Privately held Ohio metal fabrication shop goes employee-owned

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Ed Leventhal came from a family-owned manufacturing company that supplied products to the housewares industry over its 80-year history. Then, after a private equity investment firm bought it, the company was always under the threat of being sold into bits and pieces and moved. He worked for the new owners for a few years and witnessed firsthand the culture changes that occurred when the company went from being family-owned to corporate-owned.

So, when the time came for Leventhal to transition the metal fabrication company he owned, Valco Industries, to its next owner, he was determined that it would not share that same fate. He put the wheels in motion to turn it over to the people who helped build it: the company employees.

Valco History

Valco has been in business for about 40 years. It started as a supplier to International Harvester, now Navistar, in Springfield, Ohio. Leventhal became full owner about 20 years ago. Throughout his two decades of leadership, the company grew, performing general metal fabrication, stamping, welding, and machining. It is equipped with three fiber lasers, multiple press brakes, stamping presses, and welding and grinding machinery. About the same time he became full owner of Valco, he and his son started a powder coating company, A&E Powder Coating, with Valco as its largest customer.

“Before I bought Valco, my family was in the broom and mop business for about 80 years. My grandfather had migrated from Russia, settled in Cleveland, and started a broom shop.” Two of his sons moved to Springfield and bought a broom shop from Mrs. Vining, the widow of the former owner. She ran the broom shop in her garage. From that, they grew into the largest broom manufacturer in the United States, called Vining Broom. O-Cedar was one their largest customers, Leventhal said.

“I worked there until 1993 when we were sold to a venture capital group out of Philadelphia. I worked for them for 15 months, and then parted ways. It was quite a change from being a family-owned company and then working for a group out of Philadelphia who really didn't know what they bought.”

Evaluating the Transition Path

“Fortunately, or unfortunately, I'm getting older every year. We used to have an advisory board, and pretty much every meeting they would ask me what my transition plan was. Of course, I didn't have any. And so, when I was about 75, I decided I probably ought to develop one.”

No one at Valco was a viable candidate, either due to age or financial means, to purchase the company, Leventhal explained. None of the family members were interested in taking over or buying the company. “My son wasn’t interested in taking over everything. He was pretty sure he didn't want to work to 75, like his father.”

Leventhal contacted a consultant with an accounting firm who specializes in working with family businesses on family planning, transition plans, and processes. He hired her to work with him, his family, and key people at Valco to explore possible options. One of her partners specializes in employee stock ownership plans (ESOPs) while another partner handles third-party sales.

“When our consultant first mentioned an ESOP, I said, ‘No, it doesn't sound like that's for us.’ She asked, ‘What do you know about it?’ I said, ‘I don't know anything.’ So she said, ‘Well, how do you know it's not for you?’”

During a two-hour meeting, the consultant outlined some of the advantages and disadvantages.

Valco Industries has been in business about 40 years. Throughout the two decades of Ed Leventhal’s leadership, the company grew, performing general metal fabrication, stamping, welding, and machining. It is equipped with three fiber lasers, multiple press brakes, stamping presses, and welding and grinding machinery. Valco Industries

Weighing the Positives and Negatives

Leventhal outlined the points that factored in the decision.

Pluses. “One, I could still work if I wanted. I wasn't ready to go walk the concrete or beaches in Florida for five or 10 years.

“Two, it would stay in our community in Springfield, Ohio. That was a major concern of mine. I didn't want to do a third-party sale and have the company close or move, or the employees lose their jobs.

“Third, hopefully it would guarantee both continuity and longevity. It would provide a vehicle for a transition of ownership while being sure that the company would be here for the long haul.

“And fourth, it would provide a vehicle for those folks who have been here for a while—who have helped the company grow and be successful—to share in its growth in a financial way,” Leventhal said.

There are tax benefits. Once the company is a full ESOP, it no longer pays federal taxes. “It was not a major factor in the decision but helps to offset some of the negatives. It helps pay for the extra administrative costs.”

Minuses. Leventhal cited one negative in doing an ESOP is the cost of professional fees that have to be paid. Every year you have to pay an independent trustee to represent the employees in the ESOP. You have to hire an outside firm to determine the company’s valuation to set the share price, which then determines how much each person has in their accounts.

“There is a small cadre of ESOPs in Ohio, even in the United States— I think there are only about 7,000 in the country. So, there's a small group of professionals who are knowledgeable about ESOPs. Both the time and their rates make it a fairly complex and expensive process to set up. Those items have to be done every year.

“You take on a lot of debt, so that may put more strain on management. And that may be a limiting factor if you need to borrow money for expansion or a piece of equipment.”

Because you're overseen by the Department of Labor, there are legalities inherent in that.

Valco Industries owner Ed Leventhal converted the company to an employee stock owned plan to keep it intact, local, and job-providing and to reward employees who had contributed to its success.

“A third-party sale certainly would've been easier and cleaner, but I was concerned about what the company might look like in 12 or 24 months after the sale.

“After deliberation, I thought the ESOP checked a lot of boxes. So I made the decision to go the ESOP route.”

Steps to ESOP

Leventhal hired the accounting firm expert to “captain” the financial aspects of the ESOP. Together, they interviewed attorneys and hired one to be the professional legal advisor. After several months of discussions, they hired an independent outside trustee who has been in the ESOP business for 30 years to represent the ESOP and the employees.

Next, an independent firm was hired to perform the company valuation of both Valco and A&E Powder Coating. “We decided to legally combine the two companies because we thought they had a lot more value together.”

Negotiations among the independent trustee, the attorney, and the accounting firm resulted in an agreement on a formula and a price.

Then, they interviewed several banks to handle the financing. “Finding one to work with us was somewhat of a challenge. The larger banks did not have much interest because we’re not a huge ESOP deal. No local banks in Springfield had ever done an ESOP. So, we interviewed some out-of-town banks and chose one in Columbus.”

“Finally in March of 2021, we closed the deal and officially became a 100% ESOP company.”

Employee Shareholders, Compensation

So how does an ESOP work? With the employees being shareholders, how does that affect their compensation?

Leventhal concedes that the ESOP concept is difficult to understand. “Most of us grew up never hearing about an employee stock ownership plan company. I never did.

“When you use the word ‘owner,’ some people automatically think that means they're making all the key decisions. After we announced the ESOP, it took a couple employees a couple days before they told me they were going to let me go because I was unnecessary overhead,” he said with a laugh. “It’s really being a shareholder. If you have a share of Amazon stock, you're sharing in their growth, but you're not telling them how to run the company.”

This year, the company hired an expert to communicate to the new employee owners some specifics on how the ESOP plan will work for them. The expert explained how the share prices are established, how many shares there are, and what the prospects are for future growth. He explained how the ownership is similar to taking out a house mortgage. At first, your ownership is small, but every year, as you pay down debt, your home value appreciates, and your value goes up. The ESOP increases in value the same way.

The arrangement does not impact their salaries, increases, or bonuses in any way. “This is an additional investment, additional future income, like a 401(k),” Leventhal said. Unlike a 401(k), the employee does not put anything in the ESOP stock. The stock is provided to them as an employee shareholder. And then if the company does well, the stock does well, then they share in the growth through the increased stock price.

The Valco ESOP shares takes prior service into consideration. “We wanted to weigh it heavily for the people who have been here the longest, rather than just those who are earning the most,” Leventhal said. “If someone had been here 10 years, they were all already 100% vested. We gave four points for every year of service and one point for every $1,000 of their W2. Longevity and loyalty mean a great deal and this was an additional way to recognize and award that.”

Leventhal began holding quarterly meetings with the employees to go over the financial statements, so they are more familiar with the financial structure. “They see where the costs are and what drives profits that then drive their share prices.

“Starting out, everyone's account is pretty small. Typically, the company sort of goes upside down on the balance sheet because it has taken on a large amount of debt to buy out the owners. And so, from a financial and debt standpoint, you're structured differently.

“If we do a good job, take care of our customers, work together as a team, and are engaged in our work, in five, 10, 15, 20 years, they could have accrued a substantial amount of retirement benefit dollars. Hopefully with the 401(k) that we continued, company shares, and Social Security benefits, their retirement is going to look a lot better than maybe their parents’ did.”

Employee-owners’ Reception

The company just celebrated its first anniversary as an ESOP at a local brewery. “A committee of people planned it, and it was run by people who work here. And I think that appreciation will grow as people understand it more, and as people retire or leave with X number of dollars and know it's for real.”

One year in, Leventhal said he thinks there's a whole gamut of feelings from the staff about it. Most are appreciative. Many like the quarterly meetings and are understanding more as they learn some of the financials.

Looking Back, Lessons Learned; Looking Ahead, Feeling Good

Leventhal hasn’t eased out of the company just yet. At age 77, he is still working. He loves working. “Yeah, yeah; crazy enough.

“I'm happy I did it,” Leventhal remarked. “If I had to do over again though, I would spend more time doing due diligence, going to conferences on ESOPs, and really learning quite a bit more as to what's involved than I had. So, now I'm getting the education.

“I do think it was a win-win in the fact that it provided an exit strategy for myself and my family; I received a fair market value for the company, as determined by an independent outside firm; and I can keep working if I want to. It kept the business local, kept our workforce intact, and was a vehicle to financially reward the employees—in an unexpected and an unusual way—who helped build the company and were willing to stay and work for the long haul.”

So, why does Leventhal care about those things? “I'm sort of a walk-around type of guy. When you work with someone for five years or 10 years or 15 years, you develop a relationship. It's not strictly, ‘I'm the boss and you're the employee.’ Hopefully it’s more of mutual admiration. I value people's skills and their loyalty. Without them, there wouldn't be a Valco.”

In addition, Leventhal has been involved in his community for 55 years, serving on school boards and other community organizations. “Springfield means a great deal to me and my family. So, if we can keep it here and provide some jobs and continuity, that means a lot.”

What’s the No. 1 reward of having taken the road less traveled?

“It makes me feel good. It makes me feel like I've added value, not just for myself or my family, but hopefully it’ll be life changing for 80 other people and their families.”