A decade ago, Roger Ryberg began considering who would take over his Windings Inc. business when he retired.

With no family members involved in the 43-year-old manufacturing plant in New Ulm, Ryberg chose to hand the reins to his nearly 100 employees.

Today, the employees have purchased nearly 75 percent of the company’s stock.

Employee Stock Ownership Plans are growing in popularity and a Minnesota foundation is starting a new program to encourage and help finance ESOPs for owners considering retiring in a decade or more.

“We chose an ESOP as a key element of our succession plan because I want our employees to have the opportunity for substantial benefit from the continued growth and profitability of this company they helped build,” Ryberg said.

Scott Ward, a vice president of Windings, said the employee ownership has been good for the company, good for employees and good for Ryberg.

“Employees build up equity that they take when they leave. They start asking more questions about how the business is run. They have a stake in it and they hold the management accountable,” Ward said.

Ward and vice president Jerry Kauffman are the top executives of the company, while Ryberg has taken a less active role in the business.

Encouraging boomer owners

Scott Martin, president of the Northland Institute, said thousands of Minnesota businesses could take advantage of ESOP transitions, and his group has started a program to promote and finance them.

The non-profit Institute has a mission to promote economic activity in Minnesota communities.

He said ESOPs are the best way to ensure companies, profits and jobs stay in local hands.

“We want to introduce this idea to the large number of baby boomer business owners who may or may not have a family succession plan,” Martin said.

“For a lot of owners, they just get to the day where they put a ‘For Sale’ sign out. Once the sale sign goes up, you don’t know if the business is going to be sold to an outside firm, whether jobs will be cut, or whether the company buying the business will simply close it because of market share strategy.”

Martin said it’s key that an owner plan for an ESOP early — while they are in their upper 40s or early 50s. “It takes some time to do it.”

He said that because of some complexities in setting them up, ESOPs don’t make sense for businesses with fewer than 25 employees.

The Initiative has started the Minnesota Employee Ownership Fund to educate business owners about ESOP and to provide secondary financing of ESOP sales to help encourage banks and business owners to participate.

Starting in Mankato area

“We’re actually rolling this program out first in the Mankato area. There are a lot of business owners who could benefit.”

Martin said the program is a first and they hope to expand to a national level at some point. There are 9,600 ESOPs in the nation, with 10.5 million employee-owners.

Martin said the owners of businesses gain substantial tax benefits from becoming an ESOP. Proceeds from the sale, if reinvested in U.S. stocks or bonds, are not taxable until they are later sold.

“And the sale happens over time, so the owner still has control of the company until they retire.”

ESOPs, he said, can work in virtually any type of business.

Martin said employee-owned businesses outperform their peers. “Employees know that the more the company makes, the more wealth they’re going to build. And they have more job satisfaction.

Success at Windings

Windings was started in 1965 and Ryberg bought it in 1983.

The company is a contract manufacturer for electric motor parts for the aerospace, automotive, medical and factory automation industries. Customers bring Windings a design for what they need and the company makes the components.

Ward said there was skepticism and suspicion when employees were first told about becoming owners. One big worry was that employees would have to put up and risk their own money, which isn’t true.

How ESOPs work

For Windings, here’s how the ESOP works:

Legal requirements ensure that ESOPs benefit all employees equally, based on their annual paycheck. “You can’t set one up to only benefit the top managers,” Martin said.

The owner sells stocks in the company to an employee ownership trust over several years. The employees don’t pay for the stock out of pocket, rather a portion of the profits from the company are used to buy the shares — with the owner getting the proceeds.

After one-year of employment, employees become members of the ESOP trust. Each year the value of the stocks in the trust go up or down based on the performance of the company. If the value goes up, the employees’ pot of stock value goes up and vice versa.

If the trust is doing well, employees also get an annual dividend.

When the company does well and has profits beyond what is needed to reinvest in the business, more money is put into the trust, increasing the value of everyone’s shares.

Windings last year put more than $1 million into its ESOP plan.

When an employee retires or leaves the company (after a minimum of six years employment), they cash in the value of their shares, with the trust buying those shares back and redistributing them among the remaining employees.

“Employees have that money available to them, but there’s also no guarantee what the value will be. It’s based on how the company does,” Ward said.

Theoretically, an employee leaving an ESOP company that has fallen on hard times, could get little or nothing from the ESOP.

“But it’s not like a 401K or something, where the employees put the money in. There’s no out-of-pocket money at risk,” Ward said.

To replace the oversight of an owner, ESOP businesses have a board of directors that monitors the management team. An independent trustee ensures the board is acting in the company’s best interests.

Ward said nothing else changes in how a business operates and employees and managers have traditional roles.

“We had some people joke that now that they’re owners they can fire their co-workers, but it doesn’t work like that.”

Ward said having a shared ownership, if anything, eases tensions between management and employees because employees know that moves to increase efficiency and increase profits will directly benefit them.

“It keeps us on our toes, too,” Ward said. “Employees have a stake in our decisions. They’ll come and say, ‘why are we building up inventory?’ which usually isn’t a good thing. And we’ll say it’s because we’re trying to get into these new markets and it’ll increase sales. And they’ll say, OK, that makes sense.

“So management has scrutiny from the board and from the employees.”