ESOPs shown to protect supply chain, intellectual property

This story first published in “Celebrating Employee Ownership,” a special section that celebrates employee ownership during National Employee Ownership Month.

Keeping local jobs local is often cited as a prominent advantage for ESOP companies and their communities. That benefit is gaining new appreciation for another reason.

“We protect the supply chain,” said Michael Garvey. “There’s a lot of good prosperity that’s the result of a high-functioning ESOP. Prosperity is the biggest determinant to offshore ownership. It’s the key to national security. If a company and country is prosperous, they will also endure any aggression.”

Garvey is chairman of the board and former owner of M-7 Technologies. The Youngstown, Ohio company provides precision measurement and modeling services to customers in the energy, aerospace, environmental, construction, defense and automotive industries.

“We’re really a specialty service and repair provider, focused on the primary metals,” said M-7 President and CEO Wayne Denny. “We’re there supporting that equipment and keeping it running. Advanced measurement and really understanding our customers’ applications allows us to look at the shape the equipment is in. We can make recommendations and suggestions to our customers on how to extend their service life.”

The locally-owned importance of ESOP companies was recognized as the COVID pandemic disrupted supply chains across the global economy.

“You have great risk when losing manufacturing technology and processes,” said Daniel Goldstein, executive fellow at Rutgers University’s Institute for the Study of Employee Ownership and Profit Sharing. “If they go overseas, you’re exporting both technology and jobs. It becomes a national security interest.”

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Beyond the availability of some products, that potential loss of intellectual property (IP), expertise and national security issues resulted in the United States government’s first-ever program to give preference to ESOP companies when awarding defense contracts. Authorized by the 2022 National Defense Authorization Act, the U.S. Department of Defense is developing formal rules to favor 100-percent ESOP corporations.

“That is a great thing,” said Mike O'Donnell, director of the Center for Industrial Research and Service (CIRAS) at Iowa State University. “There’s probably lots of complexities into how they make that work.”

While CIRAS doesn’t work specifically on ESOP-related issues, employee-owned companies fit neatly into their mission statement “to improve the quality of life in Iowa by helping businesses and their communities prosper and grow.” Founded in 1963, CIRAS worked with more than 4,600 businesses statewide since 2019, generating more than $3.1 billion in economic impact.

“We do work with a lot of ESOPs,” O’Donnell said. “ESOPs in manufacturing are a really good way to help make sure the business and the employment stays local.”

“Defense manufacturing technology is a huge part of our economy and assuring the freedom and independence of the United States and our allies,” Goldstein said. “If that’s going to foreign companies that aren’t our closest allies, that raises the (security) question.”

Local jobs and workforce know-how became a priority as Garvey explored future ownership for the company his family founded in 1918 to serve the region’s then-booming steel industry. After college, he worked on the New York Stock Exchange trading floor in the 1980s, as steel production moved overseas.

“My dad got sick, and I came back to see what had been going on,” he recalled. “I saw how badly the area had suffered. We were able to turn that around.” Garvey refocused the company’s expertise on helping customers design and maintain precision castings and equipment.

Soon enough, Garvey found himself part of the “silver tsunami,” the wave of baby-boomer business owners preparing for retirement.

“I come from a family that has a history of cardiac problems,” Garvey said. “As I turned 60, I was alone with my wife, and I said, ‘I’m not here to disprove genetics.’ I thought it was prudent to start figuring out what my succession would be.”

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“The baby boomers are retiring, and it’s going to be the biggest transfer of businesses, many of which are going to be closed or be sold off,” Goldstein said. “Foreign companies and foreign agents are buying companies just to get IP, and then they can just shut down the companies.”

Garvey considered other options, including sale to a private equity fund.

“The more I got involved with those guys the less I liked the idea,” he said. “I talked to my accountant, and he suggested we look into the ESOPs.”

It took only about six months to arrange the stock sale to M-7’s employees, and the company went ESOP Jan. 1, 2024. Denny said he’s seen the change among the company’s approximately 35 employees.

“We’re very focused on our customers, and that allows us to be very focused on our employee owners,” he said. “Their pride in the quality of the product knowing they’re owning the business that’s providing it is something that jumps out at you.”

“You want to keep the jobs in state, in the community,” Goldstein said. “One of the best ways to do that is to transition to employee-owned businesses. If you’re employee-owned, do you think that your employees are going to vote to move offshore?”

“Private equity and other types of ownership structures can and do work for lots of good things,” O’Donnell said. “In the ESOP model, you’re less likely to see those jobs get moved out. When the employees are the ones making those decisions, they tend to be better aligned with the best interests of the community.”

“We’re in it for the long haul, and I think our customers recognize that,” Denny said.