Journey ends with worker stock plan.

Retirement is Wido Schaefer's destination.

As owner of Los Angeles-based Travel Store Inc., Schaefer has worked nearly his entire life planning other people's vacations. He's sent clients to thousands of destinations, from tribal villages in Botswana to luxury island vacations in Bali, one of his personal favorites.

Like just about any trip, however, there were some twists in the road.

Schaefer intended to pass ownership of the company on to his son, Brian, who manages a hotel in Aspen, Colo., but his son didn't have the desire to live in Los Angeles and compete in the cutthroat travel business. "He's a small town guy. He's into the outdoors, the opposite of what we do in the big city," Schaefer said.

So, with no other relatives to take over the business, the 64-year-old German-born Schaefer turned to the Employee Stock Ownership Program, a federal program that allows a business owner to sell an ownership stake in his company to employees.

"Because of my age, a succession plan becomes more and more important. ESOP is part of my exit strategy," said Schaefer, who decided to pass the business along to his employees rather than sell it to a competitor.

Schaefer opened the Los Angeles-based Travel Store in 1976 with two desks, two typewriters and one employee. Under his leadership, the agency has thrived in an industry that has seen a sea of change as Internet-enabled consumers set up their own trips. Schaefer shifted his firm's focus to corporate accounts and today it has nine offices that generated a combined $220 million in gross sales in 2005. He serves on the advisory boards of the Four Seasons Hotels, Ritz-Carlton Hotels, Orient Express Hotel and Trains, and Travel & Leisure magazine.

Exit strategies

Stories like Schaefer's could become more common.

Millions of baby boomers, many of whom have had success with their entrepreneurial endeavors, will start to reach retirement age in the next decade. Trillions of dollars in assets are positioned to be transferred to future generations.

Congress has passed more than 20 major pieces of legislation aiming to make the process more workable since initial ESOP legislation in 1974. Nevertheless, there are just over 10,000 ESOPs in existence nationwide, according to the ESOP Association. California has the largest concentration of ESOPs with approximately 1,500. "The number of ESOPs in an area parallels the size of its economy and population," said J. Michael Keeling, president of the association.

An ESOP is a tax-qualified plan that offers employees ownership shares in their company. The plan cannot discriminate under federal law, making each vested employee eligible to receive shares regardless of rank within a company. ESOPs set up a trust, which uses either company or borrowed money to buy shares from the owner and sell them to the employees. Lenders are repaid by corporate contributions to the trust, of which both the principal and interest are tax deductible.

For owners, selling parts of the company allow them to liquidate their assets without necessarily incurring the taxes related to a business sale. Owners have the opportunity to defer the income taxes on the sale if the proceeds are reinvested in qualified securities. The exchange is similar to a 1031 real estate exchange, with fewer restrictions.

"Many people have the vast majority of their assets tied into their business," said Mark Bowers, director of compliance for BSI Consultants, an L.A.-based ESOP plan designer and administrator. "An ESOP is a great way for an owner to diversify his investments," Bowers said.

Aging small business owners face many choices as they decide to exit the day-to-day grind. Without willing relatives to take over the business, most of the small-business owners sell their company to a competitor or a private equity buyout firm. Selling out, however, is an option that some business owners are uncomfortable with because they feel responsible for the livelihood of employees and customers who have contributed to their success. The ESOP alternative is more costly and usually involves some risk, as part of the company is leveraged (although Travel Store's ESOP is self-financed), but it provides the owner with a way to reward those who have helped him.

"I could get more money if I would sell the company outright," Schaefer said. Selling a company has downsides, though. It usually leaves owners without a role in their companies, a situation that Schaefer witnessed first hand.

"A good friend of mine sold his company and it was the biggest mistake of his life," Schaefer said. "I like to be busy, and playing golf is not staying busy. This way I have much more flexibility and can time my own retirement."

The greatest risk to employees from an ESOP is the potential for bankruptcy. That's particularly true when an ESOP is used as a solution to labor or financial problems. That was the case with United Airlines Inc., which filed for bankruptcy in 2002. The airline's 83,000 employees received a 55 percent stake in the company in exchange for $4.8 billion in wages only to see their collective net worth disappear due to airline industry struggles.

Offering an ownership stake in profitable companies such as Travel Store is far less risky for employees. Owners see increased productivity, better employee morale and job security to those who had dedicated many years of service to the agency. The general result is that profitable Companies become even more profitable.

"It's something that employees have really embraced," said Sue Schloeder, senior branch manager of the Palos Verdes office. Schloeder has been with Travel Store since it acquired the agency where she worked 15 years ago. "He has an investment in us and we have an investment in him. We're in for the long haul," she said.

The program has boosted profitability as employees embrace the benefits of cost cutting because of their personal commitment to the company. In the program's first year, Schaefer has already sold 20 percent of the company, which is valued at $15 million. He plans to keep approximately 15-20 percent. The agency's 150 employees are granted shares as benefits, and some longtime employees have accumulated shares valued at up to $50,000.

"You'll hear employees joke around that 'I'm the boss'," Schloeder said. "We've been given a nice reward."

As for Schaefer, he is happy that the agency will remain independent and will be around long after he is gone, although he expects to run the company for many more years.

"I'm an A-type personality. I want to be involved in the world today," he said. "The best way to stay involved is to run a business and compete and win."