One of the Annandale area’s largest employers is now employee-owned.
Malco Products Inc. announced last week that its associates have obtained majority ownership of the company, nearly 75 percent, through their Employee Stock Ownership Plan, or ESOP.
The shift in control occurred in November when owners Paul and David Keymer, two of the four sons of founder Mark Keymer, agreed to sell their shares in the business to Malco’s 150 employees at a discounted rate.
"The Keymer family has generously given Malco associates an incredible opportunity to become owners of the company that we work for," said Malco President and CEO Mardon Quandt. "This is the first time in our 65-year history that the family of Malco’s founder Mark Keymer is not in control of the company."
Why did the Keymers decide to sell? Paul Keymer said there were two primary reasons.
"As much as we would loved to have kept the stock and remained owners, the sooner Malco is 100 percent ESOP-owned the better," he said.
"ESOPs do great when the employees have control. The motivation is off the charts. It’s a work environment where they’re working for themselves, just like sole proprietors.
"So that’s one reason: motivation. The other is the tax advantage. It virtually doubles your income when you’re tax exempt, which ESOPs are. If you have one competitor who has to pay half or close to that of whatever they earn to the government and you have a competitor who doesn’t, who can re-invest everything in new products and new processes and promotion, it’s just great."
According to a company press release, Mark Keymer started what is now Malco in 1950 in his garage while moonlighting as a steel supply salesman. His enterprise consisted of a single hand tool that he designed, manufactured and marketed for crimping ductwork used with new forced air furnaces introduced in the early post-World War II years.
Additional tools followed, and the company is now recognized as one of the highest-quality manufacturers of tools for professional niche markets like heating and air conditioning; roofing, siding, gutter and fencing; and auto body repair and restoration.
Part of the game plan
Mark Keymer retired in 1973, turning over ownership of the company to his sons Gerry, Paul, David and Keven.
Gerry sold his stock to the employees in 1999 to begin the process of transferring ownership from the family to the employees – a process that took a decisive step with Paul and David’s sale of their stocks.
Kevin retains his stock at present, which is an advantage to the company because it keeps the size of the loan needed for the present sale manageable - it should be paid off in seven to 10 years.
"He’s already said that he’s willing to sell to the ESOP at basically their price whenever they want," said Paul.
As for why the sale was conducted now, Paul said that the economy appears stable enough to attempt a large transaction without putting the company in a difficult position if sales begin to slide.
"You don’t want to turn the stock over to an ESOP and have them pay for it just before the world crashes and they’re up against it," he said.
Employees first
A remarkable feature of the transaction was that not only could the Keymers have sold their shares for more money to outside buyers, but they essentially took about $1.75 million less than the fair market value for their stocks that had been established by outside appraisers and trustees. When the negotiation for the fair market value was completed and Paul announced his intention to give back $1 million to the ESOP and David - who owned less stock – to give back a proportionately similar $750,000, the outside brokers were stunned.
"The only way for us to put money in our pockets is to take it out of our associates’ retirement accounts, and we just hate that," Paul said. "How can you enjoy taking a vacation, spending their retirement money? That just doesn’t work for us."
In addition to giving employees a break on the price, Paul said that selling to employees protects jobs in this area.
"There would have been companies happy to pay us much more, but they’re the kind who buy companies and turn them," he said. "They’d come in and want the products and the name and the marketplace. That’s what they’re after. They might keep some of the people, but as far as a metal building in a cornfield in the middle of Minnesota – no way. They’d move the manufacturing overseas, they’d move the office to their home office in the Carolinas, and the people in Annandale would have been out of a job.
"They’d say they want to keep everybody, and maybe for a little while they would. But most of them are butchers. They just want to cut it apart and move the manufacturing to where it’s cheapest."
In the end, the Keymers actually sold their stock for less than they had in it, taking a loss. That wasn’t important, Paul said. What was important was pouring back into the people who work at Malco.
"Malco is and will continue to be one of the best places in the world to work," he said. "The employees always come first. They’re the ones that make it all happen. They are the company."
Little operational change
The transaction was announced to Malco employees on Dec. 10 and shared with the Advocate last week.
Quandt said that the change in ownership will not affect operations, although he has added the CEO title in place of Paul Keymer. Other than that shift, there have not been any changes to the board of directors or upper management. Both Paul and David Keymer will remain on the board and will continue to offer leadership from that standpoint, though Paul noted that they serve there now at the pleasure of Malco’s trustees: Quandt and Chief Financial Officer Jeanette Rieger-Borer.
The most significant near-term difference is the gain sharing program, under which profits are shared with employees.
"We will have a certain level of income we need to run the business and keep it viable, but then any income we make over that we will share a portion of that with all the employees," said Quandt. "So it’s a management tool for getting people engaged and finding ways to improve our profitability, and then they’ll get a piece of that gain when we do that.
"We believe that gain sharing will enable all ESOP shareholders to think like the business owners we have become."
Asked whether employee control could pose a challenge if difficult decisions need to be made in another economic downtown, Quandt said the key will be to keep everyone on the same page.
"I think the biggest challenge will be to make sure that management has a lot of communication with employees so they understand where we’re spending our money and why," he said. "So there is probably going to be more scrutiny over management decisions, but I think that’s OK. That’s a good thing. It will require probably better communication and getting more input from the employees on the decisions that are being made."
No regrets
While the shift toward employee ownership marks a drawing to an end of Keymer ownership in Malco, Paul Keymer said he had absolutely no regrets about passing on his father’s legacy to the company employees.
"My dead father would be so happy, so proud. This is great stuff," he said. "What a place for the company to end up. Employee-owned, that’s the highest and best of everything. It really is. They don’t need a union when they’re employee-owned."
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