224: Challenges for Mature ESOPs with Jeff Buettner

Bret Keisling I appreciate it. I have worked with you on a couple of transactions back in the day and your firm is just doing an absolute great job of serving the ESOP community, so I really appreciate your time. Jeff. As you know, we like to start with our guests sharing their e o Aha moment. If they have it, it's not the moment you first heard about employee ownership or thought you kind of liked employee ownership, but it really was a moment where you went, Wow, or aha, this is a space I wanna be in. You've been in employee ownership for about 20 years. We can talk about that. But have you had an e aha moment that you'd like to share with the.

Jeff Buettner You know, Brad, that's a great question. I think you know, for me I've been in the industry for nearly 25 years now, and employee ownership was not really much of a topic that Was ever covered much in universities or business schools. And I think for me, the aha moment came as I was, you know, in the early stages of my career, learning about the various types of ownership structures that exist. Everyone's very familiar with some of the more common ones and an employee ownership um, is certainly not just limited to ESOP structures. But for me, I think when I had that first aha moment was when I started to learn about employee ownerships within the ESOP structure and some of the merits. Um, Not just you know, for the employees but also. Companies and, and, and executives. And really the type of unique structure that aligns incentives can be a really powerful tool you know, for all stakeholders. And so, I thought at that point in time that it was something that was really interesting that I needed to really kind of get more involved in and learn more about because I felt like, it could be a very good fit and a viable fit for a lot of businesses going forward, particularly with privately held businesses. You know, where in this country there's a large, you know, demographic of aging business owners that are looking to do something with their business. and this type of structure, I thought would, could be a very elegant solution for.

Bret Keisling So Jeff, it's funny there, there are buckets of the aha moments and it almost sounds like. You fit in with a lot of the professionals, and this was my earliest aha moment, you know, even prior when I was a CEO of a esop. And that is that you were into business, you were certainly into financial, you know, services, advising and valuation, et cetera, et cetera, But you realized that employee ownership was a great niche to apply the talents that you already had. You could have been anywhere else in any segment of business, but you've kind of chosen to spend a good deal of your focus on employee owner.

Jeff Buettner Yeah, that's right. I think that's a fair statement. I think um, I didn't certainly start my career with the focus on employee ownership, and as I learned about it and became more intrigued by it, yeah. Did make a decision to, to devote more of my career to it.

Bret Keisling So Jeff, let me share a little bit from your biography, just some highlighted points, and then I'm gonna have you talk about ButcherJoseph. You provide valuation and financial advisory services for ESOP and non ESOP companies in a multitude of industries. And you have the ability to provide the services across any industry. Realistically speaking, you provide business and security interest valuations to stakeholders for a variety of purposes, including ESOP transactions, and you do annual valuations. You've served as a member of the board of the N ceo and you're a member of the ESOP Association, where you serve on the valuation advisory committee. So you're running a very successful ESOP practice, and you're also involved through the organizations in the ESOP community.

Jeff Buettner Thank you. Yes, that's right. It's been quite a pleasure to be involved in the ESOP community over time.

Bret Keisling So Jeff, let's start with ButcherJoseph. And sometimes we pigeonhole the facts we know, and it kind of makes us a little bit myopic. And that happened in this case when I was a trustee. I worked with you guys, I think you were in, in both transactions where the sell side advisor, I was aware, and it's come up on previous podcasts that you also do provide trustee advisory services, although Carter pointed out not in the same transaction, you know, for the trustee in the selling shareholder. But can you give us a thumbnail sketch? ButcherJoseph does so much more than I've had in my mind. So can you share with us kind of, the breadth of what ButcherJoseph does?

Jeff Buettner Yeah, Brad, thanks. Well, I think that as you pointed out we have a very broad and deep ability to provide a variety of types of advisory services to corporations, to boards of directors and as well as you know, ESOP trustees and other fiduciaries. So, you know, broadly speaking we're a, an advisory services firm. One of our core areas of expertise, of course, is working with companies, to help a founder owner navigate the sale of his or her business in some way, shape or form. And, you know, Bret, as you know, that could involve a lot of different types of buyers. It could involve the sale of the company to a private equity firm. It might involve the sale of the company to a strategic buyer. You know, a competitor, for example sometimes that might involve the sale of the business too. The management team or some, you know, some small segment, of uh, the, the employee base. And, you know, oftentimes it could involve the sale of the company to an employee stock ownership plan, which is obviously gonna be a much more broad based type of buyer. You know, but in any way regardless of you know, the types of business or the industry, what we try to do is to really sort of articulate and demonstrate to founder owners who are looking to transition their business in some way, shape, or form. You know, the variety of options that exist and really sort of work with that founder owner to determine, based on that founder owner's goals and objectives, what makes the most sense for that individual, for their business in light of the goals and objectives and ultimately, you know, what might happen with the business over a longer period of time. And so for us, we try to be somewhat agnostic in, in helping that founder owner to, to really sort of choose the best path that makes the most sense and is the best fit for the business. And more often than not, you know, we're finding, obviously employee ownership is one of those avenues that is you know, percolating to the top of the list in terms of the style of transaction. So we've developed a really strong core competency around using employee ownership and an esop you know, plan as a buyer of businesses. Along those lines you know, with our advisory practice, we've developed a really robust debt capital markets presence. As you know, particularly in the context. An ESOP transaction, you have to raise all the dollars to finance the transaction on behalf of the esop. And so given our you know, devotion to that type of structure, we've developed over time the expertise and familiarity with with the debt capital markets whether it's the senior bank market or the more junior bank market, and sometimes it might even be in the more exotic types of capital that's out there and even approaching into the equity capital markets. so, you know, our experience in the advisory side is certainly you know, very vast and expands a lot of different ownership structures. And I think that. when we work with you know, businesses and the debt capital advisory, sometimes also it's helping those businesses raise capital just to grow or to refinance or balance sheet or to find, you know, the type of growth capital that may not be available simply due to constraints of the existing balance sheet. And so the debt capital advisory business of ours is certainly one that's very active and is sort of, is a byproduct of all of our advisory businesses that, that we've been involved as a firm over time. Additionally, as you pointed out, our firm does have experience advising ESOP trustees and in that capacity we're the trustee's, financial advisor. And of course, in those types of transactions, we're helping the trustee, on an initial transaction where a company's going into the ESOP structure for the first time. We're generally helping in the advisory of, you know, the fair market value of the company as well as some of the financing aspects, and then ultimately the rendering fairness opinion on the other end of the life cycle. Many times we're working with trustees when some other third party buyer approaches the ESOP own business and puts in an offer to purchase that business again. Once again, it might be a private equity firm or might be a strategic buyer. And ultimately what's happening is that buyer's coming in, it's buying the company out from the ESOP structure, and we're helping the trustee on that sort of sell side transaction about, determining the merits of the transaction, the fairness of the purchase price, as well as deal with any sort of the allocation of value and proceeds in that particular transaction. In between those two events, of course, is just the ongoing journal administration and operation of the esop, and we'll do the annual ESOP update valuations to help facilitate the administration on behalf of the trustee. You know, the other part of our business that I won't spend too much time on is we do have a, a principle investing platform where we'll actually invest kind of in a merchant banking capacity into companies that are utilizing the ESOP structure. We like that structure. We like the attributes of the structure. We recognize the, how, the, you know, the powerful that structure can be in terms of aligning the interests of leadership and the broader base of the employees and how that can lead to, to sort of shareholder value. And given our familiarity with advising companies, given our familiarity with advising trustees, it was a sort of a natural, sort of segue to be able to provide some merchant banking activities in that space. as the firm has evolved in providing those types of things, as you might imagine, we started to see and experience and work with, many companies that we would determine and call mature ESOP companies. And we generally would define those as companies. Have been living in the ESOP structure for over a 10 year period of time. And whether it's companies that we advise coming back to us 10, 15 years later, or it's companies that, you know, we've been doing the annual evaluations for 15 years or it's companies that we, from a merchant banking perspective worth it and put capital to work. We found that there were some commonalities with many of these mature ESOP companies that created you know, a need to think about the ESOP in its sort of mature life cycle to make sure that ownership structure continues to support rather than inhibit the business. To help companies address many of the same types of challenges that re purchase obligation can bring to an organization. And really to kind of help companies think. Critically with an eye toward maybe refreshing things rather than maintaining a status quo. And you know, that sort of falls underneath our advisory practice cuz oftentimes we're advising companies in that capacity, but we're drawing on experiences on the advisory side, the valuation side, as well as the principal investing.

Bret Keisling Jeff and we are actually the focus today we're going to talk about specific challenges for mature ESOPs, but let me, if I may just make two quick points. I love the fact and if people refer to the other ButcherJoseph episodes that we've done and you can find all of our episodes and archives@www.esoppodcast.com. Is that. You folks will come in, you'll have initial consultations with selling shareholders, the business owners, You'll do a feasibility study that's been shared on the podcast that you don't charge for. You really immerse on the selling of the business, the data and it's just for those who are considering that who might be listening This episode, only 20% of businesses actually end up selling, and as we know, sometimes it's four or five tries at the market before they sell. It's very difficult if a business owner is consulting with somebody who has no knowledge of the ESOP space, Those advisors aren't necessarily likely to even mention employee ownership. What I like about ButcherJoseph, and there are others that do it, to be fair, but what I like about ButcherJoseph, is you are clearly part of the ESOP landscape, but if employee ownership isn't the right fit for a particular business seller and there are some cases where it's not a right fit, you are able to take them in any direction possible, but at least employee ownership becomes a very valid option. If business owners are consulting with ButcherJoseph,

Jeff Buettner Yeah, that's exactly right, Bret. I think you know, as is often the case, it is one of the least known structures that may be viable for a lot of businesses. You know, you don't hear a lot about it in some of the more popular you know, publications. It's not regularly on you know, CNBC and other finance channels. And so sometimes it's, an opportunity for founder owners to learn about a structure that they didn't recognize as being a viable alternative for them. Many times they may have heard something about it in the past and maybe, you know, got a little bit of information just enough to be dangerous because they may not have, you know, all the information or a complete perspective on, and sometimes the information that they may have been. From, Someone or somewhere you know, or something they read they they didn't quite interpret completely correct or to the point where they were able to then get a better understanding how viable the ownership structure and the ESOP ownership structure may be for their.

Bret Keisling One other point that I just wanna make and then we'll get to the uh, topic at hand. Is that I love the fact that you also do trustee advisory services. I was responsible with my partner for 180 ESOP valuations, all told, including the annual valuations. I think we did 50 to 60 transactions while I was there, and the most difficult transactions to get to the finish line where, where the selling shareholders were advised by non ESOP advisory firms because they would put in expectations into the transaction. And I don't wanna go too far down to the weeds, but they might re be requesting three times. The highest possible irr, the internal rate of return that I would approve as a trustee, and we would be end up battling for something that's not even in the neighborhood of realistic in ESOP transactions. So I love the fact that, you bring your expertise to whichever side that you are on, you know, depending on your engagement and your assignment, but you are at least going to be in the realm. You know, you might push boundaries if you're the selling shareholders advisor and go to the boundaries. But you have a sense that there are legitimate boundaries in ESOPs. Is that a valid thought of mine? That that it helps the transaction if the sell side advisors got some ESOP

Jeff Buettner For sure, Bret. I think it absolutely makes things more efficient. I think you know, there is a general m and a environment out there and there's a whole host of professionals that obviously practice in that space and they don't practice in the ESOP space. And then there are others that are professionals that focus solely on the ESOP space. And I think that there are some differences in those universes of transactions and how those transactions are navigated. I think there are some differences in a lot of times in kind of the expectations and how they may. Late from one to the other, and they're not always gonna be consistent. A lot of that is, you know, driven by regulatory and statutory requirements as, as well as, you know, some other dynamics that, that may be unique to the ESOP structure. And so the idea is to kind of bring, you know, general corporate m and a philosophies and tools into the esop arena and use them in a way that is supportable in the ESOP transaction while maintaining consistency with the general m and a space. And so, you know, I think for us, the nice thing is that, you know, having, the opportunity to advise companies and what we, the experience we gain on that side of the ledger, Directly translates to intellectual capital that we can bring to the trustee when we're advising the ESOP trustees in other circumstances and vice versa. Our experience with ESOP trustees and, knowing what boundaries ESOP trustees can get comfortable with or live with or the rules of the ESOP structure. We can bring that expertise to the company, to the board of the company, or to the founder owner, to let them know kind of what realistic expectations might be upfront, which just helps again to facilitate the execution of a transaction down the line.

Bret Keisling So Jeff, to the topic at hand, you in October of 2022, you posted a blog post on the Butcher, Joseph and Company website. We'll have links to the website and the blog post and undoubtedly other things that come up in today's conversation. But the topic of your blog post was, Challenges and opportunities for mature ESOP owned companies. I saw the blog post, loved it. Reached out to Jack Thurston, who's your VP of marketing that's helped facilitate the other conversations and here you are today. So just to frame it up an ESOP is set up, it goes into place if they are a well run esop, and they listen to the organizations, listen to my podcast. They're focused on the culture. They're focused on continuous improvement. They're focused on driving value, and they are fortunate enough to be good at business and what they do and their share values go up and up and up, which normally in any other business format or setup, would be a cause for celebration. But that success can cause problems for a mature esop. Can you kind of tee up what it is? We'll be talking.

Jeff Buettner Yeah, absolutely. I think Bret, what we're, what we find is that you know, the structure is unique. And the ESOP structure's uniqueness creates dynamics around cash flows just don't exist. With other types of ownership structures. you know, the ESOP, of course is a structure in which employees are participants in share ownership. And, you know, other circumstances, where it's not an ESOP owned business, but maybe it's a publicly traded company, if you want to transact and get liquidity in the stock there's a secondary market that provides that liquidity. What's unique in the ESOP context, in the ESOP structure is that there is not necessarily a secondary market that does not involve the company to provide liquidity. When. The ESOP participants seek that liquidity. The company has to stand behind making a market for that liquidity. And as a result, the company's gonna need to have some capital to be able to make a market for those shares as they get sort of put back to the business. And the company's gonna have to plan for financing those shares when they sort of come due alongside the capital that the company needs for other growth initiatives, whether it's organic growth or whether it's inorganic growth. And Bret, when I refer to inorganic growth, as I'm sure you know, I'm referring to making acquisitions, trying to go the business, you know, sort of inorganically. And I think the other thing that's unique that we'll spend some time talking about is just sort of the evolution of the company and the business and really sort of the employee base and how the experiences because with employee ownership, because of that evolution, can change over time and how maybe that creates within your employee base that again, may not necessarily exist in ownership structures, that are not employee owner stock ownership plans. It's, those are two things that I think amongst other things that are particularly unique to the ESOP structure that we can spend some time talking.

Bret Keisling So let's go ahead and get into it. And, you know, I guess I always think when I do new transactions as a trustee, you know, we'd be giving heads up in about three years. We're going to want to uh, see a repurchase obligation study. I'm not sure if the three years is still standard among trustees. Again I've been out of it for a few years now. But it really is, I guess you're broadening in this in my mind, I was looking at it in terms of just the normal stock price increases that we would hope to see as people retire, they're going to be paid off and you have to have the cash to do it. But it sounds like there's more of a holistic approach that you're taking and a more mindfulness of how you get to that point, which is the introductory levels that you've been speaking.

Jeff Buettner That's right. Yeah. I think, you know what what we typically find is you know, as at the onset you wanna obviously be mindful of the, sort of the durability of the structure and wanna be thinking, you know, critically about the ability of the company to, to sort of live in that structure over time, But, You know, even with the best planning, you know, companies evolve, they change, the world changes and the competitive landscape changes. And, you know, consumer behavior shift, technological innovation shifts, companies evolve in their philosophies on manufacturing and the placement of factories and labor and all of these things, you know, will change a business over time. As well as, you know, just the general aging of, the employee base. And so we're doing a lot more than just thinking about repurchase obligation when we see, when we work with a lot of companies to to think about how do we make sure that the employee ownership structure continues to support the business rather than inhibit. Over the longer term, given the growth objectives that the company has, you know, many of these companies obviously have boards of directors and leadership teams that are putting forth, strategies to grow and create shareholder value. And obviously you wanna make sure that whatever those strategies are, that your ownership structure is gonna support that in the best way possible and the achievability of those as best as it can.

Bret Keisling So, Jeff, it also sounds like this is an ongoing connection. Even going back to the initial transaction where a company became an esop, what were the goals, what were the projections, what were the plans? Now you're bringing this to a level of mindfulness that where are we gonna be in 10 years? What ESOP employees are going to retire or otherwise separate from the company and have to be paid out. But also tie it with all of the business operations and the inorganic growth as you had said. it's a deep look at all of the capital needs that the company would have.

Jeff Buettner That's right. Bret. I think what it is really is kind of, you know, in, in advanced planning, sort of exercise that we often go through with many businesses to make sure that companies don't find themselves in a circumstance where, you know, they, they reach the conclusion that because of repurchase obligations they have to sell the company. I Cannot tell you how many times we've been introduced to UROP companies who been of the perspective that. Employee ownership is an all or none situation. And repurchase obligation has gotten to a point where they believe the only alternative is to sell the company. Being advocates of employee ownership. Obviously you hate to see a company be sold out from the employee ownership structure. And so what to us, what the big aha moment is for many companies, and we talked about my aha moment at the start of this podcast, but what we found is the aha moment for many companies is that ownership doesn't have to be all or nothing. You know, many times companies say, We like to be and tell ourselves and tell the marketplace that we're employee owned. Well, you can still say that your employee owned, you know, even if your ESOP only owns 80% of your business and the other 20% is owned by. Employees outside the esop. So we're, We're trying to work with companies in such a way that again, allows them to think differently about employee ownership, allows them to bring unique tools from the general corporate m and a world to the ESOP world and use these vast types of tools to allow the company to sort of maintain the ability to be employee owned, but also address some of the challenges that are unique to the ESOP structure. I think Bret as you are well aware you know, the repurchase obligations that companies have are directly linked to value creation. And so as companies grow, And share value increases, as you mentioned earlier, where purchase obligation is gonna increase and that's only, you know, one need for capital. But how do you balance that need for capital against the fact that you're also wanting to invest in your business organically? You want to invest in innovation and technology. You want to increase efficiencies of your throughput by using capital to buy most efficient machinery. And then how do you balance that against making acquisitions that are accretive to value? And then thinking about, okay, if we are successful at achieving our organic growth initiatives and we increase value, what does that do to my repurchase obligation? And similarly, if we are successful at making a CRE of acquisitions, Tucking that acquisition into our business generating synergies. What does that do to our repurchase obligation? In a nutshell, if you're successful at that, is going to increase your repurchase obligation, and then it's further diving in a little deeper to say, Okay, who ultimately in our participant base is going to benefit from this value creation? And does it make the most sense that this particular group of this cohort of folks within our employee base are the ones that are going to benefit from that versus others? I'll give you a great example o of that. What I mean by that, Bret, is it's not uncommon for mature ESOP companies that are 10, 15 years old to find themselves in a circumstance where a sizable amount of the allocated shares are held by people that don't work there anymore. And so you've got an employee base that are coming in every day that are tasked with driving value, that are creating value through the achievement of organic growth initiatives. You've got an active employee base that is tasked with going out and finding acquisitions and making acquisitions and tucking in those acquisitions. and it's interesting to find then circumstances where those active important employees are successful at achieving the goals that the board and the company and the leadership has laid out, only to look up after the fact to realize that half the value of those efforts goes to folks that haven't worked there in eight, nine or 10 years. Another great example of that, Bret, are circumstances where many businesses have evolved outside. You know, the domestic the confines of the United States, they developed international operations, right? And many times we found instances of companies who. invested heavily in their international operations in the last 5, 6, 7 years because they saw more growth internationally than they did domestically. And as, as you know, it's, challenging for international employees to participate in the ESOP structure. And so many times we've heard from mature companies that they're hearing from some of their international employees that they can sometimes feel a little left out, a little bit like a sort of a second class citizen because all their domestic counterparts get this great participation in an employee ownership plan that they don't get yet. All of the growth of the enterprise is coming from their efforts. So how do you adjust and how do you deal with this sort of misalignment of incentives and how do you think differently about your business in employee ownership? And that's where this holistic perspective comes in, where you can kind of look up one day and you can say, Okay, well we can be employee owned. Without necessarily having to be only ESOP owned. how do we use those tools that are commonly used outside the ESOP community in general, corporate m and a, and apply those within the confines and constraints of regulatory, and, and statutory requirements that the ESOP structure itself is bound by. And that's the type of value add and things that we're doing that's more innovative, with many of these mature ESOP companies to help them solve for some of those types of commonalities that we constantly hear from maturity. ESOP companies. Your industry may be different. Your products and services may be different, but there are general commonalities and themes oftentimes that I think companies that have been living in that structure, the ESOP structure for that long generally will experience.

Bret Keisling Jeff, there are a couple of points that I'd like to make it's interesting in my mind because, you know, I, I start the podcast and it's sincere, it's on my business cards that I'm a passionate advocate for employee ownership. And that is true. As you know, employee ownership was kind of rocked a few years back when New Belgium was acquired by a Japanese corporation and. We lost them as employee owners and there was a lot of media coverage in employee ownership and employee ownership news had viewpoints of everybody. And I took the view that although I miss having new Belgium in the employee ownership space, that 192 people got million dollar checks. You know, And that ultimately, and this ties to what you were talking about, that transaction was driven by New Belgium no longer having access to the amount of capital required for them to remain or reach the next level of growth independently as an employee-owned company. The other thing that I was very mindful of, cause I was living in Colorado at the time, is that at the exact same time, New Belgium left employee ownership. Cores, I believe was sold out to someone bigger. And whereas new belgium's agreements were to keep the jobs in Colorado where New Belgium was, they essentially were left in place. All the cores jobs were being sent off to Chicago, you know, that the Colorado operations of cores were essentially significantly minimized. So that's the challenge when you talk about giving up. You don't have to be 100% esop. I, my throat catches a little bit as I say this. You're absolutely right. I liked when you said even if you're 80%, you can still say with credibility, you're employee owned. And I'll even go and say, to be a member of certified do, which does just such a great job, they consider EO certification at, I think it's 35% now. So there are lots of different options. I guess ultimately it's the, how do you maintain the unique character of an employee-owned company? And to your point, you cover this in the blog post, the discrepancies. If you are relatively new to an esop and it's perceived that the purchase obligations are going to people who haven't been there in eight or 10 years, that is a bad perception. I always said as, and we would face as a trustee, whether accounts should be segregated. And again, I don't wanna get into the weeds of plan design, but whether these folks should be segregated out of the uh, esop you still have to make those payments, but it's. They helped build the company. You know, it's kind of like pensions for teachers, you know? Where do we meet the obligation for the folks who helped get them where we are? But it's really challenging you, you put it in the context of serious, serious financial environments. Do you have the expertise on hand? You know, I know Hypertherm has international operations. A number of companies do. I mentioned Hypertherm cuz Jesse Tyler hosts the Owner to Owner podcast on my podcast network. And I know that ESOPs is only in the United States, but they have employee based profit sharing overseas. Can you do that advisory?

Jeff Buettner Absolutely. Yeah. In fact uh, we've worked with a number of companies that have international employees to help address those, those challenges of those international employees not being able to participate in ESOP and creating and designing something that would kind of give them that same type of experience, whether it's a. Type of plan that sort of mirrors the same experience, or if it's giving even international employees actual authentic ownership you know, through some sort of mechanism. I mean, those are definitely commonalities that, that we found with many large companies. And we do have, have that expertise and have assisted companies in that regard. You know, you mentioned New Belgium. I mean, that obviously was a well known company the, in the ESOP community just because they obviously make a very notable and popular product. you know, And it's a great result for employees to, to be able to get the type of You know, payouts you know, for for their account balances. And that sounds like I don't, well, I don't know the particulars on a account balance basis, but I'm sure it was a large enough premium that many employees achieved retirement wealth that otherwise would not have otherwise been possible, particularly through a 401k. We always think it'd be interesting if, you could have found a way rather than sell new veg amount completely from employee ownership, to preserve the employee ownership in employee stock ownership plan in some way, shape or form, so that those participants could have taken some ships off the table while also continuing to participate in the bright outlook for future growth of New Belgium. Again, not knowing what the future goals are and what that growth might be, not having a relationship with that business. I can only anecdotally tell you that it seems to me like. Their products continue to be more and more popular, and so my guess is it had a very bright future and sure would've been nice for folks to take some chips off the table, but also continue to remain invest.

Bret Keisling Yeah, it's, And by the way, Cliff Bar also, you know, another famous employee-owned company that recently sold out. And again boy, a lot of people got really huge payouts as a result of the ESOP termination. I guess the concern is, you know, and certainly the space I'm primarily in now, which is advocacy for employee ownership and not in, you know, transactions themselves, but it's the fact that there are people who successfully built up significant retirement balances, is what we're here to do. But with those companies, you know, the future people, as you said, aren't going to get it have those same opportunities. And so again, just as an advocate, I'm like I'm happy for some of them, but I'm still sad. So it seems to me, Jeff, that. What you're looking at, and let's talk about the life cycle a little bit. And by the way, it's also very relevant. This past spring of 2022, I went to the NCOs Spring conference, ESOP conference in Seattle and just waiting to check in. And as you know, Jeff, I like to chat with people and what are you doing and what not? Two of the first conversations I had, and I mean this is, this is waiting to register two different companies and both were there essentially saying, We don't think ESOPs are going to last, you know, more than 10 years. Like, we're considering esop, but we don't think it'll last more than 10 or 12 years, so why should we do it? It seems to me that, that what you're talking about, if you're being proactive and mindful about it, that's also an anecdote to that, that it doesn't have to end as long as you're involved from the beginning or, or mindful of it from the.

Jeff Buettner I think that's exactly right. I think with the advanced planning that we do with maturity companies to address some of these constraints, we can help extend the life, beyond that 10 or 12 years. And that goes back to the point that I think I was talking about earlier today on the podcast, which is I think, you know, there's this perspective that exists that, you know, you're going to get to a point where employee stock ownership is all or nothing. And you reach a point after 10, 12 years where because of repurchase obligation, it becomes such a noose, for lack of a better word, that your company is now unable to be as flexible to adapt to competitive. Opportunities to grow because the amount of capital that you need just to finance your purchase obligation doesn't leave enough leftover to do anything else. And what we think is that with enough advanced planning and with some creativity around the use of a variety of corporate finance strategies, you can do both.

Bret Keisling Let me, Jeff, if we can, let's chat for just a moment. One of the other big topics in employee ownership in the last six or eight months, well, for the last couple years, but private equity has noticed great things about employee owned companies. And we certainly, boy, there was a three month period, I think the first three months of 2022, although time flies, it might have been 2021, maybe it was 2021. But the professional advisors that I was in touch with were doing significantly more ESOP terminations than ESOP creations. Whereas, you know, if I did 20 deals in a year, you know, there might have been two or three terminations for whatever reasons. And sometimes there are no other choices. But private equity seem to find us. There is certainly a strong. Argument that's being made that on the one hand, you know, the advocates might say, Keep it employee owned, even with the limitations. Keep it purely, employee owned forever. And that must not vary. And that's on the one end. And on the other hand, it's kind of the private equity mindset of, you know, for five years it can be employee owned, we'll do another transaction, we'll spin it off, and those who are around for those five years might get something. Maybe not, but you seem to be very much in the middle of that where you're saying, Hey, you know, it may not be plausible. Best intentions aside, it may not be plausible to mean maintain 100% employee own, but it sounds like your solutions wherever possible would continue an employee ownership. C.

Jeff Buettner Yeah, I think Bret, what we're saying is, you know, again, being a hundred percent employee owned, may be fine. But it might be better to be 80% employee owned you can partner with the, that other 20% owner could be something like a private equity firm that can provide you with some growth capital that otherwise wouldn't be available because of the constraints of your balance sheet in a 100% ESOP owned company. with that additional growth capital, you might find a situation where that company is able to grow faster with that type of partner than without that type of partner operating sort of on its own status quo. you're right. The last several years we have seen a lot of private equity firms come into the ESOP community, for lack of a better word. Generally speaking, private equity has a lot of money and they wanna buy. And they wanna find good high quality businesses. And, you know, there's a lot of great, good high quality businesses that happen to be ESOP owned. I think 10, 15 years ago, it was not uncommon for many private equity firms just to sort of shy away from ESOP owned businesses cuz they didn't understand the structure or maybe they thought it was too arduous to address. But whether it's their own education or through necessity of finding a high quality asset, they have certainly become more accepting of approaching ESOP own businesses and either A, purchasing them outright or b partnering with them and where we can come in. And what we've helped do is use that, deep pockets, that the private equity universe has to partner with etop own companies to use that capital and that expertise. To grow businesses and create shareholder value for in excess of what would otherwise be achieved on a standalone basis.

Bret Keisling I love that. So Jeff as we move towards wrapping up, I imagine that if a mature ESOP is looking at a major repurchase obligation or the other things that you were talking about just in ESOP world, you know, I'm specific to it, but growth or whatever, but they're facing a significant ESOP repurchase obligation, let's say, in the next year or so. Obviously, they can reach out to you and you know, if it's a matter of funding and you can advise and the best path forward. What I'm wondering is to make the best use of ButcherJoseph's services and to be the most mindful, if we were saying, 15 years in, it's arbitrary you're going to be mature and you're going to have these issues. Should they be reaching out to you, you know, at year eight, you know, is it a couple years beforehand? It takes the time to put together and implement your strategies, I imagine.

Jeff Buettner Yeah, I think you know, what we tend to find is companies in the first seven or eight years post initial ESOP transaction, they're at the point where they're largely through perhaps that first phase of de-leveraging the balance sheets, they. I look up and find that, you know, they no longer have any senior financing outstanding from the transaction, and maybe they rele their balance sheet and have start to buy down some of the more junior financing. Usually at year 10, you start thinking about maybe you know, again, some advanced refinancing exercises even around the, you know, the warrants that may have been used to finance a portion of the transaction. And so right around that time you start to find companies that have moved beyond the initial. Capital structure that was used to finance the ESOP transaction. And now companies are, they've allocated a significant number of shares to their ESOP participants. Their employee base is now 10 years older. You've got folks that are nearing retirement age vested. And folks are now starting to, you know, move on from the company and are no longer necessarily employed at the organization, whether it's through retirement or just they decided to, you know, to to quit and move on to a different opportunity or challenge. and so that's really started the at the point where companies are, they get to this in, you know, sort of this inflection point, you know, and, they're creating a lot of shareholder value. They're starting to see more demands on their capital for repurchase obligation. Maybe the company's building up cash on its balance sheets and, you know, it's, it doesn't necessarily know how best to deploy that capital. What's the highest and best use of those capital dollars. And you know, you have these initiatives that are organic, you wanna pursue, you have initiatives that are inorganic you wanna pursue, but you know, you've got repurchase obligations you're gonna have to deal with right at that inflection point. Is where I think, you know, folks can kind of seek our assistance and we can come in and try to help them look critically and objectively at the business to find ways to allow the company to continue to grow, Preserve employee ownership. Think about the best way to preserve the employee ownership. Maybe even think about the type of organizational structure you currently have, most commonly ESOPs or S corporations. They don't necessarily have to be, and maybe we need to think about other types of. structures that we navigate the company into because it allows for and affords the ability to do more things. And maybe there's a more flexible structure that would be best suited for the company as it looks to go forward for the next 5, 6, 7, 8, 9 years. Right at that inflection point, I think is when it helpful for companies to look and think a little bit differently about perhaps what we'll, you know, call refreshing perhaps what has been the ESOP structure for the last 10 years to make sure it still makes sense. because that way you're not finding yourself by doing nothing. Looking up three years after that saying, Gee, now I'm forced to make a decision. I don't have a lot of options. I don't have flexibility do many things. I don't have a lot of time. I'm forced to make a decision, and the decision that I'm forced to make is to sell the company

Bret Keisling And that's the worst position to be in, in business or in our personal lives. If we are forced, it's not even to make a decision if we are forced to take an action because there are no options, there is no decision to be made. That really is and this is to be hard on people to some extent, it's lack of preparation. You know, we know that repurchase obligations are going to. There are lots of different things and I like your approach because if they're talking to you at seven or eight years and you know, or even earlier, but they've begun to get the repurchase obligations. They have a sense of what that debt's going to be. But to having a conversation with you and your colleagues about where you want to go, there are a lot of things you can do. You mentioned changes to capital structures. You can tweak the plan, you know, when you talk about how folks are paid off who've left the company, and that's cuz the plan dictated. There are some things you can address, you know, not necessarily everything, but all of these things gives a totality approach to managing the business and ultimately doing what any, business management wants to do, which is to become master of all of the potential options and then choose the best for their company.

Jeff Buettner I think that's right, Bret. That's exactly right. Finding the best structure that's gonna fit the organization to achieve success. As best it can given all the various, you know, constraints and needs for capital and making sure that the employee ownership structure continues to support rather than inhibit the ability to achieve all that.

Bret Keisling Jeff, I appreciate it. You've brought a lot to opening. My mind in what I thought was kind of just straightforward, Hey, a bill's coming, get some capital and you have very appropriately said no. There's way more than that. So I wanna thank you for your time. If there any points that you wanted to cover that I didn't give you a.

Jeff Buettner Bret, I think we covered a lot today. I hope it's been very informative and insightful and I hope it's given you a new perspective on some of the possibilities and uh, we'd be happy to chat more the next time we see one another.

Bret Keisling Jeff, you've actually given two topics that we could have gone down. Major rabbit holes that I'm going to uh, reach out to you afterwards and see about having you come back. But I wanna thank you and again, I hope that folks will circle back and check out the episodes with Albert Dolar and carterSmith@www.esoppodcast.com. But Butcher, Joseph and Company and there are other folks in the space and they're my friends. But you guys just do a really great job at what you do and folks should certainly reach out to you if they have any advisory or financial needs whatsoever. It certainly is at least worth a good conversation with you and your colleagues.

Jeff Buettner I agree. Thank you for the kind words. Appreciate Bret, thanks for your time. Have me on.

Bret Keisling All right, Jeff, thank you for coming on. And folks, for those of you who are listening, you have my greatest appreciation. Thank you for listening. This is Bret Kesling. Be well,

Bitsy McCann We'd love to hear from you. You can find us on Facebook at EO Podcast Network and on Twitter @ESOPPodcast. This podcast has been produced by Bret Keisling for the EO Podcast Network, original music composed by Max Keisling, branding and marketing by BitsyPlus Design, and I'm Bitsy McCann.