember that those employees are my customers too, and I need to get better at that.”
Livingston Machinery is proving that an ESOP can provide successful ownership transfer and extra cash for growth. Skaggs is confident that with the high average age of dealer principals, it will become more prevalent in the farm equipment industry. He says the biggest challenge is a lack of knowledge. “We have to constantly communicate with our community, financial institutions, customers and vendors what an ESOP is, how it works and reassure them that we are still run by our management team.”
Livingston agrees that education might lead more owners to ESOPs. He says some may feel it could lead to a loss of control of the company, which is not the case. “The ESOP can own anywhere from 10-100% of the company, depending on what the owner wants.” He adds, “Of everything available to a businessman to reward employees, the people who have helped make him successful, and customers, by making sure the business continues, I think it’s the best thing out there.”