How the Ownership Mindset Behind ESOPs Could Make Manufacturing Companies More Profitable

Back on episode 292, we featured Jeff Taylor, President and CEO of Craft Technologies. When Jeff came into the role as CEO, his first and highest goal was to make the company world-class in everything it did. His leadership was instrumental in making that happen, but it wasn’t through his charisma and smarts, it was through utilizing approaches to employee empowerment that he’d long wanted to see implemented. He led the company’s employees to establish an ESOP (Employee Stock Ownership Plan) and in time, arranged for the ESOP to purchase the company. This effectively made the company “employee-owned” and for the next 7 years, the team deliberately worked under his leadership to become the world-class organization Jeff envisioned. Jeff’s contention at the time (and today) was that if a company can show a trajectory toward growth that is in line with how the broader market values a company, then that company is in a position to generate great value for its team members, board members, and possibly for an acquiring company in time.

What is required to develop an “ownership mindset” in your team?

When Jeff and his team established their ESOP and gave team members literal stock in the company, the cultural changes that demonstrated that shift took time to grow. As Jeff says, “Shifting from a sole proprietorship to a team mentality is extremely difficult, it doesn’t just happen.” But there were things that Jeff and the Board of Directors did to educate the employees on exactly what their ownership meant for them and for the company.

It was important to connect the dots for the team by openly discussing the larger issues and metrics that are commonly used to make valuations of companies. This included terms like EBIDA (Earnings before Interest, Depreciation, and Amortization), future valuation, share valuation, etc. As team members realized that their efforts on the job were contributing to an increase in company value, reflected in those metrics, the mentality slowly began to shift. 

As an example of the results that are possible when team members get the significance of their ownership, Jeff explains that though he didn’t track the metrics of employee buy-in, in detail, he did see twice the amount of sales 8 years later, and his team size had not increased even by one person. That’s an increased productivity of 100% that happened as team members caught the vision of what their stake in the company really meant and how their contributions made a difference.

Peers in the workplace drive the change 

Peer to peer accountability became a major driver of productivity as team members took ownership of the outcomes the company was achieving. The piece of paper they received as a stock certificate became less of an intangible and more of a reality for them. They encouraged each other to greater production, appealed to the benefits that would come to all of them, and worked together on innovations and process improvements. When someone on the team retired, a real-life example of what “ownership” meant was played out for everyone to see. The cash value the retiring employee received as a part-owner in the company became a point of conversation among the peers that person left behind. As you might imagine, the remaining employees were motivated to realize that benefit for themselves one day. In moments like these, the intangible became tangible. 

Then the day came when the company was approached by Hyperion Technologies. Hyperion was interested in a possible acquisition of Craft. It wasn’t a surprise that someone was interested because everyone knew they had added tremendous value to the company over the last 7 years. But the team had ever planned on selling the company, so it was a new option to consider. The Board of Directors knew it would be fiscally irresponsible not to evaluate the offer so they began talks with Hyperion. Employees were told that an offer had been made and that the due diligence process was happening to see if it was a good offer that would benefit everyone. That was their main criteria if anything were to move forward. The due diligence process took approximately a year. The outcome of their evaluation was that it was an offer that they couldn’t refuse. Why? Because it was such a good outcome for all parties involved.

The final distribution after the sale, received by employees was to the tune of six figures for each individual. Jeff points out that a figure like that is life-changing, and it only happened because of the ESOP and ownership mindset it produced in the team.

Such an amazing result doesn’t happen by accident

Jeff makes a point of highlighting that companies that are able to cash out in a big way as Craft did, are companies that are…

• Extremely well-run
• Comprised of team members who have bought-in
• Healthy in terms of company cultures
• Develop and own industry-specific intellectual property
• Sell products to a niche market

That’s what Craft became, and it became that by design. Every employee knew (over time) that the maximum value each member of the ESOP could achieve would be realized by becoming world-class. And keep in mind, “world-class” was the goal they set together and worked toward every day. The acquisition happened because they had reached that goal. The point to be made here is that what you realize from the business will depend on what you put into the business, on all levels. 

Jeff believes ESOPs are the future

ESOps make sense on a number of levels. For example, Jeff points out that ESOPs are one of the best hedges against the future for team members by giving this illustration: the annual income of the average individual in the United States is just over $50,000. He honestly asks the question, “How can people live on that? How can they even start contributing to a 401K when the main thing they’re concerned with is paying their rent?” He believes that creating a culture of ownership (either through an ESOP or another vehicle) enables those individuals to have greater control over their own futures through the efforts they make to advance the company. It’s a daily, front-of-mind focus, not an intangible retirement account somewhere in the ether.

Equity improves the financial situation of the average person, making it possible for them to build something that will provide for them and their families in greater ways. If this model was applied broadly and was leveraged through appropriate tax legislation, Jeff believes that it would increase the GDP (Gross Domestic Product) of the U.S. dramatically. Why? Because it empowers people to build their own future through the ownership mindset they develop. The companies they are a part of thrive as a result and the country as a whole is more successful. The data supports his belief. Companies, where employees have a sense of ownership, outperform companies that don’t. It’s that simple. Jeff’s story is inspiring and provides lots of food for thought for any manufacturing leader. Be sure you listen to episode 296, as Jim and Jason discuss these issues with guest, Jeff Taylor.