8, March 2023
The One Workforce Attraction and Retention Strategy You Probably Haven’t Considered
By: Matt Fieldman
Here at America Works, we’re all about workforce innovation. We know that the existing workforce development system isn’t working as efficiently as it could, so companies need to try every strategy in the book to retain their workers (rather than expect to replace departing workers with new ones). To accomplish this, I’ve written about becoming an employer of choice, the importance of focusing on the employee experience, and how employers need to stop pushing the “easy button” on their workforce efforts.
I thought that after eight years working at the Manufacturing Advocacy and Growth Network (MAGNET, part of Ohio MEP) and focusing on workforce development, I had a pretty good grasp on all the strategies out there. So admittedly, I was surprised to learn about a relatively unknown and underused – but tried, true and tested – workforce strategy that manufacturers should consider. I met Emily Bergstrom from Project Equity in September 2022 at the MEP National Network Update Meeting, and within a few minutes of chatting, I was sold on employee ownership as an exciting way to attract and retain workers. So today I’m inviting her onto the Manufacturing Innovation Blog for a conversation exploring this important topic.
MATT: Emily, a pleasure to have you on this workforce-focused blog. Tell us, what is employee ownership?
EMILY: Employee ownership is a proven business model where the employees who work at the business own the company. Employee ownership can be baked into a company from its formation, or an existing business can transition to this ownership structure. At Project Equity, we work with two types of business owners: The first is retiring business owners who want to sell their business to their employees, and the second is business owners who are looking for tested employee engagement strategies that can help drive increased business performance. We advise them on the three main employee ownership structures: employee stock ownership plans (ESOPs), co-ops, and employee ownership trusts. We help them choose the right fit for their business and their goals.
MATT: Where did you first hear about employee ownership? And what drew you to promoting it?
EMILY: I’m originally from Michigan, and I’m the first generation to not work in the automotive industry since my great grandpa moved to the Detroit area in the early days of automobile manufacturing. So, I was brought up around a lot of management vs. front line worker dynamics in the careers of my parents, cousins, grandparents, etc. I spent twelve years working at an industrial supply company. It’s a wonderful family-owned business that incorporates profit sharing into its compensation package. When I started working there almost 20 years ago, the first surprising experience was how the profit-sharing model really helped to align the incentives of everyone at the company. And also, how very personal and deep the loyalty to the company was. I attended business school later, and I thought a lot about how the profit sharing and generous benefit packages impacted how people showed up to work. I knew that there was something special about the combination of long-term focus, investment in people, and shared rewards that I saw there. I wanted to explore that more and eventually found Project Equity to be a great vehicle for me to do that.
MATT: OK, let’s jump to the meat of this. Why should a small manufacturer consider employee ownership? What’s in it for them?
EMILY: To be very direct, small companies in general, and small manufacturers in particular, have very limited options when it comes time to sell their businesses. In my experience, if you are under $1.5 million in earnings before interest, taxes, depreciation and amortization (or call it $1 million net profit), your options as an owner who wants to retire can be quite limited. You may be lucky enough to have a big company in your industry who wants to buy you, but barring that, businesses of this size are typically too small for private equity interest. They also tend to have a lot of owner involvement in day-to-day operations, customer concentration, and heavy capital expense requirements that make them less appealing investments for an individual buyer.
I’ve spoken to so many owners who begin a process with a broker with high expectations for a fast and easy sale right at their dream selling price. Then I catch up with them six months, one year, two years down the road, and I hear that they haven’t attracted interest, have spent a lot of time in diligence with different buyers, only for it to not work out. Many decide their best option is to close up and sell off the assets.
As a person really invested in the future of U.S. manufacturing, I find this situation devastating – not just to manufacturing business owners and their employees, but to the whole manufacturing ecosystem. The whole community suffers as talent, know-how and niche services go away.
I see employee ownership as such a simple and effective countermeasure here. Everyone wins. The retiring owner has a known buyer whom they trust and who can effectively run the business. Employees keep their jobs and gain additional skin in the game, which changes how they show up to work. Communities retain legacy businesses and a skilled workforce while preserving their manufacturing ecosystem.
MATT: That’s great in theory, but let’s talk about how this is actually working in the real world. Can you tell us some employee ownership success stories?
EMILY: Sure! Uplifting success stories are a big part of our mission. We often say that we want employee ownership to go from being a best kept secret to being business as usual. One way we accomplish that is by showing real benefits to real companies and employees.
One example is a transaction we’re closing this month in Oregon. We heard about the client through our partnership with the Oregon MEP (OMEP). This manufacturing company has about 50 employees and more than $10 million in revenue. OMEP referred the owner to us, we had a few free consultations, then they did a feasibility study and transition with us. In that company, the owner is choosing to stay on for a couple of years in a part-time role. He chose employee ownership because he had built a solid culture and he had a practice of profit sharing with employees that he really wanted to protect. He saw transitioning ownership to them as a way to retain his great staff, inspire them to grow the company, and to maintain the company name and legacy after his retirement. He knew that selling to a competitor or an outside group would not be best for his customers, his employees, the industry or his family.
You and I also had An America Works Coffee Chat conversation recently with Dave Tenny and Luke Orszag at Firstar Precision Corp. in Brunswick, Ohio. Dave started the company when his employer closed in 2000. He and a co-worker, Jack Horstman, bought a few machines, found a small location, got together with some other former employees and had a great run for the next two decades. Dave’s wife had worked in a company that became an ESOP, and his goal from the start was to eventually exit to an employee ownership model. His company was acquired by an ESOP holding company almost two years ago. He brought a lot of great information from the owner’s perspective, so I want to share some of what he said:
On selling to his employees: “I felt really comfortable that, number one, my employees were going to be really secure and well taken care of and so is the company. They weren’t looking to drastically change what Firstar is, they were looking to retain it – the way it was built and the way that it carries itself … Our employees, they’ve had a lot of merger and acquisition (M&A) transactions that they’ve experienced in the past. And most of them turn out to be horror stories. Just taking a great company and demolishing it. Changing it into something totally different. So, a lot of our longer-term employees had a lot of concern [with the prospect of a sale]. Probably the biggest thing we did … was education. We brought in a lot of Ohio ESOP experts to talk to the employees, to better explain the process. I feel very good that the right people are owning and managing this company moving forward.”
On recruiting and retention: “There’s always a shortage of our type of employees, especially in the greater Cleveland area because there is so much manufacturing [here]. There’s not a lot of employees out there, and we’re all fighting for the few that are available. In 2021 when things couldn’t get much worse, we were able to add 10 people. That’s going from 25 to 35 employees, so that’s a significant bump. Being able to share that ESOP story, what this means beyond the other compensation, the job – no question, it really sold a lot of the people that we were aggressively pursuing.”
On staying on after the sale: “One of the things that we discussed and agreed upon before the sale was bringing in somebody that was more of an expert with finance and business. I’m a machinist by trade; I was kind of put in this opportunity 22 years ago, and it’s worked out great for me. But I knew we were at the point where for the company to move forward and really take the next step, we were going to need to become more professional and more structured. And that’s what I’ve been able to participate in. Fortunately, the way the ESOP holding company approached it was they wanted me to be able to stay on board for an unlimited time period. So, I’ve been able to participate in making a lot of these decisions and making sure that Firstar’s culture, what its strength is, stays intact as we move into a new direction.”
MATT: What are the stumbling blocks to employee ownership, and how is Project Equity helping companies overcome them?
EMILY: I’ve met so many owners who want to sell their company to their employees, but then there just isn’t a clear path for them to follow. If they don’t happen to get connected with us or another resource, they might go to a broker or a banker or investment adviser who isn’t familiar with employee ownership structures or financing, and they just hit a dead end.
There are a lot of misconceptions out there on the part of sellers and other M&A folks like bankers, advisors, etc. The first being that the employees need to have the cash to buy the business. That’s not how it works. Employee ownership transactions are typically facilitated with debt. The business takes out a loan based on the going-forward cash flows of the business. So typically, on the day of the transaction, the owner receives 50-80% of the purchase price in cash (which came from a bank loan) and a 20-50% seller note (a loan that will be paid back over about five years to the seller). The new employee-owners pay back both loans with the profit from the business, and over time own the company outright – just like financing a home purchase with a mortgage. Sometimes sellers are hesitant to have a seller note, but this is very common in all M&A transactions – even for multimillion dollar deals. In bigger companies it might take the form of equity, an earnout, or another risk-sharing structure. In smaller companies, especially when the buyer is using a Small Business Administration loan, the lending bank will usually require at least a 10-15% seller note.
Part of our mission at Project Equity is to educate everyone in the M&A ecosystem about employee ownership from owners to bankers to wealth management professionals. We hold webinars, attend conferences, advertise and have conversations like this one with you!
Another thing we do is partner with local organizations. In our interview with Luke and Dave, we talked a bit about Project Equity’s partnership with OMEP. We started by educating their staff and client consultants in the basics of how employee ownership works. Then, one of their consultants in the field came across an owner who was thinking about selling and wanted to learn more about how to sell to his employees. We had a few free consultations with him to help explain his exit options with employee ownership. Then he hired us to do a feasibility study to really dig into the financials of his business and propose a potential price and sale structure. After that, we spoke to a small group of employees to form an entity to buy the business and coached both groups through the negotiation process to a final sale agreement.
Our work relies on a lot of education – educating the owner on their options and then educating the employees about what being employee-owned means, and guiding them through the choices they need to make to set up the new employee-owned entity. This is a relationship that we can form with any MEP Center. We can lead training for staff who want to increase their awareness or to become practitioners in employee ownership transitions.
MATT: Emily, I just wanted to thank you for your partnership with the MEP National Network. I firmly believe that our Network’s goals – to help grow and sustain a thriving American manufacturing industry – align well with Project Equity’s mission.
Blog originally appeared here.