THE E.S.O.P. PLAN
Zach Zachowski and Barbara Gabel, owners of Zachary's Pizza in Oakland, have decided to get out of the pizza business. They will start an ESOP that will sell the business to employees.
Mark DuFrene/Contra Costa Times
Zachary's Chicago Pizza has no plans to stop serving the same famously thick stuffed pizzas to spill-over crowds at its two East Bay restaurants. But it will soon have new owners -- its cooks, waiters, shift managers and other employees.
Zach Zachowski and Barbara Gabel, the husband-and-wife team that opened the first restaurant in Oakland back in 1983, have decided that they are ready to get out of the pizza business. Starting this year, they will adopt an Employee Stock Ownership Plan, or ESOP, that will sell the business to its employees.
The complicated plan involves borrowing money from a bank to pay Zachowski and Gabel for their stake. Essentially the company uses that loan, as well as contributions from the business's revenues, to buy the business from the owners. At the same time, each employee who works more than 1,000 hours a year is given a share of the company based on his or her salary.
The pizzeria employees' paychecks will still be the same; the shares being set aside for them are on top of their normal salary. Their allotted piece of the business will become theirs to sell or keep after seven years have passed, starting from either their first day of work or January, 2001, whichever is more recent.
During a presentation to 60 employees at the Oakland establishment, Gabel pointed to the many plaques and certificates hanging on the walls from local publications. "All of the awards were won because of everyone in this room," she said. "And we can be even better."
The owners said that they were motivated by the desire to reward their employees for loyalty and hard work. It would be impossible to find the perfect benevolent owner, said Zachowski, who said that the restaurants pay benefits and above-market wages that a new owner would probably cut. "This was the best way to proceed, for everybody's benefit."
Zachary's has turned out to be a very successful venture for the couple, who met in Milwaukee and found their way to the California because of the weather -- though neither would say how much it makes a year.
It pumps out enough profits that starting a decade ago, the two scaled back their involvement to about half-time, letting managers take over daily operations. When the couple isn't traveling, Zachowski races Porsches on a local amateur circuit while Gabel spends time with the couple's dogs and sits on the board of the East Bay chapter of the Society for the Prevention of Cruelty to Animals.
The employees, still digesting the news, expressed excitement about the prospect of becoming owners. J.P. LaRussa, who started working at Zachary's when it first opened at age 17, said simply, "It's awesome."
Despite Zachary's devoted following -- getting a table on a weekend often takes more than an hour -- making the new ownership plan work will not be a slam dunk, LaRussa said. "It will be the biggest challenge I've ever had as general manager," he said. He said he expects to draw on the entrepreneurial talents of many of his employees, and cited one kitchen worker who owns five houses in Mexico that he rents out as a sideline business.
Paul Hunt started at Zachary's in 1987, where he has worked on and off ever since. He does prep work in the Oakland kitchen most mornings and works in the Berkeley restaurant on weekends. He has worked there so long, he said, because they pay a "living wage." He said he planned to stick around to participate in the employee ownership. "We now have a stake in this," he said.
Zachary's employees will join many others in the Bay Area who participate in a broad spectrum of worker-owned organizations. San Francisco and Berkeley feature many well-known employee cooperative businesses, including the Rainbow Grocery, the Cheese Board and even Good Vibrations, the sex-toy purveyor.
Tim Huet, a San Francisco attorney who has helped start two cooperative Arizmendi Bakery shops using the Berkeley-based Cheese Board's model and recipes, said that employee ownership confers two sets of advantages. Workers consider their work more meaningful, he said, while the places where they work benefit because customers get better service and the workers make more than just hourly wages.
ESOPs, Huet said, can sometimes function like collectives, where each worker gets one vote, but more often stick to the original top down management system, which Zachary's plans to do. A Zachary's rank and file employee shareholder will not be able to fire his boss, but will get to vote on big decisions, such as whether to merge or liquidate the business.
Small business owners often choose ESOPs as a way to turn over their business because there are so many tax advantages, said Corey Rosen, the executive director of the Oakland nonprofit National Center for Employee Ownership. One key reason is that the money the owners receive for their stake is tax deferred.
Kyle Coltman, the CEO of Menke & Associates in San Francisco, charges small businesses about $20,000 to $30,000 to orchestrate an ESOP like the one he's doing for Zachary's. "Zachary's Chicago Pizza has a classic reason for an ESOP," he said. "The owners desire liquidity and diversification, plus an incentive plan for the people working hard at the company that will give them a piece of the value of the company."