A Successful Owner Chooses an Innovative Exit

[Music] hello everyone welcome to the 21 hats podcast I'm your host Lauren Feldman this week special guests Laura Anderson founder of local ocean and Peter kler her Financial Consultant explain why Laura decided to sell her thriving Seafood business in a transaction that created a business model that is neither widely known nor widely understood it's called an employee ownership trust and there are only about 50 of them in the United States but their numbers are growing here and abro Brad and for good reason the trust model offers owners something of a Choose Your Own Adventure option that can allow them to sell for a market rate and a relatively uncomplicated transaction that makes it far more likely that business will remain true to its established Mission especially when compared to selling to private Equity or even to an employee stock ownership plan of course there are challenges including getting a bank to consider financing one of these deals but in this episode Laura explains why with Peter's help she decided to trust the trust even in Good Times owning and running a business can be a lonely Pursuit our hope is that these weekly conversations will let owners know they are not alone in facing challenges same thing with our daily newsletter the 21 hats Morning Report which Inc magazine named the best newsletter for business owners and which you can subscribe to for free at 21h hats.com where you can also find transcripts of our podcast episodes and lots of other articles and interviews joining me this week on the podcast are Laura Anderson founder of local ocean a restaurant and Fish Market in Newport Oregon and Peter kler founder of lumo group which is based in Portland Oregon and advises mission-driven businesses the episode is titled a successful owner chooses an Innovative [Music] exit before we get started I want to tell you about an upcoming event that you should know about it's the great game of business conference this year's theme is navigating an uncertain future as always the conference will focus on engaging and educating your staff to build a company culture where employees feel valued and where owners don't have to solve every problem going back more than 15 years I've been to this conference more times than I can remember and I've seen some great speakers great presentations great discussions I've even led a few of them but here's the thing that's not why I love this conference I love it because it attracts an amazing array of entrepreneurs and business owners I've made countless friends and I've learned so much from the willingness of great game businesses to share their Journeys The Good the Bad and the Ugly if you decide to go I'm confident that you will know you are in the right place with the right people this year's conference is in Arlington Texas it runs from September 10th to 12th you can get more information at Great game.com but if if you do sign up be sure to use the code 21 hats that's the number two one hats run together which will get you $150 off the list price and now on to Today's Show welcome Laura and Peter it's great to have you both here as I think you know we've been talking a lot on this podcast about uh ownership models and business Transitions and succession plans uh which is why I was really eager to speak with both of you to start Laura maybe you can give us a little background on local ocean Seafoods how did you come to start the business thanks Lauren uh local ocean is mostly a seafood restaurant located on the Oregon coast in Newport Oregon I came from a commercial fishing family and I've always been really deeply connected and close to the fishing industry we uh started the company about 20 years ago I started it with another commercial fish F actually who had a little more business Acumen and also a lot more collateral than I did at the time which both of which were very handy for starting a new business um I did uh I did buy out that business partner um after about the first eight years so I was sole owner for um quite a while until we did the employee ownership transition but really our special sauce is that we are located right across the street from one of the most dynamic and diverse fishing fleets on the west coast so our ability to access that Seafood product directly from boats um and be able to serve that product up same day often in our restaurant was really something that was um critical for our brand and was ultimately I think the kind of North Star for our success over the last 20 years is the uh restaurant that exists today pretty similar to the one you opened 20 years ago or did it evolve yes and no um interestingly the menu is there are a lot of main days on the menu that are just so popular that we um still offer them but the size of the restaurant has definitely changed when we started we had a fish market and only about eight tables at as people were lining up for our cups of roasted garlic and dungeoness crab soup and our perfectly grilled tuna minons and our fishwife stew uh we quickly realized we needed more tables so we just started stuffing tables wherever we could and had outdoor seating um at one point we had like three-hour weights in the summertime so wow at that point I bought the building and we had an upstairs to the building and we expanded and doubled our capacity which is about what I would consider a right size for us we still do run weights in the summer even with our expanded capacity but it's a manageable operation that I think we're really comfortable with now I think you said you it's started primarily a restaurant business but you eventually started doing other stuff as well well we always had the fish market uh part of our mission was to be a showcase for the local seafood species that we Harvest here off the Oregon coast so the fish market really allows that to happen um we've stayed pretty true to restaurant and fish market during the pandemic we did pivot into a really successful meal kit called dock boox that we were sending our signature sefood dishes in meal kit think like hellofresh kind of form across the the state and that was uh really cool uh as the world kind of went back to its normal patterns we've wound that program down to just kind of a special occasion offer so we still stay barly focused on uh restaurant and Fish Market and when did you start thinking about some sort of business transition or or succession what prompted that well oddly enough I think I started thinking about it when we were starting the business back in 200 and two interesting I always had a hunch that employee ownership there was something there that would be meaningful I know it made sense to me I thought wow if I was an employee and I felt like I was an owner of this business I might behave differently and so at that point in 2002 I started collecting some information on esops Employee Stock ownership programs or plans I think I went to a seminar or two and talk to some different business owners that were using esops but it you know when you're growing a business doing something really complicated well it seemed really complicated to me at the time like an ESOP just took a back burner so it wasn't until uh probably 2020 kind of the um the seminal year for many of us that I really said it's time to look at what the exit strategies are and lo and behold there were some new options there that were really compelling and exciting uh for me how did you find out about those new options well I I started with just a Google search like many of us do and uh stumbled across some websites that um led me to a group uh called project equity which is based out of California and and I reached out to project equity and they got right back to me um they're a nonprofit that is really vested in promoting employee ownership Across the Nation uh they offered a a feasibility study package if you will that um seemed to be a really good first step in looking at what the modern current options are for employee ownership and helped me to deduce uh what the best fit for local ocean Seafoods might be how did you end up running into Peter Well I um after going through that process with project Equity we looked at esops we looked at worker owned cooperatives and we also looked at the I hear it referred to as different things employee ownership trust uh Perpetual purpose trust stewardship Trust but the trust ownership model and its different incarnations um one of the things that I really liked about the trust model for ownership more so than the other two options was that well compared to ESOP I I really liked that it was a kind of more of a realtime benefit for employees esops are more of a retirement benefit for employees and when I thought about the demographic of our Workforce being largely young people and a lot of immigrant labor I thought wow we're going to be challenged to incentivize people with a retirement plan when they're coming to work uh what they think is maybe just a summer job I mean interestingly a lot of those summer jobs turn into 8 10 year employees but they don't know that at the time that they start that they're you know going to build a career with us worker owned Cooperative model was uh definitely more kind of bench tested in the country and there's a lot more options uh to look at out there in terms of case studies but the one thing I didn't really love about the co-op model is that an employee has to opt in meaning they have to like sign up and even put in a nominal contribution it doesn't have to be much it can be $25 which doesn't seem like a barrier for most of us but in fact I was a little concerned I have a hard time getting employees just to pay $3 for a phone app so they can manage their schedule we have to subsidize that for them you know you're working with a lot of young people and um also people who just like I said they don't know if they're going to be there very long what I loved about the trust ownership model is that nobody has to opt in every everybody's included once they meet your predetermined Benchmark for what that kind of besting level is and um just had a lot more flexibility in terms of um kind of the management structure and the government structures so project Equity really specialized in co-ops and they didn't have a lot of experience with trusts and uh lo and behold we had that experience right here in my home state of Oregon Peter was was working uh with um a company at that time that was specializing in this new form of ownership Peter tell us uh how did you come to specialize in this area yeah so I was working in the food World in Oregon I was working at a startup grocery store here that was like a healthy convenience store hybrid and when I was working there I was in charge of um kind of the raising the capital raising piece of the puzzle I had come from a political fundraising background and kind of parlay that into Capital raising at the startup level and then uh after that I kind of went out on my own to help other Mission driven companies think about how to capitalize their companies for growth um at this point I wasn't doing succession planning or anything like that it was all about just helping Mission driven companies find aligned capital and as I was doing this as a consultant I got approached by organically Grown company which is the largest independent organic produce distributor in the country and they're right here in Oregon and they were planning to um do this pioneering new form of ownership which was a Perpetual purpose trust transition um and this was 2017 uh and so they to facilitate that transition needed to bring in capital to buy out the outgoing owners um which included both an ESOP as well as a bunch of human owners uh so they brought me on board I helped them raise is money from aligned investors uh so that they could make this transition possible and right after that transition happened they were then the largest purpose trust owned company in the United States or if not the largest one of the largest how many do you think there were at that point there were very few there was a handful maybe a dozen um but most of them were small and unknown now there are only 50 in the United States there's you know a lot more in Europe but it's newer in the United States and you know people like Laura are they truly are pioneers because there's only 50 businesses that have done this um that have made this transition to a purpose trust or an employee ownership trust but it's growing rapidly um and so after organically grown did this transition we started getting calls from peer companies all over because organically grown is kind of a hub they work with Farmers they work with sellers retailers and they're this Hub in the middle of this organic industry and if you think about the organic industry the dawn of the organic movement quote unquote of course it goes back to centuries but the dawn of the new organic movement is like the late' 7s early 80s and there's all these idealistic young Founders in their 20s or early 30s at that time who 40 years later in 2018 2019 are at retirement age and they want a way to transition their business without compromising the Integrity or the purpose or the values or the way they treat their employees and so when ogc organically grown did this transition we started getting calls and said hey can you help us do something similar so sensing an opportunity both to help and to diversify ogc's Revenue a little bit uh we started an in-house consultancy called alternative ownership advisors which Laura alluded to before so at AOA alternative ownership advisors for the next four years we helped companies like local ocean uh explore these Transitions and execute these transitions and then ultimately having a consultancy housed inside of a produce distributor just no longer made sense organically Grown company was a fantastic incubator for for that but we decided to move it outside of the the confines of the produce distribution business and continue the work elsewhere so my colleague partner uh Natalie wman white and I we we spun off and we both started our own businesses so she started purpose owned I started lumo group and we both work on these trust ownership Transitions and we continue to collaborate you know on a lot of the deals that we do go you know to this day do you specialize in trusts or do you do other alternative uh forms as well we help people explore and we try to do it in a in a neutral way like look at esops look at co-ops look at trusts even just look at traditional employee buyin programs you know something like where they just buy in over time uh like a the law firm model but uh ultimately if they want to actually move forward and Implement and execute that's the only thing that I focus on the only thing that Natalie focuses on is going to be the trust structure there's other service providers like project Equity who are great at other things like co-ops or esops um but we focus on trusts so Laura when you uh connected with Peter and you started to learn more about trusts did it appeal to you right away or was it more of an acquired taste well honestly it appealed to me right away but I didn't really get it for quite a while I was having a hard time wrapping my head around what this meant that what what is a trust how does it actually own a company it's a piece of paper like what does that mean uh coming from the business world of individual ownership ship I had a very strong sense of what I thought ownership meant and this was really changing the whole nature of that so it took me a while but once it clicked for me and once I got it I was like wow this is really gamechanging I was all in when we went into it and uh yeah I I'm still all in I think it's uh I think it's an incredible model for ownership for for the future so maybe at this point I think the time has come to explain what an employee ownership trust is Peter why don't you do that and then Laura um maybe you could after that explain what it was that it took a while to sink in and what became meaningful to you once you understood it so Peter first with what is an employee ownership trust sure so like Laura mentioned there's a few different terms people use so I'm going to zoom out and and I'll start with the term Perpetual purpose Trust and then we'll zoom in a little bit on employee ownership trusts so the Perpetual purpose trust ownership or what what often just people call Trust ownership or Steward ownership the thing that it does is it makes it possible for business owners like Laura to sell or transition the ownership of their company in a way that maintains the company's purpose and values and perpetuates its independence so that's what it does now let's let's get specific let's take the phrase Perpetual purpose Trust trust and focus on two key words perpetual and purpose so Perpetual this is important because what you're doing is you're replacing a mortal human owner with an immortal Perpetual owner and this Immortal Perpetual owner the trust never wants to sell a company it never wants to take a dividend it never wants to extract value it just wants to hold this entity and make sure that it's governed to to purpose and of course you know it has to make a profit it has to survive as a business but the trust is interested in in the purpose as well so that's the Perpetual part I think uh to the extent people are familiar uh with this concept if they've heard of one they've probably heard of Patagonia and they know that uh Ivan schard did uh this and um the purpose in that case uh I believe all the profits of the of Patagonia going forward goes to a foundation that's the purpose and obviously it's climate related uh the purpose can it could strictly be to to benefit uh you know the employees who work for the company and local ocean case I'll let uh Laura share her purpose statement which has to do with I think both uh sustainable seafood and employees if my recollection is correct but you don't need to have some fancy structure like Patagonia in many ways Patagonia is the exception not the rule when it comes to trust ownership most of the businesses making this transition are not you know big well-known businesses they're small or mediumsized businesses like local ocean many of them are family businesses who maybe don't have airs who want to take it over but they all share this desire to perpetuate something bigger and more meaningful than just maximizing profit for the sake of it but I think it would be helpful maybe to dive into the specific local ocean example of how they set up their trust maybe you can start Laura by telling us what what was it that you struggled with what was it that it took you a while to get about the trust uh platform I think it was just kind of like uh Peter said it's this non-mortal owner it's this piece of paper um and so that was kind of just a little bit nebulous as we were working through this with our transition team so I mean essentially what happened with AOA with Peter Natalie and their other partners at that time was they brought uh myself and I think there were five of us from our leadership team at local ocean together for weekly meetings over a fairly robust period of time I think it was prob about six months of what I would call intense meetings and then maybe another three months just to kind of fill out those details some of the first things that we had to do was uh as a as a team really Define that purpose purpose and we don't have a single purpose statement the company has a mission statement that's a single statement but the company is not necessarily the trust the company is still a corporation so um what was Laura Anderson previously Laura Anderson and my business partner we owned an escorp many of us are familiar with that the tax liability flows back to the owners through a K1 um when I bought out my business partner we had a thousand shares of stock I bought 500 shares of stock from him and I paid that on a personal note over a seven-year period all of that debt was paid off before we started this process so really what we had to do was Define this new owner in terms of purpose and we actually have 12 purpose statements that range from purposes around people uh particularly our employees and how they benefit from the company uh purpose statements around our product and really ensuring that we continually and always buy the majority of our Seafood direct from our local fishing fleet through these relationships and through these Fair purchasing practices which as I said to you that's really the Hallmark of our brand and it's how we've been successful so ensuring that we do that in perpetuity was very important to me we do have purpose around planet and philanthropy and advocacy and supporting values aligned Partners through donations but as Peter said we have to have a profit so we actually have 12 purposes and then we had to really um get to a governance model that would define a group of people that would be there to annually review what the company's results are to those purposes so just this last year we myself and the CEO of the company put together our first results to purpose report where we have metrics for every uh one of these 12 objectives and we can measure how we're doing relative to that and we turn turn this over to a What's called the trust stewardship committee that's written into the trust agreement that we have um a body of people that reviews the results to purpose and says definitively every year are you doing what you said you were going to do and if you're deviating from what you said you were going to do then we need to remediate that so if for example we were selling a product that was not aligned with our values in our case farm salmon would not align with our values of wild and local then that trust stewardship committee would need to take action with the CEO who's ultimately responsible for those purchasing decisions so that um kind of put in place an oversight committee they have a very limited role it's just that that's all they do they don't run the company they don't make the purchasing decisions they just make sure that things are going according to plan so once that purpose and that committee was established that goes into the trust agreement all those shares that I talked about got boiled down to a single share local ocean is now a single share Corporation and the reason for that is that it's indivisible local ocean can't say we want sell 50% of our company to another Seafood Company um that would be outside of the rules we could in fact merge with another employee owned trust or stewardship trust which is within the rules so organically Grown company for example and local oce could merge but only in as much as those they're both of the same structures those were some of the the kind of um Nitty Gritty legal logistical details that got worked out over this six Monon period but it was incredibly valuable in terms of really defining the brand and uh making sure that we're set up for Success so the trust has its oversight committee but the company is still the company it's now a C Corp uh we had to make that transition because there's no Mor entity to take the tax liability so that was pretty simple and the C Corp is run by a board of directors which is primarily all of those uh accountabilities flow to the CEO of the company so as a Founder I am on that board of directors and I have a seat in prepu as long as I wanted if at some point down the road I decide that uh you know what I'm kind of ready to really move on and exit the company I can leave that seat behind but they can't get rid of me until I'm ready so that's kind of cool um it allowed me to retain some oversight which is important to me um we'll probably talk a little bit about how the buyout was financed and some of the other relationships that I still have with the company but suffice it to to say one of the beauties of the trust model is that there is a lot of flexibility for every founder owner and um entity to define the system that works best for them and Peter and his Partners were really great about bringing case studies to us so that we could learn about how other companies were approaching governance and I think we landed on a um on a Ure that works well for our company and now local ocean is the case study we bring to new clients uh I do want to talk about how you financed it Laura but but first did this deal close in 2020 or when did it close we closed the trust in June of 2022 oh okay and give us a sense of how big the company was at that point in terms of Revenue employees yeah um we had reached a point where we were kind of maintaining a a six to7 million sales um sales Topline and we have about 80 employees when we're in our peak season uh we maintain about 70 employees year round for the slow season and you needed to get some money out out of this as the owner of the business how did you arrange that yeah so I think the um financing part of it is still something that's a little bit nent in the country probably as a whole as a business owner I was very um experienced in signing a lot of Bank documents uh and doing a lot of personal guarantees for every single loan I took out uh when I bought my business partners shares when I bought the building when we did a major remodel on the building I always had to sign a personal guarantee which basically said if I fail on this you can pretty much take me personally to to the end of it um the employees don't have that risk uh they are not true owners in the sense that Peter mentioned the trust is and the trust has nothing the trust in fact doesn't even have a bank account at this point we had a bank account for a brief period of time to distribute that single share of stock but uh the trust has no interest in um amassing any kind of wealth and it doesn't need it for anything so the traditional banking sector has a really hard time with this there's nobody to hold accountable in the event of a business failure we had a couple of options itions to consider one was looking for impact investors that are willing to go out on a limb and take risk for supporting social impact Ventures and also uh as the outgoing owner I could hold a personal note for the company that could be paid over time we were I think lucky I think it was a best case scenario for me we were able to find an impact investor that financed about half of the buyout and I took a personal note on the other half of the buyout but we were refused by our first uh Overture for Banking and as Peter was there through that whole process trying to nurture that relationship and really make that deal happen it took several months of just a lot of grunt work and paperwork and and handing over documents to ultimately find that they weren't willing to do it so we're I think both uh I think keer and I both are of the mind that we have a long way to go in terms of um getting more banking options especially for owners that maybe aren't willing to or able to carry a personal note but right now those are kind of the main financing options what does the impact investor get in return for providing half of the financing you you know I mean it's a market rate loan they have an interest rate commensurate with market rate so they are acting you know as a normal bank would with normal Bank interests it's just they're taking a larger risk if the company fails before the end of the loan there's nothing to back that up except for the collateral of the business which would probably not cover the loan and one of the other you know challenges is just it's I was always used to having a line of credit for the business which sometimes we would tap into during the slow season just to get through you know the the winter months and we have a very cyclical tourist economy and that's just wasn't available through my through my normal bank they are a small community bank and they just are not in a position to go out on a limb unless there's somebody to sign or put up collateral for a line of credit so that means that we have to be a lot more prudent in our reserves and be more self-sufficient and there's risk to that you sold 100% of the business um you got paid for half of it from the uh impact investor you took a note for the other half how do you feel you did in terms of that price compared to what you could have gotten had you decided to sell the business on the market um I felt good about it I um I felt like the third party business valuation that we did contract for was a fair assessment and that was the number that we used for the sales price and I think that was required by the impact investor they did want that third party independent assessment so I did feel good about it there were other options available to me through the trust ownership which was a partial sale or sale over time I went with a one andone I personally felt we would be more successful with just going all the way through with 100% sale of that stock rather than parsing it out over time but that is also an option for businesses particularly if the financing piece necessitates that and I I just want to underline the point here is that um you know this is not charity uh and most businesses most clients that we work with they do realize a fair market value on their sale of their business to the trust now how that is financed really varies uh but the value they're getting is typically going to be a fair market value now there are exceptions to that most famously it's going to be patagonia's exception where you had an already wealthy founder who was willing to basically gift the business but that's not the situation most people are in sure my guess is that you end up talking Peter to businesses who are intrigued by this idea who might get a little wary about once they start hearing about the financing aspect of it the fact that banks are are not on board with this concept yet not every business I imagine is going to be able to find an impact investor who's willing to do uh what lures did uh how do you deal with that what do you tell businesses who are concerned so the flexibility of the outgoing owner outgoing shareholders is is very important so if you're looking for you know a big liquidity event upfront uh say 100% buyout or something close to that then there's a good chance this structure won't work for you unless you're an exceptional business because A bank's not going to finance 100% and a seller Note won't give you the upfront liquidity so you'll by definition have to bring in an equity partner and you're right it is hard to find good Equity Partners um for these sorts of things unless you're an exceptional business um and so many businesses just aren't either they're not investable in that sense like they're not going to be able to attract that sort of capital or they maybe just aren't willing to put up the the work that it would require to to raise that money but that said most of the owners we do work with happen to be flexible and my theory on this is that you know this is our our typical client's going to be someone whose later stage in their career um because they're trying to design their succession plan their exit their retirement uh so that means they've already worked for multiple decades they've built up you know some level of wealth or some Nest Egg where they don't necessarily feel urgent about getting all the money at once so maybe they want a partial liquidity event um like the example Laura just gave a local ocean so maybe we can find anywhere from zero to 50% to be financed by A lender and whether that lender is a traditional bank which we do see or whether that's an alternative lender like someone who came in in Laura's case that can provide upfront liquidity and then the rest we can do with a seller note we also see 100% seller note deals fairly frequently that's the most flexible way to do it if you are okay getting paid out over five seven 10 15 years depending on um you know how you design it then great that's like so easy you get to negotiate with yourself you don't have to bring an external financing and you can still realize fair market value of the company you just get paid out over time with whatever interest rate you attach so the equation for us the question for us is what are the goals and the needs of the owner for the shareholders what are the goals and the needs of the company and then what are our hopes and dreams for the stakeholders such as the employees and how do we find a financing plan or how do we design a financing plan that meets that vend diagram of good for the owners good for the company good for the stakeholders um and so that's the work we do but yes it works best if you're a profitable company um with a flexible owner Laura what's the mechanism by which the employees get paid um under the trust we set up a an equation that uh allows for profit sharing when there are profits to share in our first year we had profit sharing and that was pretty exciting so we have a pool and in our case it was $110,000 last year that we allocated for profit sharing so basically we looked at what our net income was at the end of the year we ensured that we kept enough for uh prudent Reserve in fact we should have kept more but we didn't know that in November it was going to be a really tough winter so we're taking that lesson pretty seriously into this next year so part of this is learning uh and we also had to make sure we had enough to do any facility equipment and upgrades and make sure that we of course service all of our debt so after that we um allocated 110,000 for employees we take all of the hours hours are capped at um a maximum of 40 hours a week and every individual is in that pool and they get a 5% bonus for every year that they've worked up to 10 years and then that also caps out so you have a weighted pool that distributes those funds for a very parttime employee that maybe only worked for a few months but left on good terms we would hunt those employees down even if their payout was $50 or more but for tenure to Max tenured employees working Max hours the payout was a little over $3,000 and so that constitutes what we think is Meaningful patronage every year is different and there's no guarantee that there will be that large of a pool for profit sharing or that there will be any Prof profit sharing at all but we do have that formula in place we have some flexibility about being able to work with that formula over time the trust just ensures that we have a profit sharing mechanism it doesn't dictate exactly how it works but through the experience of other businesses that AOA brought to us like organically Grown company we thought that was pretty fair one of the questions I do get often is do you wait it for performance or for people who are in higher responsibility uh positions and the answer is no um that's what their pay uh band is for and that's what the compensation plan is for so if you're in a higher responsibility position or you're a high performer your your pay reflects that but when it comes to profit sharing it's a bit more um evenly distributed with the exception of a small bump for 10 year I know it hasn't been that long but it have you seen an impact on uh hiring and retaining of employees it's a little hard for me to answer Warren because I'm not in the operations and dayt day I'm not on the floor anymore I go in the restaurant and sometimes the hosts just to look at me and and greet me like I'm another customer that's how a little out of touch I am um but um my my gut sense says that we have 80 employees there's always been a certain number of employees that have treated the company as if they own it even before this you know that employee that just really wants the company to succeed and feels vested in that this is probably enhancing that for them and there are always employees in in my kind of work where people just you know they come in they want to clock in clock out do a good job and they don't really think too much about the bonus structure they're just more in the daytoday like what I need to do right now so it's a little soon to call but we do have incredible uh tenure rates compared to the national average um our tenure is off the charts compared to the national average for restaurants but we were enjoying that kind of tenure rate even prior to employee ownership just because we are a values-based business and have always uh taken a lot of care with uh employee satisfaction I think one of the questions that I do get a lot is like how do you know if you're a good fit for this kind of an ownership model model or how would I prepare our company to be a good fit and I think the what I learned through the process is there kind of four main things that I think set us up for success in a trust ownership model one was that we already had a really strong management team in place that allowed me to Exit the operations of the Business Without disrupting the flow of the business um I I still stay involved from an overarching fiscal management perview and some brand management things that will be transitioning over the next year or two but we had strong operations in place also I had been sharing our financial picture with employees for probably I think four or five years prior to the transition every year I did a full and still do a full monty presentation where I share with all employees what's the income the expenses and the financial health of the organization so they had some financial literacy going into it which I think was really useful the other is the financing part we did not have debt and I would imagine it would be and Peter would know more than than I for company that do have debt but I had personally signed every loan agreement the company ever had and I think it would have been hard to turn that debt over to trust ownership I probably would have had to have kept those notes or paid them off so having um low or no uh Debt Service and positive cash flow because as an outgoing owner I want to know that the company has enough funds to do make the loan payments to me and to the impact investor over time and then the fourth thing I think is something that a company really has to think about is do you have a purpose is there a legacy like rational for your business do you have a strong why because that's really the focal point to which this all revolves around uh purpose ownership requires purpose if your business is just process same equipment and not really doing purpose-- driven work it might not have the traction that's needed for this kind of a of a model so those four things I think were reasons why local ocean was really well poised for this Peter do you have anything to add to what makes someone a good candidate for the this process um I mean like I said it it helps to be a profitable business uh a low debt load I agree helps um although we do see companies go through this transition that have you know a number of loans on the book or um Deb on the balance sheet and they make that transition um and then the specifics of how that happens really varies and whether or not they had personal guarantees before whether or not those need to carry forward but we have seen for example banks finance transitions where they will accept the one the one asset the trust does have right is the um is the stock of the company um so most uh deals I would say don't expect a bank to accept the stock of the company as acceptable collateral for a Term Loan to finance these transitions but we have seen that happen in certain circumstances but I think it has less to do with like as long as you're profitable and the owner has some flexibility then it's really more of like a cultural purpose question and and and what your goals are so if you've been if you're an owner and you've been looking for a succession plan and you've been struggling to find one that's aligned with your values this may be a good option because it's so flexible you can sort of design it yourself you can design your ideal buyer to come and buy your company that you can exit your business in a way that allows you to not compromise the Integrity of this beautiful thing that you've built but it also allows you to realize a fair value on your life's work and it's becoming more popular because so many companies who have grown with the purpose they look at the Alternatives they look at selling to private Equity okay that's going to I'm worried about my employees or my purpose if I do that they look at esops and they say oh that's administratively burdensome it's also basically purpose agnostic and like Laura said maybe a retirement benefits not the way I want to incentivize my employees and they look at co-ops and co-ops are great for some companies and they're just not a good fit for others um so this is kind of this fourth option that I predict will become much much more popular over the next decade Laura when you sold the business uh to the trust did you include uh ownership of the building no Lauren I did not so I still retain ownership in the building which actually keeps me vested in the long-term interest of the company far beyond what many owners would would really even need to be uh because of course I want I want to retain them we have seven-year Lo loans with myself and with the um with the impact investor it's you know going to be an interesting thing in uh five years as we really think about how that uh when that debt service is paid how that additional Capital can be activated throughout the company either just through enhanced pay distributions what have you but purchasing the building has been considered it's an interesting thing for us to think about and you know it's like what's the purpose of owning a building when if you have a beneficial landlord like myself that has a long-term interest in just keeping you there is there a benefit in owning the building and I think that's something that we'll we'll think about it's it's really changing the nature of ownership for me and my mind from kind of a winner takes all I've benefited quite a bit from being a business owner I went out on huge risk I'm not a bash to say I was three million dollar in debt at one point between purchasing stock purchasing the building putting in um improvements and you know had a lot of skin in the game and had it all on the line and we've set up this kind of Winner Takes all approach where you know big risk big reward yeah I've been I've been really benefited by the company and um I'm grateful for that but I don't think any particular employee is ever going to be able to benefit nearly like I was really what we're talking about is Distributing those benefits in very real time to push the edge on living wages which in the restaurant industry is very difficult to achieve living wage standards for all of your employees but this is where we can really make a difference is living wages for all paid time off for all excellent benefits for all not many restaurants outside of large corporate chains perhaps are really in a position to provide that for employees so it's changing the kind of the dynamic of risk and reward in the business and I think that's really exciting that all makes sense and I'm certainly very glad that you're putting it all on the line uh paid off for you um I am curious about the building ownership from from one perspective which is the trust that owns the restaurant may be uh Immortal but there's a chance that maybe you are not uh which would mean that there's going to be a transition there at some point which introduces some element of risk uh for the business going forward not knowing for sure who might end up owning that building if it's if it's not the trust was that a concern for you and and I'm curious then how Peter views that element of the deal yeah Lauren I don't know that I have a definitive response for that at this time um but maybe I'll be working with uh Peter and his associates more as we kind of consider some of the next steps of securing the long-term interest of the trust I think it's an astute question Lauren um it's not unique to local ocean either we we work with a lot of businesses who have a a piece of real estate that is integral to the company uh operations whether it's a manufacturing facility or a uh kind of a marquee retail location or whatever it is and so this question gets raised of you know and often the they're separate businesses like the real estate is an LLC that's owned by say the owners separately from the business so this this question does get raised what what to do with that and there's no right answer the right thing to do is raise the question and so I think how much of a risk is it to local ocean I'm not sure I mean obviously the restaurant is a is a great tenant regardless of who owns the building and I don't think any owner would be eager to to boot them out but that said the most conservative thing you could do would be to include real Assets in the trust or in a sister trust to kind of secure that Legacy have I missed anything is there anything that you feel compelled to mention I would just say from an owner like just an emotional perspective I really had to face some of my own fears about what it would mean to sell this company in this way or in any way and what if they fail was something that I thought a lot and it wasn't just me I had employees on our leadership team that would say Lord you've built a successful business like what if we can't you know keep it going without without your leadership to which I said well there's never any guarantees in business I mean even under my leadership in the future we could fail there's so many ways a business can fail and just you have to know that so what if the business fails if the business fails then all the assets get dissol solved they get the debts get paid in as much as they can if there's anything left over it goes to a prescribed charity that's written into your trust agreement and you go find other jobs but nobody's coming after your house you know nobody is taking you to Bankruptcy Court there's a lot of those risks are averted but there's no guarantees that you're going to succeed you just got to show up and do the work and we have to do the best that we can at making this a success my thanks to Peter kler and Laura Anderson and of course to our sponsor the great game of business which helps businesses use an open book management system to build healthier companies you can learn more at Great game.com wait wait don't leave yet if you have a question or a comment that you'd like the 21 hats owners to address send it to me by replying to your Morning Report or by email at Lauren 21h hats.com that's l r n21 hats.com do it now before you forget and don't be afraid to tell Jay what you really think you can take it and if you got something out of this conversation help us reach more business owners tell a friend subscribe and review us wherever you get your podcasts follow us on Twitter subscribe to the morning report at 21h hats.com this episode was produced by Jess Theron founder of blank word Productions okay now you can leave thanks for listening everyone [Music]