New York Times and Zachary's Chicago Pizza


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Pizza to Go, Shares to Stay

Barbara Gabel, Zach Zachowski, J.P. LaRussa of Zachary's Pizza
WIN-WIN A retirement plan for Barbara Gabel and Zach Zachowski benefits them and also their employees...

by Laura Novak
April 10, 2007
Oakland, Calif.
(From the article)

It was on little more than a wing and a prayer that Barbara Gabel and Zach Zachowski opened their first pizza restaurant 24 years ago in a storefront here near a freeway overpass. The couple liquidated their nest egg, took out a loan and hired the first teenager who knocked on the door of their newly named Zachary’s Chicago Pizza.

Now, Ms. Gabel and Mr. Zachowski, both in their 50s, are retiring, something they have been methodically planning for nearly a decade. The couple are not following a standard exit strategy of selling their successful business outright. Instead, they are slowly transferring Zachary’s, which now includes three restaurants and lines out the doors, to a trust that will ensure a successful retirement not only for them but also for employees who have helped them along the way.

The trust, called an Employee Stock Ownership Plan, is a retirement vehicle that is gaining traction among small-business owners who fit specific criteria. For Ms. Gabel and Mr. Zachowski, an ESOP (pronounced EE-sop) was the only retirement choice that guaranteed longevity for their business and financial security for their employees.

“You don’t succeed unless everyone does,” Ms. Gabel said. “We worked side by side with these folks for decades. How can you feel good about yourself if you get yours and don’t consider the people who have gotten you where you are?”

According to the National Center for Employee Ownership, a nonprofit research organization that tracks employee stock ownership plans, 11,000 companies have adopted ESOPs since tax laws made them available in 1974. It estimates that eight million employees, and $600 billion in assets, are now covered by this type of retirement plan.

Corey Rosen, executive director of the center, describes an ESOP as a “collective bank account” set up for employees but with tax benefits to both the employees and the retiring owner.

“The key idea of an ESOP is that it is a way that employees can acquire stock in their employer, but not by purchasing it with their own money,” Mr. Rosen said. “That’s an important concept, because employees would not become owners in significant numbers if they had to buy stock with their own money.”

Ms. Gabel and Mr. Zachowski said they felt strongly that they didn’t want to sell Zachary’s to an outsider who might not share their commitment to the employees or the community. The stock ownership plan provided an alternative marketplace for selling equity in the restaurant chain at a pace the couple were comfortable with. Each year, the company uses its pretax profits to buy stock from Ms. Gabel and Mr. Zachowski. Currently, 35 percent of Zachary’s is in the ESOP. Ms. Gabel and Mr. Zachowski plan to divest themselves of up to 80 percent of the company.

The restaurant business, however, is not a classic case study for ESOPs. Restaurants typically have low margins and transient employees, and roughly 80 percent close in the first few years. But Zachary’s has a core of long-term employees who are committed to keeping the restaurant vital. A strong cash flow also allows the company to use current profits to buy stock from Ms. Gabel and Mr. Zachowski. (Some companies borrow money against future profits to finance the ESOP. This allows owners to get out sooner, and in some cases can provide cash to the company to expand the business.)

One tax advantage for ESOPs is that retiring owners can sell a portion of their shares tax free while employees can acquire stock annually without paying income tax on it.

“The tax man does not cometh if the ESOP is done properly,” said Kyle Coltman, the chief executive of Menke & Associates, a national firm that structures and advises ESOPs. “If you own the company and meet certain requirements, the owner pays no capital gains tax on the sale. And for employees, this is a retirement benefit that is not taxed as it builds, just like a profit-sharing plan.”

Profits contributed to the ESOP are also tax deductible, said Mr. Coltman, who has structured ESOPs for 27 years. “Since company profits are not taxed as they are pumped into the ESOP,” he added, “this allows them to beat the competition, because all of the money is now available to grow the company.”

Mr. Rosen says that an ESOP is not a magic retirement solution. But for business owners who want to exit slowly and reward employees while enjoying tax benefits, it is worth a serious look.

“Success takes a long time,” Ms. Gabel said. “You can get on the horse beautifully and ride beautifully, but if you screw up the dismount and fall off, you’ve ruined the ride.”



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