The Employee Stock Ownership Plan gives Edible Beats employees an ownership stake in the business.
Justin Cucci is the restaurateur behind the Edible Beats restaurant group in Denver. He also was the owner, but decided after a cycle of about eight years of growth, he was done opening new concepts.
When meeting with financial advisers, he was asked about what kind of succession plan he had if he eventually exited.
“I had no idea how to answer that,” Cucci says.
He was presented with many options—including private sale—but when Cucci heard about an ESOP, an employee stock ownership plan, he looked into it immediately and thought it was the right option to leave an impact.
Cucci wanted to do a 100 percent ESOP, meaning, once in effect, Edible Beats’ employees would own the whole company through shares allocated to staff at no cost, which accumulated in a trust. Cucci would stay on as CEO, but transfer the ownership over. This includes the group's Root Down, El Five, Linger, Ophelias’s Electric Soapbox, and Vital Root concepts, as well as Cucci's stake in Root Down DIA.
“I was like wow, here's an opportunity for the restaurant group to sort of have a legacy beyond myself,” Cucci says. “But at the same time, I can still be involved and it also was an opportunity to I think shake up an industry that usually just spits people out.”
This wasn’t an immediate switch, however. A company has to do its due diligence and meet certain metrics to make an ESOP work.
Cucci says in 2017 and 2018, Edible Beats just wasn’t there yet. Then, in 2019, the restaurant was growing and hitting all the numbers it needed to make the ESOP work.
In 2020, it signed the contracts to do the ESOP, but the world got in the way.“COVID happened and it just went dark,” Cucci says.
In the middle of the pandemic, Cucci called his lawyers to see if the ESOP was even still a possibility. They told him he had to be prepared for a lower valuation than 2019, and to not have a bank involved.
Not doing so meant Cucci essentially became the bank. He had to “owner carry” the money needed for the change-over, meaning he makes no immediate profit from switching to the ESOP.
Normally, the bank would lend the employees, or Edible Beats, money, and then buy that from the owner. So, with him carrying those costs himself, Cucci does not make money in the short term.
Cucci felt like he could deal with these circumstances, and lower sales numbers from 2020 and 2021 were not factored in. So he continued on.
The ESOP went into effect at the end of February. Edible Beats’ 330 employees were all grandfathered in if they were working for the company at that time. New employees become eligible after a year of employment.
Cucci says the people that got in on the ESOP at the very beginning will make the most money, giving them the best theoretical value compared to those who joined later.
Edible Beats received support from service providers and the state of Colorado during the process. To help with conversion costs, Edible Beats applied for the Employee Ownership Tax Credit to cover 50 percent of costs, which the group plans to use on next year’s Colorado tax filing.
As he planned, Cucci has stayed on as CEO of Edible Beats, and the employees are represented by a trustee who works in their interests.
At a time of increased turnover and labor shortages in the restaurant industry, Cucci hopes this employee-ownership model will help people be able to build more sustainable careers they can see themselves in for a long time.
After putting the ESOP in their most recent round of job ads, Cucci says the company has had more responses than in the past five months.
“I think for the immediate future it will just run the way it's been run except with the employees having an increased awareness of business and how to make it successful as well as an increased voice of the employees,” he says.
According to Edible Beats, only six restaurants in the U.S. have had this benefit plan. Additionally, less than 7,000 businesses nationwide tout an ESOP.
One reason so few people do this is because of the costs associated with establishing it. Cucci says he was initially quoted up to $300,000, but the price ballooned because of all of the costs associated with legally removing his name from documents so Edible Beats could operate independently from him as the previous sole-owner.
He also says another reason ESOPs are uncommon is because if you have partners and investors in your restaurant, it becomes more complex. Having additional parties involved can slow down the timeline and make the cost rise more. Cucci says he was lucky he could make that decision by himself.
“What may be central to this is: do you want to get less and give your employees more,” he says. “And that’s one of the factors you have to decide if you want to be an ESOP.”