Latest / Business Roundtable / ESOPs Explained: Succession, Legacy, and Employee Ownership with Kelly Finnell

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ESOPs Explained: Succession, Legacy, and Employee Ownership with Kelly Finnell · Business Roundtable

• 0:00
  Speaker 1: Hello everybody, and welcome back to the Business Roundtable podcast.
• 0:04
  Speaker 1: I am your host, David Carr Founders Toward Your Business,
• 0:06
  Speaker 1: where we bring people together to accomplish great things. That
• 0:09
  Speaker 1: includes amazing guests. Today, I have a brand new guest here,
• 0:13
  Speaker 1: Kelly Panel, who is the president of EFS ESOP Consultants.
• 0:18
  Speaker 1: I'm going to break this down for you guys based
• 0:20
  Speaker 1: in Memphis, Tennessee. One of the leading experts in employee
• 0:25
  Speaker 1: stock ownership plans AESOP. So maybe you've heard that term before,
• 0:28
  Speaker 1: maybe you haven't. I'm excited to have Kelly on here
• 0:31
  Speaker 1: because he's going to help break it down for us.
• 0:34
  Speaker 1: And Kelly, I just want to say thank you and
• 0:36
  Speaker 1: welcome to the podcast.
• 0:38
  Speaker 2: Thanks David. Great to be with you.
• 0:40
  Speaker 3: Yeah.
• 0:40
  Speaker 1: Absolutely, I know you know some of these I'm familiar
• 0:44
  Speaker 1: with us, and this is why I wanted to have
• 0:45
  Speaker 1: you on the podcast because I think a lot of
• 0:46
  Speaker 1: people don't understand this, this option of business succession and
• 0:51
  Speaker 1: how that gets your reward, your team, preserve your culture
• 0:54
  Speaker 1: and helps minimize taxes as multifunction and I want to
• 0:58
  Speaker 1: get to that. We're going to break that down in
• 1:00
  Speaker 1: this episode. But tell me a little bit about your
• 1:02
  Speaker 1: journey Kelly about you're the president and you've done this
• 1:05
  Speaker 1: for many, many years. Tell us a little bit about
• 1:08
  Speaker 1: your journey and how you got here and why do
• 1:10
  Speaker 1: you love doing this today.
• 1:12
  Speaker 4: Well, like many entrepreneurs, I think I got into this
• 1:14
  Speaker 4: business totally by accident. So it was the summer of
• 1:19
  Speaker 4: nineteen seventy nine. I had just finished my first year
• 1:23
  Speaker 4: of law school, and I had this great opportunity to
• 1:27
  Speaker 4: do some good work and to see a new part.
• 1:30
  Speaker 2: Of the country. So I moved from Memphis, Tennessee, to.
• 1:33
  Speaker 4: Worcestern, Massachusetts, where I worked for a.
• 1:37
  Speaker 2: Group of pension lawyers.
• 1:40
  Speaker 4: So the law that created ESOPs was implemented in nineteen
• 1:47
  Speaker 4: seventy four. This was nineteen seventy nine, so the law
• 1:50
  Speaker 4: is only five years old. And the lawyers got a
• 1:55
  Speaker 4: letter from one of their clients asking for.
• 1:58
  Speaker 2: A white paper on AESOPS.
• 2:00
  Speaker 4: And so all of these gray haired, very experienced pigion
• 2:03
  Speaker 4: lawyers looked around at each other and they all said,
• 2:06
  Speaker 4: I don't know anything about ESOPs. And the result was
• 2:10
  Speaker 4: they decided to give the project to the kid.
• 2:13
  Speaker 2: In nineteen seventy nine, I was the kid.
• 2:16
  Speaker 4: So I spent that summer reading and writing about ESOPs
• 2:20
  Speaker 4: and then graduated from All School in nineteen eighty one,
• 2:22
  Speaker 4: passed the bar exam that summer, and went straight into
• 2:25
  Speaker 4: this business. So I kind of stumbled into this by accident,
• 2:30
  Speaker 4: but it was a very fortuitous situation.
• 2:33
  Speaker 3: That's that's great. I mean I know a lot of
• 2:36
  Speaker 3: people to get into the law.
• 2:37
  Speaker 1: I have a good friend of mine like that and
• 2:38
  Speaker 1: they're like, well, what aspect of it do I want
• 2:40
  Speaker 1: to get into? And obviously you took it and now
• 2:42
  Speaker 1: you're ticket in this direction and you've been doing this
• 2:45
  Speaker 1: over many states, many jurisdictions now, Kelly, which is exciting.
• 2:49
  Speaker 1: I mean it's I know, I get nervous or try
• 2:52
  Speaker 1: to like figure out how to do this. I've been
• 2:54
  Speaker 1: in an environmental consultant for a year, so I know
• 2:55
  Speaker 1: dealing with the laws it's tricky at times and how
• 2:57
  Speaker 1: do we handle this? So I'm glad, thank you you
• 3:00
  Speaker 1: for your those guys back then that they said hey, Kelly,
• 3:02
  Speaker 1: I'm in here, and that you've taken it and now
• 3:04
  Speaker 1: you're a champion for ESOP.
• 3:07
  Speaker 3: So that's fantastic, can you So let's just break that
• 3:10
  Speaker 3: down a little bit.
• 3:11
  Speaker 1: What for those of that don't know or maybe they've
• 3:13
  Speaker 1: heard the term, but it's kind of out there. What
• 3:16
  Speaker 1: how do you define an aesop, Kelly.
• 3:19
  Speaker 2: It's really two things in one.
• 3:21
  Speaker 4: And so for a business owner, an ESOP is a
• 3:26
  Speaker 4: liquidity strategy, a way for the business owner to cash
• 3:29
  Speaker 4: in on their life's work while at the same time
• 3:33
  Speaker 4: handing the business off to their employees. And so it
• 3:39
  Speaker 4: is a liquidity and succession strategy like a sale to
• 3:43
  Speaker 4: a strategic buyer or a sale to private equity alternative
• 3:49
  Speaker 4: to those two liquidity strategies from the employees perspective. And
• 3:56
  Speaker 4: ESOP is a retirement plan, so it's a first cousin
• 3:59
  Speaker 4: to a four rowin K plan. But an ESOP has
• 4:04
  Speaker 4: three differences as compared to a four rowin K plan
• 4:07
  Speaker 4: that allows it to serve these dual roles, a succession
• 4:11
  Speaker 4: and liquidity plan and a retirement plan at the same time.
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  Speaker 2: So the first difference.
• 4:17
  Speaker 4: Is unlike any other type of retirement plan, and ESOP
• 4:20
  Speaker 4: can borrow money. The second difference is that an ESOP
• 4:25
  Speaker 4: can engage in certain transactions with parties and interest. So
• 4:28
  Speaker 4: that's a legal term and I'll come back and what
• 4:31
  Speaker 4: that means. And then the third difference is that an
• 4:35
  Speaker 4: ESOP is required to invest primarily in the stock of
• 4:39
  Speaker 4: the sponsoring company. So as a practical matter, what happens
• 4:45
  Speaker 4: is that an ESOP borrows money. Part of that comes
• 4:48
  Speaker 4: from a bank and part of that comes from seller
• 4:52
  Speaker 4: notes and I owe you between the company and the owner.
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  Speaker 4: It then uses those two sources of care capital to
• 5:01
  Speaker 4: engage in this transaction with a party in interest. And
• 5:04
  Speaker 4: in plain English, what that means is that the ESOP
• 5:09
  Speaker 4: purchases stock from the company's owner or I mean, we've
• 5:14
  Speaker 4: had anywhere from one to about sixty people.
• 5:19
  Speaker 3: To ESOPs in the past.
• 5:22
  Speaker 4: Then once that stock has been purchased by the ESOP,
• 5:27
  Speaker 4: it is then allocated to participants accounts over a period
• 5:32
  Speaker 4: of time and that might be somewhere between twenty and
• 5:36
  Speaker 4: forty years. Shares are allocated to participants and that's how
• 5:41
  Speaker 4: it becomes a retirement plan. There is something in this
• 5:46
  Speaker 4: for the company's owners and for the employees that's great.
• 5:50
  Speaker 1: So it's giving what I hear you saying is it's
• 5:53
  Speaker 1: giving the owner a different option or owners adiption option
• 5:57
  Speaker 1: than you know, looks like I just have to go
• 5:59
  Speaker 1: to private equity or you know, I'm trying to like
• 6:02
  Speaker 1: and it.
• 6:03
  Speaker 3: Gives them a different strategy. And I like that.
• 6:05
  Speaker 1: I mean, I guess so that's I want to break
• 6:07
  Speaker 1: that down a little bit more about you know, as
• 6:08
  Speaker 1: you've shared this, you have multiple owners and and and
• 6:13
  Speaker 1: why they might choose this, you know, like you said,
• 6:15
  Speaker 1: versus selling to a competitor or private equity. It's like,
• 6:19
  Speaker 1: break it down a little bit like what is what
• 6:20
  Speaker 1: have you seen as you speak spoke to these owners,
• 6:23
  Speaker 1: like the I you know, the light bulb going off, like, oh,
• 6:26
  Speaker 1: this is a different way of doing it.
• 6:28
  Speaker 2: Yeah.
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  Speaker 4: Well, one thing is I just got off the teams
• 6:32
  Speaker 4: meeting with a business owner in southern California, Okay, not
• 6:36
  Speaker 4: too far from from We're Wow, uh huh, and they
• 6:41
  Speaker 4: had just been frustrated going through the process of dealing
• 6:44
  Speaker 4: with the investment banking, private equity oratory process. There were
• 6:52
  Speaker 4: lots of things about it that they didn't like and
• 6:57
  Speaker 4: just we're desperate to find an alternative. And so that's
• 7:01
  Speaker 4: one motivating factor. Another is there are some business owners
• 7:07
  Speaker 4: out there that I call compassionate capitalist people who want
• 7:14
  Speaker 4: to do well for themselves and their families while also
• 7:17
  Speaker 4: doing well for others, and often those others that they're
• 7:21
  Speaker 4: thinking of are their employees who help get them to
• 7:25
  Speaker 4: the point where they can have this successful financial transaction.
• 7:30
  Speaker 4: M So, an ESOP, unlike a sale to private equity
• 7:34
  Speaker 4: or to a strategic buyer, gives a business owner to
• 7:38
  Speaker 4: take care of themselves, receive full fair market value in
• 7:42
  Speaker 4: this AESOP transaction, while at the same time selling the
• 7:46
  Speaker 4: company to the employees, with that sale being financed by
• 7:51
  Speaker 4: the company with a generous tax subsidy provided by Uncle
• 7:57
  Speaker 4: samm And So for those business owners who want to
• 8:03
  Speaker 4: protect and reward their employees and not subject them to
• 8:07
  Speaker 4: the uncertainties that come when you sell to a third party,
• 8:10
  Speaker 4: right and offers that alternative.
• 8:14
  Speaker 3: No.
• 8:14
  Speaker 1: I love that because I've been in this environmental consulting space,
• 8:17
  Speaker 1: as you know, Kelly, we were talking before we recorded
• 8:19
  Speaker 1: the podcast, and I've seen the challenges. In fact, I
• 8:23
  Speaker 1: had a podcast earlier this year with a former a
• 8:27
  Speaker 1: colleague that she sold her company and the challenges that
• 8:30
  Speaker 1: what came along with that of you know, you know
• 8:33
  Speaker 1: she did chose not to do an ESOP for different reasons,
• 8:36
  Speaker 1: but just the reality of the challenges of keeping the
• 8:39
  Speaker 1: team together in the transition period, people leaving, people feeling betrayed,
• 8:44
  Speaker 1: the whole host of things in there. And I hear
• 8:46
  Speaker 1: you saying that here's a different way that you can
• 8:48
  Speaker 1: take care of your people. I like your language that
• 8:51
  Speaker 1: you say about the compassionate capitalists, about great, great terminology,
• 8:56
  Speaker 1: and actually that makes me wanted to dig a little
• 8:58
  Speaker 1: deeper in there. Like to that point, the owner has
• 9:03
  Speaker 1: to potentially have that kind of mindset, right, Kelly, I mean,
• 9:05
  Speaker 1: tell me a little bit about the mindset and the
• 9:07
  Speaker 1: approach that the owner has to have to make this
• 9:09
  Speaker 1: successful or not if they don't, you know, because maybe
• 9:11
  Speaker 1: they don't have that mindset and that might not be
• 9:14
  Speaker 1: a good fit.
• 9:15
  Speaker 4: So I've got this thing that I call the greed scale,
• 9:18
  Speaker 4: and I wonder, to the end of the greed scale
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  Speaker 4: is Mother Teresa, you gave way all of her possessions
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  Speaker 4: to take care of the poor. And on the other
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  Speaker 4: end of the greed scale is Gordon get Go. And
• 9:32
  Speaker 4: so in order to be a good candidate for an esop,
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  Speaker 4: you don't have to be Mother Teresa. You're going to
• 9:37
  Speaker 4: be able to take care of yourself and your family
• 9:40
  Speaker 4: and get full value of the for the company. But
• 9:43
  Speaker 4: you can't be Gordon get Go and only be focused
• 9:47
  Speaker 4: on yourself you have to be more of a compassionate
• 9:51
  Speaker 4: capitalist who wants to take care of themselves, but is
• 9:55
  Speaker 4: thinking beyond themselves and thinking about other people.
• 10:00
  Speaker 3: Right.
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  Speaker 1: Well, and I think this is kind of beginning with
• 10:04
  Speaker 1: the end in mind, if you will thinking about the legacy,
• 10:07
  Speaker 1: because I know, you know, I don't know what this
• 10:09
  Speaker 1: occurrences the experiment. You can probably tell me, Kelly, the
• 10:12
  Speaker 1: length the the life span of a company, what is
• 10:15
  Speaker 1: it about? Maybe twenty thirty years and then it goes
• 10:18
  Speaker 1: away something like that. I don't know the exact stats,
• 10:20
  Speaker 1: but what would but if you do an e stop
• 10:22
  Speaker 1: or you have something that you want to create a
• 10:23
  Speaker 1: legacy that can go beyond that. I mean, there's it's
• 10:28
  Speaker 1: amazing when we have those and I think that that
• 10:30
  Speaker 1: legacy in mind of what would this look like to
• 10:32
  Speaker 1: continue on this tradition, it's valuable, it's creating great impact.
• 10:36
  Speaker 1: We don't have those as unfortunately as many and many
• 10:40
  Speaker 1: more companies that have been around for fifty sixty one
• 10:43
  Speaker 1: hundred years that want to create us this and have
• 10:46
  Speaker 1: this lasting influence impact for generations to come.
• 10:51
  Speaker 2: That's exactly right.
• 10:54
  Speaker 4: Legacy and culture are two additional things that draw people
• 10:59
  Speaker 4: to so We've got a client in Texas that when
• 11:03
  Speaker 4: we did the ESOP, the company was one hundred and
• 11:06
  Speaker 4: four years old.
• 11:07
  Speaker 2: Wow.
• 11:09
  Speaker 4: And the business owner said, look, there has been a
• 11:13
  Speaker 4: business in Dallas, Texas with my family's name on it
• 11:17
  Speaker 4: for over one hundred years, and I'm committing. I'm committed
• 11:21
  Speaker 4: to making sure that continues. I know i'll sell to
• 11:25
  Speaker 4: a third party. That's not going to happen. Yeah, And
• 11:29
  Speaker 4: so that was his motivation for doing the ESOP. Was
• 11:33
  Speaker 4: really focused on legacy, but it was also focused on
• 11:38
  Speaker 4: maintaining company culture. He was a wise gentleman and he
• 11:42
  Speaker 4: knew that if he sold to a third party, they
• 11:44
  Speaker 4: were going to tell him, look, after the sale, nothing's
• 11:47
  Speaker 4: going to change.
• 11:49
  Speaker 2: But everything changes, and.
• 11:52
  Speaker 4: Legacy of his company becomes the legacy or the culture
• 11:57
  Speaker 4: of his company rather becomes the culture of the acquire
• 12:02
  Speaker 4: That's not only detrimental to the company's employees, it's also
• 12:08
  Speaker 4: detrimental to their customers.
• 12:10
  Speaker 3: Yes.
• 12:11
  Speaker 4: I mean they're successful in their business because their customers
• 12:14
  Speaker 4: are a customed to be being treated a certain way.
• 12:18
  Speaker 3: Yeah. Absolutely changes.
• 12:20
  Speaker 2: It's not good for business.
• 12:21
  Speaker 1: Yeah, I mean, how many of us have experienced that.
• 12:24
  Speaker 1: I know I have where you had a certain company
• 12:26
  Speaker 1: you were working with and they got bought, and how
• 12:28
  Speaker 1: many changes are Like, this is not the same experience.
• 12:31
  Speaker 1: I'm not having the same experience. I'm being treated differently
• 12:34
  Speaker 1: and the same thing. Like I said, both the client,
• 12:36
  Speaker 1: customer and the employees. It's inevitable in my experience. Like
• 12:39
  Speaker 1: you're saying, Kelly's like, it just you can say we're
• 12:42
  Speaker 1: going to try and keep it the same, but it
• 12:43
  Speaker 1: just it's just because you are now part of this
• 12:45
  Speaker 1: other organization, this other culture, and this is what they're about,
• 12:49
  Speaker 1: and it may be similar, but it's not going to
• 12:50
  Speaker 1: be exactly the same.
• 12:52
  Speaker 4: Speaking of the way you're treated, Yeah, I think the
• 12:55
  Speaker 4: best example is a shopper who walks into Kroger versus
• 13:02
  Speaker 4: a shopper that walks into gosh, what's the big upscale
• 13:12
  Speaker 4: grocery store chain based out of Florida.
• 13:15
  Speaker 3: Uh oh, I know you're talking about.
• 13:19
  Speaker 2: It.
• 13:19
  Speaker 1: I'm I know, yeah, I'm in the West Coast, but
• 13:22
  Speaker 1: I think I know what you're talking about. Yes, yeah,
• 13:25
  Speaker 1: but the difference between yeah, what the what?
• 13:28
  Speaker 4: The difference is incredible And you're you're treated like a
• 13:34
  Speaker 4: number and on the other hand, you're treated like a person.
• 13:38
  Speaker 3: Yep, mm hmm, absolutely no.
• 13:41
  Speaker 1: I mean, so I think if you're a business owner
• 13:44
  Speaker 1: listening to this, and hopefully you guys know, we're gonna
• 13:47
  Speaker 1: put links to Kelly's website and we're connected on LinkedIn,
• 13:49
  Speaker 1: and I want to make sure you guys can reach
• 13:51
  Speaker 1: out to Kelly of course and put comments and questions
• 13:53
  Speaker 1: as we're going through the podcast or we love to
• 13:55
  Speaker 1: feel those for you. But I like that you're providing,
• 13:58
  Speaker 1: and hopefully as a business owner, you're thing like, Okay,
• 14:00
  Speaker 1: what do I do here?
• 14:01
  Speaker 3: Because I do.
• 14:02
  Speaker 1: I work with a number of business owners Kelly, as
• 14:03
  Speaker 1: you know, and I'm in the part of the people too,
• 14:06
  Speaker 1: of like, how do we develop the people? How do
• 14:07
  Speaker 1: we sustain them? Because the business owner does care, but
• 14:10
  Speaker 1: what's there? What's their future? What does that look like?
• 14:12
  Speaker 1: And sometimes you know, you've got people that really want
• 14:14
  Speaker 1: to be they want to stick around, but I'm not
• 14:17
  Speaker 1: sure what that looks like. And so as this to
• 14:19
  Speaker 1: me is an esop says, hey, there's a there's a
• 14:21
  Speaker 1: future here that you can grow with the company, and
• 14:24
  Speaker 1: you have a share in this company. Different than it's
• 14:27
  Speaker 1: not so transactional, is purely just I get this employee,
• 14:31
  Speaker 1: and I got my paycheck. Talk a little bit about
• 14:33
  Speaker 1: that kind of mindset shift, Kelly for the biz owner
• 14:36
  Speaker 1: and the employees too, because they're going to be this
• 14:38
  Speaker 1: is going to be new for them as well.
• 14:40
  Speaker 4: Yeah, And one of the keys to having a successful
• 14:42
  Speaker 4: AESOP is communicating to the employees what the AESOP means
• 14:46
  Speaker 4: for them.
• 14:47
  Speaker 3: M hm.
• 14:48
  Speaker 2: So with an.
• 14:49
  Speaker 4: AESOP, everybody's interests are perfectly aligned. All of the employees
• 14:56
  Speaker 4: are going to get a salary and a bonus, that
• 14:59
  Speaker 4: bonuses to be based upon short term performance, and then
• 15:02
  Speaker 4: on top of that, they're probably going to continue to
• 15:05
  Speaker 4: have their four one K plan and in addition have
• 15:09
  Speaker 4: the ESOP, and the long term performance of the company
• 15:13
  Speaker 4: is going to determine the value that they receive from
• 15:17
  Speaker 4: that ESOP. So if a company grows at five percent
• 15:22
  Speaker 4: rather than two and a half percent, then the employee
• 15:25
  Speaker 4: is going to have twice as much money in their
• 15:28
  Speaker 4: ESTOP account as they would otherwise. So you really get
• 15:31
  Speaker 4: that alignment of interest where we see all of the
• 15:34
  Speaker 4: employees in the same boat, rolling in the same direction,
• 15:38
  Speaker 4: trying to make the company better and more profitable for
• 15:42
  Speaker 4: everybody because it's going to benefit them and their families.
• 15:46
  Speaker 3: Mm hmm. Yeah.
• 15:47
  Speaker 1: I love that because it starts. You know, in today's world,
• 15:51
  Speaker 1: I see a lot of this, it's just transactionals. What
• 15:53
  Speaker 1: can I get employee and what in employer? It's like, no,
• 15:56
  Speaker 1: I like you, Like you said, Kelly, it's aligning them together.
• 15:59
  Speaker 3: So we all we together, or we all you know,
• 16:01
  Speaker 3: don't make us much together, but we all.
• 16:03
  Speaker 1: So they're just like if somebody's falling behind, it's not like, oh, well,
• 16:06
  Speaker 1: they just do their thing. I'm gonna get mine. It's like, no,
• 16:08
  Speaker 1: how do I help them along the journey? And I
• 16:12
  Speaker 1: worked with a company was an esop Kelly, and they
• 16:15
  Speaker 1: were quite large.
• 16:16
  Speaker 3: But what they would do. One of the things I
• 16:18
  Speaker 3: know that they did love this.
• 16:19
  Speaker 1: They would look because we're in billable hours, you know,
• 16:21
  Speaker 1: environmental or engineering.
• 16:23
  Speaker 3: So they would look and they would look at build
• 16:24
  Speaker 3: you know, people's.
• 16:25
  Speaker 1: Hours, and they're often like they're not going to like
• 16:27
  Speaker 1: just you know, school somebody, like how do we help
• 16:29
  Speaker 1: them get their their billable hours up? Because you know,
• 16:34
  Speaker 1: because I got somebody's working extra in here, and it's like,
• 16:37
  Speaker 1: let's help each other.
• 16:38
  Speaker 3: And it's just a different approach and mentality. Kelly, and
• 16:40
  Speaker 3: I really appreciate what the ESOP is fostering in that?
• 16:45
  Speaker 4: Yes, and you know you're talking about engineering firms. Historically
• 16:49
  Speaker 4: that's been our biggest market. We've done more than a
• 16:53
  Speaker 4: dozen ESOPs for engineering firms, and I think there are
• 16:56
  Speaker 4: two key reasons for that. To first, as owners know
• 17:00
  Speaker 4: that the success of an engineering firm is totally based
• 17:03
  Speaker 4: on the company culture.
• 17:05
  Speaker 2: And they want to be able to maintain that after
• 17:08
  Speaker 2: they leave.
• 17:09
  Speaker 4: I think the second reason, and one of the disadvantages
• 17:12
  Speaker 4: of AESOPS is it are complex.
• 17:16
  Speaker 3: Yep.
• 17:16
  Speaker 4: But that's an engineer's life, right. What engineers do is
• 17:21
  Speaker 4: solve complex problems. So you don't have the fear factor
• 17:28
  Speaker 4: with engineers that you sometimes have with others because they
• 17:32
  Speaker 4: relish the complexities where others run from it.
• 17:36
  Speaker 3: Right.
• 17:37
  Speaker 1: Well, and here's the thing, if you you know, it's
• 17:40
  Speaker 1: I think if you want quick things, there's a certain
• 17:43
  Speaker 1: amount of return on this and there's some complexity, and
• 17:46
  Speaker 1: I think, like you said, you're playing this longer game.
• 17:48
  Speaker 3: So I guess me to the question.
• 17:49
  Speaker 1: I guess Kelly, you said engineers are a good ideal client.
• 17:53
  Speaker 1: Talk a little bit more about so if I'm a
• 17:55
  Speaker 1: business owner, I'm a participating you know, looking at this
• 17:57
  Speaker 1: what what is the type of companies or maybe size
• 18:01
  Speaker 1: or profitability requirements?
• 18:03
  Speaker 3: Talk a little bit about what does that look like, Kelly.
• 18:06
  Speaker 4: In terms of financial metrics, you need to have at
• 18:08
  Speaker 4: least thirty five employees and at least two million dollars
• 18:13
  Speaker 4: of adjusted to EBADAD. Because of the complexity, ESOPs are
• 18:18
  Speaker 4: expensive to implement. There at least three sets of lawyers
• 18:22
  Speaker 4: involved in every AESOP transaction, sometimes more, and so ESOPs
• 18:28
  Speaker 4: work best for mid size to small companies, not for
• 18:34
  Speaker 4: micro companies. You have at least a couple of million
• 18:37
  Speaker 4: dollars of adjusted to EBADAD to be a good candidate,
• 18:41
  Speaker 4: and you need to have at least thirty five employees.
• 18:45
  Speaker 2: They're two of the key qualifiers. And then in terms.
• 18:51
  Speaker 4: Of softer types of qualifications, company where the owner is
• 18:56
  Speaker 4: interested in legacy, maintaining culture, rewarding employees, aligning their interests,
• 19:03
  Speaker 4: some of those things that we've already discussed.
• 19:05
  Speaker 1: Yep, yeah, absolutely, And I mean and so and would
• 19:10
  Speaker 1: you say how would you evaluate that too? So the
• 19:12
  Speaker 1: employer feels that like they want to do this use
• 19:15
  Speaker 1: op and they're like, okay, would you have to have
• 19:17
  Speaker 1: to make sure that you have the employees that like
• 19:21
  Speaker 1: is a education or understanding of like this is what
• 19:23
  Speaker 1: it be, and like the people that would want to
• 19:25
  Speaker 1: do this because it's an amazing thing that the business.
• 19:27
  Speaker 1: But you have to have the employees that want to
• 19:28
  Speaker 1: participate in this because if not all the employees want
• 19:31
  Speaker 1: to participate or I don't know exactly, I'd love to
• 19:33
  Speaker 1: ask you this qual does all the employees have to
• 19:35
  Speaker 1: participate Kelly?
• 19:36
  Speaker 3: Or how does? What does that look like?
• 19:37
  Speaker 4: When you start substantially all of the employees, So those
• 19:41
  Speaker 4: are people who work full time, which is awe thousand
• 19:44
  Speaker 4: hours a year, have been with the company for at
• 19:46
  Speaker 4: least a year, receive a W two, not a ten
• 19:52
  Speaker 4: ninety nine. There are some of those requirements that could
• 19:57
  Speaker 4: eliminate some of the people from participating, but most of
• 20:00
  Speaker 4: them participate, but they don't make an election as to
• 20:05
  Speaker 4: whether or not they want to be in the plane.
• 20:06
  Speaker 2: It's not like a four to oh win K plan.
• 20:09
  Speaker 4: I make a decision to contribute my money in order
• 20:12
  Speaker 4: to qualify for the match with an Everybody is in
• 20:16
  Speaker 4: the plan that meets those qualifications because the company's paying
• 20:21
  Speaker 4: for everything.
• 20:22
  Speaker 2: Mm hmm.
• 20:23
  Speaker 4: From an employees perspective and ESOP is much more generous
• 20:27
  Speaker 4: than a four to h win k plane because in
• 20:30
  Speaker 4: an ESOP, I don't have to do anything in order
• 20:32
  Speaker 4: to get my contribution. I just have to be there
• 20:36
  Speaker 4: and continue to work. And then the harder I work
• 20:40
  Speaker 4: and the smarter I work, the more I'm going to
• 20:43
  Speaker 4: have in my account.
• 20:45
  Speaker 3: That's no, that's that's great.
• 20:46
  Speaker 1: Talk a little bit about Kelly, the the if so
• 20:50
  Speaker 1: somebody decides yes, the stop is a way that I
• 20:53
  Speaker 1: want to go absolutely, talk a little bit about the
• 20:55
  Speaker 1: timeline that that looks like in reality of like starting
• 20:58
  Speaker 1: the exploring the product so to actually getting it in place.
• 21:02
  Speaker 3: Talk a little bit about that, Kelly.
• 21:04
  Speaker 4: The process almost always begins with a conversation or two
• 21:07
  Speaker 4: to help us determine whether or not the company might
• 21:10
  Speaker 4: be a good candidate. And if they are, then they
• 21:14
  Speaker 4: will engage us to prepare a feasibility analysis. So that's
• 21:18
  Speaker 4: the first major step, and in that analysis we answer
• 21:23
  Speaker 4: the four key questions that they always have. First, if
• 21:26
  Speaker 4: I sell to an ESOP, what would I expect the
• 21:28
  Speaker 4: purchase price to be? The owner needs to know if
• 21:31
  Speaker 4: that's consistent with their expectations. The second thing is how
• 21:36
  Speaker 4: will the transaction be financed? And so ESOP transactions are
• 21:40
  Speaker 4: financed with a combination of bank debt and seller debt
• 21:44
  Speaker 4: sometimes company cash, and so the owner wants to know
• 21:48
  Speaker 4: more specifically, how much cash can I.
• 21:50
  Speaker 2: Expect it close?
• 21:52
  Speaker 4: That's a use we're going to provide them an estimate
• 21:55
  Speaker 4: of that, and then they're going to want to know.
• 21:59
  Speaker 2: What the seller note are going to look like. And
• 22:01
  Speaker 2: just by way of previews.
• 22:02
  Speaker 4: Since that debt's going to be subordinated to the bank debt,
• 22:05
  Speaker 4: it's going to have an all in return of approximately
• 22:08
  Speaker 4: twelve percent, so a very attractive rate of return for
• 22:13
  Speaker 4: the business owner.
• 22:13
  Speaker 2: It's probably going to be their best investment.
• 22:15
  Speaker 3: And they.
• 22:19
  Speaker 4: And then they want to know about corporate governance, and
• 22:22
  Speaker 4: the shortcut answer to that is not much changes. There's
• 22:26
  Speaker 4: usually some additional formality that's required, but the owner who
• 22:30
  Speaker 4: sold is going to continue to control the transaction and
• 22:35
  Speaker 4: control the company after the transaction. And then the fourth
• 22:40
  Speaker 4: thing that we look at are stock appreciation rights. So
• 22:43
  Speaker 4: almost all of our clients tell us that all of
• 22:47
  Speaker 4: my employees are important, but there's some employees who are critical,
• 22:52
  Speaker 4: and I want to be able to do something extra
• 22:54
  Speaker 4: for those mission critical employees. And so that's done via
• 22:58
  Speaker 4: a stock appreciation right plans, So those key employees have
• 23:02
  Speaker 4: their ASoP account. Then layered on top of that, they
• 23:06
  Speaker 4: have a STAR plan that provides them additional incentives.
• 23:11
  Speaker 1: Okay, so that gets in some different that's a great breakdown, Kelly.
• 23:14
  Speaker 1: So you're going through all of those elements and then
• 23:18
  Speaker 1: obviously it depends on the complexity, but just roughly what
• 23:21
  Speaker 1: time like. So if you identify that you've looken through
• 23:23
  Speaker 1: those things and you want to set those things up,
• 23:25
  Speaker 1: what does that look like from.
• 23:26
  Speaker 3: So the employer? This is what I find.
• 23:28
  Speaker 1: This is why I ask you this question because sometimes
• 23:30
  Speaker 1: people are like, well, I've got to sell my company
• 23:33
  Speaker 1: or something's changed, right, And I'm like, well, this is
• 23:36
  Speaker 1: not going to happen overnight, and it's definitely not.
• 23:38
  Speaker 3: And I talk with people even in.
• 23:39
  Speaker 1: The in the mergers and acquisitions and in the PE space,
• 23:42
  Speaker 1: and they're like, it typically is a three to five
• 23:44
  Speaker 1: year process to get your company into a good space
• 23:47
  Speaker 1: to maximize return.
• 23:48
  Speaker 3: Right.
• 23:49
  Speaker 1: You know, now you could sell it tomorrow or next
• 23:51
  Speaker 1: week or whatever the case might be, that's not going
• 23:54
  Speaker 1: to be very beneficial for you anyways. Maybe beneficial for
• 23:57
  Speaker 1: the buyer, but not so much for you talk a
• 24:00
  Speaker 1: little bit about just what they should be expecting to
• 24:03
  Speaker 1: get this transition.
• 24:05
  Speaker 4: Well, assuming a company's in a position where it's ready
• 24:08
  Speaker 4: to sell, then it's going to take four to six
• 24:11
  Speaker 4: months in order to execute the ESOP sale.
• 24:16
  Speaker 1: And then you know, you mentioned there's you as, there's
• 24:20
  Speaker 1: there's an expense, and there's of course I think of
• 24:23
  Speaker 1: lawyers and things involved. There's some complexity there. But once
• 24:25
  Speaker 1: you get that sat up, Kelly, talk a little bit
• 24:28
  Speaker 1: about the ongoing kind of meetenance and just making sure
• 24:31
  Speaker 1: that that's being taken care of.
• 24:33
  Speaker 4: Yeah, there are several pop parties involved in an ongoing basis.
• 24:38
  Speaker 4: One of those is going to be the trustee, which
• 24:40
  Speaker 4: is now the owner of the stock. The second is
• 24:43
  Speaker 4: going to be the trustees valuation advisor. So we're dealing
• 24:47
  Speaker 4: with closely held companies m H a price quoted on
• 24:51
  Speaker 4: a stock exchange, So how are we going to know
• 24:55
  Speaker 4: what the value of the shares.
• 24:57
  Speaker 2: Is from year to year?
• 24:58
  Speaker 4: They answer, the trustee hires evaluation advisor and each year
• 25:03
  Speaker 4: the company's shares are revalued. So those two parties are
• 25:07
  Speaker 4: going to be involved. And then the third party is
• 25:10
  Speaker 4: the planet administrator. So sometimes in the four to one
• 25:14
  Speaker 4: K world, we refer to that person or that party
• 25:18
  Speaker 4: as a TPA, a third party administrator. And so the
• 25:21
  Speaker 4: AESOP is going to have a TPA much like a
• 25:25
  Speaker 4: four to L one K plan does, and that TPA
• 25:28
  Speaker 4: is going to prepare participant statements so that the participants
• 25:33
  Speaker 4: know from year to year what's in their account and
• 25:36
  Speaker 4: how much of that is vested. And they're also going
• 25:40
  Speaker 4: to do compliance testing and prepare the esop's tax return.
• 25:48
  Speaker 4: Those are the three key parties that are involved on
• 25:51
  Speaker 4: an ongoing basis.
• 25:52
  Speaker 1: That's great because I want people to hear because it's
• 25:54
  Speaker 1: one thing people like to get things set up, but
• 25:56
  Speaker 1: then what's the ongoing long term cost to so that
• 25:59
  Speaker 1: they plan for that and prepare for that and there's
• 26:01
  Speaker 1: no surprises, right, It's like, oh, I didn't realize that
• 26:03
  Speaker 1: was that was needed to be involved.
• 26:05
  Speaker 3: Oh that makes sense, you know.
• 26:07
  Speaker 1: To that point, Kelly, I'd love to ask you what
• 26:09
  Speaker 1: are the current or what do you see commonly challenges
• 26:12
  Speaker 1: or myths or misunderstandings out there about estops that maybe
• 26:16
  Speaker 1: we can help address here on the podcast that they're like,
• 26:18
  Speaker 1: oh well this is what I heard this that, or
• 26:19
  Speaker 1: the misconceptions What are those things that you commonly see
• 26:22
  Speaker 1: come up that they would say why they wouldn't going
• 26:25
  Speaker 1: to go with an e stop or their experience in
• 26:26
  Speaker 1: the past.
• 26:27
  Speaker 3: Yeah.
• 26:28
  Speaker 4: Number one is most people assume that if I sell
• 26:31
  Speaker 4: to an ESOP and do what's really in my heart
• 26:35
  Speaker 4: to do, that I'm going to have to make a
• 26:38
  Speaker 4: sacrifice on price, and that's not the case. Probably twenty
• 26:44
  Speaker 4: five to thirty three percent of our clients each year
• 26:49
  Speaker 4: have engaged an investment banker and gone through a process
• 26:55
  Speaker 4: of trying to sell the company to a strategic buyer
• 26:58
  Speaker 4: or to provid equity before we ever.
• 27:00
  Speaker 2: Talked to them.
• 27:02
  Speaker 4: Based on that, they have a number based on pretty
• 27:07
  Speaker 4: informed information about what they think the company's worth, and
• 27:12
  Speaker 4: they tell us, look, if we can't get at least
• 27:15
  Speaker 4: this much based on our experience, then we're not interested.
• 27:20
  Speaker 4: Never had a situation, David, in forty four years, I've
• 27:23
  Speaker 4: never had a situation where the AESOP did not meet
• 27:27
  Speaker 4: their expectations. ANOP offers more than the best quote or
• 27:35
  Speaker 4: bid that they had ever gotten from private equity, and
• 27:38
  Speaker 4: that is so counterintuitive.
• 27:40
  Speaker 3: For most Yes, they assume.
• 27:43
  Speaker 4: That private equity is going to pay more. They think
• 27:46
  Speaker 4: private equity is a more glamorous path. But actually, if
• 27:52
  Speaker 4: you think about it, it makes perfect sense. Private equity is
• 27:57
  Speaker 4: owned by and reports to its investors, and those investors
• 28:03
  Speaker 4: want a double digit rate of return. Sometimes they expect
• 28:07
  Speaker 4: as much as twenty percent on the money that they're investing,
• 28:11
  Speaker 4: and so if you have that drag on the finances
• 28:16
  Speaker 4: of a transaction, it just makes perfect sense that private
• 28:19
  Speaker 4: equity can't pay as much because private equity is serving
• 28:22
  Speaker 4: two masters, the seller in the transaction, but its primary
• 28:29
  Speaker 4: obligation is to its investors, and the higher the price,
• 28:34
  Speaker 4: the lower the return to those investors.
• 28:38
  Speaker 2: The AESOP doesn't have.
• 28:40
  Speaker 4: That company is paying for the cost of THEESOP, not
• 28:48
  Speaker 4: an investor who's expecting a double digit rate of return.
• 28:52
  Speaker 4: So it's just perfectly logical that an ESOPT could pay
• 28:55
  Speaker 4: more because anop's only serving one master, the seller. It's
• 29:00
  Speaker 4: also looking out for the best interest of the employees,
• 29:03
  Speaker 4: but the employees aren't investing any of their own money.
• 29:07
  Speaker 1: Yeah, I mean, I really like this point of your
• 29:11
  Speaker 1: hitting hard about the legacy and how you're helping them,
• 29:14
  Speaker 1: and it's multi pronged approach, and how even you have
• 29:19
  Speaker 1: Uncle Sam, Like you said, helping you from the tax perspective.
• 29:22
  Speaker 1: Taco just briefly about that, and we're getting closed to
• 29:24
  Speaker 1: in the podcast, but I think that's important too, about
• 29:26
  Speaker 1: how does the government help us in this process?
• 29:30
  Speaker 3: Kelly Yep.
• 29:31
  Speaker 4: Well, I hope our listeners are sitting down because they're
• 29:34
  Speaker 4: going to be surprised when they hear this. If you
• 29:38
  Speaker 4: have a one hundred percent AESOP owned company, that company
• 29:42
  Speaker 4: is going to be exempt from taxation.
• 29:46
  Speaker 3: Wow.
• 29:47
  Speaker 4: And so your company is going to operate as a
• 29:50
  Speaker 4: church or a synagogue on a top free basis, no
• 29:54
  Speaker 4: tax at the company level because the company is going
• 29:56
  Speaker 4: to be an es corp. And we all know s
• 29:59
  Speaker 4: corpse are flow through entities. They're flowing their income through
• 30:02
  Speaker 4: to their owner. And so if I own an S corporation,
• 30:06
  Speaker 4: then I might pay forty percent in tax on that
• 30:11
  Speaker 4: S corporation's earnings. Right, If an ESOP trustee owns an
• 30:18
  Speaker 4: S corporation, that ESOP trustee is a tax exempt entity.
• 30:25
  Speaker 4: So we don't have that forty percent tax drag on
• 30:30
  Speaker 4: the company. So the company can afford to pay off
• 30:33
  Speaker 4: the debt that it's choosed about the owner on a
• 30:37
  Speaker 4: much faster pace because it's not sending forty percent of
• 30:42
  Speaker 4: its earnings to the taxman.
• 30:45
  Speaker 1: Right and there and then and here you are taking
• 30:48
  Speaker 1: care of your employees. You're creating a space for them,
• 30:52
  Speaker 1: which I think is a win win because otherwise we're
• 30:54
  Speaker 1: going to be relying on the government to pay more.
• 30:56
  Speaker 1: So security other benefits is like here, you know, here
• 30:58
  Speaker 1: we're taking I mean, that's still there, but I'm saying,
• 31:00
  Speaker 1: here's another way of taking care of it. And I
• 31:02
  Speaker 1: think the government when this law was past, Kelly, at least,
• 31:06
  Speaker 1: what I'm hearing is it's like, here's a way that
• 31:07
  Speaker 1: we can sustainably grow as a culture community. Here's a
• 31:12
  Speaker 1: mechanism that helps. And I think, to me, what you're saying, Kelly,
• 31:16
  Speaker 1: there's a four oh one k's out there, But this
• 31:18
  Speaker 1: is another great way to really help. And obviously sometimes
• 31:22
  Speaker 1: w k's aren't that great. We were losing pensions or
• 31:25
  Speaker 1: you know, they're not merely pensions around anymore. That's almost
• 31:27
  Speaker 1: heard of nowadays. So this is one of those ways
• 31:30
  Speaker 1: that you can actually take care of your people. And
• 31:34
  Speaker 1: what I found because I work, you know, my steward
• 31:36
  Speaker 1: your business all but organizational health.
• 31:38
  Speaker 3: If you can keep people.
• 31:39
  Speaker 1: In your organization every day that you keep them every month,
• 31:41
  Speaker 1: every year longer, you have a competitive advantage in the marketplace.
• 31:44
  Speaker 1: So this is like, really, it's like, why would i
• 31:46
  Speaker 1: want to go somewhere else. I'm getting this long term
• 31:49
  Speaker 1: benefit being here as an employee and you don't have
• 31:52
  Speaker 1: to There's a lot of folks that you can't compete with.
• 31:56
  Speaker 1: Then you were like, well they don't. I don't even
• 31:58
  Speaker 1: have an option. There is no ESOP option. I have
• 32:00
  Speaker 1: no skin in the game. I'm just an employee, you know.
• 32:03
  Speaker 1: To me, it seems very attractive to retaining and attracting
• 32:07
  Speaker 1: people to your company.
• 32:08
  Speaker 4: Yeah, oftentimes the mentality is I'm an owner and owners.
• 32:13
  Speaker 1: Quit right right, Yeah, that's that's a big deal. I
• 32:19
  Speaker 1: know we're getting. In the end of the podcast, Kelly,
• 32:21
  Speaker 1: you've given us just some great information and understanding, and
• 32:24
  Speaker 1: hopefully as you're listening to you guys, if you haven't
• 32:26
  Speaker 1: considered Nie, hop now you know you can reach out
• 32:29
  Speaker 1: to Kelly. We'll have all this contact information in the
• 32:31
  Speaker 1: show notes or wherever you're listening to this, whether it's
• 32:34
  Speaker 1: on YouTube or LinkedIn or Spotify or whatnot, Please leave
• 32:37
  Speaker 1: a comment for Kelly and we'll make sure that we
• 32:39
  Speaker 1: get him back there, Kelly, I want to give you
• 32:42
  Speaker 1: the opportunity as we're transitioning and wrapping up the podcast.
• 32:45
  Speaker 1: If I'm listening, i'm the business owner, or maybe if
• 32:48
  Speaker 1: it's not even the business owner, but I'm a key person.
• 32:50
  Speaker 1: Like we talked earlier, that says, man, this sounds interesting
• 32:52
  Speaker 1: and it might be something that the business considered, they
• 32:54
  Speaker 1: just didn't even know about it. What would you say
• 32:56
  Speaker 1: to those that business owner that you know, high level
• 32:59
  Speaker 1: executive in that company to consider what would be the
• 33:02
  Speaker 1: next steps? You would suggest to them.
• 33:03
  Speaker 4: A couple of things. I think the key is education.
• 33:07
  Speaker 4: People know how the other liquidity options work. Most people
• 33:11
  Speaker 4: don't know how an ESOP works.
• 33:13
  Speaker 3: Yes.
• 33:15
  Speaker 4: In two thousand and nine, I wrote a book called
• 33:18
  Speaker 4: The ESOP Coach, and it's the only book on ESOPs
• 33:23
  Speaker 4: that was written for business owners in plain language, with
• 33:28
  Speaker 4: all of the legalese stripped away. I found over the
• 33:32
  Speaker 4: years that business owners often learn best via examples, and
• 33:37
  Speaker 4: so there's six chapters with case studies in there. And
• 33:40
  Speaker 4: an owner can find a company that looks like theirs
• 33:44
  Speaker 4: and just read a story about that how that company
• 33:47
  Speaker 4: used an esop. The book is available on Amazon. The
• 33:53
  Speaker 4: second thing that I'd recommend is go to our website
• 33:55
  Speaker 4: and there's a link to buy the book there as well.
• 33:59
  Speaker 4: But our website is just full of educational information. And
• 34:05
  Speaker 4: our email or our website address is www dot Execfinn
• 34:11
  Speaker 4: dot com, e x E c fi n dot com.
• 34:15
  Speaker 2: And so those will.
• 34:16
  Speaker 4: Give business owners two great resources to learn more and
• 34:20
  Speaker 4: determine whether or not it might be something worth considering.
• 34:24
  Speaker 1: Fantastic, Kelly, Well, thank you so much for being here
• 34:28
  Speaker 1: with us on the podcast.
• 34:29
  Speaker 3: It was real pleasure Kelly having you and sharing these
• 34:31
  Speaker 3: resources with the NAVID Thanks very much absolutely. Of course,
• 34:36
  Speaker 3: you guys continue to come back week after week. We
• 34:38
  Speaker 3: appreciate you here.
• 34:39
  Speaker 1: Listening, following along leaving your reviews and comments. Until then,
• 34:44
  Speaker 1: be well, take good care. Thanks everybody for listening.