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ESOP Magic: Millionaires and Meaning with Kelly Finnell · The Heart-Led Business Show

• 0:01
  Speaker: Welcome to The Heart-Led Business Show, where compassion meets commerce and leaders lead with love.
• 0:09
  Speaker: Join your host, Tom Jackobs, as he delves into the insightful conversations with visionary business leaders who defy the status quo, putting humanity first and profit second.
• 0:20
  Speaker: From heartfelt strategies to inspiring stories, this podcast is your compass in the world of conscious capitalism.
• 0:29
  Speaker: So buckle up and let your heart guide your business journey.
• 0:36
  Tom Jackobs: Welcome to the heart-led business show where passion meets purpose.
• 0:40
  Tom Jackobs: And today we're graced with the presence of Kelly Finnell, a Titan in the realm of ESOP consulting.
• 0:45
  Tom Jackobs: With over 300 electrifying speeches and 14 insightful articles under his belt, Kelly's heart beats to the rhythm of ownership, succession, and helping businesses flourish.
• 0:57
  Tom Jackobs: As the president of EFS ESOP consultants, he's turned the complex world of employee ownership into a symphony of success.
• 1:06
  Tom Jackobs: So get ready to dive into the conversation about heart-led business ownership from one of the best in the biz.
• 1:12
  Tom Jackobs: Welcome to the show, Kelly.
• 1:14
  Kelly Finnell: Thank you very much.
• 1:15
  Kelly Finnell: It's great to be here.
• 1:16
  Tom Jackobs: Wonderful to have you here as, as well, and have you on the show.
• 1:19
  Tom Jackobs: I've always been really interested in the whole ESOP program and of course, I'm gonna have you define what that is for the listeners that don't know what an ESOP is, but I think it is one of the most beautiful ways of creating a legacy, and that's just my own personal opinion.
• 1:34
  Tom Jackobs: But I always like to ask, though, on the first part of the show, what's your definition of a heart-led business?
• 1:42
  Kelly Finnell: One of the articles that I've written is called Compassionate Capitalism,
• 1:48
  Tom Jackobs: Wow.
• 1:48
  Tom Jackobs: Okay.
• 1:48
  Kelly Finnell: and the definition of a compassionate capitalist is someone who does well for others while doing well for himself.
• 1:59
  Kelly Finnell: And to me, that's a heart-led business.
• 2:03
  Kelly Finnell: I've got this scale that I talk about with business owners.
• 2:07
  Kelly Finnell: It's called the Greed Scale.
• 2:09
  Kelly Finnell: And on one end of the scale is Mother Teresa, the woman who gave away all of her earthly possessions to take care of the poor.
• 2:17
  Kelly Finnell: And on the other end is Gordon Gekko.
• 2:19
  Tom Jackobs: Greed is good, baby.
• 2:21
  Kelly Finnell: And in order to be a good candidate for an ESOP, you don't have to be Mother Teresa.
• 2:24
  Kelly Finnell: You're going to get fair value for your business.
• 2:26
  Kelly Finnell: But you can't be Gordon Gekko.
• 2:28
  Kelly Finnell: You have to be looking at something beyond yourself.
• 2:33
  Kelly Finnell: And most of our clients are motivated primarily by taking care of the people who have helped them get to the point where they can cash in on their life's work.
• 2:45
  Kelly Finnell: They wanna do that in the most financially.
• 2:47
  Kelly Finnell: Efficient way possible.
• 2:49
  Kelly Finnell: And the tax benefits of an ESOP allow them to bring those two things together, doing well for others, while doing well for themselves.
• 2:57
  Tom Jackobs: Yeah, that is, I think that's gonna be one of the top definitions of a heart-led business.
• 3:02
  Tom Jackobs: I really appreciate that too.
• 3:03
  Tom Jackobs: That you do well by others.
• 3:05
  Tom Jackobs: You're gonna do well by yourself.
• 3:07
  Tom Jackobs: Everybody wins at that point.
• 3:09
  Kelly Finnell: The only loser in an ESOP is the tax man.
• 3:12
  Tom Jackobs: That's okay.
• 3:14
  Kelly Finnell: Exactly.
• 3:15
  Kelly Finnell: I don't lose any sleep at night because of that.
• 3:18
  Tom Jackobs: Yeah, I don't think I would either, so that's awesome.
• 3:22
  Tom Jackobs: So aren't we, for those who don't know what an ESOP is could you define that for us?
• 3:28
  Kelly Finnell: Yep.
• 3:28
  Kelly Finnell: So let's start at the very beginning.
• 3:29
  Kelly Finnell: It stands for Employee Stock Ownership Plan.
• 3:32
  Kelly Finnell: Some people mistakenly refer to it as an employee stock option plan, and there's a big difference between those two.
• 3:39
  Kelly Finnell: With an option plan, the employees have to come up with money to pay for the stock that they end up owning with an ESOP.
• 3:46
  Kelly Finnell: The company finances that acquisition of the stock that goes into their ESOP accounts, and the employees don't spend any of their own money to do that.
• 3:56
  Kelly Finnell: The beginning and employee stock ownership plan, and by definition, it is a retirement plan, like a 401k plan.
• 4:06
  Kelly Finnell: With three key differences.
• 4:08
  Kelly Finnell: The first difference is that an ESOP can borrow money.
• 4:12
  Kelly Finnell: Every other type of retirement plan is specifically prohibited from doing that.
• 4:16
  Kelly Finnell: The second is that an ESOP can engage in certain transactions with parties and interest, and I'll come back and explain that.
• 4:24
  Kelly Finnell: And then the third difference is that an ESOP is required to invest primarily in the stock of the sponsoring company.
• 4:31
  Kelly Finnell: So the business that I own.
• 4:34
  Kelly Finnell: So when you put those three things together, what happens is with an ESOP, a company borrows money.
• 4:42
  Kelly Finnell: Part of that comes from a bank loan, and the other part of it comes in the form of an IOUA seller note issued by the company to the selling shareholder.
• 4:53
  Kelly Finnell: So those that gives us our two sources of capital, that capital is used to purchase stock.
• 5:00
  Kelly Finnell: From our business owner.
• 5:02
  Kelly Finnell: And so that's the transaction with the party in interest is the retirement plan is purchasing stock from the business owner and then over a period of time, 20 to 40 years, generally the stock is divided up among the employees ESOP retirement plan accounts, and that gives them a way to own the business that our client, the selling shareholder is cashing in on.
• 5:33
  Tom Jackobs: Oh wow.
• 5:34
  Tom Jackobs: Okay.
• 5:34
  Kelly Finnell: That's really what an ESOP is.
• 5:35
  Kelly Finnell: It's a retirement plan with those three key differences that allow it to act as our retirement plan for the employees and a liquidity and succession vehicle that maintains the company's legacy, as you mentioned, for the business owner.
• 5:51
  Tom Jackobs: Yeah.
• 5:52
  Tom Jackobs: And the employees don't have to put any of their own money necessarily into it to buy the business.
• 5:58
  Kelly Finnell: It is very rare for employees to put in their own.
• 6:01
  Kelly Finnell: Yeah, it's less than 2% of the ESOPs that we work on have any employee investment.
• 6:10
  Kelly Finnell: 98% of the time the company finances 100% of the purchase of the stock that goes into their accounts.
• 6:19
  Tom Jackobs: Okay.
• 6:20
  Tom Jackobs: Sweet.
• 6:21
  Tom Jackobs: And when you mentioned the time horizon is 20 to 40 years, is that when would a business owner think about starting an ESOP in their career?
• 6:32
  Kelly Finnell: Yeah, most of our clients are baby boomer business owners, so that generation that was born between 46 and 64.
• 6:41
  Kelly Finnell: They're getting along a little long in the tooth at this point.
• 6:44
  Kelly Finnell: So most of our clients begin the process somewhere between age 60 and above.
• 6:51
  Kelly Finnell: We have clients that sell to an ESOP into their early to middle eighties or eighties.
• 6:59
  Kelly Finnell: Yeah.
• 6:59
  Kelly Finnell: And so, there is a range.
• 7:02
  Kelly Finnell: But the owner is going to get paid out much more quickly than the employees are going to receive the stock in their account.
• 7:09
  Kelly Finnell: So the owner might get paid out with a down payment financed by the bank loan day one it close, and then get paid off on the seller notes over a five to seven year period.
• 7:23
  Kelly Finnell: Okay.
• 7:23
  Kelly Finnell: So there's a disconnect between gets his money and when the employees get the shares that are allocated to their accounts.
• 7:30
  Kelly Finnell: Employees get those benefits spread to their accounts over a period of time.
• 7:34
  Tom Jackobs: Okay, so is it that over that period of time, the 20 to 40 years, that's when the ESOP is paying off the loan and paying off the owners?
• 7:45
  Tom Jackobs: So then the full equity is then in the shares?
• 7:47
  Tom Jackobs: Is that the process?
• 7:49
  Tom Jackobs: Okay.
• 7:49
  Tom Jackobs: Alright, cool.
• 7:50
  Tom Jackobs: Nice.
• 7:51
  Tom Jackobs: So what size of business do you typically work with to get a ESOP in place?
• 7:56
  Kelly Finnell: Yeah, that's a great question and it's very important because I get two or three calls a week from business owners that are interested in doing an ESOP.
• 8:05
  Kelly Finnell: And they have all of the right motivations.
• 8:08
  Kelly Finnell: They're heart-led businesses, they have all of the right motivations to do it.
• 8:12
  Kelly Finnell: And we get to the end of the conversation and I ask them about the company's financial metrics, and they say we had a profit last year of$300,000.
• 8:21
  Kelly Finnell: That is not a good candidate for an ESOP.
• 8:25
  Kelly Finnell: ESOPs are expensive to implement because they're highly regulated by the government.
• 8:30
  Kelly Finnell: There are many teams of lawyers involved in every ESOP transaction, and so in order to be a good candidate, a company needs to have a minimum adjusted EBITDA of at least$1 million and$2 million works better.
• 8:48
  Kelly Finnell: So to give you some real life input, over the last four years, our smallest client had adjusted EBITDA of 1.2 million.
• 8:58
  Kelly Finnell: Client had EBITDA of 56 million.
• 9:02
  Kelly Finnell: And the mean was 4 million of EBITDA.
• 9:06
  Kelly Finnell: And that's really what in general, the ESOP market looks like.
• 9:11
  Tom Jackobs: Okay, so yeah, I, I work with a lot of doctors that have practices in, in, a lot of'em are cash pay, private pay practices that are probably meet in that range.
• 9:21
  Tom Jackobs: So they're doing, five or 6 million gross and so they might be having that.
• 9:26
  Tom Jackobs: How do you work with a business that is tied around an individual that might, they might be the heart-led individual, that's the practitioner and also owner of the business.
• 9:37
  Kelly Finnell: So that's another very important determining factor as to whether or not a company is a candidate.
• 9:43
  Kelly Finnell: You've got to have the financial metrics that we just discussed, but in addition to that, since an ESOP is an internal transition, it's imperative that the company have a successor management team.
• 9:56
  Tom Jackobs: Ah, okay.
• 9:58
  Kelly Finnell: Many of our clients already have that successor team in place.
• 10:03
  Kelly Finnell: Every once in a while we have a company that's a good candidate for an ESOP.
• 10:07
  Kelly Finnell: They don't yet have that successor management team in place, and they use the ESOP as a springboard for the future to help them create that successor management team.
• 10:18
  Kelly Finnell: And that might come from internal people who have been with the company for a while, or it might, they might come from outside the company, so they might be an external hire.
• 10:32
  Tom Jackobs: Okay, that's cool.
• 10:34
  Tom Jackobs: So let's kinda shift gears a little bit.
• 10:35
  Tom Jackobs: Let's talk about the heart a little bit and what brought you to build a heart-led business and support other heart-led businesses.
• 10:44
  Kelly Finnell: It was like many business owners, something that happened totally by accident.
• 10:50
  Kelly Finnell: When I was in law school.
• 10:52
  Kelly Finnell: This was 1979.
• 10:55
  Kelly Finnell: So ERISA the law that codified ESOPs for the first time was only five years old.
• 11:02
  Kelly Finnell: Between my first year and my second year, that summer, I had a job working for a firm in Massachusetts.
• 11:10
  Kelly Finnell: And every Monday morning we had a meeting and the leader of the pension team assigned projects for the week.
• 11:18
  Kelly Finnell: And this is 1979.
• 11:21
  Kelly Finnell: There was no email.
• 11:23
  Kelly Finnell: So he had received a letter in an envelope delivered by the United States Postal Service that asked for a white paper on ESOPs.
• 11:34
  Kelly Finnell: And so he looked around the room and all of these very experienced pension lawyers said, man, I don't know anything about ESOPs.
• 11:43
  Kelly Finnell: And so the leader of that group decided to assign that project to the kid.
• 11:50
  Kelly Finnell: And in 1979, I was the kid.
• 11:54
  Kelly Finnell: And so I went to law school thinking that I was gonna be a litigator, which is the traditional path for lawyers.
• 12:01
  Kelly Finnell: But because of that experience, that summer, I decided that I was gonna go into business law and tax law and help people sell their businesses to their employees with a huge tax subsidy from Uncle Sam.
• 12:19
  Tom Jackobs: That's awesome.
• 12:21
  Tom Jackobs: That's a long time to be doing the work that you're doing.
• 12:25
  Kelly Finnell: I know.
• 12:25
  Kelly Finnell: It's hard to believe.
• 12:28
  Tom Jackobs: So you must absolutely love it.
• 12:30
  Tom Jackobs: What's the drive now?
• 12:32
  Tom Jackobs: Not being obviously in 79, you're being told to do this, but what's the driver now for you?
• 12:38
  Kelly Finnell: It's primarily I love what I do.
• 12:42
  Kelly Finnell: I love helping business owners.
• 12:44
  Kelly Finnell: Cash in on their life's work.
• 12:46
  Kelly Finnell: They had a dream and the dream was to build a business that was gonna benefit their family and their employees.
• 12:55
  Kelly Finnell: And there's nothing in the world more satisfying in my mind than helping them achieve that goal.
• 13:01
  Kelly Finnell: And so that's one of the drivers.
• 13:03
  Kelly Finnell: Now, the other driver, honestly, my seven grandkids.
• 13:09
  Kelly Finnell: One of my personal goals is to create memories for my seven grandchildren.
• 13:16
  Kelly Finnell: So I'm making money and putting that money to use to achieve that goal.
• 13:21
  Tom Jackobs: Oh, I love that.
• 13:22
  Tom Jackobs: Yeah.
• 13:23
  Tom Jackobs: Memories are so much better than things for sure.
• 13:27
  Tom Jackobs: Yeah.
• 13:29
  Tom Jackobs: Do you mind sharing one of the memories that you would love to share?
• 13:34
  Kelly Finnell: Yeah.
• 13:34
  Kelly Finnell: There are lots of great experiences that I've had in the ESOP world, but perhaps my favorite at least recently was a company that we worked with in Alabama.
• 13:47
  Kelly Finnell: It was a large company.
• 13:48
  Kelly Finnell: When we began working with them, they had 1200 employees, uh, doing very high tech, sophisticated engineering work.
• 13:58
  Kelly Finnell: Their primary client was the Department of Defense.
• 14:03
  Kelly Finnell: And we had done their ESOP 10 years later, the company had grown substantially from 1200 employees to 2200 employees.
• 14:16
  Kelly Finnell: And a strategic buyer, an international company based in France, came along and said, we're gonna make you an offer that you can't refuse.
• 14:27
  Kelly Finnell: And so this 100% employee owned company sold to this big international company for 1.6 billion with a B dollars, and much of that money was divided up among those 2200 employees.
• 14:47
  Kelly Finnell: So a few months after the transaction I took the CEO, the former CEO now of the company to dinner, and I said.
• 14:55
  Kelly Finnell: Tell me the best thing that happened as a result of this transaction.
• 15:00
  Kelly Finnell: He said we had an employee who had been with the company 40 years.
• 15:04
  Kelly Finnell: He said he was one of our least organ organized or least educated, non-professional employees.
• 15:13
  Kelly Finnell: But he had been with us forever.
• 15:14
  Kelly Finnell: He loved the company, we loved him.
• 15:17
  Kelly Finnell: And after I had done the meeting where I explained to the employees the sale and what this was going to mean for them, this gentleman walked into my office he said, boss, I appreciate everything that you talked about during that meeting, but could you help me understand what that means to me?
• 15:36
  Kelly Finnell: And the boss got on his computer and called up this gentleman's account, and he said, it means that in six months you're gonna get a check for over$4 million.
• 15:48
  Tom Jackobs: Oh.
• 15:50
  Kelly Finnell: And this was a guy who wasn't making a hundred thousand dollars a year.
• 15:53
  Kelly Finnell: Never dreamed that he would have this type of financial security, and he said to the boss, he said, I'm gonna set up a fund so that everyone in my family for generations to come, can go to college.
• 16:10
  Kelly Finnell: He said, I never had that opportunity.
• 16:12
  Kelly Finnell: And he said, that's what I'm gonna do with this money that I'm gonna get.
• 16:16
  Kelly Finnell: I'm not gonna spend it.
• 16:18
  Kelly Finnell: I'm gonna use it for grandkids and great grandkids for generations to come.
• 16:24
  Tom Jackobs: Wow.
• 16:24
  Tom Jackobs: That is such a beautiful story and so heartfelt.
• 16:29
  Tom Jackobs: That's great.
• 16:29
  Tom Jackobs: Wow.
• 16:31
  Tom Jackobs: What a great payday too.
• 16:33
  Kelly Finnell: Yeah.
• 16:34
  Kelly Finnell: The CEO of that company felt like a million bucks because he was involved in doing something that had that impact for people that he cared about.
• 16:47
  Tom Jackobs: Yeah.
• 16:47
  Tom Jackobs: Yeah.
• 16:48
  Tom Jackobs: Now, just outta my own curiosity, that the CEO that was involved, was that the original owner or had the owner already just.
• 16:56
  Kelly Finnell: This was an old company.
• 16:58
  Tom Jackobs: Okay.
• 16:58
  Kelly Finnell: This was when we did this transaction, we called it G three.
• 17:02
  Kelly Finnell: So this was a third generation transaction, and this CEO that I'm referring to was actually the fourth generation CEO.
• 17:12
  Kelly Finnell: This company that had been around a while?
• 17:14
  Tom Jackobs: Okay.
• 17:15
  Tom Jackobs: Okay.
• 17:15
  Tom Jackobs: Nice.
• 17:16
  Tom Jackobs: The owner of the company at some point had developed the ESOP and passed that on down to the employees and okay.
• 17:23
  Tom Jackobs: It totally makes sense that that's very cool.
• 17:25
  Tom Jackobs: What about, what, what goes through the mind of the business owner that's wanting to put together an ESOP and sell it to their employees?
• 17:36
  Tom Jackobs: Do you have insight into that?
• 17:38
  Kelly Finnell: I think that our clients tell us that culture is the key to their company's success.
• 17:45
  Kelly Finnell: And that culture is something that has been developed intentionally by the owner of the company.
• 17:52
  Kelly Finnell: He wants there to be a certain feel that the employees and their customers get from doing business.
• 17:59
  Kelly Finnell: They want those folks to feel like it's family, that they can trust him, and that they can rely on them, and that the company has the employees and the customer's best interest at heart.
• 18:11
  Tom Jackobs: Yeah.
• 18:12
  Kelly Finnell: They know a wise business owner knows that if they sell to a third party, such as private equity, that third party's gonna tell'em, look after the sales, nothing is going to change.
• 18:23
  Tom Jackobs: Right.
• 18:23
  Kelly Finnell: But the reality is everything is gonna change.
• 18:26
  Kelly Finnell: If I write a check to buy your company.
• 18:28
  Kelly Finnell: I'm in control and I'm gonna run that company the way I want to, not the way that you had run it and that your predecessors had run it.
• 18:38
  Kelly Finnell: And so when a business owner wants to cash in, but at the same time maintain the company culture and maintain the legacy that the business represents for the owner and his family, then they're really good candidates and they are really focused and attracted to employee stock ownership plans.
• 19:00
  Tom Jackobs: So why not just move it down the family line, give it to your son or daughter and move it down.
• 19:06
  Tom Jackobs: Why?
• 19:06
  Tom Jackobs: Why the employees.
• 19:07
  Kelly Finnell: Some business owners do that, and that's not necessarily inconsistent with doing an ESOP at the same time.
• 19:13
  Tom Jackobs: Okay.
• 19:14
  Kelly Finnell: You can do a combination of transitioning to family and to, employees.
• 19:24
  Kelly Finnell: By doing a partial ESOP in which your employees end up owning a portion of the business, likely something like 49 to 51%, and your family members own the rest of it.
• 19:39
  Kelly Finnell: So those two goals are not inconsistent.
• 19:43
  Kelly Finnell: But it's Rare for the family to have the money that the business owner might need to fund their retirement.
• 19:50
  Tom Jackobs: Yeah.
• 19:50
  Kelly Finnell: And so in that situation, the business owner needs to sell to get some liquidity.
• 19:57
  Tom Jackobs: Okay, nice.
• 19:59
  Tom Jackobs: Now, you being a heart-led business owner as well, what challenges or great moments have come from being a heart-led business owner for you?
• 20:10
  Kelly Finnell: The experiences that I have every day in dealing with business owners, and helping them achieve their goal of taking care of their employees and their families.
• 20:24
  Kelly Finnell: That's what it's all about for me.
• 20:26
  Tom Jackobs: Yeah.
• 20:26
  Tom Jackobs: Yeah.
• 20:27
  Tom Jackobs: You perpetually have that great smile on your face like throughout the day as you're helping these folks.
• 20:33
  Tom Jackobs: Yeah.
• 20:34
  Kelly Finnell: It's very fun and rewarding.
• 20:36
  Tom Jackobs: Yeah.
• 20:37
  Tom Jackobs: So how do you balance, and this really the purpose of the show is talking about the balance between making a profit and having a healthy business, but also being that heart-led business.
• 20:48
  Tom Jackobs: How have you seen either your clients or yourself balance having a heart-led business, but also making sure that you're making a profit and you can help people along the way?
• 20:59
  Kelly Finnell: I think that business owners focus on culture.
• 21:03
  Kelly Finnell: And treating their employees the way they would want to be treated and treating their customers, that way.
• 21:09
  Kelly Finnell: To me, that's what being a heart-led business and being a good candidate for an ESOP is all about, is caring about something in someone beyond yourself.
• 21:20
  Tom Jackobs: Yeah.
• 21:20
  Tom Jackobs: And then allowing the employees to shine and blossom and pull up the business as well.
• 21:26
  Tom Jackobs: Yeah, there's a, I had a guest on the show and he runs a payroll company and he was, he's going through the ESOP program as well.
• 21:35
  Tom Jackobs: He is I couldn't imagine my kids running this business.
• 21:37
  Tom Jackobs: These guys have run it, for the last 30 years.
• 21:40
  Tom Jackobs: So who better to leave the company to then the employees?
• 21:45
  Tom Jackobs: Yeah.
• 21:46
  Tom Jackobs: And then get that great tax benefit as well for doing that.
• 21:49
  Tom Jackobs: Yeah.
• 21:50
  Tom Jackobs: What other stories do you have about some of the, maybe some of the train wrecks that may have happened?
• 21:54
  Tom Jackobs: Everybody loves a good train wreck story, but.
• 21:57
  Kelly Finnell: Fortunately I haven't had many of those, but I've had one that really sticks out.
• 22:03
  Kelly Finnell: I got a call from a business owner went to his office, said, I think I wanna sell and I wanna sell to my employees.
• 22:10
  Kelly Finnell: And my lawyer has told me that an ESOP is the best way to do that and that you're the person that I need to talk to about an ESOP.
• 22:19
  Kelly Finnell: And so the first step in our process with a client is to do a feasibility study.
• 22:26
  Kelly Finnell: And in that study we answer the four key questions that I have.
• 22:30
  Kelly Finnell: ESOP specific valuation, how the transaction's going to be financed, what can you do in addition to the ESOP for your mission critical employees.
• 22:42
  Kelly Finnell: And then who runs the company corporate governance, who runs the business after, the ESOP is implemented.
• 22:49
  Kelly Finnell: So we did that feasibility study at the end of it he said, okay, let's go.
• 22:54
  Kelly Finnell: I wanna do an ESOP.
• 22:55
  Kelly Finnell: That's very unusual.
• 22:58
  Kelly Finnell: I had two meetings with this gentleman and ESOPs are complex
• 23:02
  Tom Jackobs: Right.
• 23:03
  Kelly Finnell: He claimed to have grasped everything after two meetings and had made a decision to go.
• 23:09
  Kelly Finnell: So I was a little suspicious because that's so unusual.
• 23:14
  Kelly Finnell: Usually it's a multi-month process for a business owner to process all of this and make the decision.
• 23:22
  Kelly Finnell: But we went ahead, we got everything implemented.
• 23:25
  Kelly Finnell: And like any business transaction, when you do an ESOP, you have a due diligence meeting.
• 23:30
  Kelly Finnell: And the purchaser in an ESOP transaction is the ESOP trustee and the ESOP trustee and the ESOP due diligence meetings ask the same kind of questions that any purchaser, would ask.
• 23:42
  Kelly Finnell: And many of those questions are focused on risk.
• 23:46
  Kelly Finnell: And so the business owner, the seller in this situation was asked verbally and in writing multiple times, are there any lawsuits or government actions pending against the company?
• 24:00
  Kelly Finnell: And he said, no.
• 24:02
  Tom Jackobs: Okay.
• 24:03
  Kelly Finnell: That turned out to be a lie.
• 24:05
  Kelly Finnell: And the transaction a year later when this was discovered was unwound.
• 24:13
  Kelly Finnell: He had all of his sales proceeds clawed back, and the company was then sold, and I don't remember the exact numbers, it's been a while, but let's say he sold for$25 million after the dust settled and all of the damage was taken care of.
• 24:31
  Kelly Finnell: The company sold to a third party this time for$500,000.
• 24:37
  Tom Jackobs: Oh wow.
• 24:40
  Kelly Finnell: So you know the message is if you think an ESOP gives you a way a fast one, you're not a good candidate and you're going to be disappointed with the end result.
• 24:54
  Tom Jackobs: Yeah.
• 24:55
  Tom Jackobs: And that, that makes sense for somebody that's just driven by profit there.
• 24:59
  Tom Jackobs: He's probably was in this trouble, wanted to get out of the business as quickly as possible, and he is oh yeah, this ESOP would be good because employees don't know what, those stupid employees, whatever that mentality is, which is ridiculous.
• 25:12
  Tom Jackobs: Yeah.
• 25:12
  Tom Jackobs: That's interesting.
• 25:13
  Tom Jackobs: Is that, that trustee, is that one of the employees or is that somebody assigned?
• 25:18
  Kelly Finnell: No.
• 25:18
  Kelly Finnell: There are professional ESOP trustees around the country.
• 25:22
  Kelly Finnell: There might be 15 to 20 of them, and these are people who, have advanced professional education and designations and have been doing this for 20 years and do you know, 30 to 40 transactions a year and know how to do this and do it right, which is critical to protecting the selling shareholder from fiduciary risk.
• 25:48
  Tom Jackobs: Yeah.
• 25:48
  Tom Jackobs: And then, and they're protecting the employees as well, right?
• 25:52
  Tom Jackobs: In terms of sure that they're not.
• 25:53
  Kelly Finnell: That is exactly right.
• 25:54
  Kelly Finnell: They're ensuring that the employees through the ESOP don't overpay for the stock that's being purchased from the owner.
• 26:02
  Kelly Finnell: That's the number one responsibility of the trustee.
• 26:09
  Tom Jackobs: I would see that, that's, that would be the, probably the biggest risk in terms of, or the biggest lever an unscrupulous person to pull is let's just jack the up the company.
• 26:20
  Tom Jackobs: They won't know any different, and then on with it.
• 26:23
  Tom Jackobs: Yeah, that's interesting.
• 26:24
  Kelly Finnell: I'll tell you another heart-led story about sales price.
• 26:27
  Kelly Finnell: I had a company in Middle Tennessee, the CFO came to me and he said, I think that the owner would be a good candidate for an ESOP, but he has all of these misconceptions about ESOPs he doesn't think that an ESOP's gonna be able to pay him fair value for the stock.
• 26:48
  Kelly Finnell: And I said send me some financial information and me and you will have a conversation about that.
• 26:53
  Kelly Finnell: And then you can go back to the owner.
• 26:55
  Kelly Finnell: And see what he thinks.
• 26:57
  Kelly Finnell: And he did that.
• 26:58
  Kelly Finnell: And at the beginning of the next conversation, the CFO said, the owner thinks that his stock is worth 24 dollars a share.
• 27:08
  Kelly Finnell: And I had gotten the financial information, had my analyst look at it, and I knew it was worth at least 27 and a half dollars a share.
• 27:18
  Kelly Finnell: And so I said to the CFO, look, I guarantee you that we can get more than the owner's goal.
• 27:27
  Kelly Finnell: And we discussed the details and the process and he said, okay, fine.
• 27:32
  Kelly Finnell: So we went through due diligence, we negotiated with the trustee, and I came back and the trustee had offered over$27 per share.
• 27:42
  Kelly Finnell: And I said to the business owner, we've exceeded your goal.
• 27:46
  Kelly Finnell: We've gotten you more than$27 a share, and that will be the sales price.
• 27:52
  Kelly Finnell: And I'll never forget this.
• 27:53
  Kelly Finnell: He said, you didn't listen to me.
• 27:57
  Kelly Finnell: He said, I want$24 a share.
• 28:00
  Kelly Finnell: And he said, that's all I will take.
• 28:02
  Kelly Finnell: He said a way for that additional money to benefit the employees.
• 28:09
  Tom Jackobs: Wow.
• 28:09
  Kelly Finnell: He said, I want to be paid fair value, which I think is X.
• 28:15
  Kelly Finnell: And if I can get more than X, then I want the employees to benefit from that.
• 28:20
  Kelly Finnell: Not all of our business owners, in fact, that's rare, that happens and that is so counterintuitive, and that has happened more than once.
• 28:30
  Tom Jackobs: You work close enough with your employees, and if you have that culture, it's, it becomes like a family too.
• 28:36
  Tom Jackobs: And hopefully a functioning family not a dysfunctional family, but a functioning family that doesn't screw each other out of money and stuff like that.
• 28:44
  Tom Jackobs: I mean that, yeah, it makes sense.
• 28:46
  Tom Jackobs: I think I would do something like that too if I went through at ESOP.
• 28:50
  Tom Jackobs: I get what I think I deserve out of the company.
• 28:52
  Tom Jackobs: The employees, like you said at the beginning of the show, the employees are the ones that are building that company with you and you wouldn't have that success without them.
• 29:00
  Tom Jackobs: That's very cool.
• 29:01
  Tom Jackobs: Kelly, this has been just a fascinating conversation.
• 29:04
  Tom Jackobs: It's typically, it's a little bit different than our normal conversations, but I think it, it goes to the core of, that you can still have a profit business and still be heart-led and make sure that goes for generations to come.
• 29:17
  Tom Jackobs: And I love that so much.
• 29:19
  Tom Jackobs: How can people learn more about your work and get in touch with you if they wanna create an ESOP as well?
• 29:24
  Kelly Finnell: They can go to our website, which is www execfin E-X-E-C-F-I-N.com.
• 29:33
  Kelly Finnell: We got lots of educational material on the website and so that could be a great resource for people I've written a book they can find the book and a link to Amazon to purchase the book online.
• 29:45
  Kelly Finnell: The book is the only one of its kind that's written for business owners.
• 29:49
  Kelly Finnell: There are lots of ESOP books that are written for lawyers and CPAs and investment bankers, but there's only one that was written for business owners.
• 29:57
  Kelly Finnell: And so it gives a simple explanation of what an ESOP is and how a transaction works, how it benefits the employees and the tax benefits.
• 30:06
  Kelly Finnell: And then it also has about six case studies.
• 30:11
  Kelly Finnell: And I have found that's the best way.
• 30:13
  Kelly Finnell: You're focused on stories.
• 30:15
  Kelly Finnell: Yeah.
• 30:15
  Kelly Finnell: And what I think business owners relate very well to stories.
• 30:20
  Kelly Finnell: And so there's six stories that are based on real life clients, and so I think it would be a great.
• 30:27
  Kelly Finnell: Resource for anyone that's interested in learning more about ESOPs.
• 30:31
  Tom Jackobs: Awesome.
• 30:31
  Tom Jackobs: And we'll link that all that up into the show notes as well.
• 30:35
  Tom Jackobs: And I think you, there's a link that we'll have in there as well for the introduction, the ESOP introduction program that you have as well.
• 30:41
  Tom Jackobs: Cool.
• 30:42
  Tom Jackobs: Thank you so much, Kelly, for sharing your wisdom and sharing your time with us today.
• 30:46
  Tom Jackobs: I really appreciate it and I know our listeners really enjoyed the conversation as well.
• 30:50
  Kelly Finnell: Thank you.
• 30:51
  Kelly Finnell: I enjoyed it very much.
• 30:52
  Kelly Finnell: Great to be with you.
• 30:53
  Tom Jackobs: Awesome.
• 30:54
  Tom Jackobs: And thank you listeners for watching the show today or listening on your podcast application of choice.
• 31:00
  Tom Jackobs: I really appreciate it and I know Kelly appreciates you spending the time with us today.
• 31:04
  Tom Jackobs: Make sure you're checking everything that he's doing down in the show notes.
• 31:07
  Tom Jackobs: We're gonna link all that up so it's super easy for you to go down there.
• 31:11
  Tom Jackobs: Click away.
• 31:12
  Tom Jackobs: Go find that, resources and stay heart-led with your employees.
• 31:16
  Tom Jackobs: 'Cause that's such a beautiful thing that you can leave to your employees if you have a business that can do an ESOP.
• 31:21
  Tom Jackobs: And if you could do me a favor real quick, and that is to share the show with a friend or family member that could use the advice that we shared on today's show and that might be interested in learning more about being a heart-led business.
• 31:33
  Tom Jackobs: And until next time, lead with your heart.
• 31:37
  Speaker 2: You've been listening to The Heart-Led Business Show, hosted by Tom Jackobs.
• 31:42
  Speaker 2: Join us next time for another inspiring journey into the heart of business.