How The Welk Company used an ESOP for Shareholder Liquidity

How The Welk Company used an ESOP...

The Welk Company started in 1964 with the famous television band leader Lawrence Welk going on a road trip to San Diego, meaning to invest in an orange grove, and coming back with a motel on a nine-hole golf course.

Partner, Global Head of Family Business

KPMG in France


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Today the Welk Company is an international hospitality business, branching out from just the San Diego resort to include four-star quality resorts in Palm Springs, Lake Tahoe, Branson, MO, and Cabo San Lucas, Mexico, with plans to expand even further.

A Welk Family Experience

Throughout this growth the company has continued to reside in the hands of family members over the decades. Currently, seven of Lawrence’s descendants hold shares in the company, ranging from 8% to 33% stakes. The current CEO is Lawrence Welk’s grandson, Jon Fredricks.

Despite growing internationally, the Welk’s attribute a lot of their success to the fact that they not only keep the managing of the company within the family, but also treat every employee as if they too are a family member.

Employees are shown this appreciation in the form of daily respect, generous benefits and good pay. Such treatment has breaded a level of loyalty in the employees that sees each and every guest experiencing only the best stay.

In turn, this has led to the company being granted Gold Crown status by Resort Condominiums International, as well as enjoying top tier Trip Advisor and Expedia rankings in all their respective markets. 

Assessing the liquid wealth of the company

By 2012, the Welk Company found itself to be a highly successful international resort business, boasting over 1200 employees and annual revenues of more than US$130 million.

The problem lay in the fact that the Welk family had no way to formally assess the liquid value of the company wealth, and a few family members were interested in liquidating stock, without diluting the family’s interest in the company.

Fortunately, it was around the same time that Jon Fredricks found himself at a local business seminar, where he learnt about the perfect solution for his company, which would also benefit and incentivise their employees at the same time.

Introducing an ESOP to the advantage of the employees

An ESOP is a ‘qualified’ employee retirement plan, which can be generated by selling shares into the plan. By ‘qualified’, it means that the ESOP qualifies for certain attractive tax advantages.

There are two distinct characteristics of an ESOP making it attractive to the Welk Company:

  • Its sole purpose is to accumulate and hold retirement assets for the employees in the form of the sponsoring company’s stock. 
  • It is able to incur debt, meaning it is able to acquire employer stock that it will hold for the employees, from which it will generate dividends for the employees. 

Basically an ESOP allows a privately held company to enable shareholders to liquidate shares, without the costs to the company, while at the same time generating a tax and governance efficient benefit to employees.

Traditionally, when a company agrees to buy back stocks from a shareholder, the company incurs costs in the redemption. If a shareholder rather “sells” the shares to the company ESOP, then the costs incurred are tax deductible for the company, and the ESOP buys the shares, rather than the company.

An ESOP was a very attractive option for the Welk Company, as it keeps all the shares being sold by family members in the ‘family’ by effectively giving them to the employees. It also allows for the loyalty incentive to employees, by giving them an invested interest in the success of the business, without allowing them any control over the company.

This is because the ESOP is not owned by the employees, although they are the beneficiaries, it is entrusted to a trustee to oversee. The current trustee is Jon Fredricks himself, which helps ensure that decisions made are in the company’s best interests.

The Welk’s use of an ESOP shows that it is possible for employees to receive incentivising benefits, while also aiding the business. A family run business is all about loyalty, so every link within the working of the business has to be strong.

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