Most family-owned manufacturing companies fall in the range of small- to mid-sized, which is also the space my company occupies. In 2018, my husband Drew and I acquired Onex, an industrial furnace manufacturer and servicer, from Drew’s father, Ric Walters. Since then, we have worked very hard, enjoying several years of consistent growth. Today, the company has achieved a level of success and stability that finally allows us the space we need to be able to take a step back and consider our next steps, which include discussing our own personal goals and, ultimately, succession plans.
Drew and I are in our early 40s. To some we may seem too young to be considering succession options; however, as leaders we are cognizant that we must always have a clear vision for our company’s future. Long-term business success is not based solely on today’s financials, or the next quarter’s sales, or even economic conditions over a period of time. It is about being profitable so future generations can reap the rewards.
Succession planning takes time and effort. If it’s not done properly, you risk making snap decisions and possibly hiring expensive, risky outsiders over taking time to thoroughly evaluate and promote deserving internal candidates.
With early planning, the owner remains in charge and in the position they prefer for as long as they choose—it’s their plan. Another benefit of planning ahead means the business is able to go through a stable transition, allowing the company to continue to thrive, produce products and services that have made them profitable over the years, and not rattle their clients with any hint of instability.
But this is sometimes easier done in the abstract, as the demands of operating a business day-to-day do take priority over determining how, and sometimes when, owners exit the business.
The Four Options We Considered
When we were ready, we began reviewing all of our options. A transition plan requires to talk first with family members who will be affected by your decision. This is because--and there is no getting around it—everyone needs to consider their long-term personal and financial goals—especially the owner.
Option One: Transfer the business to a family member
Drew and I considered this traditional path, thinking that at least one of our two young sons might be interested when the time came. Since we are both fact-driven in our decision making, it was important that we looked at the larger picture and considered the unique generational challenges family–owned businesses often face. Historically, only 30% of second-generation family businesses, like ours, succeed. That statistic is sobering enough, but when you get to the third generation, the survival rate plummets to only 12%. We believe in our boys, but they are still young, and these are daunting odds—and the decisions they make as to how they make their mark on the world involve many factors beyond our, and sometimes even their, control.
Option Two: Sell the company to a key employee or business partner
This option assumes you already have someone internally interested in purchasing the business, which we ultimately did not. Even though it functions much like the family option, it is a bit more complicated from a financing standpoint since your successor is not an heir, and that means negotiating a financial arrangement. A successor could obtain a business loan to finance the purchase, or the seller could hold a seller’s note, or the sale could be paid for with company distributions.
Option Three: Sell the company to an outside purchaser
Because supporting local manufacturing and the prosperity of our employees’ families and the community are very important to us, this was not a desirable option for Drew and me. While this option may be the best to maximize the value of the company for you and your heirs, it might not be the best choice for all stakeholders. When you sell to a third party or private equity, there is no guarantee that the new owners will leave the company intact with the same personnel, or even stay in the same city. In most cases, private equity looks to sell a business again after three to five years. Often shareholders or investors are focused on short-term gains rather than a long-term strategy.
Option Four: Close and liquidate the company
To us, this was the worst option and one we wanted to avoid. Taking into account statistics that every manufacturing job supports five other jobs in the community—and the impact that closing would have on our community of Erie, Pennsylvania--we quickly dismissed this idea. Not only would our employees have to find new jobs; our clients would have to find another source for needed products and services. I understand that sometimes companies have no other choice but, planning ahead will lower the odds of having to go this route.
Which did we choose? None of these, exactly. We went with another approach that is not well-known, and I’ll explain further: an Employee Stock Ownership Plan (ESOP). An ESOP is a transfer of stock ownership from the owners of a company to employees. The transition to an ESOP can be 100% or the owner could choose to sell any portion of their shares over time. In return for selling shares to the ESOP trust, the owner receives liquidity while the company receives a tax break and a way to attract new employees and improve morale among existing ones.
You could say an ESOP is a hybrid of options 1 and 2, as our Onex family members are our employees and we live within the company culture we have built together. We are proud to be known for our experienced, creative, hard-working people who are committed to finding innovative solutions and who treat one another and our clients like the family we are. And as Peter Drucker and Ford say, “Culture eats strategy for breakfast.”
This family-focus and the culture it has created around us has made Onex strong and successful. This unique and powerful engine for success actually changed the playing field for us and helped Drew and me to reimagine what the term “family-owned” really meant to us.
Reimagining ‘Family Owned’
Doing our research, we decided that an ESOP would ensure that the company’s culture and legacy remain intact while rewarding hard work with a stake in the growth of the company. In addition, we believe that owning stock in their own company will lead these new owners to make more suggestions for improving performance, become long-term members of the team, and work more cooperatively with colleagues, thereby encouraging everyone to perform at their highest standard. It is the best path for everyone to feel inspired, safe and fulfilled each day, knowing that their work matters in the greater economy.
For our clients, we remain invested in making the best possible products to meet their ever-changing needs. We hope to continue to recognize and create the products and services to make their operations more efficient even before they self-identify their own future needs. We want to operate competitively and supply living wage jobs for proud loyal employees for generations to come.
When we considered all these positives, it made sense to make the transition now and start reaping the benefits. Being 100% employee-owned rewards our hard-working employees, excites our clients and also keeps the business headquartered in its original home of Erie. It also ensures we have the same strong management team and leverages the tax advantages.
Realizing Our Vision
With our changes at Onex, Drew and I feel we are contributing to revitalizing American manufacturing and helping inspire more people to pursue manufacturing careers. It will take more than us to accomplish this vision, but it starts with people like us and spreads to the culture of manufacturers who must change from traditional top-down “command and control” to an empowered and agile workforce. Employees are more committed and productive when they are psychologically protected at work, fairly compensated for their efforts and see that they are contribute to a cause far bigger than themselves.
Today, as an ESOP, our employee-owners and their families, our community, and Onex are strong and healthy enough to remain in the game for many generations to come.
Reflection: If you haven’t started thinking about your business succession plan, maybe it’s time to think about the future—and maybe even contribute to changing the world.
Ashleigh Walters is president of Onex and author of Leading with Grit and Grace.
