Franklin Forge: Full Case Study

Unprofitable SubsidiaryUnprofitable subsidiaries are often offered for sale to employees. Employees should approach such opportunities with care and predicate their actions on feasibility studies conducted by skilled consultants who know when to say no to a bad idea. The feasibility and success of the Franklin Forge worker buyout depended on a number of factors including strength and skill of both the workers and management, the community's need for ht plant, the fact that the workers initiated the buyout, and the parent corporations' motivation to sell at a low price and make the deal work.Located in West Branch, Michigan, Franklin Forge was a subsidiary of Capitol Manufacturing, a company in the oil field equipment business. Franklin was and continues to be one of Capitol's suppliers. During most of the years it was owned by Capitol, Franklin lost money. These losses resulted mainly from Capitol's cost structure and lack of experience in the forging business. Yet because Capitol was quite profitable prior to 1982, Franklin's losses did not become important to Capitol until 1983 and 1984.In early 1984, Franklin Forge employees sensed that the company's continuing losses threatened their future. The union, International United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) Local 1874, organized a jobs committee to explore how they could save their jobs. After investigating Franklin's financial condition, the employees determined that purchasing the company was the best way to protect themselves.At the same time, Harsco Corporation, which owned Capitol Manufacturing, decided to sell Franklin due to the increasing significance of Franklin's losses. Harsco could not close Franklin without a buyer because it had a take-or-pay contract with the gas utility that ran a gas line to Franklin. Since the contract was in effect for at least another year, and no buyer seemed interested in the less than desirable West Branch manufacturing location, Harsco knew that the employees' offer was the best it would get.The employee effort to buy Franklin began in earnest when UAW International Representative Jack Laskowski sought assistance from the Michigan Employee Ownership Center (MEOC). The employees subsequently formed a buyout association, retained Groban Olson and Associates as counsel, and commissioned a feasibility study. The employees recognized that they needed strong management to make Franklin profitable and asked the company's former manager to be the plant's new manager and chief executive officer. He had managed the plant for several years, was well-acquainted with the forging business, and was well-respected by local businesses and lenders.Franklin's recent losses made it difficult to raise the money to finance the buyout. Union members made numerous calls to lenders and worked hard to raise funds from employees and various government bodies. The perseverance and positive attitude of the buyout association impressed the lenders. The National Bank of Detroit (NBD), for example, became involved in finding other lenders to join it in financing the deal.In addition to raising money, the buyout association worked hard to educate themselves and the community on the concept of employee ownership. Aided by MEOC, the association developed its own employee ownership education program. As a part of this program, the Industrial Cooperative Association (ICA), MEOC, NBD, and the Michigan Department of Labor, led education sessions attended by those involved in the buyout and interested community members.As a result of the buyout association's efforts, Franklin Forge became a worker cooperative. Each worker owns one voting membership share and a proportionate share of capital in the company's internal equity accounts. The workers were able to purchase their membership shares, which initially cost $5,000 with loans primarily from the Industrial Cooperative Association Revolving Loan Fund and the Farmers and Merchants Bank of Hale. These loans required down payments of $250 and payments of $1 per working hour for 3 years to settle the $4,750 balance. Other lenders whose help was essential to finance the buyout included the State of Michigan, Ogemaw County, the National Bank of Detroit, the seller, and Franklin's chief executive officer. In the fall of 1986, employees invested an additional $2,000 each to cover working capital costs caused by a rapid increase in business.In 1984, when the employees first contemplated a buyout, Franklin employed 20 people and had 82 on a seniority list. At the time of the buyout, management projected that Franklin would employ 38 workers by the end of the first full year of operation. After six months of operation, Franklin already had 38 employees, and by the end of 12 months, it employed 54 people. By December of 1986, Franklin employed 68 people. The 1988 employment averaged 82. For the year of October 1988 through September 1989, the average employment is expected to be approximately 100.