Chew on this: Hell's Kitchen owners sell their restaurant to employees

Hell's Kitchen, the Minneapolis restaurant known for irreverent marketing, a 35-foot Bloody Mary bar and lemon-ricotta pancakes, will soon stand out for something else: employee ownership.

On Wednesday, owners Cynthia Gerdes and Steve Meyer closed the restaurant after lunch for a staff meeting, where they told more than 100 employees they will transfer their shares into a newly created employee stock ownership plan, or ESOP. The pair, both in their mid-60s, also laid out plans to retire in coming years.

"Hell's Kitchen will be one of only a few independent restaurants in the country with an ESOP," Gerdes said.

The move means that Gerdes and Meyer, instead of being paid for their stake all at once, will receive a portion of the restaurant's profits from the ESOP for years to come. But employees will get most of the future profits, which they will be able to use for retirement savings or additional income.

Sous chef Alfredo Calderon, who translated the information to the 30 or so Spanish-speaking employees, said the news was a surprise. "Unless you work for a big corporation or a restaurant chain you don't have a 401(k) or an ESOP," Calderon said. "The owners are good-hearted people who want the best for everyone."

ESOPs have become an increasingly popular form of ownership for some types of mid- and large-sized businesses because of tax breaks that Congress created nearly 20 years ago. Most ESOP businesses pay no federal or state income taxes.

But they are rare in the restaurant business because the benefits of an ESOP occur when a firm has a long record of profitability, something that's difficult for restaurants to build.

Gerdes remembered her late husband, Mitch Omer, as she announced the transition. Omer, who died in 2015, would have been 65 on Wednesday. "The ESOP honors Mitch's huge, generous heart," she said.

For Gerdes — who gained prominence in the Twin Cities as the founder and longtime owner of Creative Kidstuff, a toy retailer — the decision to turn Hell's Kitchen over to employees is another example of creating her own recipe for success.

Hell's Kitchen offers workers medical, dental and vision care insurance, rare for an indie restaurant. Two years ago, when the restaurant's profitability fell sharply, Gerdes took the unusual step of opening its books to a group of employees and asking them to plot a turnaround.

She spent the past year researching ESOPs on her own after several bankers and accountants told her she shouldn't do it. "Most of them said no because they don't know enough about them," she said.

About 6,700 businesses around the U.S. and 250 in Minnesota are owned by employees under ESOPs. Hy-Vee, Publix, Scheels, and Great Lakes Brewing are some examples.

"Most business owners don't even know they can do this," said Corey Rosen of the National Center for Employee Ownership, a nonprofit organization that supports employee-owned businesses. "Employers think the employees don't have the money."

In the case of Hell's Kitchen, employees won't have to pay for their stock. They will be given shares based on their tenure with the restaurant and earn more over time.

The risk? If the restaurant's profits evaporate, the value of the employee's shares will decline. And if those profits evaporate before Gerdes and Meyer are fully paid, they will have to deal with the loss of value that a third-party buyer would have given them today. "Our payments could be cut, delayed or gone," Gerdes said.

The exact value of the company wasn't immediately set. Two independent organizations will place a value before the ESOP is initiated on Jan. 1. Every year, another valuation will be performed.

Meyer, 65, plans to retire by the end of the year and Gerdes, 66, within two years.

"I'd get my money faster by selling it outright, but I wanted something good and fair for our staff," Meyer said. "They're doing a magnificent job. Our employees deserve this more than anyone else."

The restaurant has no debt and has made money consistently for 17 years. For a restaurant, its employee turnover rate is ultralow at 5.5%; the national average is 75%.

"You have to have a name brand," said Stephen Cohen, a Minneapolis lawyer who specializes in restaurant strategic planning. "This industry is infamous for its high turnover rate, and Hell's Kitchen has a great formula for loyalty and low turnover."

With an ESOP, businesses tend to see a lower layoff rate and a bump in productivity and employee tenure. One part-time employee asked Gerdes if he could be hired full-time after she announced the transition Wednesday afternoon.

"Employees who have a stake in the business stick around," said Darren Tristano, a restaurant analyst at Foodservice Results in Chicago. "Employees with an ESOP feel more like voters, not just workers, and they start looking at things more carefully," he said. "They may start wondering why employees don't take their uniforms home to clean them instead of sending them out."

Kjersti Granberg, general manager at Hell's Kitchen, said she doubts that younger employees will grasp the importance of the ESOP, but added she hopes that will change over time.

"When I started at Hell's Kitchen 10 years ago I went in thinking I'd never have a retirement benefit, but back then I didn't have two of my kids," she said. "Having that end support lined up makes me joyful and anxious. It's up to us to make the future successful."

Gerdes considered selling the business, though she turned down an offer from First Avenue several years ago and relatives in her family and Meyer's weren't interested. She said employees are responsible for the restaurant's success. Soon, a sign will go up declaring the restaurant is employee-owned and a wall will be filled with their pictures.

At Wednesday's gathering, Gerdes, Meyer and the employees ate birthday cake in tribute to Omer.

"This is Mitch's legacy. He's the reason there is a Hell's Kitchen," Gerdes said. "He was off-the-charts generous. At the end of the day, he would have said this is perfect."