Giving a company away
Monday, August 04, 2008
MiBiz
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By Joe Boomgaard | MiBiz
MUSKEGON — The owners of a lakeshore
foundry have found a way to transition out of the company
— by giving it away to their employees.
Eagle Alloy
VP John Workman told MiBiz the plan started a few years ago
when he and President Mark Fazakerley started to think about
how they wanted to eventually end their careers.
"We want to keep the company in Muskegon to benefit
the employees," Workman said, "but with any business,
you need to sell at some point."
Workman and Fazakerley looked at their options. They could
sell the highly successful Eagle Alloy to a holding company,
but they didn’t think that was the best option to keep
the company in business in Muskegon County’s Egelston
Township. Over the course of their careers, they’d seen
too many examples of holding companies closing up a local
operation and taking the business elsewhere.
The company could also sell to an individual they didn’t
know, but that, too, left them with questions.
"We would not know how they would proceed with the business,"
Workman said.
The business partners also knew they didn’t want to
have a succession, or a takeover by their children.
"We decided early on that wasn’t the appropriate
strategy," he said, noting the owners had a mix of male
and female children. "Given those variations and the
observations of other companies that struggled with that concept,
we opted not to make that a viable option."
The route they decided to take was an employee stock ownership
plan (ESOP).
"The ESOP we felt was the best option for Eagle Alloy
to be here and thriving in 50 years and benefiting the employees
that made it a success," Workman said. "We made
the decision to do that (since) we’re not getting any
younger."
Workman looked at several ESOP examples from around the region
and the country and came to conclusion that the benefits outweighed
the possible negatives.
One major question companies like Eagle Alloy face is how
to fund the ESOP plan. They could borrow money and fund the
process through cashflow or, if the company made money, the
employees could purchase the stock from the ownership. That
was the route they decided to take.
"We did not want to leverage the business to find the
money," he said.
With the ESOP plan, when Eagle Alloy makes money, it contributes
a portion of the profits to a trust, which then acquires stock
for the employees. The employees are able to make the purchases
pretax, much like putting money into a 401(k). The funds also
are tax deductible for the company.
Eagle Alloy is working with the Menke Group, a 34-year-old
ESOP advisory business; they were referred to the consultants
by Comerica Bank.
Currently, after four years of buying stock, employees own
about 15 percent of the company, a percentage Workman hopes
will grow each year. One thing curbing the growth of the ESOP
is that the company is still doing profit sharing with the
employees.
"We wanted to add a benefit, not detract from that,
but it does slow down the process," he said.
Employees must be with the company for five years before
they are totally vested and able to buy stock.
The ESOP plan isn’t without risk, and that’s
not lost on Workman and Fazakerley. The plan has rules in
place to protect the company in the case of mass retirements
or other problems, according to Workman. The plan was also
pre-funded for four years.
An outside appraiser comes into the company annually and
examines the books to determine a value for the company, which
determines Eagle Alloy’s stock price. After the first
year, the company’s value has appreciated every year,
buoyed by the business’ success in gaining business
coming back from China. (See the July 7 edition of MiBiz for
a story about why Eagle Alloy has been able to stay strong.)
"What creates value is the earning potential of the
company," Workman said. "It all depends on profitability;
it’s all based on how well you do and the potential
for next year."
Because the company had been profit sharing for years, the
employees always had a good idea of how the business was doing.
The ownership made sure to share the numbers with the employees
on a regular basis, which means even more to them now with
the ESOP.
"They’re in tune to how good we’re doing
in a given month and why," Workman said. "That leads
to an enhanced feeling of ownership."
That’s not to say they could take over the company
and oust Workman and Fazakerley. The employees own non-voting
stock for which the two owners are trustees.
Workman, 60, knows this ESOP plan is not a short-term way
for he or Fazakerley to retire. It will take at least 8-10
years for the company to be in a position to buy his stock.
As trustees, Workman and Fazakerley would also select their
replacements.
Their goal, however, is to be able to push responsibility
down the ladder and have the management and employees be in
a position to run the company. All employees would be granted
a "tremendous amount of security" for their retirement,
giving them the impetus to work to make the company successful.
The Eagle Group also owns three other businesses besides
Eagle Alloy, and the owners also have plans to turn those
into ESOPs as well.
"The company has to be in the right position,"
Workman said.
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