How an ESOP Rewards S&C Electric Company

by Mary Josephs, Verit Advisors

Reading daily business coverage, with its unremitting focus on tech startups and the doings of Wall Street, one easily could conclude that America lacks a base of middle-market manufacturing excellence and that to source equipment for major infrastructure like the smart grid, we’ll have to look abroad.

But as readers of this publication know, there remains a strong and highly productive base of privately held industrial might in this country. And the story of each of these companies–how it remains independent in an age of consolidation, investing for the long term while others focus on the next 90 days, striving for excellence rather than commoditizing the operation–is the story of how business helps build a stronger U.S. economy, not a weaker one.

As these remarkable companies move from one generation of ownership toward another, I have the privilege of helping some of them find a new path toward preserving and growing the business, the well-being of employees and the wealth of owners. During the past 25 years in scores of instances, I’ve found the best structure to achieve those aims is often an employee stock ownership plan, or ESOP.

The experience of S&C Electric Company, based in Chicago, shows how an ESOP can reward owners when it’s time to sell the company and also help build a stronger business. S&C, a global provider of equipment and services for electric utilities and commercial, industrial and institutional power systems known for its precision switches, in a series of transactions became 100 percent employee-owned in recent years.

The change allowed S&C’s former majority owners, the granddaughters of one of its founders, Nicholas J. Conrad, to sell their stake. Selling to an ESOP can allow owners to defer capital gains taxes, which is significant. The company, adopting S corporation status, meanwhile is subject to an improved income tax situation, and that frees up cash to repay debt taken on to fund the purchase.

But the biggest benefit from an ESOP might be its empowerment of workers, shifting their mindset from that of employee to owner.

“Now, we are all in this together,” S&C CEO John Estey told me. “It’s really cool to look every employee in the eye and say, “˜If you save us a dollar, that dollar goes to the employees. Not someone on Wall Street. Not some distant owner.'”

The cultural shift wasn’t enormous at S&C because Estey’s predecessor, John Conrad, always ran an employee-friendly company: Pay near the top of the industry range and overtime to top that off, and keep staffing levels lean so that during slack times there were no layoffs.

Pre-ESOP, Estey asked workers on a small assembly line to re-engineer it for maximum efficiency. They saved 5,000 square feet of space, sped the line up and cut needed work force from 23 to 18.

“I promised them that if someone is displaced, we will find a place for them,” Estey said.

The Big Picture

One way S&C measures employee engagement is by the number of employee ideas implemented, and over 15 years, the company counted some 7,000. Post-ESOP in 2013 alone, the total was about 8,000.

S&C always has worked to keep turnover low and to retain talented employees who allow the company to compete against equipment suppliers many times its size.

Chris Lettow, a manager of product engineering, came to the company right out of the University of Illinois, where he graduated as an electrical engineer, and chose S&C over employers such as NASA and Motorola Inc.

“There were some sexy names out there,” Lettow said, “but I knew what I wanted: a place where product development is important and where I could grow.”

Precocious in his personal financing planning, Lettow had consulted a financial planner soon after joining S&C in 2002, and his long-term goal was to retire comfortably at age 60.

“It was a crazy stretch goal,” he said.

Now the ESOP provides additional retirement savings.

“The prospects for doing that are pretty good,” Lettow said. “I come to work every day knowing that if we’re successful, I’m building wealth for my family and myself.”

S&C manufactures equipment crucial to the construction of the smart grid. Estey said lives depend on the company’s products.

“Skill matters,” Estey said. “If you treat employees well, you’ll get the kind of care and attention to detail our team members give.”

When it’s time to form an exit strategy and sell your business in part or in whole, you’ll hear from larger competitors and private equity firms. If your goal is to preserve the business legacy you’ve built, consider an ESOP.

Author

Mary Josephs is the founder and CEO of Verit Advisors, a Chicago-based investment banking firm specializing in ESOPs. She led ESOP advisory groups at Bank of America, ABN AMRO LaSalle Corporate Finance and LaSalle National Bank. For more information, visit www.verit.com/our-team/mary-josephs.

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