EOT Advisors Client - Paras and Associates is First Employee Ownership Trust (EOT) in California

EOT Advisors’ client Melinda Paras discusses the sale of her business, Paras and Associates, to an Employee Ownership Trust.

In this interview, Melinda Paras, founder of Paras and Associates, explains why she chose to sell her company to an Employee Ownership Trust (EOT) as part of her retirement and succession plan. Paras and Associates, a technology company that supports healthcare interpreter networks, was built around a mission of social good rather than profit alone. As retirement approached, Paras sought a way to realize the value she had created while preserving the company’s purpose, culture, and commitment to its employees and customers. She discusses how the EOT structure enabled employee ownership, ensured long-term continuity, and even allowed her to maintain certain protections over the company’s future direction and legacy.

• Transcription

  Hi. My name is Melinda Paras and I’m the founder of Paras and Associates. Our company was incorporated in 2006 and we sold the company to the employees in 2019 in an Employee Ownership Trust, an EOT. Let me tell you a little bit about the company and our background and how we came to this decision.

  Our company is a technology company that manages a video interpreting platform that mostly healthcare systems use to utilize their own interpreters in a seated position from a call center and broadcast their interpreting capabilities throughout their hospital system. And in our network, the hospitals also share interpreters with each other. And so when we formed the company, it was really not thinking about the question of profit, although it is a for-profit company. We were really trying to do social good and improve the access to quality healthcare interpreting to many hospital systems that really couldn’t afford to have large numbers of in-person interpreters in their facilities.

  And so it’s with that goal of social good that we founded the company, and then as myself and the CFO were approaching retirement age, we began to think about what we could do to facilitate our retirement. We wanted to capture some of the value we had created in the company, but we also wanted to retain the social good that the company had facilitated. Paras and Associates has a gross profit annually of about six to seven million dollars, and it has about ten employees. And so it’s a small company, but it operates nationwide.

  And so as we began to look at some of the options of retirement and sale of the company, we thought about selling the company to our competitors. There are a lot of for-profit language agencies and we thought probably there would be some interest in purchasing PAA. But we thought about what would happen if we did that, and a lot of the social good we had created we thought would be diminished. The competitors would be mainly seeking our client base, would probably let go of our employees, and really change the vision and the value of the company.

  And so in the course of our considering these options, I heard about employee stock ownership plans, ESOPs, from a friend. And conveniently, the National Center for Employee Ownership I found was located in Oakland really just down the street from our offices. And I went and visited them and found out more about the ESOP option, and myself and my CFO attended one of the national conferences of the National Center for Employee Ownership.

  First I want to say how valuable I think the National Center is for companies who are looking at employee ownership options. They hold two to three conferences a year, or they did before the coronavirus pandemic. I’m sure they will return eventually. And at these conferences, companies share their experiences about what it took to form an ESOP and manage an ESOP going forward. So I attended the conference, but what I found was that an ESOP option was not going to work well for our company. First of all, you really need more than ten employees. You need, I don’t know, fourteen, fifteen. The ESOPs are under restrictions related to the Labor Department because they are considered retirement programs. And there were just a lot of management processes that were required in an ESOP. And I greatly appreciate that at the National Center’s conferences you meet a lot of really good vendors who are lawyers and trustees who know how to manage an ESOP. And if you are a larger company and the ESOP option is good for you, I really recommend attending one of their conferences and getting introduced to many of the people in the field.

  But as I sat through that conference and I looked at the size of our company and what would be required for oversight, it just felt like too much. So I was feeling kind of discouraged about it, and I left a little bit early and I missed the last presentation of the conference, which was a big mistake. Chris Michael, an attorney who is knowledgeable about employee ownership trusts was the last speaker of the conference, and my CFO stayed and heard him speak and spoke to him afterwards.

  And as we followed up with Chris, we found that an Employee Ownership Trust was much more suitable for what kind of company we were. First of all, the size of the company, it wouldn’t require us adding employees or merging. At the National Center conference I even met with another company whose CEO said hey, maybe we should merge and then we could be able to do an ESOP. But it was a company completely unrelated to what we do.

  So as my CFO and I talked more with Chris, we found a lot of advantages to the EOT type formation. I think the first thing that drew me to it is that there was an immediate value to the employees. In an ESOP, really the employees don’t see the value of their shares in the ESOP until they retire. It’s really a retirement plan essentially, and as they leave the company then they get paid for their stocks, for their ownership portion. In the EOT, Employee Ownership Trust model, the employees profit share at the end of every fiscal year, which means that they see the immediate result of becoming an employee-owner. In our model, we decided to distribute the profits to the employees based on their salary proportions. So if we’re giving out $100,000 in profits to the employees, it will be divided based on salaries. That way, those who have more responsibility and greater leadership in the company, who have higher salaries, are going to get a little bit more of the profits than others. But frankly, the distance between our lowest paid employee and our highest paid employee is not that high, so frankly it’s pretty good sharing of the profit.

  And so we managed the process of that sale. It took about, I would say four months, five months altogether between beginning investigating it and accomplishing the sale. We had to do a valuation of the company, and the basic concept was we would create a valuation of the company, the company would pay back the original owners over the course of ten years utilizing the profits that the company made, and then after the distribution to the original owners the remaining profits could be divided then among the employees.

  So the employees did not have to put up any of their own funds to become owners of the company. And the original owners of the company would be paid off over ten years, which we believed was economically feasible for the company to be able to afford.

  A lot of people have asked me how the company is managed. Is it a co-op, does everyone have a vote? And we’ve had at our company a board of directors really since the beginning, which was a leadership structure of four to five staff members who were the CFO, the CEO, the chief technology officer. And so we’ve had that management process in place and that continues under the Employee Ownership Trust. So the board of directors makes the main management decisions. For example, at the end of the fiscal year, determining how much of the profits would be distributed to the employees. What the board of directors cannot do is they cannot decide to award all the profits to themselves. In our EOT structure, we have a trustee whose responsibility is limited and does not involve management of the company, but it involves an oversight to make sure that the goal of the Employee Ownership Trust is retained by the future management of the company. So the board of directors really has to make those profit distributions based on the bylaws of the company and the vision of it being an Employee Ownership Trust.

  Some other special arrangements, if you will, as the founder of the company, I wanted to have just a little bit of say about the future of the company even after I no longer own it. And so I was able to make an arrangement in the legal process of the trustee transfer to say that any future sale of the company would need my approval, partly because my name is on the company still. I’m the Melinda Paras in the Paras and Associates. And I just wanted to make sure that the company didn’t go in any directions that I wasn’t comfortable with in the future.

  So I guess in conclusion, I wanted to say that the Employee Ownership Trust I think has great value as a mechanism for the transfer in ownership from the original owners to the employees. One of the things I really value about our company is the team that we’ve been able to put together. They’re great people, they’re very invested in the social good that the company was trying to create, and I can’t feel better about leaving the company than having it be in their hands. And having them see the results of their ownership very immediately and being rewarded a portion of the profits each year, even though a profit is not, I think, the main driving force in our team’s interest in the company. It was the social good and remains the social good. But still, it’s an important part of the process, and if there’s going to be profit, having it distributed among the employees in a fair and reasonable way, I think is a good way to go.

  So I want to say that Chris Michael has been an invaluable resource in understanding the EOT and informing business owners of this as an option. Chris was not only our lawyer for the transaction, but he’s also our trustee, and so we really appreciate that he understands what we were trying to accomplish through the process. I want to just close and say that anyone with more questions or more thoughts about Employee Ownership Trusts who would like to speak further with me are welcome to contact Chris and he’ll put you in touch with me.

  Just one thing about who the original owners were. I was the majority stockholder. I had more than 51% of the shares of the company. But there were three other of our senior leaders in the company who also owned stock. The CFO was also interested in retiring, but two other senior leaders in our company are staying with the company, and so we’re glad to have that continuity in place. One of the biggest challenges about thinking about retirement is you have to find a replacement. So really it took me about a year to find a replacement CEO for myself and also a replacement for our CFO. And we’re now in the process of transitioning out of our roles in the company and our new leadership is taking over. So thank you all for your interest, and good luck with whatever transitions you’re seeking in terms of your business ownership.