When An ESOP Is The Answer To “What’s Next?”
A Conversation With
Vice-Chairman Of The Board
KI Industries, Inc.
During much of her career, Betsy Goltermann has held a consistent presence in the C-suite at KI Industries, Inc. -- a supplier of decorative components for the appliance and automotive industries based in Berkeley, Illinois. After joining KI as a second-generation family member, she served for 30 years as the company’s CFO.
She worked with her father and uncle, and then alongside her cousin, to diversify and expand the business. KI went from being a small niche provider of a narrow range of products, to becoming a premier supplier of decorative parts used in the appliance, automotive and industrial markets.
In the last four years, Betsy’s fundamental role shifted away from day-to-day operations. She now serves on the board and promotes the succession of a new thriving leadership team, leads ESOP sustainability efforts and continues to support strategic initiatives.
During this conversation, Leading With Courage Academy talked with Betsy about her decades of experience in helping to build a successful ESOP-owned manufacturing company. She enjoys watching and working with the new leadership team and influencing ESOP policies and culture. In addition, she serves on boards of a number of Chicago-area philanthropies.
LWCA: Betsy, you’ve had the entrepreneur’s spirit in your family’s blood, haven’t you? Tell us a bit about how you were born and raised into that early on. BETSY: I grew up here in Chicago, the second child of a middle-class family. My parents were both the first in their families to go to college, and quite entrepreneurial. They were confident in the world around them, and their own abilities. They mostly saw opportunities. After studying accounting at the University of Illinois and holding progressively advancing jobs, my father started this business in 1964 at the age of 34. They had saved enough money so that we could live for a year without any income, supporting my sister and me. It’s important to underscore that my mother was an equal partner in their endeavor, fully participating in decisions.
Did you intend to go into the family business?
No, when I graduated from Northwestern University with a degree in economics, I got a job in economic consulting, which I loved. These were the days when data analytics and the power of information were in its infancy. I worked for a company called Data Resources Inc., which became a division of McGraw Hill.
I worked there for a couple of years, then started in business school at the University of Chicago in their evening (190 E. Delaware) program. After we married, my husband supported me while I finished business school full-time. I loved business school and my interests were broad, but I gravitated to finance and accounting. Shortly after graduation, I passed the CPA exam and I worked in the Small Business Consulting Group of Deloitte Haskins & Sells. There, I got broad exposure -- audits, tax work and general consulting work for smaller companies.
A few years into our early careers, my husband received a job offer to join a Fortune 500’s legal department outside of Chicago. It was then that my father started thinking about succession: “What are we going to do with this small business that has such a bright future?” He had been in the business for 21 years. That’s when I started at Knobs, Inc. – now KI Industries, Inc.
What was it like to work with your father?
His strengths were on the sales and transaction side. He loved to make a deal. And was great in a customer-facing role. When I started, the market penetration of the company in the U.S. appliance market was about 20%. There was a lot of upside, but there was also some healthy competition and our customers were numerous – there were probably 30 unique major appliance companies in the U.S. – most selling products regionally. The Company was doing about $5 million in sales and had maybe 25 employees.
My first job was as a sales administration – a customer service position. I interfaced with customers and learned about our products and processes. After doing a rotation there for about six months, I took on staff accounting responsibilities. And from there, it was ever increasing responsibilities. My first cousin came to work in the business in 1989 as my father and uncle planned for their transition.
It was around this time that my father’s interests migrated to other entrepreneurial ventures. Finally, in the early 1990’s he left his operating role at the company and his brother, my uncle, took over as President.
I can’t say enough wonderful things about my uncle’s leadership and the values that he instilled in the business. We have always been a “business-first” family, not a “family-first” business. We treated the company objectively and did our best to make decisions that were going to grow and support the business. My cousin and I were the only two family members who came to work there, although we had other shareholders in our generation. My cousin became CEO in 1995 – we’ve worked together since then.
We continue to reinvest heavily in the business and grow it by the ongoing hiring and development of a terrific management team. The firm succeeded because the people that we brought in and worked with were and are extraordinary.
Was there anything, in particular, you were looking for in those extraordinary people? What distinguished them from the others that you may have been considering?
When I think about it, it was our team’s commitment to the business and the concept of stewardship. I feel that my cousin and I fostered that as much as possible. We both led by example, putting in lots of time, and driving improvements and excellence as much as possible. Being able to set high level goals, expand our product base and continue to grow the business in our existing markets was critical. We continued to grow much faster than those markets grew, and this was through product and geographic expansion – supported by innovation. There was something about the character of our company that our customers regarded as a vendor that they wanted to continue to partner with.
So, when did you make the jump to employee ownership?
Between 1995 and 2015 we bought a competitor in Broadview IL, and green fielded three new plants – one in Illinois and two in Queretaro, Mexico. We opened a China office and diversified our Asian supply chain. During these years the shareholders had ongoing conversations looking at “What’s next?”
We were the second generation and when we looked at generation three, although they were still not of age, we saw enough challenge that we thought, “Let’s explore other ownership options.” We went through a sell side process in 2007, which concluded with the 2007/2008 financial crisis. As the world got back on its feet in 2010, we connected with our accountants and bank, and they walked us down the long path of ESOP ownership. Our board, which consists of seven members including three independent directors, decided in 2011 to put together a team and pursue negotiating an ESOP transition.
What’s the state of the transition today?
We’re 100% ESOP owned – we were from beginning. Part of being a successful ESOP is being able to adjust and tweak the benefit as the company’s needs change. It’s been an active ten years since we first considered ESOP ownership. We successfully accomplished our ESOP feasibility (2011); the negotiation, due diligence and sales transaction (2012); and then the company’s ongoing ESOP sustainability activities.
I see ESOPs as a compelling framework for tax deferral with advantages for a business that generate cash and have predictable capital needs. We have a group of employees who are committed to working in a place that has a deep customer focus. They realize how important new products and processes are to our success. We have many employees who are deeply devoted and give extraordinarily to the company.
At least this way, you control your destiny, right? It doesn’t sound like you’re looking back and saying, “We should have gone for the bigger payoff.” It’s been a good journey up to this point. Along those lines, how do you define leadership?
Leadership is always doing by example. It’s the thousand nudges that create an impression or that create a perception of a person, someone who is willing to sacrifice, to get in there and roll up your sleeves as well as being able to see the possibilities and make tough decisions. It’s gaining trust at multiple levels.
How do you think working for an ESOP or being an ESOP has helped you become the leader you were striving to be?
Once an ESOP is in place and folks absorb it, it becomes more conversational with how this is going to benefit everyone in the company and not just the owners. It’s an underlying premise in discussions that are occurring, and decisions are being made. That was an exciting thing for me to watch as we continued to have executive leadership team meetings. The executive team had a wider embrace of what the future could be and conveying stability around the ownership of the company. The ESOP energized the company and helped the employees who provide value.
Is there a particular mistake you’ve seen ESOPs make in general or maybe that you made that you wish you could press the “do over” button on?
Now that ESOPs have gotten better with professional advisors around them, feasibility studies and cash flow implications are better understood than several years ago. The apparent mistake for us was not understanding the implications of the relationship between our U.S. payroll and the value growth overall of the company related to its international presence. Having such an understanding could have provided a better view of what that meant for benefit levels. And folks can always communicate better, this is such an important part of promoting an ESOP’s culture and rallying around the succession plan. I look at the world now and I see best practices around communications, transparency and town halls. And we’re doing that now. But we were slow to the plate on that at first.
Right. At the end of the day, what employees crave is information and certainty.
Correct. And there are varying degrees of that. I read once that thoughtful transparency is not simply, “blah” telling everything to all, but to understand who should and needs to know important facts, and providing that trustingly to them. Our company tended to be private and to move away from that is not something that is quickly done.
No, that takes courage on the part of the leaders.
We did that and we continue to do it better. We have a good ESOP communication committee. We celebrated when we had the transaction and continue host the Trustee and Valuation Advisor in annually for a town hall. I think we do that reasonably well and the ESOP communication committee has tried to educate folks and host fun events. Some of that is balancing the celebration with answering questions on the type of growth the company will experience and how employees can contribute to that. I always feel that balance is something that has to be looked after and managed.
What do you think is the mindset of a successful leader of an ESOP? What mindset does he or she need to have?
That’s a good question and so important. We have a new CEO and CFO team who I can’t say enough wonderful things about – both long time employees of KI’s. For both of them, the mindset of an ESOP company is such that I don’t see it as being much different than a mindset of the former ownership. We need to put our customer’s first, lead with innovation, and demand excellence in everything we do.
I think that there’s a particular aspect relating to managing benefits and the employee base longevity that is important to be able to have flexibility in compensation for young folks as much as those folks who are approaching retirement. Right away we put in place repurchase obligation forecasting processes, and incorporate that in our planning. Our board’s compensation committee has worked hard to integrate the ESOP benefit with the entire compensation strategy.
We recently have hired and enhanced our sales and marketing leadership team. One of the things that I heard from one of the new hires was that a primary driver of coming to KI related to the retirement benefit and the benefit of being employee-owned.
What do you think the biggest challenge facing leaders today is?
I think in a very general sense – prioritizing actions in a fast world overfilled with information. For ESOP, it’s getting clarity through the complexity and communicating what an outstanding possibility it provides for long-term wealth creation. For our business, we were in a very sweet spot for this type of ownership: Steady customer base, reliable cash flows, growing niches, established marketplace, and a culture of stewardship.
If we can address all of those elements (and then some) toward the ESOP’s success, we can help ensure more ESOPs stay on the table instead of being taken off when conversations about the future of the organization are taking place.
If you're an employee- or family-owned company and want to build an even healthier, thriving, sustainable business, consider giving LWCA a call. With the pandemic, we're seeing an increase in the interest in succession planning and getting everyone re-engaged with an organization's culture and purpose. We have tools and processes for doing this and would welcome the opportunity to see if they're a good fit with your needs. Contact our founder, Lee Eisenstaedt, at Lee@LWCAcademy.com or (312) 827-2643.