An unusual employee-ownership model shows tremendous promise
by Karen Kahn
An intriguing and potentially replicable new model in employee ownership is at work at Empowered Ventures. This firm is structured as a holding company, created to acquire a diverse group of lower middle-market businesses, with a key difference: Empowered Ventures is 100 percent owned by the employees of its subsidiaries through an Employee Stock Ownership Plan (ESOP). The model is so rare in the United States (examples include Folience, OwnersEdge, and SRC Holdings) that founder Chris Fredericks didn’t know of any ESOP holding companies when he came up with the idea.
Fredericks is CEO of TVF, a supplier of industrial fabrics based in Carmel, Indiana. He created Empowered Ventures after implementing an ESOP ownership structure at TVF. As CFO of the firm in the late 2000s, Fredericks was asked by founding owner Dick Hanzel to help him with succession planning. Hanzel had no children and did not want to sell to private equity or a competitor. He wanted Fredericks to take over the management, but Fredericks wasn’t in a position to buy the business.
The “aha” moment
Fredericks says, “We reached out to our accounting firm, and it turned out they were ESOP-owned and had an ESOP practice. In talking with them, I had my ‘aha’ moment. I was sold on it, both because of the tax benefits and its impact for employees; I took the idea back to Dick, who thought it was a good solution.”
Empowered Ventures is 100 percent owned by the employees of its subsidiaries through an Employee Stock Ownership Plan (ESOP).
In October 2010, the firm converted to 100 percent ESOP, with Hanzel carrying an eight-year note for the full value of the firm. TVF paid off the note in just four years, a testament to the beneficial impact the ESOP had on productivity. Over ten years, TVF has grown from 50 employees and $35 million in revenue to 75 employees with over $70 million in revenue. Profits have tripled as the employees have increasingly embraced an ownership mindset, observes Fredericks.
Spencer Springer, who joined Empowered Ventures to lead acquisitions, says TVF is an “incredible case study for converting to employee ownership.” Over the last ten years, the company has become a powerhouse because the employee ownership culture is energizing. Says Springer, “The people are passionate, they care about how the business is doing; it is not a clock-in clock-out environment.” Coming from a traditional M&A career, Springer was impressed with the level of engagement and camaraderie among TVF employee owners, who benefited from their shared success.
Listen to the Owners at Work podcast produced by the Ohio Employee Ownership Center, with Chris Fredericks and Tim Rettig.
Creating an ownership culture
Growing that culture took effort, says Fredericks. Following the ESOP conversion, he took immediate steps to help employees understand they were now owners. At first, these were little steps. Fredericks made everyone feel more equal by, for example, taking away the reserved parking spaces for managers. He decorated his office for the holidays, encouraging others to do the same. He notes, “TVF had a high-performance culture but it was based on fear. Dick had been a demanding boss. I wanted to change that—to help people feel the company was theirs and we all had a stake in its success.”
Over the years, TVF has become increasingly attentive to its culture, working through mission and vision statements and identifying core company values that are now integrated into processes such as hiring, performance reviews, and team meetings. The leadership sets big, multi-year goals, like paying off the seller note and raising the share value, and at quarterly meetings, shares financial results through the income statement. When profit exceeds the yearly target, a share of the excess is divided equally across all employees and distributed through profit-sharing bonuses (in 2020, bonuses exceeded 10 percent of average wages). These steps have worked together to create the level of engagement and camaraderie that Springer observed when he joined the company in 2020.
Creating Empowered Ventures
Fredericks says that working with Hanzel on succession planning and announcing the ESOP to the employees at Empowered Ventures was one of the most gratifying experiences he has had. After paying off the loan to Hanzel, he began to think about how he could recreate the kind of rewarding experience he had had with the ESOP, while also creating more value for TVF employees. Knowing that an unprecedented wave of business transfers was on the horizon as baby boomers reached retirement age, he decided on an acquisitions strategy. He envisioned a diversified holding company that would be owned by workers through an ESOP.
One of the complaints about ESOPs is that employees own shares of a single business,” says Fredericks. “The diversified ESOP reduces this risk significantly.”
The holding company structure, Fredericks believed, would have multiple benefits. For sellers, Fredericks could offer flexible financing, a chance to preserve their legacy, and a negotiated off-ramp that might include the seller continuing to lead the business for some time. For the acquired companies, Empowered Ventures would bring management expertise and investment capital that would strengthen the balance sheet. Finally, the workers who would own Empowered Ventures would benefit from both the diverse portfolio and from the holding company’s strategy to invest in long-term value creation.
“One of the complaints about ESOPs is that employees own shares of a single business,” says Fredericks. “The diversified ESOP reduces this risk significantly.”
An exit option that benefits sellers and their employees
Springer became intrigued by Fredericks’ vision at a chance meeting, and soon began lobbying to join the venture. He had left his private equity firm to help his mother sell her home care agency. It was sold to a large public company—which worked out great for his mother, he says—but didn’t provide the same lasting legacy for her business as an ESOP sale. Springer says, “When I met Chris and learned about the ESOP model, I realized that it would have been perfect for my mother, who cared about her employees and their future.”
It’s a win-win. The business owner is able to get market value for the firm, while preserving the firm’s legacy and rewarding its employees.”–Spencer Springer, acquisitions leader for Empowered Ventures
Springer thought he could sell the model to retiring business owners. “It’s not an option that most business owners know about,” says Springer. “Yet it’s a win-win. The business owner is able to get market value for the firm, while preserving the firm’s legacy and rewarding its employees.”
Empowered Ventures Makes Its First Acquisition
On April 1, 2021, Empowered Ventures acquired Firstar Precision, a CNC (computerized numerical control) machine shop located just outside of Cleveland. “It’s gone extraordinarily well,” says Fredericks.
Firstar Precision represented exactly the kind of firm Empowered Ventures is seeking to buy: relatively small, lower middle-market business service or manufacturing companies, with revenues between $5 million and $30 million. “What’s most critical,” says Fredericks, “is finding high-performing businesses with owners who care about their legacy and their employees. Dave Tenny, the founding owner, is truly an example of the type of business owner we are looking for—he has high standards and he cares about the people.”
Tenny had considered selling to an ESOP but he had been advised his firm was too small. Empowered Ventures offered a unique opportunity to preserve the company for the long-term, provide equity to the employees, and give Tenny a path to retirement.
Empowered Ventures offered a unique opportunity to preserve the company for the long-term, provide equity to the employees, and give owner Dave Tenny a path to retirement.
“Firstar is known for its exceptional quality and customer service,” says Springer. “That means there is more demand than what the company can produce, so we’re focused on growing.” In a tight labor market, it turns out the ESOP offers a distinct advantage. Says Springer, “It’s generally tough to recruit machinists, but we had plenty of candidates, all of whom mentioned the ESOP as having attracted them to the company.”
Both Fredericks and Springer emphasize that Empowered Ventures plans to hold on to its acquisitions and invest in long-term growth. That’s appealing to selling owners who want to preserve their legacy, and it is how the holding company grows wealth for its ESOP beneficiaries. For the various subsidiaries, there is an added benefit as well: sharing talents, skills, and knowledge across the holdings helps everyone thrive. It’s most certainly a “win-win” for the sellers, the companies, the employees, and innovators Chris Fredericks and Spencer Springer who are designing a more equitable and empowering future for America’s workers.
Karen Kahn is a communications consultant and the editor of Employee Ownership News.