Latest / Construction ESOP Collective / Why Contractors Sell to an ESOP, and When They Shouldn't: Jeremy Garrett of Lazear Capital Partners

Transcript

Why Contractors Sell to an ESOP, and When They Shouldn't: Jeremy Garrett of Lazear Capital Partners · Construction ESOP Collective

• speaker-0: You know one thing I've never heard from any business owner I've ever done a transaction with? They want a new boss. That is never something I've ever heard from any business owner. That's just not something that's desirable. Business owners are business owners because they wanted to take charge, they want to be in control, they want the responsibility that comes along with that. They don't need a boss, they don't want a boss. speaker-1: Welcome to the Construction ESOP Collective. I'm Chuck Mazzanti, Senior Vice President at Christianson Group Insurance, and this is the show where we explore the wins, challenges, and real-world lessons of employee ownership in construction. Each episode brings insights from CFOs, former owners, and employee owners who are building something bigger together. Let's get into it. On today's episode, I have Jeremy Garrett, managing director of Lazier Capital Partners. He helps contractors sell to their employees through an ESOP transaction. In this episode, we discuss why construction makes such a good fit for selling to their employees through an ESOP transaction, as well as when shouldn't a contractor go the ESOP route. Hope you enjoy it. Jeremy Garrett, managing director and Detroit market leader of Lazier Capital. Thrilled to have you on the construction Aesop podcast. speaker-0: Yeah, thanks for having me, Chuck. I'm excited to be here and talk construction ASAPs. speaker-1: Yeah. Yeah. Something you and I are both pretty passionate about, maybe a little biased, but that's all right. and just to set the stage, if if you could tell the audience kind of who you are and how you ended up at Lazier. speaker-0: Yeah, so again, Jeremy Garrett, managing director, Lazier Capital Partners. I've been with the firm for about nine years. I think my ninth year anniversary was on in August of this year. And before joining Lazier Capital Partners, I spent about seventeen, eighteen years in commercial banking, with some, you know, super regional banks in the Michigan market. And You know, before banking though, I actually spent some time working for my dad's business, which was an electrical contracting company in Lake Orion, Michigan. And really got got to understand the ins and outs of the contracting world and what contracting business owners go through every day. And so I think it was a great start. And today I'm I'm proud to be able to to help business owners both in the contract contracting space, but in other spaces as well, help them sell you know their business and and monetize their otherwise illiquid investment. So very exciting. speaker-1: Yeah, yeah, no. is your dad's electrical contracting outfit is it still in existence or what what's going on? speaker-0: He ended up selling it directly to his employees when he got out, which was about ten years ago. But he had that for over forty years of his life. And and so, you know, during those forty years there was some serious ups and downs in the economy and the market. And and we lived it, you know, at home and and when I was working with him during college, we you know It's not it's not an easy sport. Contracting is not an easy sport, I'll tell you that right now. speaker-1: No, no, it's not for the faint of heart and the you know the cyclical nature and they're they're exposed to a lot of stuff, man. I I have nothing but respect to our contractors out there. speaker-0: Yeah, no doubt. speaker-1: Awesome. So so you kinda that that's an interesting perspective. So you saw your dad's company go, Aesop. were they were they a union shop as well? speaker-0: He was a non union shop, smaller shop. And they did primarily commercial and industrial work all throughout Southeast Michigan. And and but d non union though. And you know, since I've been in the ESOP space for the past nine years, it's interesting because we've done a number of union shops. we've done done a number of non union shops as well, but There's a lot of different things to think about when you're selling a company that's got union labor inside of it. That's for sure. speaker-1: Yeah. Yeah. And we'll definitely get to that. That's, you know, as we were talking before I hit record, that's probably the number one question I get is, Hey, can you can you talk about union construction with ESOPs, both, you know, when the labor f the union labor force does not participate in the ESOP and then also when they participate. So we'll we'll definitely get to that. In your view, Jeremy, why do you feel construction is so ripe for employee ownership? You know, it's a third of all all ESOPs and I feel like it's picking up momentum with the the quote unquote silver tsunamis. So from where you sit, why do you think can construction goes so well with employee ownership? speaker-0: Well, I think there's a number of drivers that that encourage business owners in the contracting space to sell to eSOPs. one of those drivers is the fact that there is there are not just not a lot of buyers for contracting companies in general. And I'm being I'm being pretty generous with that term. I in certain spaces, residential HBAC lawn care landscaping, there's lots of buyers right now, lots of private equity firms trying to tap into those different spaces of the contracting industry. But generally speaking, for earthmovers and vertical construction companies, there's just not a lot of buyers out there. And so what you've got with an eSop, an employee stock ownership plan, is you've got a built in buyer. Okay. So your employees are there, the ESOP is all upside for the employees of the company. And so having that guaranteed buyer, which is your employee base and this ESOP concept, is one reason why business owners choose eSops to sell. The other reasons are that contracting companies, the value of the company really walks out the door every day. The employees are what binds the company together. and creates value for a company and and many of the business owners that I work with, they say, you know, all the time that, listen, I want to reward the people who have, you know, allowed me and and helped me build this company over time. I want to reward those people. And that's really the true, true value of a of a contracting company is the people. And what happens is, you know, when you announce the ESOP and once people start to understand the benefits of an ESOP, especially in the contracting space, they start to they start to stay longer. There's statistics that show for every one person that leaves a d eSOP firm, four people leave traditionally owned firms, privately owned firms. And and so, you know, when you can kind of provide the glue to bind everybody to the company, take care and reward the people that have worked for you for a long time. Those are all important things to to business owners in the construction space. They they really feel like their employees are are more like family, like truly like family, than just employees. And so, you know, the employees and the value that they provide is a big benefit to business owners in the construction space. And then three, very important for any business owner. is the value overall on an after tax basis from selling to an eSOP typically can can far outweigh what that same business owner would get from a sale to a third party. And so value is always going to be an important concept for any business owner looking to transition their company. And so and the the tax benefits, you know, we're we won't get deep into those today, I'm sure, but you know, not having to pay taxes when you sell your company and having the company be able to operate indefinitely without paying federal and state income tax, those are huge tax benefits. And, you know, the federal government, Congress allows for those two tax benefits. They want to encourage more ESOFs to be formed. And so the tax benefits cannot be overlooked when a business owner's looking to sell their company. So those are some of the reasons, you know, that I that I typically that it kind of boils down to when we're talking to business owners and they're making the decision to to go forward with selling their company to an ESOP. speaker-1: Yeah. No, I appreciate that perspective, Jeremy. There's a couple things I wanna dig into because you brought up a a point about the value, and and I think everyone thinks, if you go Aesop, you're leaving money on the table, right? You're you're doing something it's kind of a charity thing to a certain extent. So you said they could come out ahead. So that's something I wanna get into. But the first thing a note I wanna add. Is yeah, we're not, you know, neither of us are are tax providers, I don't think. I mean, I'm I'm one once a year on Halloween, but that's that's about it. But it's not, you know, people kind of like poo-poo it or they think they have to be hush-hush around the the tax benefit, but it you don't have to hide from it to your point. Like the federal government, the state governments understand and and they want that benefit. It's not like you're playing some nefarious game. It's it's fully out there and and employee stock ownership plans are one of the few things in today's polarizing political environment that both sides of the aisle agree on. and and they they think it's a huge benefit to America. and and the more Aesops, the better for for our country in general. So that's some color commentary I wanted to provide around taxes. But Can you explain what you mean? I mean, I everyone says you're taking a haircut if you go ESAP. So how how do you figure they're coming out ahead of the game in some instances? speaker-0: Yeah, so an Aesop, you know, when the you know, the the the buyer of the ESOP ultimately is the employees of the company, but what happens here is a ESOP trust is set up to buy the shares of the company and that ESOP trust is governed by a trustee that's hired. And it's gonna be an independent third party. trustee that's buying the company on behalf of the employees without the employees really knowing about the transaction until it closes. Kind of a unique scenario, right? So you've got somebody buying a company on behalf of the employees. They never they never know anything's going on until the company's actually has traded hands. And so when you look at the value that is paid The trustee can pay up to and not more than fair market value for the company. Fair market value is a pretty broad term, but generally it's, you know, what an arm's length, you know, bu buyer is willing to pay for a company. And and so it can pay fair market value for the company. So you get equal to sometimes a little bit more than what you would get from a sale to the market. so that's Kind of a starting point. Beyond that, though, is the tax benefits that I was talking about. A business owner that sells his company or her company to an ESOP can elect what's called the 1042 exchange. This exchange allows for a permanent deferral and ultimate avoidance of any capital gains on the sale of a company. So when you look at taxation when you sell a company. Like when a business owner sells a company and has to pay capital gains tax on it, and let's say that that sale price is a hundred million dollars, they would normally have to pay twenty-five million dollars in taxes. Well, with an ESOP, that business owner electing a ten forty two exchange pays zero federal and state capital gains taxes. So it keeps t almost twenty-five million dollars of what would otherwise go to the federal government and state government keeps that in their estate. And so when you compound that tax savings of roughly twenty-five million dollars, twenty-five percent, plus the fact that they're getting a fair market value for the company, plus the fact that post closing, there's a tax benefit where the company, if it's an S-Corp that's owned by an ESOP, that S-Corp S Corps are a pass-through entity. They never pay taxes. That tax bill goes up to the owners via a K1. And when it hits that income hits the ESOP trust, the owner of the shares of stock, that ESOP trust is considered to be a qualified retirement plan. It does not pay taxes, it's a tax exempt entity, and that's how you end up with a completely tax-free. S Corp organization into perpetuity from the time of close and beyond. And so when you factor in the fair market value plus the tax benefit of ten forty two, plus the fact that the company's not going to pay taxes in the future, that owner can get his money much more quickly. It's really, you know, a profound, you know, outcome for for most business owners. Game changing. speaker-1: Yeah, no, that's that's huge. and then isn't there upside? Correct me if I'm wrong, Jeremy, but let's say you have a younger owner, right? Late thirties, early forties, and wants to utilize the e-sop, but he doesn't he or she doesn't want to get out of the game. They want to stick around, right? They still have another twenty, twenty-five years left in the tank. But they want to get some chips off the table or whatever their reason is, right? To sell to the ESOP. Isn't there a benefit even if they don't go 1042 to kind of get a second bite at the apple with the upside of the the growth of the company for your non-traditional? You know, not I'm not the 65-year-old guy selling want my money, but I'm the younger guy or gal that wants to get some money but also wants to participate in the growth of the company. speaker-0: Yeah, definitely. So younger selling shareholders that may want to work for the next ten or twenty years post closing, typically what they're looking for there is they're looking to diversify their assets. They're looking to turn a illiquid asset being the company into liquidity. So they typically they want to go and either buy real estate, buy other companies, do something else in addition to the company that they're running. but you're cr absolutely correct. What they can do when they sell is they can continue working there and running the company for as long as they want. a business owner that's thirty five or forty, we deal with them all the time. They you know want to maybe continue working for 10 or 15, 20 more years. They can do that. They can keep the president role. They can remain on as chief financial officer, whatever they want to do. And what they can do in the meantime, or during the time that they're working, is they can continue to collect a great wage. they can also get the benefit of the ESOP participation, which I think is what you were asking. Yep. And that participation in the ESOP can build up to several hundreds of thousands, maybe into the millions of dollars over the long haul. we've got transactions. I've got transactions in Michigan that I closed six, seven, eight years ago, where many of the, you know, higher earners in those companies have several hundreds of thousands of dollars in Esau participant values already. And so yeah, so a a business owner can continue to work at the company. continue to control the board of directors. that's another unique benefit of an ESAP. So instead of having a new owner and a new boss, like you do with private equity, these business owners that are selling that are younger can continue working there. They can be on the board of directors. They can control the board. there's typically we're gonna set up a three person board and you'll have two insiders and one outsider. The two insiders therefore control the strategic direction of the company. And so when you look at an ESOP transaction shortly after close, what people don't want to have happened, what the employees don't want, what the selling shareholders don't want, what the trustee doesn't want is big changes, right? So the the trustee stepped in, the employees stepped in. They bought this company because of the value. that was inherent in it historically. And, you know, rapid, large changes post closing are unnerving for everybody. And so with an ESOP, many of my business owners, six months, a year after closing, will call me and ask me, Jeremy, is there's is something supposed to be changing here? 'Cause it feels like it's always felt. And that's the way a successful ESOP should operate. It should feel like it always has in the in the past. But instead of, you know, if you think about it, instead of a single owner or two owners of a company, now you've got maybe a hundred owners in the company. Now you've got, you know, a hundred people that are excited and they understand that over time, the harder they work, the more value they're gonna create for themselves and their families versus all of that value going to the existing owners, the selling shareholders of the company. So but yeah, selling young selling shareholders can definitely participate In the east south that's that's set up, for sure. speaker-1: Yeah, I th I think that's one of the the lesser known facts about a benefit of an ESOP, you know, in in this case for contractors, but for anybody selling their business is the control piece, right? If you go private equity, even the best run private equity firms, I mean, their sole purpose is to get as much value out of that as possible and eventually flip it, right? For and generate that alpha and If it's not performing well, let's say you go right into a a downturn, right? Of of the market and they're looking to flip it, a dollar saved is a dollar earned, you know. So they're gonna do rash things, maybe not even because they want to, but they have to to generate that value. Versus as Aesop, you're still the owner. You're still, like you said, in that case, the younger guy or gal, like you're still steering the ship. And so you get to choose. How you're going to operate, how you're going to weather the storm, how you're going to take care of your fellow employee owners. And I I think that goes to the point you made earlier that for every person laid off in a Aesop owned firm, there's four in the traditional firm. That that goes back to that principle. So I I think your points are are well noted and it's it's very customizable from young to old to getting all your chips off and 100% transaction to maybe going partial Aesop and steer stepping your way up based on your needs and wants. You're not getting that in a strategic sale. You're not getting that in a private equity sale. You're not getting that in selling to a a publicly traded firm. ASOP is the only vehicle that I'm aware of that has this much customizability for the contractor. speaker-0: You know one thing I've never heard from any business owner I've ever done a transaction with? You know one thing I've never heard from them is they want a a boss. They want a new boss. That is never something I've ever heard from any business owner that that we have either sold to you know sold to private equity. We do and A, sold to private equity, or to an eSOP. That's just not something that's desirable. Business owners are business owners because they Wanted to take charge, they want to be in control, they want the responsibility that comes along with that. and and and the business owners and and successful business business owners that we're dealing with, they just don't they don't need a boss, they don't want a boss. So an eSOP is a great fit for them to continue to run the company the way that they see fit. So speaker-1: Yeah, a hundred percent. It it's funny. I was talking to a buddy that that sold a private equity. I told him, you know, there's other options. But you know, I don't fault anybody for for choosing how they're gonna exit. It's their business at the end of the day. But I had lunch with him last week and they're about maybe four years post close of the private equity sale. And he he made a good, you know, multiple seven figures personally. And he can't stop complaining about how he's got a boss now. And how his customers aren't seeing the same white glove service as he was used to giving when they were steering the ship and own the company, but he's only you know, he's just an employee now, right? Of of the PE firm. And so I was like, you know, so and so, like, you you got that bag of money though. He's like, Yeah, I mean, that was great the day after, but now it's just a pain in the butt dealing with this stuff day to day and answering the to clients on why we're dropping the ball and and so your point's well noted. No nobody likes a boss and they they they forget at some point like, I got all that money. But unless you're exiting the next day, you gotta deal with it. speaker-0: Yeah. there's studies out there that have I think the stat from I think it's the Exit Planning Institute is seventy five percent of business owners who sell their company have buyers remorse. And you know, there's a whole number of things that that cause that. You know, it's the new owners are not running it the way that they ran it in the past. They're not giving raises, they're not hiring, they're You know, a whole slew of things can happen, or they just don't like don't like the buyers, right? And there's some friction there. many transactions, particularly third-party transactions in the contracting space, will come with earnouts, which means that if you sell your company, you get some money down at closing, the rest comes over time. The problem with that scenario is that You've now handed over the reins of control to somebody else who bought your company. And I'm talking with private equity or strategic buyer. You've handed the reins over, somebody else is controlling the company, and you're sitting there hoping that your contingent money that's contingent on them performing gets paid. And many times it may not, you know. And so the difference, that's one of the key differences between an eSop sale and a and a private equity sale. too is that with an ESOP sale on day one, you're gonna lock in a price. And then it's just a matter of making sure that the company is profitable enough to be able to pay the selling shareholder off. And so that's that's how an ESOP works. There's no the you know hurdles that you have to hit you know in the future. There's no you know magic to it. It's just here's the number that we locked in for the sale of the company. And then so long as the company's profitable post closing The selling shareholder will get all the proceeds from the sale over time. speaker-1: And can you talk a little bit about because construction, right? And a lot of these contractors are heavily bonded, and so that's something they have to anticipate with the balance sheet flipping. And and we've done a really good job, at least, you know, at our firm and other firms. I think by and large the bonding community understands esops well enough now, and they know when it's structured correctly and when it's maybe not. but Can you talk about the benefit to the selling shareholder of, you know, seller financing? And are they able to, you know, generate some interest for doing the seller financing, at least a a piece of it to preserve, you know, bonding and and those sorts of things? speaker-0: Yeah, so the key thing with companies that have bonding in place is you have to recognize that that that bonding, that surety provider is a true partner of the business. meaning that, you know, to win projects in the future, some companies, many companies need bonding capacity to be able to win projects. And you have got to make sure that you're paying attention to the structure of the transaction. To make sure that that bonding capacity isn't minimized or reduced as part of the transaction. Our transactions, the first thing that we do is we reach out to the bonding company, to the insurance provider, and to make sure you know they understand the transactions coming and to make sure that they're on the same page as we are with structuring the transaction. The one thing that you don't want to do with an ESOP transaction, if you've got bonding in place. is try to over leverage the company or strip out too much working capital as part of the transaction. the transactions that we work on typically we will get somewhere between one point five to two point five times EBITDA for the selling shareholders at closing and and then the rest comes over a number of years. And the way that works is Let's let's take an easy scenario. $100 million transaction. business owner, maybe the company's doing $20 million in EBITDA. Owner gets $40 million on day one, and the rest comes in the form of a seller note. That's $60 million in a seller note that's paid typically between three to six years post-closing. And you know, the structure of that seller note is going to be. typically about a 12% all in return. Many times we'll carve that return up into two pieces, seller note interest and then interest rate replacement warrants. so we'll kind of carve that return up. but essentially the seller is going to get 12% on the seller note. so you know that's getting some money at close is great for a selling shareholder. but the 12% is not too bad either. So we try to structure our transactions where everybody's comfortable, everybody wins, the bank, the surety provider, the business owner, the employees, all sides are coming out winners, where there's not too much friction during a transaction and we're not trying to press too hard for over levering the company or getting too much debt on the balance sheet. it's a bit of a you know teeter totter there, but you know over the years we've kind of devised different strategies to be able to make sure that you know, both sides are happy, all sides are happy. speaker-1: Well, I think that's the key, not to give you a plug, but I mean it's it's legitimate. That's the key for partnering with people that understand these transactions and also understand construction because construction's a different beast. And so you need to partner with people that understand it, understand the difference between a a heavy civil contractor versus a mechanical contractor versus a roofing contractor. There's nuance not only to construction but the type of trade. and so I think that's i pick your your service providers wisely and make sure they have experience in it. speaker-0: Yeah, and like you know, the difference between like a general contractor and a self performed company, that working capital fluctuation as you're heading into and out of projects is critical to understand as you're as you're looking for bank financing, line of credit availability, to make sure that you can withstand those ups and downs through cycles. capital expenditures for heavy heavy, you know, industrial, heavy, heavy civil type companies. is critical to understand how much CapEx does that company spent historically? Is that enough to support the backlog coming up? And if not, you have got to layer in financing or you know, cash purchases for new equipment. so there's a lot, a lot of considerations, and you're right. Different segments of the contracting industry, their cash flows behave much different, much differently. And you gotta plan for that. speaker-1: Yeah, a hundred percent. well, I want to transition to you you mentioned it at the beginning of the pod, the the union piece. How let's start with, you know, a union contractor that goes Aesop and does not include the union workforce. Can you walk us through what does that look like from the transaction level? And then how does it become a house divided? Is it the union versus the The back office, like what does that look like? speaker-0: Yeah, so I I'll start off with saying that over fifty percent of my transactions that I've worked on, the sell insureholders have actually included the union as part of the ESOP. Which, you know, when you back up and you think about that, what that's doing is it you know, they've already got their retirement benefits through the union. they're collectively bargaining on those every few years. This ESOP comes in alongside of that the union benefits that they're receiving and acts as almost a secondary retirement benefit for those employees inside the union. And so it can be a real windfall for employees that are at these, you know, companies with unions, at least the the union employees. so the ones that include the union. there's a couple different kind of threads, common threads that I see and one is the the culture. if you include the union, typically you've got a really strong relationship and strong culture that whereby you know the union employees are thought of no differently than the employees that are in the front office of the company. And so you've got that, you know that that feeling that they want to take care of all their employees that have helped the company get it to where it's at, union and non union. And so that's one thing, kind of this the cultural fit. The second thing is there are, you know, some financial incentives for business owners to include the union up front during the transaction. And I won't get too technical on it, but There's some tax benefits of including more employees at the company inside of the ESOP than less. The other thing I'll say in addition to inclusion is you can you can choose to include employees because this inside of these union companies there's a lot of churn at the lower levels of the company. And so what you can do is you can actually have the union, the eSOP benefit apply only to certain titles and above. Foreman, superintendent, you name it, you can set it up in a way where only those employees and above are included inside the inside the ESOP. And so you can reduce some of the churn that happens at those lower levels of the company. so lots and lots of different ways to structure the ESOP, to include or exclude the union. the the the benefit I guess Which makes some sense to me, for for maybe not including a union, could be that if you did not include the union workforce in the ESOP, then all the ESOP benefit would go to, you know, the the front office or the non union employees. And the thought there is, you know, the un the business owners that I speak to, the thought you know not including the union is they've already got a retirement benefit plan. that is, you know, very fruitful for them. And so they're already governed under that plan. Let's provide a hypercharged retirement program for the non union, maybe front office employees of the company, and kind of only keep it to them. there's no real unless the company's resold at a later date, there's really no financial benefit or negative to inclusion or or not including the union employees. So from that perspective, it's not neutral. So including them is is you know no negative there's no negative impact to including the union people, to the non-union people. but there's lots and lots of different ways you can skin that. The unions that I've worked with, that that we've done transactions with have viewed generally viewed the ESOP as a as a way to strengthen the union, meaning that, you know, the union's gonna be stronger if it's not only got the benefits from the union itself, but also a another qualified retirement plan alongside of it. So the the smart union leaders that I've I've dealt with on many transactions see the ESOP coming as a as a benefit for their their members, a benefit for the union itself. and it's viewed very favorably. I will say that we've never had a union say no to the inclusion of an ESOP. And in fact most unions only have a notification clause, not a a consent clause as part of their you know, participation in an ESOP. And so for that you know, because of that, we only typically have to notify the union thirty or sixty days before the transaction closes. And then the if if the union's included, they'll automatically be included on the day of close and beyond. but lots of nuances, lots of things to think about, lots of mathematics behind it. And it really, you know, what I think it stems what it boils down to is what what are the goals of the b selling business owners and what What do they want to see happen? And really that's that kind of guides our our direction of what to do and how to structure the transaction. speaker-1: Yeah, no, that makes a lot of sense. And what I'm hearing from the contractors I'm dealing with that are, you know, Aesop curious or the contractors that did go Aesop, but they thought for whatever reason, like you just can't get the union employees in. Well, like, do you think it's you know more nuanced within, you know, Michigan or like have you had a scenario, Jeremy, where You went to the union to let them know, hey, the XYZ contractor is now employee owned and the union the union workforce is part of the ESOP. Have you had a conversation where that that specific union was taken aback and didn't know? And they were maybe riled up about it, but then you had a conversation and once they understood it, they realized that's just an additional benefit and not a competing type thing against the union. Because I ultimately it could be done. You said fifty percent of your transactions include union workforce at some capacity on the Aesop. And so I'd like to go on the offensive and and make sure that all the unions across the country understand that this isn't taking away from them, but this is additive to their respective unions. So I I'm curious if you have any stories around that. speaker-0: I do have one interesting story. So we had a earthmoving client that was going to include that did include all the union members as part of the ESOP. The the notification went out to the union. a competing earthmoving company sat on the union and raised their hand and said, Hey, wait, w we we don't feel like you can add the ESOP retirement benefit to these union members. and obviously you you c you can and you could in that situation. And so but they didn't want what they didn't want is the they didn't want the the company that was coming into the union to have an ESOP benefit when they didn't provide that benefit. maybe in their ESOP. And so they were they thought of it as though Well, this company, Company A, is going to have this ESOP benefit and all of our employees are gonna get a w want to work at Company A because they've got the ESOP benefit in addition to their union benefits. And I don't necessarily think that's unfolded the way that anybody that they thought it would. I think it's it's been a great benefit for the employees that have been at the Earth Moving Company that we we did the ESOP transaction for. But it's not like it It sucked all the employees away and they all went over to the company that's got the y ESOP benefit in place. I will tell you, if if I was a union member and I had the opportunity to go work at work at a company with an ESOP, I'd probably choose that route. in addition to my you know, my collectively bargained benefits from the union. But so that's one scenario where We only got pushback because a competing firm was in the union leadership and you know, as we were setting the ESOP up, there was a little bit of pushback. But it got done on time, as we expected. we didn't have an issue. didn't go to a lawsuit or anything like that. And it was a very smooth transaction for everybody. we Ohio, we've closed a a bunch of companies with unions in place in Ohio. So it's not just Michigan, it's Ohio, Pennsylvania. we've got one going on right now. And each state's a little bit different, but I think, you know, when you step back as a union leader and think about the reason the union's in place, how could you say no to another benefit to your employees? Does E stock coming in? How how I mean you know, if anybody could explain to me why or how somebody in the union would say, you know, no, it's too too much benefits, too rich for our employees. I I'm all ears. But I otherwise I they really do v vie view it v very favorably. but you gotta make sure you send the notifications. If there c there's consent, you have to get consent. You know, so there's different things you gotta do. And also structuring it in a way that aligns with the day-to-day operation of the company and the reward and benefit that the selling shareholders want to give to the employees, you really got to think about all aspects of the union if you're going to include it. The one thing that we haven't talked about yet that comes into play with unions is is withdrawal liabilities. so many times when you go to sell a union company to a third party, that that third party's gonna say, okay, we're gonna pay you this, but you've got withdrawal liabilities of X. So we're gonna pay you this minus those withdrawal liabilities. It turns into a negotiation. But you know, third party buyers are going to try to discount that that company value by the withdrawal liability as a negotiating tactic. With an eSOP, we're very upfront with the trustee, the valuation firm that they hire. And I've never seen a discount for withdrawal liabilities when we've sold companies to a union. so I'm sorry, the when we've sold companies to an eSOP in the contracting space. And so from that perspective, you know, if you look at just that alone and say a company's got a very large withdrawal liability and you can sell and not have that discount for the withdrawal liability, it could be a huge benefit for the selling shareholder. And really the reason why they don't they don't discount the value by the withdrawal liability is there is no intention of getting rid of the union or moving to a different area. So that that's not part of the ESOP an Aesop, that's just just not what happens with Aesops. They use what's been done historically as part of that future success. And there is no intention with an ESOP sale of either moving out of state or, you know, abandoning the union. That's never a consideration with an ESAP transaction. speaker-1: Well, and that that's a good point, right? So if we unions, the the purpose of the union is for the benefit of, you know, the union member, right? To protect them. And so it it shouldn't really differ whether it's Ohio, Pennsylvania, Detroit, Chicago's a huge union place. I I think it's like anything, transparency, following the collective bargaining to the T, not, you know, giving them a surprise after the fix. So following that. But then just explaining to the the different union leaders of why this is a benefit and an additive as opposed to, you know, someone sells the private equity. Sure, there's plenty of good PE deals in the construction space that get them extra, you know, capital and and knowledge sharing to grow the company. But I I would argue that there's also differences that detract from the company. So then maybe you have less. Union employees 10 years later, or they exit the market because it's not making as much money as some of their other markets across the country. And to your point, the Aesop is structured that it's like, hey, we're we're doing everything we did prior to the transaction, post-transaction, we just want to do it even better. And and you can look at the NCEO studies and in Rutgers and all these different think tanks that have empirical evidence on. reduced retention and better profit margins and all these different things. And so I I think that's maybe a gap in the market that you know I'm gonna try to tackle with with people like you getting the unions to better understand the benefits to eesops and why they could benefit their specific union and and not it's not a competitor. speaker-0: Yeah, I think in in the state of Michigan I've I've probably done a transaction with almost every single union. And so the the union leaders across Michigan are are pr are well aware of ESOPs and what it can provide for their employees. So we've got them up to speed. Ohio, we're doing you know, we've do a lot of transactions down in Ohio, so we've got that state covered and they understand it well. Pennsylvania, they we we encountered our f one of our first consent requirements for a transaction, that's very uncommon. So we're gonna work through that with the client and do what you're talking about, which is just educate. Educate the union leadership on what the benefits are of an ESOP and and I think when they see the track record that Lazier has provided for so many contracting companies companies across the United States, I think they'll they'll get on board. So speaker-1: Yeah. Well, success leaves clues, right? So let's follow the good transactions that are, you know, five, ten, fifteen years post, and they're they're benefiting the union, right? And there hasn't been this withdrawal and and all these different things. So no, that's great. we've touched on it a bunch, but I'll I'll ask you flat out what what is the biggest misconception of eSops within, you know, the construction space? speaker-0: the biggest misconception is probably th it's it's the valuation. It's I think a lot of business owners think they, you know, are gonna leave money on the table. that, you know, it's it's almost too good to be true when they're when they're shown the numbers and then you know, once the transaction closes their eyes are wide open and And our our clients in the construction space are our b best advocates and they are our best referral generators for do business. And it's because of the fact that, you know, once they see it and are living it, they believe it. And so I think the biggest mis misconception is is the value piece of things. that's but probably by far the number one. speaker-1: Yeah, that that's from where I'm sitting, I would I would agree with that as well. who, you know, trying to say best fits, who would not, you know, qualify or who shouldn't really think about ESOP from the construction space, whether it be, you know, trade or size, e bit a target, what are a couple of things that you're like, hey, if this is you, maybe Aesop isn't the best path forward, at least right now. speaker-0: yeah, so three things I think. the first one is you need some some scale to be able to do an ESOP. So I tell all my clients, you need and for prospective clients, you should have at least a couple of million dollars in Ebita to do an ESOP. because then you've got the company's got some meat on the bones. It's typically got a management team, finance department, you know, all that in place. And so two million dollars in Evita and above, I think, is where the areas where I don't think an ESAP fits real well is when a company is already very leveraged. So a lot of debt on the balance sheet. and the reason I say this is because at closing, most business owners would like to put some money in their pocket. I would if I was a business owner. And so I have an you know encountered situations where there's a lot of existing balance sheet debt. The owner sees the outcome of closing on the transaction and and no cash goes into their pocket at closing, and that's undesirable. You know? the scenario that I ran be that I, you know, talked about b earlier, a hundred million dollar transaction, forty million dollars in pocket at day one, that's a lot of money. That's an that's a nice payday for a business owner, a nice chunk down on the transaction. and so companies that are over leveraged to begin with are not great fits. The other area and this is great for business owners, but companies that demand really high multiples ten, twelve, fifteen times in the market, I do not think should do an ESOP. And the reason for that is is because Those companies, if you can trade for twelve times your EBITDA, that's twelve years of EBITDA. I advise any business owner, friends, family I would advise anybody the same way, which is take that money and put it in your pocket. If you care about your employees, cut them a check on the way out the door. That's what I would do in that scenario. So in a very high multiple trading company, again, residential HVAC, weirdly enough. lawn mowing landscaping companies right now, in those in those trades, I would I would totally just sell the company and cut checks to the employees. it would take if you sold at a twelve times multiple, I wouldn't doubt if it would take you, a business owner, fifteen years to get paid back. And that's too much risk. It's too long over horizon to get paid back. Our business owners, as I mentioned, that are selling for five to six times EBITDA are typically getting paid anywhere between three to six years from close. Very manageable, short time frame, you know, doing ESOP. So those are a few scenarios I've seen where where I didn't think an ESOP, you know, really fits. Over leverage or if your company's gonna sell for a really high multiple in the market. a lot of people think too that you have to have a management team in place. This might be another misconception with eSops that they think that because I don't have a management team, I can't sell to the employees or an ESOP. Totally not true. And so what you can do in that scenario is you can actually close on the transaction and then use the ESOP as the tool to get people interested in your company because of the great benefits that the eSOP itself provides. But then also alongside of that, you can layer in management and setup programs. we call them stock appreciation rights or SARS. And you can layer those in alongside of the ESAP benefits to have a really supercharged retirement benefit for key leaders at these companies. So you can entice somebody from from a competitor to come over and say, Hey, listen, you're gonna be an ESAP participant, you're gonna get access to these SARS, and it That works great for business owners that are looking to build out management teams and you do not have to have the full management team in place at closing. Trustees still gonna pay full and fair market value for the company with or without a like a wide and deep management team in place. So speaker-1: On the SARS piece, because it's not, you know, it's talked about at the deal level, of course, but in like Aesop Curious Circles, not too many people get into the weeds, and we don't have a ton of time to to go super deep in it. Maybe that's part two of Jeremy, but you know, is that totally customizable? I mean, I'm kind of thinking through it, and it's like, all right, if I don't have all my ducks in a row from a management standpoint, and maybe I want to take my money and run once I'm fully paid back in that three to six year time frame of the seller note piece. I mean, what realistically, what is that looking like? Can I poach a competitor CFO because SARS could be so much above and beyond? And then the ESOP part is additive and then I'm paying, you know, in line with what the market will yield for that type of CFO? Can you I know every deal's different, but can you put a target or just an example of what what a SAR Yeah. speaker-0: SARS package is going to equate to roughly 10 to 15 percent of the enterprise value of the company. So again using the $100 million sale price $10 to $15 million can be allocated to them to the management team. Those are those vest over typically a timeframe of up to 10 years. And so from years five through ten, they'll start vesting and getting paid. And so ten to fifteen percent of the enterprise value company goes to the management team on a non-dilutive basis, meaning that if the company was gonna sell for a hundred million dollars, if you layer in ten to fifteen million dollars of stock appreciation rights, that does not bring down the value that the sh selling shareholders get. So it doesn't reduce it from a hundred to ninety or to eighty five, they still get a hundred and the management team gets ten to fifteen million dollars in stock appreciation rights off to the side. And so and then from there, business owners can divvy that up amongst key leadership. They can give that to one person. They can give that to ten people. on average we typically see business owners dividing that up over three to five people, but it varies wildly. we I think we've seen it all. speaker-1: Close. speaker-0: And that's how, you know, the management incentives can kinda, you know, be there to to like you said, go and poach some, you know, top talent in the market and bring them over. And and then, you know, at that point everybody wins. The employees win, the company wins, the selling shareholder be begins to shed his or her responsibilities off to those people. And it could be a great way to exit. speaker-1: Well, that that could be the missing piece, right? If they're growing it, you know, a fifteen to thirty percent clip, but they haven't been able to get that one key operational person for whatever reason. And now they could do the SARS, and that's the you know, the straw that broke the camel's back, so to speak, to pull them over. I mean, that could open up Pandora's box in a good way to help help the company scale for for some of those key executive leaders that it's just such a hyper competitive. Market to get those people. So no, I appreciate you sharing that. And I guess the the last question I have for you, Jeremy, is let's say I'm a hundred million dollar heavy civil guy sitting on the fence. I listen to this podcast, you got me intrigued. What, you know, what's your honest advice? If you know, what does this entail? Do I need three years of lead time? Am I gonna have to spend, you know, six or seven figures to do due diligence on this? And if I don't go that Route, is that just money gone? You know, what would you tell me if I'm like I'm I'm looking to do it, but just give me honest feedback on what it would look like? Time frame, money that's speaker-0: You know, if you're you're on the fence, you've been thinking about it for a while, you're a business owner, you wanna see what it would look like, how much money you'll get, how long it's gonna take to get the money, what the benefits are to your employees, the management team incentives, all of that I would have you know, us prepare a feasibility analysis, that ESAP feasibility analysis we do for free. And we do that within a time frame of about thirty days. And that will give you all the answers you need in terms of what's this out ESEP outcome gonna look like for me and my employees and my management team. And so 30 days, you'll have the answers that you need to know whether it's a fit. If it is, and you want to move forward, we sign what's called an engagement agreement. And from that day to closing, it should be about a four-month time frame. So pretty quick to close. this is not a year, you know, long process at all, not even close. Four months to close on an ESOP transaction after that, you know, initial thirty days to to diligize the transaction and and to make sure that we understand all aspects of the company. so that's what I would recommend. If you're on the fence, talk to somebody like us and we're happy to do that for any business owner out there. and I think that's a smart move. And if it's not something that's a fit today, and it's gonna be a couple of years down the road, that that happens all the time. So we've got people that we business owners we've talked to five years ago that are now doing transactions. So, you know, whenever the time's right for the business owner, that's that's when we're ready to ready to act. speaker-1: Yeah. So inside of six months, I mean, that's that's kind of surprising in in a good way. And and the thing I tell people most times you're only gonna sell a company one time, right? And so you've you've never done it before, you have no experience. D despite how successful you are in business, you don't have that learned experience unless you've been in and A or you came from somewhere else. But let's pretend it You inherited the company or you started the company. You just don't have experience in it. And so you should turn over every rock. Talk to the private equity. Talk to the strategic. Talk to a publicly traded firm if they're trying to trying to buy you. But vet out ASOPs too, and you'll find out if it's a fit or not. And if it's not, that's okay. But you should look at every option before you pull the trigger. Cause there's once you pull the trigger, it's really, you know, hard to unwind, especially in the, you know, strategic or private equity. speaker-0: It's a lot of transactions that we do on the ESAP side are transactions where somebody tried to sell the company to a third party. they were sold, you know, the fact that they could, you know, sell the company for, you know, many times more than what they were actually going to achieve in the market. And so an ESAP can be a great backstop for somebody that's went through that process, tried to sell, couldn't sell to a third party. And ESOP's a guaranteed buyer. So a great kind of backstop for a transaction. And and you know, again, if a business owner likes what they see in the feasibility analysis, once we complete that to get to closing, we really use that as a roadmap. So it's almost you know, almost I wouldn't say certainty, but close to certainty as possible that they will achieve whatever we put into the feasibility analysis in terms of the outcome of price of bank financing, the time to get paid off and the benefits to the employees. So yeah, the the feasibility is a k a key thing to get done. That's great. speaker-1: Yeah, simple and easy. 30 days. it's it's well worth it. So, Jeremy, it was a pleasure having you on. I I think there's some serious insights that are gonna be gleaned from your episode. So I appreciate it. I had a blast having you on. How do I'll have the link to your, you know, Lazier's website and your LinkedIn, but speaker-0: they can reach me by email, JG at laziercapital dot com or call me on my phone. It's two four eight eight eight one four four five seven. So reach out anytime. even if it's just a conversation to you know, kick the tires. I'm happy to talk to anybody about you know what to do and you know, maybe there's a way where I can connect them with somebody that might help them grow the company. to the point where they, you know, it'll it'll reach what they want to achieve on the sale. So lots of things I can do and help provide, but I really appreciate you having me on today, Chuck. This has been great. So appreciate the work that you you and Christensen group do and it's it's awesome. So thank you. speaker-1: Yeah, no, it's the feelings mutual, my friend. until part two. Thanks for listening to the Construction Aesop Collective. If this was useful, follow the show and share it with a colleague. Join the conversation with me, Chuck Mazzanti, on LinkedIn and find all episodes at constructionesopcollective.com. Until next time, keep building ownership one conversation at a time.