Tell us more about Windings, Inc. and your career path with the company

in 1983, after spending 18 years at 3M Company putting my degree as an industrial engineer from Iowa State University to use, with the help of a financial partner and a generous bank, I bought Windings, Inc.  At that time, Windings employed 25 people who manufactured stator assemblies for rotating components, and the company had gross revenue of about $750,000. Today, the approximately 100 employee-owners at Windings make components for electric motors and generators, often in the form of custom-built prototypes or low-run high-quality products for research and development with gross revenue of approximately $30 Million.

What do you think contributed to the success Windings had under your leadership?

Our commitment to being the best at what we did and our sincere interest in making our customer successful were keys to our success, but I also believe that treating our employees fairly helped develop a totally committed crew. We already had annual cash bonuses and stock options allowing key management personnel to purchase company stock. We chose to address low to mid-level production quantities, not seeking large volume contracts requiring automated processes. We offered a quick response to custom needs and were able to shortcut the customer’s development process without compromising quality. We priced for a fair return, not getting into highly competitive segments of the market such as consumer products or automotive. We looked for small quantities of difficult parts to make in aerospace, medical products, and industrial automation equipment.

What went into your decision to transition out of owning Windings?  What were some of your objectives?

As I approached age 60 I knew this Company had more longevity than I did. I hoped for it to continue to serve these important needs beyond my personal involvement. With two daughters who were both professionals in their chosen fields (education and speech pathology) I had no logical heir to assume management responsibility.  Also, according to my financial advisors and other experts, I needed to diversify our investments for retirement years as all my eggs were in one basket–Windings, Inc. I was not interested is just selling and walking away at 58, I was having too much fun, so I hoped for a plan to gradually ease out.

With all of this in mind, my goal was to diversify my net worth and have sufficient resources to maintain our then current lifestyle into retirement. I wanted to be rewarded for the growth in the value of the enterprise that we had directed, but I did not understand exactly how to calculate or define this. I wanted to transition out of ownership, but I wanted to do it gradually as I enjoyed working. I also wanted the enterprise to continue successfully, well beyond my personal involvement, and to stay in New Ulm with continuing employment for our employees. I did not want to see it disbanded, combined, or moved to another location. Finally, I wanted to offer, not guarantee, our employees the opportunity to earn exceptional retirement benefits the old-fashioned way, by continuing to build wealth through successful operation of the enterprise.

How did you learn about the ESOP concept?  Why do you think that more business owners don’t make the same choice you made to sell to an ESOP?

As time marched on, survived our first 15 years, paid off our debt, and continued to grow profitably, it was clear this enterprise had legs.  I spoke with our CPA about transition options, my objectives were a bit unique.  I read about ownership transition, attended seminars about employee ownership (Menke & Associates), and networked.  I finally hooked up with a Twin Cities law firm and Chartwell who helped me step through the process to form our ESOP in 1998.

Transitioning a business, especially one you have grown from scratch is not only a financial transaction but an emotional experience.  The owner has to be motivated by other objectives, like keeping the company in place in the community, retaining valued employees, providing continuing opportunity for growth and wealth creation for employees.  I think there is a general misconception that an ESOP involves giving up all control and giving the Company to the employees, NO.  The ESOP creates a friendly Buyer and allows the Owner to maintain as much control (within reason) as he desires.  Upon completion the result is an orderly transition (financial and emotional) with a 5 way win for Owner, Employees, Community, Customers, and Vendors.  I offer my personal testimony, IT WORKS!

How was the sale of your ownership to the ESOP structured?

The ESOP at Windings was a gradual process.   In 1998 The ESOP began by buying 17% of my shares and then as each transaction was payed off I sold an additional 17% until at the end of 2008 when I sold the last 20% and the company became 100% ESOP owned. My wife and I confidently financed all the ESOP purchases up until the last one, as we knew the cash flow existed to pay the debt. This process made the financing easier and safer for the company, but because the stock value kept going up, it also meant that the final transaction the ESOP elected to purchase went up as well.

For me, and, I believe, the employees and the company, this gradual transition worked very well. It allowed me to step away over time, take advantage of the increasing share prices after the ESOP first started buying stock, and know that the company the employees and I had built would stay independent and in New Ulm, Minnesota, our home town. For the employees and the company, it provided a way to transfer ownership at no cost to them and assure that a planned and gradual leadership succession process was in place for years before the final buyout.

What advice would you give to a business owner thinking of selling to an ESOP?

Strategic decisions must remain in the hands of management. They need to be highly motivated and rewarded in some manner in addition to being participants or employee-owners. I recommend some form of synthetic equity such as stock appreciation rights or phantom stock.

In addition, do not underestimate the power employee ownership can have on morale and productivity.  The shift in how employees think about profitability is definitely affected by the presence of the ESOP. Given a good education program, employees come to understand that they win when the company wins. Efforts toward customer satisfaction and efficiency have great buy-in by the employee-owners as they figure out quickly that increasing value of the company (dependent upon growth and profits) shows up directly in the annual value of their ESOP accounts. Large accounts turn into comfortable retirements.

Lastly, no matter what, when creating a sale transaction to an ESOP both the selling shareholder and company should always spend the money on top-class advisors.  This is not the time to try and save a penny here or there as the oversight by the Department of Labor and IRS is significant.  You want to get it right the first time.

What do you think the role of employee ownership holds in income equality?

Rather than income inequality I believe ESOPs address wealth inequality.  Income is important, it puts the food on the table and a roof over our head but leaves little to invest in wealth creation (equities).  Wealth comes from the application of resources via ownership and gives us comfort and security  The ESOP creates the opportunity for middle class, average wage earners to participate in wealth creation via ownership at no cost. Ownership leads to commitment that leads to success that leads to increasing wealth.  The cost of buying ownership (stocks) is so great the average wage earner just isn’t able to participate in equity.  Not so with an ESOP.

So, the ESOP model:

   1) provides the average worker (at no cost) an opportunity for wealth creation, the more successful the enterprise the bigger the wealth and therefore the benefit!

   2) aligns goals for all owners; workers and management.  Owning a ‘piece of the rock” makes a difference; the enterprise wins we all win!

   3) begins to address wealth inequality in our society, everyone’s an owner (of equity) who wins when the economy grows!  Fewer left behind !

In conclusion, how would you sum it all up?

Windings was, and still is, an extraordinarily successful company. I know that I could have probably sold for more money to someone else, but other objectives were more important to me. I know that people with bigger pots of money than me aren’t necessarily as fulfilled as I am.  I believe that having the privilege of watching how the sale to an ESOP has positively affected so many of our employees’ lives is a large part of that satisfaction.

Looking back on our process, I think four things really stood out that I think are crucial for any company considering this:

• If you can do a gradual sale process, do it, as it can make the transition a lot easier for everyone.

• Make sure you get experienced, high-quality advisors.

• Start management succession early and look not just for someone who has the right technical skills, but someone who can show that he or she really buys into the values of the company and employee ownership.

• ESOPs are not the end of the story. To work well, you really need an active policy of education and involvement.