Passing on the torch in metal fabrication

During a fabricator conference hosted by the Fabricators & Manufacturers Association, International®, last year, a shop owner came up to compliment FMA on the event (a LeanFab workshop, focused on lean manufacturing). We started chatting, and he recalled a certain similarity among all the fab shop managers in attendance.

“We all have gray hair.”

Talk in this business often focuses on the skilled work force, how not enough young people consider a manufacturing career these days. And for those who do enter this business, how do you get them involved, to spread the word about the benefits of a career in manufacturing? But during the next five years, the face of this industry will change, regardless of what happens. The boomer generation is retiring, and they’ll need to hand off the torch to somebody. The big question is who.

Lane Moyer, a corporate lawyer with Chicago-based Vedder Price, sees the wave coming. “You can just see it coming,” said Moyer, who also sits on FMA’s Business Valuation committee. “We’re seeing a demographic shift. What will drive these transactions is the owner’s desire to retire.”

The ownership transition may occur in various ways. This is an industry of small shops, many of them multi-generational. At last year’s FABTECH®, speaker Alan Beaulieu, CEO of ITR Economics International, Boscawen, N.H., asked his audience how many business leaders in the audience wanted their children to pursue a manufacturing career. Out of an audience of a hundred or so, only about eight people raised their hands.

This response may have been a fluke, but if it wasn’t, I can see why many manufacturing professionals wouldn’t want their kids to follow their career path. Everybody talks about a resurgence in this business—and it’s certainly true—but it’s been quite a ride getting to this point.

So rather than keep the business in the family, small companies may sell as part of a bolt-on acquisition of another firm. Troy Berg at Dane Manufacturing, Dane, Wis., spearheaded several of these in recent years. More financial (e.g., private equity) and strategic (companies with complementary services) buyers may step to the fore as well.

One of the most intriguing ways to pass on the torch may be an employee stock ownership program, or ESOP. The contract fabrication arena has quite a few, actually. ESOPs often are associated with small companies, but some rather large metal fabrication companies have ESOPs as well—Mayville, Wis.-based Mayville Engineering Co. (MEC), a $300 million-a-year behemoth, being one of them. For three years running, MEC has held the No. 1 spot on The FABRICATOR magazine’s FAB 40 list of the top contract metal fabricators in the U.S.

Employees are stockholders; they don’t vote on every decision, of course. But as the company does better, so does their retirement plan. ESOPs help tie long-term company growth with long-term employee wealth.

Waseca, Minn.-based contract fabricator Corchran Inc. (also on the FAB 40 list) has had its ESOP since the 1980s. Two brothers, Jim and Roger Corchran, led the company for decades; their father launched the company in the 1940s as a small blacksmith shop. A few years after Roger died, Jim decided to pass on the company to its employees by forming an ESOP trust.

When a fully vested employee leaves or retires, the ESOP buys back the stock at the latest per-share price. When that money comes back in, the ESOP trust managers, with the help from the bank and valuation firm, determines what to do with those shares. They could be reallocated within the company, or they could be retired, reducing the number of shares outstanding and, in turn, driving up the per-share price.

The ESOP does go against conventional wisdom in investing: Don’t put all your eggs in one basket. But at Corchran and other fabricators with an ESOP trust, the company allows employees to diversify. And once an employee (with at least 10 years at the company) reaches 55, he or she can choose to invest a portion of their ESOP nest egg outside the company, be it an IRA or anything else. Corchran also offers a voluntary 401(k) program.

Though it depends on the company and situation, an ESOP seems to work well for at least some fabricators. Their thinking: In modern metal fabrication, employees must think like owners to thrive; an ESOP makes them, well, actual owners.