In 2015, Robin Petravic and Catherine Bailey, co-owners of iconic California ceramics brand Heath, were looking ahead to the 15th anniversary of their tenure. Over the last decade, the couple had transformed the company from a struggling legacy brand into a thriving enterprise that recently celebrated its 70th anniversary. Moreover, they had done it with a tightly held set of values, keeping all design and production in-house, staying local, and favoring sustainability over growth. There was plenty to celebrate, but instead of breaking out the Champagne, the pair turned their attention to a subject many business owners choose to put off as long as possible: succession planning.
“It’s still a ways off,” Petravic tells Business of Home, “but at some point there’s going to be succession at Heath. And unlike a lot of businesses, we didn’t want the company to be sold off to the highest bidder, we exit stage left, and that’s it. We wanted to ensure continuity of the values we’ve built here.”
At the same time, Petravic and Bailey were hoping to pay back a group of early investors. The traditional route to solve both problems would be to sell a piece—or all—of the company, but for Petravic, the idea was a nonstarter. “I read an interview with the founder of Clif Bar, Gary Erickson, that really resonated with me,” says Petravic. “He said, ‘You couldn’t give me enough needles to poke in my eyes rather than go public.’ I totally get that. You may go into [having investors] thinking it’s benign, but it starts to seep into what you’re doing.”
Petravic and Bailey began looking at other options, and it wasn’t long before they hit on a solution that felt true to their philosophy: Heath would sell, but not to an outside investor. Instead, they would split the company with their own employees in a financial maneuver called an ESOP.
ESOPs, or employee stock ownership plans, have their roots in the industrialization of the American economy. In the 1800s, companies like Proctor & Gamble and Sears & Roebuck began setting aside small shares of stock for longtime employees as a kind of proto-401K plan. The modern history of employee ownership begins in 1974, when Congress passed the Employee Retirement Income Security Act, conferring significant tax benefits on the creation of an ESOP. Suddenly, giving employees the keys to the kingdom was good business.
There’s a faint aura of utopian thinking that permeates the ESOP community. Indeed, many companies that undergo the process are driven by a CEO’s sense of egalitarianism, or a belief that employee ownership is the ideal form of capitalism. However, the majority of ESOPs are motivated by something else entirely: a desire to sell.
“Historically, ESOPs have been driven by business owners who want to retire,” Michael Pasahow, senior corporate counsel at Menke, the financial services company that oversaw the Heath ESOP, tells BOH. “You’re too small to do an IPO, your managers don’t have the cash to buy you out, and you don’t want to sell to a competitor.” Instead, owners create a trust that takes possession of shares that are then divided among employees. When the owners leave, they sell their stake to the trust, taking a payout. There are a variety of ways to structure the deal, but the primary motivator is typically financial.
“From the start, with Heath, it wasn’t a typical situation,” says Pasahow. “The first thing they asked was, ‘How is this a benefit for our employees?’ In our business, that’s normally the second or third question. Heath was different. They wanted to make it sustainable.”
Heath is different. The company was founded in the Bay Area in 1948 as a small pottery studio by married couple Edith and Brian Heath (she was the potter, he was the engineer and businessman). It quickly found an audience and grew exponentially in the following years, expanding into tile in the 1970s. Over time, the name Heath became synonymous with a kind of American craft ideal: simplicity of design wedded to quality workmanship. In the 1990s, the company entered a difficult period, and had shrunk to only 24 employees by the time Petravic and Bailey cobbled together the finances to buy it in 2003.