Most ESOP companies have a very open-book, high-involvement culture. They share a lot of information with employees about the company, and they set up structures for employees to get more involved in identifying problems and generating ideas. That largely accounts for why these companies are so much more successful and is often a part of the draw in selling to an ESOP company.
Integration of the two companies requires careful planning and communication. Education, compensation and benefits are major areas of consideration. Pay is usually not changed, at least not at first. It is likely that the two companies will have different benefit plans (and, of course, your firm likely does not already have an ESOP), and retirement, healthcare, and other benefits will need to be addressed.
For plans covered by the Employee Retirement Income Security Act, such as a 401(k) plan, pension plan, the ESOP, and health insurance plans, the acquiring company has a window of 12 months after the end of the plan year (the operating year for the plan) for the plan in question to decide what to do. In almost every case, the acquiring company will include the employees in the target company in their ESOP at some point during this window. The acquiring company normally will start vesting new employees in contributions the company makes annually to the plan as of their employment date with the buyer, but some companies will give credit for prior years of service. Most ESOP companies will have their own 401(k) and health plans and will include the target employees in those plans under the same terms, but in some cases, the target’s health plan may be maintained as it is. Of course, the buyer will also need to make decisions about pay, paid time off, sick leave policy, etc. The case of Firstar Precision Corporation, a precision machining company of 38 employees based in Brunswick, Ohio, offers an inside look at how the integration of benefits may play out.
David Tenny founded Firstar in 2000, and by 2019, he was looking to sell. David had known about ESOPs because his wife worked at Kraft Fluid Industries, a longtime, successful ESOP-owned manufacturer in Ohio. Despite multiple efforts to start a plan, Tenny says he found the costs unmanageable.
Operating in the industrial space, as well as the booming biomedical field, and having experienced significant recent growth, the company was an attractive target. Tenny hired a business broker to help find buyers. The process took considerable time, but by late 2020, more than 20 potential buyers had been lined up. The pool was narrowed to ten entities, and in early 2021, Zoom calls were set up with all ten. The potential buyers included other manufacturers and private equity firms. The top three potential buyers were identified, and each submitted letters of intent. The most attractive offer, it turned out, was from Empowered Ventures, an ESOP holding company. Tenny explains that “the top three letters of intent were similar in value at closing, but the additional earnouts Empowered Ventures offered did make their potential value considerably higher.” The sale was structured as an asset sale.
Part of what made Empowered Ventures appealing, Tenny believes, was their philosophy. The Empowered Ventures website says its mission is “to help great businesses continue to thrive. To do that, we support great leaders and we empower workers as owners and beneficiaries of their efforts.” Empowered Ventures adds that “being 100% employee-owned through an ESOP underlies everything we do and enables fulfilling ‘next chapters’ for sellers and their employees.”
Tenny was a machinist by trade, so it was important to him “that the company culture was a collaborative effort. We have always worked together to achieve the goals that we agreed were paramount for the long-term success of the company and all the employees.” When Firstar was put up for sale, Tenny says, “Our average employee tenure exceeded 12 years, with only 20 years in business.” He says the company held regular meetings to discuss company business and address employee concerns. “We never had structured teams, committees, etc., but our employees understood they could always discuss anything with me or other management and it would be addressed accordingly.”
Tenny says that the employees never wanted Firstar to be sold, but were especially concerned about it being sold to a private equity firm. They knew about people in companies that had been acquired that way, and the experience was not encouraging. This level of trepidation is not unusual, Empowered Ventures says, citing experience suggesting that employees are often unclear on why companies must be sold.
Shortly after the buyout, Tenny says Firstar’s culture was similar, but showed improvement. “The first year, we made significant efforts to educate the employees about the ESOP, but some of the longer-tenured employees were skeptical, expecting a big (holding company) hammer to drop,” Tenny says. Sixteen months in, he says, the mood shifted. “Once we received our first ESOP statements in July, the company culture went into overdrive. The current employee base is all-in and excited for the future of the company and the Empowered Ventures ESOP.”
Empowered Ventures chief executive officer Chris Fredricks and vice president Spencer Springer arrived in April 2021 to finalize the transaction and formally introduce themselves and Empowered Ventures to the employees. Their approach, however, was largely aimed at supporting the existing management team, Tenny says. “Other than adding a VP of finance (at my request) in June of 2021, they have had very little involvement with the day-to-day operations of Firstar. At the transition, they told me and the management team to continue doing what we have successfully done for the past twenty years.”
Tenny calls Empowered Ventures a great resource, especially in helping with improving overall company management. “One (improvement) to mention is establishing a budget,” Tenny says. “We never understood the necessity and initially resisted establishing a budget, but after we finalized and implemented our fiscal budget for this year, we have found it to be a great resource, and we refer to it almost daily.”
The global COVID-19 pandemic had a negative impact on the company, but Tenny says that Firstar rebounded in 2021. “There have been no major changes to our incoming business, as we have been running over capacity since the transition,” he says. “At the transition, we had 25 employees. We now have 38 employees and are still looking to fill other openings. I strongly believe that being an ESOP has given us a significant edge over our competitors when it comes to hiring.”
As for the so-called Great Resignation? Tenny says only one employee has left voluntarily since the ESOP transition. The ESOP and strengthened culture, plus an enhanced overall benefits package, have made Firstar an employer of choice in the local area.
"The employees of Firstar Precision have hit the lottery with Empowered Ventures,” Tenny concludes. “All they have asked from us is to continue doing what we are the best at: making precision-machined components for the manufacturing industry. For me personally, it has been very gratifying to keep leading Firstar as part of Empowered Ventures. I am so happy that all the Firstar employees are now owners through the Empowered Ventures ESOP. The future is bright for Firstar, and I couldn’t be prouder.”