Latest / Alternative Exit / Alternative Exit #71 | The Jerry Maguire Letter That Started an EOT with Aaron Schroeder
Transcript
- Andy Farquharson: Hello, everybody, and welcome back to the alternative exit. So I am so excited for today's guest. He is one of the first owners of a business in Canada to take advantage of the newly minted EOT legislation and transitioned his firm, which he founded in 2015, Bright Spot Climate, to an EOT. So being one of the first companies to adopt a newer legislation is typically never easy. But but Aaron Schroeder has persisted and now he is a co-owner along with his forty other employees and trustee members. So Aaron, welcome to the alternative exit. Aaron Schroeder: Thank you, I'm happy to be here. Andy Farquharson: Mate. So I'd love it if you could take people through just a a little bit of your your journey as you sort of started your business in twenty fifteen. I mean what what made you sort of start get to the point of saying, hey, look, I wanna sell this business to the employees. Aaron Schroeder: Yeah. Well, a little background first, I suppose. the business that that we have here is called Bright Spot Climate. We're an engineering consulting firm focused on climate change. We work with large industrial firms, municipalities, governments on quantifying and reporting greenhouse gas emissions, as well as verifying the emissions, making sure that a third-party review is done. and then we do a lot of work as well on things like life cycle assessments. renewable fuels and we work across a broad range of industries. so that's the work that I've been doing even before I started Bright Spot. I was working with a big consulting firm doing that work. you know, after about eight years, I decided to leave the big company and kind of burnt out, but very quickly found an opportunity to, you know, start something of my own. initially it was just going to be me. I I didn't really anticipate growing a company, but fairly quickly I realized that there was an opportunity here. So I started I started adding you know, welcoming people to the team. And that was back in twenty fifteen. Andy Farquharson: Yeah. Aaron Schroeder: we've grown the team, like you said, to forty people and we're we're offices are here in Vancouver and Calgary and and in Toronto. And you know, we're actually recording this, I just I just realized we're recording this on the National Day of Truth and Reconciliation here in Canada. So you know I'd like to acknowledge that the land that I'm sitting on here is actually the unceded territory of the Muscoom, Swaylatooth and Squamish nations. of of the of of this land and it's an honor and a privilege to be, you know, sitting here today thinking about truth and reconciliation in this country as I'm talking to you. Andy Farquharson: Yeah. Aaron Schroeder: You know, building the company's been been a been a lot of fun. it's been a lot of hard work, but I realized at some point, I think it was in around twenty twenty two, that the success of the company was really absolutely the result of having great people on the team and all the hard work they were doing. And I realized at that time that I I wanted to find a way to further share you know the wealth that we're building in the company with them. Andy Farquharson: Okay. Aaron Schroeder: Prior to that, or up until that point, we had developed a profit sharing plan that really reflected the results of of project level profit. So as projects, you know, moved through the system and they were profitable, we shared a portion of the or I guess I guess I should say I shared a portion of the profit along you know to to the staff who worked on those individual projects. And that was that was you know kind of the way of sharing with the staff before we had formal employee ownership. but it was back in twenty twenty two. when I wrote my what I like to call my Ju Jerry Maguire letter to my team. I work was over for the day and I was thinking about this all day and I I just sat down and wrote a letter to the staff that night. I I remember writing late into the evening and and then thinking I should probably wait till the morning to send this in case I change my mind. Andy Farquharson: Yeah, yeah. So did you send it that night? Aaron Schroeder: But you know, the letter focused on what I felt at the time and still believe were two existential th threats to our society. you know, one day in climate change, it's I think we need to be doing a lot more work than we're doing now on this issue. Even though it's not in vogue right now, it it we need to bring it back and we need to really, you know, get to work. And the other one I I believe is the accumulation of wealth in our society, you know, amongst a few not few people. And I said to the staff in that letter that I had the desire and the commitment to move to employee ownership when we found a structure that would work for us and when the time was right. So that was I sent that letter out to the staff. And I kind of expected, you know, like like the movie, a big reaction, but there was there I think people were just stunned, they didn't really know what to think, so there wasn't much of a reaction at all at that time anyway. Andy Farquharson: Well I I've I've heard that a lot, that a of people don't know how to how to take that news. I mean, especially in Canada where there is no like existing form of employee ownership. So but you wrote this in twenty twenty two. The the legislation wasn't even in p in place until twenty four. How are you thinking about actually making this transition? Aaron Schroeder: Yeah, well in twenty two they were starting to talk about it. So I I was already following along some of the early thoughts that were going on. Employee ownership Canada and and other, you know, people were working pretty hard to to talk to the government of the day about this this as a possibility. You know, there's legislation Andy Farquharson: Yeah. Aaron Schroeder: in the UK for trusts and there's you le legislation in the US for eSOPs. So they would they were starting to talk about this in twenty twenty two. And I think that that's part of what gave me the courage to write the letter to the staff was knowing that you know, this was coming at some point, but without any understanding of what it would look like or whether it would fit. but at least the conversations were getting started. Andy Farquharson: Okay. Awesome. So you're aware of the EOT and these other models, which is awesome. So as you're thinking about how like mapping out the journey to getting ready, because I think the for me we often said we often hear about a couple of different avenues which companies need to look out for and owners really need to take it and look out for. I mean, one is like the economics, like how are they going to get paid for the exit of their business. the other one is the cultural element, how are they going to make their company ready? to be c to be a an employee owned company moving forward. How do you I'd love it if you could just sort of take us through a little bit of a timeline as to sort of how you how you worked on both those two streams. Aaron Schroeder: Yeah. Yeah, from twenty twenty two until twenty twenty five when we eventually, you know, signed the papers on April first, twenty twenty five, we I and and the leadership team here were doing quite a bit of work with the team to to do exactly that, to help people understand what this might mean. And of course, we were taking our best guess at that because we didn't know for sure ourselves, not having Andy Farquharson: Yeah. Aaron Schroeder: through it before. But you know, we're doing things like working on financial literacy amongst the whole staff. so you know, Andy Farquharson: Yeah. Aaron Schroeder: read down to you know, sharing we started sharing our financials, you know, our balance sheet and our income statement on a regular basis so we could get people familiar with really what how, you know, how the finances fit together. rightly or wrongly, we you know, we decided to do that. We're still doing that to this day. Andy Farquharson: On that, like what did you see as a challenge from sort of your employees? I mean, a lot of of they're all going to sort of white collar, like educated well educated. What did but still a lot of them, I'm sure, not financially literate when it comes to reading an income statement or a balance sheet? I mean, what Aaron Schroeder: Sure. Yeah. Andy Farquharson: were some of the challenges that you faced in sort of helping people understand the difference between like revenue, profit, market, et cetera? Aaron Schroeder: Well, to be honest, the most difficult thing is keeping people's attention because people have varying levels of interest. So, you know, there were some Andy Farquharson: Yeah. Aaron Schroeder: people that were just right on it and they were they were asking great questions and they wanted to learn. And there were other people that, you know, y they're busy with other things in their life or other things at work and they're just like, I don't know what this means, you know, I'll figure it out later. So you know, we'd have these all hands meetings and you'd get varying levels of questions. You get questions, you know, I thought we covered that five times already, but sure, let's cover it one more time because you know, people are coming along at different paces and it just had to be patient to see where people are at. the the employee ownership trust mechanism that we ended up using does not require that anybody puts any money up front, zero money down. But that's that's not really the kind of the the norm of employee ownership that people are are are aware of. Like employee ownership existed in Canada before the EOT, but typically you have to buy in. So Yeah exactly, yeah. Andy Farquharson: Yeah, it was like an MBO, wasn't it? A broad based MBO, yeah. Aaron Schroeder: So right up until April 1st, 2025, people were like, How much is this going to cost me? And and and do I have to participate? Like it was just really challenging getting Andy Farquharson: Now I where's my wallet? Aaron Schroeder: people's minds framed around this idea that they're going to, you know, technically own the company, not direct ownership, but it's through the trust. But they're technically going to own the company and they don't have to pay anything for it. That w that that took a while. And then of then there was some trepidation around, okay, well, does this mean we're not going to get bonuses for the next 10 years as we're paying off the debt? Like there were And those are reasonable questions. So we had to walk through all those types of of issues and and and you know, w help people look at the forecast and help them understand what this would mean. What would the what would the dividend structure look like under this new employee ownership trust? Like there was a lot there was a lot of work there and we we spent a lot of time, especially in like late twenty four and early twenty five leading up to the day. you can you can even see it in our if you go back to our kind of our timesheets and you look at where time was spent in that time, there's a huge amount of non billable time spent around, you know, just socializing the EOT. Andy Farquharson: So that's a really, really great point. I'm glad you brought it up. I mean, a lot of people like don't know how to quantify what what's the going to be the impact of sort of really sort of driving this cultural change within the business? Like and a big part of that's the education, as you said. I mean, for you, that was a real cost, unbillable time, right? How did you like how did you think about that when with regards to I mean the the profitability of your business moving forward? And like how did did you have Target in mind of how much sort of time you wanted to spend on this cultural change, etc. Or was it just seeing how like just doing it by feel? Aaron Schroeder: Yeah, we had it in mind. I think we were a bit off. we ha we we recognized that our that fiscal year was going to be an asterisk year, if you will, where, you know, there's a lot more non billable time. there, you know, and other costs of course, you know, the legal and accounting and all the other fees that we had during that year. So we you know w when we talk when we look at when we look at our historical financials now, looking back even just a year or or two, we we put a big asterisk beside that year because that was Andy Farquharson: Yeah. Aaron Schroeder: a a very special year. but You know, overall it was I think it was a very good Andy Farquharson: I love to Aaron Schroeder: investment. Andy Farquharson: I do love, I I've I've obviously seen the asterisk many times, but I've Aaron Schroeder: Yeah. Andy Farquharson: never actually had it been called an asterisk yeah. Aaron Schroeder: Yeah. That's what we've been calling it. Yeah. Because I mean that's what it is. It's just a special year that that, you know, is not really comparable. on top of it, we decided to change our fiscal year that year, so it was a thirteen month year. So it really was an asterisk year. Like it r it couldn't have made it more complicated. Andy Farquharson: Yeah. Well it's a good way to hide things. I mean th this is jumping ahead a little bit, but like we'll just while we're on that theme of sort of culture and thinking about like how you invest in that culture change and like and how that impacts impacts a company's performance. How are you thinking about the today as an employee owned business? Aaron Schroeder: Yeah, that's a good question. I think what we've been trying to do, our senior leadership has been trying to do is for the you know, it's only been a year and a half. We're trying to keep things as steady as possible. You know, i there's there's every organization goes through change, cycles of change, and that was a very big cycle of change. we're having to adapt to the fact that climate change is, you know, climate change consulting has very much changed in the last couple of years. So we're having to adapt to that as well. So I think We're we're kind of very focused on on that, like just the the change in governance of a company as a result of EOT and the change in our industry. we've been talking about, you know, spending some time looking inward to say, okay, now that we're employee owned, what does this mean and how can we leverage this? But I think that that has to come a little bit later just given the circumstances that we have right now. So we've been throwing all kinds of things around, like, you know, you know, should we consider becoming a B Corp, for example, or should we Andy Farquharson: Sure. Aaron Schroeder: consider you know, s speaking more, doing more of these kinds of webinars and talking a lot more, or or should we just get back to the, you know, focusing on on the work that we're doing. So that's that's underway right now, trying to figure out what comes next. But what I will say is, you know, all of this investment has resulted in what I've observed and and didn't really anticipate, was the level of entrepreneurship that's building within the team. You know, I I expected Andy Farquharson: Okay. Aaron Schroeder: there would be some, but It's it's definitely building day by day. And I can see it in the questions that are being asked, in the ideas for for you know new service offerings, for new approaches. They're they're they're different. They're they're they are starting to come from a more of an owner's perspective because people are talking about how will this affect you know our finances this year and within five years. Those those questions that are a lot more than just employees asking, you know. Will will this result in my bonus changing? It's the questions have gone to the next level. So I I'm encouraging that and hoping that that's going to be a really important part of how we leverage employee ownership in the future. Andy Farquharson: That's awesome to hear. I mean what w what are some of the activities that you and the management team are doing to foster those kinds of ideas and and enable people to feel empowered to bring them up? Aaron Schroeder: Yeah. We started a program a few years ago, even before employee ownership, that we call Bright Spot Labs. So we give everyone in the team two and a half hours a week to do some reading on, you know, climate change related topics or or management or leadership, you know, things that are related to the company. And then the other two hours are meant to be sandbox hours where you spend time, you know, thinking about a particular topic. So I was just meeting with one of my staff yesterday and he's really interested in biochar. This is like char pool that you produce. to remove carbon from the atmosphere, through Andy Farquharson: Yeah. Aaron Schroeder: through plants and you know, has agricultural purposes. He's he's been spending his two hours a week just doing a lot more work on really understanding where the biochar industry is and how we might participate. you know, we've got grand dreams of maybe owning a biochar facility someday. It it's sandbox, right? So it's it's blue sky thinking. but from that sandbox have come a few ideas that have actually resulted in new processes in the company, new business lines. So it's it's been fantastic and we're continuing to encourage, you know, staff to do that. It's tough when people are busy. On their busy weeks, the lab's time gets pushed aside, but we're we've been pushing for people to to make sure they're getting their their time in the sandbox every week. Andy Farquharson: Yeah, I look I absolutely love hearing that. I mean it's great. It sounds like you've already been like budgeting for that anyway. I said th th this this lab's time is non billable. but yeah, like as you said, it's already creating those opportunities for the future. Aaron Schroeder: Yeah, that's right. It's it's our it's our R and D time, you know, which isn't very typical for a consulting firm, but you know, there's a lot a lot of consulting firms out there that are doing that kind of raw research so they can apply it to the work that they do. That's that's really the idea here. but you know, we've we've we've put some guardrails on it because it's it you know, to make sure that the that the time is productive to to the to most degree. But it's been very interesting to see what people are spending their time on. Yeah. Yeah. Andy Farquharson: Yeah, that's awesome. Super exciting. now I want to change, change the lens to the other stream. Like you think about so going back to your owner's hat, like a lot of people think about when they're going, hey, look, I'm looking to exit my business. I've got lots of different options on my table. Obviously, some people like how do I maximize my exit? How do I look after my team? but look, some people, like a lot of people with a heart anyway, want to try to do a little bit of both. I mean As you were thinking about that exit, I mean what what was yeah, if you could just talk us through like how you thought about the the financial element and what did you have to do as one of the first EOTs that sort of was going through the wall? Aaron Schroeder: Yeah, that's really good question. And I think that actually strikes at the heart of what needs to happen in Canada next in order to make these VMTs successful. the financing, you know, the financing was a bit tough. the company's been doing well. We've been around for eleven years. We have very strong financials. but, you know, when I go to the bank and say, you know, we'd like to do a a share buyout here for a portion of the value of the shares, they're like, yeah, but you don't have any assets. You know, you've got a strong Sheet, and you've got you've got good history, but you don't, you know, you don't you don't have any assets. So like what are we gonna lend against? And and and they asked immediately for a personal guarantee. Like that's where they went immediately. And it didn't matter really which bank I went to, they all seem to be have the same be singing by sing the song same tune. So, you know, I've I've raised this with the federal government already. I had an opportunity to to chat with with the parliamentary secretary to the Minister of Finance and to Senator Tony Lafredo. in a on a recent trip where where we talked about you know this is a bar this will be a barrier for some people Andy Farquharson: Yeah. Aaron Schroeder: for some owners, especially if especially in more complicated EOTs. You know, I was a sole owner. If you have multiple owners and they all you know they want personal guarantees from it it'll just get too complicated and people won't do it. So Andy Farquharson: So way too messy. Yeah. Aaron Schroeder: I think there's an opportunity here for the federal government to help out. I don't know what that looks like. perhaps, you know calling the CEOs of the big banks in and saying just make this work or or maybe the federal government putting up some sort of a guarantee as well. I I don't know, but I you know, I think every circumstance is different. But there's the f the financing part is is still a bit of a challenge in Canada. so when I talk to new c companies that are thinking about this, I always, you know, let them know that that's something they should get on right away. Because I I just, you know, b maybe a little bit rose colored glasses believed that it would just be fine. You know, just go to the bank and here we go. so probably should have started working on that piece of the pie or that piece of the puzzle a little bit earlier. Andy Farquharson: Yeah, look, I mean, y you you're definitely not alone. Like obviously financing of EOT transactions is really, really tricky and still reliant on benevolent owners like you, to to to be able to do that. But at least I mean, even though it was quite seemed quite funny, I mean, taking out a personal guarantee to pay yourself money. Aaron Schroeder: Right. Yeah. Well, you know, I looked at it I I I I did some soul searching and talking to some mentors about it and I you know, one of the other options I had was just to sell out to a big company. But those deals Andy Farquharson: Yeah. Aaron Schroeder: typically come along with, you know, mm pr pretty significant restrictions as well. You know, the owner has to stay in the company for a couple of years and you only get the full full amount if you know you you keep and grow client base and you keep staff and grow clients and grow staff base. you know, I've been through enough mergers in consulting for companies or watched them. To know that you never really get the full value that you're promised at the beginning. That that just doesn't happen. So I'm just comparing it to that and saying, well, if you know if I'd have to put a personal guarantee up and stay in the company for a few years longer to help make sure the company's successful, you know, I I'm I'm willing to do that. that that for me that that that worked, but it's not gonna work for everybody. so there, you know and not every company's in the same s same place as well. You know, this is this is a small, you know, forty person consulting company. there's Other companies out there that are considering EOT that have a lot larger asset base that are you know more flexibility and and won't have this problem. Yeah. Andy Farquharson: Yeah. Definitely. Well it I I guess part of me it it's I also like how you've I mean the in in the 'cause it when we think about sort of like the benevolent owner, like in the UK model, a lot of people they don't bother about going to the bank to to take any cash off the table. They they're doing it purely based off a deferred consideration, which could happen over sort of six, seven, ten, twelve years, right? Aaron Schroeder: Right. Yeah. Andy Farquharson: could take some time. So I think when you've already done something quite innovative that you don't see many people doing at all, to to provide that initial exit. Like was it all was it all financed by that loan or was it also some deferred consideration that you've yeah. Aaron Schroeder: Yeah, it's a mix of both. Yeah. Yeah. Yeah. The the initial loan isn't is definitely not the full amount. It's less you know, less than half. so the the deferred consideration is, you know, punted down the road and and and hopefully the company will continue to be successful and we'll be able to, you know, address that when when the time comes. so I for me for me it works, or it worked. It's I I mean I'm still taking a lot of personal risk, Andy Farquharson: Yeah. Aaron Schroeder: and giving up control of the company. which is something I have to Andy Farquharson: That's the tough part. Aaron Schroeder: you know, remind my senior leaders and my board of frequently that, you know, I I gave it up for a for a piece of pa for a little piece of paper. But you know, I I do that in jest, but also, you know, we we do talk about that from time to time, that that there is consideration there. Andy Farquharson: Yeah. Aaron Schroeder: Yeah. Andy Farquharson: Absolutely. Absolutely. Yeah. very much so. I mean like in the UK they often talk a lot about Financial Freedom Day. Like how long is it going to take for the company to be unencumbered by their debt and be solely employee owned? What when how long do you guys like what what's the sort of current modeling based off current performance of when that's gonna be for for for Brad's Aaron Schroeder: Yeah, I think every company's different. you know, Bright Spots in the five to seven year range, you know, which I think is a reasonable amount of time for a transaction. That'd be you know, similar to to s n to financing if we've you know gone a different route, like selling Andy Farquharson: Yeah. Aaron Schroeder: out to a large to a larger company would probably in the same time frame ish. so so I'm comfortable with that. And I and I think the the company's growth trajectory has has been pretty strong, it's you know leveled off as we've gr gotten larger and larger. but I think it it can handle that. So you know, fingers and toes. Andy Farquharson: Awesome. Aaron, I wanna be super mindful of your time. I know you're gonna run off to a meeting shortly. So what I like to do is end these interviews with just a a fast round where I'll just ask you three questions and just offer a quick response. Is that okay? Aaron Schroeder: Sure, let's do it. Andy Farquharson: Great. Like who's the leader that you most admire in employee ownership? Aaron Schroeder: I think Employee Ownership Canada as a whole has been doing an incredible amount of work on this. I can't thank them enough. Andy Farquharson: Okay, awesome. We've got and I'll I'll actually pin web, we've got two representatives of Employee Ownership Canada in that I'll I'll link in the show notes. that we've had them on here as well. So thank you. We'll we'll do that. And so secondly, Aaron Schroeder: Yeah. Yeah. Andy Farquharson: what is your favorite resource on employee ownership? Aaron Schroeder: Favorite resource is my lawyer. Andy Farquharson: Did your lawyer know anything about EO? Aaron Schroeder: I have to I have to give a call up to Jessica at Blake's. she's a trust lawyer and she did not know much about employee ownership when we first started employee ownership trust because nobody did. It was it was Andy Farquharson: Yeah. Aaron Schroeder: the second transaction ever. but she was incredible and just in terms of how patient she was and how she how how insightful but also how curious she was. I really we really connected. so she was very, very helpful. Yeah. Andy Farquharson: That's amazing. Okay. And finally, what would you say to another business owner who's sitting on the fence regarding a transition to employee ownership? Aaron Schroeder: I would say go to the employee ownership conference and meet other Andy Farquharson: Ha ha ha. Aaron Schroeder: meet other people and practitioners. That's that's what I did. I I attended the Employee Ownership Canada conference in Montreal a few years ago, and that's where I had the opportunity to socialize with you know other owners who would you know already employee owners or people that were considering the trust. All the practitioners were there. I I that that's where I started to realize that I shared a lot of values with with other companies that had done this. so I would recommend and I and I have recommended to people that's a great place to go. the conference is actually coming up here in October in Vancouver, so you know it's still time to grab your ticket if you're if you're listening to this before end of October twenty twenty six. Andy Farquharson: Awesome. I'll also put the link to those in the show notes. brilliant. Aaron Schroeder: Sure, sounds good. Andy Farquharson: Aaron, thank you so much for your time. mate, where can people, if they want to follow your journey, follow Bright Spot, where's the best belt for them to to to find you? Aaron Schroeder: Yeah, our website is pretty active. We we post on our blog there, so it's brightspot.co. you can find us there. also on LinkedIn. we're posting stuff up there all the time you know what the team's up to. Not just work stuff, there's some social things up there and and things about employee ownership. So those were some great places to find us. Andy Farquharson: Brilliant. Aaron, thank you so much for joining us on the alternative exit. Aaron Schroeder: You're very welcome. This has been a pleasure. Andy Farquharson: Yeah.