Adventure 16 is at the forefront
of the employee takeover trend

Often the mere whisper of a merger, acquisition or takeover fills employees with terror. But a San Diego company is experiencing a change of ownership that is leaving workers with the opposite feeling. In fact gradually, over a six-year period, the employees of Adventure 16, an outdoor products company, are becoming the owners.

    Adventure 16's chairman, Mic Mead, is at the forefront of a trend that is sweeping America. In 1989, Mead and his nephew John D. Mead learned about Employee Stock Ownership Plans (ESOPs) and decided to use an ESOP as a way for Mic Mead to retire and to pass the company on to the workers who helped build Adventure 16. "I’ve had offers to sell out," says Mead. "But Adventure 16 is about passion for the outdoors and ownership. I want to see the employees get the rewards of ownership that I’ve had the past 25 years. Many of them have been with us for years and they deserve to benefit from this company’s success."

    Anyone who drives Interstate 8 has seen Adventure 16's eye-grabbing camping displays at the store in the stadium area. A leading outdoor, travel and adventure-travel outfitter, Adventure 16 has six stores in Southern California, plus an international wholesale distribution center.

    The company’s colorful history has an entrepreneurial twist that characterizes many Southern California enterprises. It was founded in 1962 by a group of Explorer Scouts whose passion for nature led them to the production of 16mm adventure films (Adventure 16 - get it?). They also created a revolutionary, sturdy lightweight backpack that allowed the weight to be carried on the hips.

    "Mic Mead was a customer of the founders since 1967," explains John Mead, who also is the company’s president. "When it was ready to go belly-up in 1970, he bought it. It was a garage operation, working out of a Quonset hut at Gillespie Field."

    The company now has 180 employees and turns $17.5 million in annual sales. Stores in Mission Valley, Horton Plaza, Solana Beach, Costa Mesa, West Los Angeles and Tarzana carry the popular Patagonia, The North Face, Black Diamond and other brands of outdoor sports gear. The company also employs a crew of experts who lead backpacking, bicycling, rock climbing and other wilderness outings both in the U.S. and internationally.

    Outdoor activities have become a transforming passion in this country in recent years, and in a similar way, ESOPs are transforming individual and family-owned businesses. ESOPs can be used for several purposes, including the motivation of employees, a vehicle for raising investment capital, or, as in Mead's case, an exit strategy. After studying ESOPs for several years, the Meads hired a Northern California consulting firm to roll Adventure 16's existing profit-sharing plan into an ESOP.

    Mic Mead had several partners earlier, but in recent years has owned about 90 percent of the company. Under the ESOP mechanism, he sells his shares to the ESOP trust gradually, which in turn gifts the shares to employees. Mead heads the ESOP committee and will remain chairman until all his shares are purchased.

    On March 1, Mead sold additional shares to the ESOP, lifting the ESOP's ownership to 51 percent of the company.

    Currently, about half the company’s employees own stock. They receive shares in proportion to their earnings. "Someone earning $20,000 will get 100 percent more than someone making $10,000," explains John Mead. Employees are vested in the ESOP gradually, earning a 20 percent vesting after several years. At the end of seven years, they are 100 percent vested. If an employee leaves before becoming fully vested, the shares that have been allocated to that person but not yet vested to him are distributed among the remaining employees.

    Despite the merits of ESOPs, there are drawbacks. The company’s worth is evaluated once a year by an appraiser, and a value is assigned to the shares. As with any company, share value will fluctuate. However, once a price is set by the appraiser, the price sticks there until the next appraisal. Following a good year, this can be an advantage. Following an off year, employees are sad to find their net worth has declined. This is exactly what happened at Adventure 16 recently, when the share price fell from $104 to $92.50 per share. The company has just over 300,000 shares outstanding.

    Another downside to the plan is that until Adventure 16 is fully transferred to the ESOP, all its profits are going to buy out Mead. Any company expansion must be done with outside capital. Nevertheless, employees seem satisfied with the plan.

    "I think it’s motivated employees," says John Mead. "People say they care more about sales, profitability and making this an enjoyable place to work. Our goal as a company is to balance those three things."

    John Mead is one of the happy employees who will benefit from the ESOP. He started working for his uncle during school vacations and joined the company full time when he graduated from the University of Idaho in 1979.

    Mic Mead, who lived in San Diego for 40 years, has returned home to Indiana, where he's making another dream come true. Mead was first introduced to the great outdoors at camp, where he also served as a counselor. Not long ago Mead bought the camp, called Acorn Farm, and now lives there full time.

    Janet Lowe is author of several investment books, including "Value Investing Made Easy" (McGraw Hill) and "Warren Buffet Speaks" (John Wiley & Sons).