Bonus Episode: Not Sold on ESOPs? There’s a New Alternative

[Music] hello everyone welcome to the 21 hats podcast I'm your host Lauren feldin this week two special guests who have built highly successful companies talk about what they ultimately plan to do with those companies Ari winw is co-founder of Zingerman's community of businesses a collection of mostly food related companies that are an iconic part of Ann Arbor Michigan Brad Herman is co-founder of Tex to all a software firm based near Dallas that helps organizations deliver personalized informational and emergency messages by text and by phone both Sigman and text them all consider themselves purpose-- driven both practice open book management and so not surprisingly the founders of both companies took a hard look at selling to an employee stock ownership plan or ESOP in the hope that the cultures they created might live on but both companies independently soured on the notion of creating an ESOP one after spending more than $200,000 in coming within a week of closing the deal and both as settled on a little known alternative what's called a Perpetual purpose trust so far only a handful of companies have tried to create a purpose trust for this particular purpose but zingerman and tex them all are taking the leap and as both Ari and Brad acknowledge in today's podcast brought to you by our principal sponsor the great game of business they're kind of figuring it out as they go the episode is titled not sold on esops there's a new alternative welcome Ari and Brad it's great to have you both here who wants to take a crack at explaining what a Perpetual purpose trust is go for it Ari okay Brad I'm going to do my best as I've been explaining this within our own organization I uh referenced there's a line from The Basque uh Co-op monrean where they say we're building the road as we walk so we are also building the road as we walk and best I can understand there's only about 40 of these in the country maybe it's up to 42 now with the two of us so we're we're all kind of figuring this out but I I guess maybe easier than explaining it would be to tell you how I found out about it and through that to explain it well just give us a hint what what it is just so we have so listeners have some idea where you're going it basically allows you to gift the company to itself which sounds simple and obvious but legal constructs don't allow the company to own itself it has to be owned by someone else so this allows the company to own itself and essentially as Natalie wman white who helped us do this from alternative ownership advisors out west says purpose becomes more important than profit because the purpose guides it so in essence the core of it can be owned by a purpose instead of a person so to the extent anybody is familiar with this I suspect they're familiar with it because of Patagonia and Ivan schard who did this I think last August if I remember correctly and understood it correctly 2% of the stock went to a trust controlled by his family and by advisors and the rest went to a nonprofit organization which is going to receive all the profits that's what people know about this if they know anything about it it sounds like yours is different Ari is that correct well I think they're all probably different because there aren't that many and because maybe it'll change but nobody started a company with this in mind it's always been grafted onto a company an organization that already exists and so in a good way Brad and his organization and Zingerman's community of businesses share a lot of values but we're different organizations so in order to make this work we're going to each adapt it as we do here in our world the the trust is only applicable on the intellectual property which because each of our businesses in the Zingerman's Community is actually a separate legal entity with different managing Partners etc etc so this is about the intellectual property which Paul my co-founding partner and I own and this will allow us to transfer more and more of the ownership in in the intellectual property over the next 10 to 20 years to what we call Community share owners which are staff that own a share and the trust itself is essentially a small piece of it but what it does is it protects the business from being sold and it also protects the use of the intellectual property and it's so it's it's it's the entity that would approve any use of the intellectual property right so that could be opening a new Zingerman's business which would be pretty straightforward but could be 30 years from now somebody comes and goes hey man the pick your negative organization the uh Nazi party wants to give us $20 million to co brand a Zingerman's t-shirt and then the trust would say sorry that's not aligned with our values no go and similarly if if a big company came and you know and said we're going to give $50 million to you all to buy out the Zingerman's name it would say no that's one of the things well two points here that the the best thing that happened for Perpetual purpose trusts is Patagonia because now when I mentioned what we're trying to do people go oh oh I saw that and they marketed it really well with our only shareholder is the planet or something like that so that's wonderful and and our model is going to look a little different we're a more traditional business you know AR's got some complexities in there that are unique you know ours is uh 100% of the company is going to fall under the trust and all of the employees will be the beneficiaries uh in the long run not to mention community and potentially charity Etc but primary beneficiaries are the employees and we love the same thing Ari loved about it and that is it can never be sold so I love the expression run it or ruin it Ari what Brad just described sounds complicated enough to me I believe just one organization you're talking about putting a whole bunch of you know the Zingerman's community of businesses under this umbrella and you're doing it through the intellectual property as opposed to stock could could you explain that a little bit what happens to the actual ownership if it's just the intellectual property that's going to the trust well there there's there's actual ownership in the intellectual property I'm going to try to explain all this in a relatively manageable format so tell me if I'm going to uh off course but we have a Zingerman's community of businesses Paul and I started the deli the first business in 1982 in 1993 and '94 Paul and I wrote our first formal Vision the process that Brad is well familiar with and so are you Lauren uh where we write the story of our organizational future at a particular point in time and we picked at that point 2009 so we went 15 years into the future and that's where we created this community of Zingerman's businesses all located here in the an arbor area each with its own unique specialty so instead of replicating the deli as most people would do we created new Zingerman's businesses and each business with managing partner Partners in it so that there were owners on site all operating as one organization so each of those businesses whether it's Zing train where I'm sitting right now or training business Zingerman's Bake House Zingerman's mail order Zingerman's Coffee Company Etc each of those are separate legal entities and they have a managing partner who owns very real shares right Paul and I retained the ownership of the intellectual property and we own shares in each business we've operated as one organization I just wrote a piece in my E news that I do every week last week on governance and I referenced in there that although the story is not told a lot we have been governing our organization by consensus of all the managing Partners our partners group for 29 years now next year will be 30 years and uh I think that group is roughly 20 people right now so in our model the governance of the organization the running of the companies stays within that Partners group the trust is only for the intellectual property so it would deal like I described earlier briefly with brand issues you know Lauren if if 21 hats started to put zingermans on its t-shirts or on its website without permission with somebody from the trust I thought I had permission Ari somebody from from that entity would call you up or drop you an email and say hey dude what's up can't do that and then it would approve the use so if we were going to co-brand uh with 21 hats or Patagonia or whatever the trust would have to sign off on that beyond that in our world the trust doesn't do much it really has no governance say in the organization but it creates an ownership for the intellectual property that as I've been metaphorically saying can allow zingerman to become this old growth forest rather than clear cutting so if the ownership stays separate from the trust could the businesses still be sold to another entity at some point well in theory they can but not with the Zingerman's name I see and that's more about I think the Zingerman's model itself right and that you've got sort of a a that that one company that ties all the all the others together you know that's unique not so much of the trust model yeah and and it's Unique that we've been governing in a way that we have by consensus of a pretty large group for all this time so yes in the they could depart but they would have to stop being Zingerman's bake house or Zingerman's roadh house or whatever which clearly would not be great so all right let's go back to where you wanted to go initially which is how how you wound up here I'm sure you considered every option how did you land on this one well like many people of my age group when we started businesses all those for now for US 41 years ago we weren't really worried about succession planning we were happy if we stayed in business for 50 years so in a good way not by accident we have arrived at this point and about 15 years ago Paul uh as he is good at doing started asking these provocative questions about succession so again I'm going to attempt to explain this relatively coherently but we had early on arranged a buyout agreement between the two of us so that if one of us would pass away uh we had life insurance that would fund the buyout of The Heirs of the person who had passed right so if I had died the life insurance would pay out to Paul he would use that money to buy out my heirs so that they wouldn't become owners in the business and that was all good and about 15 years ago he started saying what happens after the second one dies and I said well we have insurance it's no big deal and he goes yeah but where do the shares go I'm like I don't know anyway so that that started a long long series of conversations and the obvious answers for what you do are the typical things you sell the business to somebody else I have a lot of friends who've done that it's a very good way to hit that in quotes cash event that people like you can do an ESOP which is an employee stock ownership plan which uh our friends at great game of business Greenfield remanufacturing are big fans of that I'm not a big fan of it for a number of reasons but one issue that we have is that because we have all these separate businesses you can't do it as one esap even if we wanted to you literally can't do one like employees the employees work for each business so The Zing train employees work for Zing train right the employees at cornman farms work for cornman Farms so you could do an ESOP within Zing train but you can't do an ESOP for all of Zingerman's there's other issues with esops in my unprofessional opinion also I think Brad's going to raise a few of those too when we get to his story okay okay so you can you can leave it to your heirs which we weren't going to do or you could public which is another version of selling it I didn't really like any of those you could also sell it to your partners right and they could inherit it but the problem with that and I'm not saying this would have happened but is that it doesn't eliminate the thing that you sell it to them and then five years later they sell it so us giving them a deal to get it in the interest of keeping it local and in the community is isn't really that helpful if it just gets flipped to you know some big multinational five 10 years or 20 years later around the time we were struggling with this I was reading EF Schumacher's book which is uh celebrating its anniversary this was 1973 so whatever that adds up to 50 years this year and in there uh it's not the main point of the book which by the way the book is fantastic but he wrote about the Scott Bader Commonwealth in England and Scott Bader was uh born in Switzerland moved to the UK I think 1920 3 started his own business in the chemical business and in 1951 having attained a fair bit of success made the same sort of decision Brad has made and we've made now which is essentially rather than selling the company or leaving it to his kids he wanted to preserve it to benefit the people who work there and keep it self-owned and so he created what he called the Commonwealth and they are now celebrating their 100th anniversary so it worked I love this because it it allowed the business to stay local because part of what happens when companies get sold is like all of this great stuff that not like we're the greatest thing in the world but we've contributed a lot to the community in terms of jobs quality of life contributions etc etc and all of a sudden when headquarters shifts from an arbor to whatever Abu Dhabi or New York or San Francisco or wherever over time and no matter what the good intentions of the people who made the purchase were they move on and more and more decisions are made further a field the power shifts away the money shifts away and you really lose that connection with the community and this model I love because it allowed us to prevent all those things from happening yeah Ari I think you hit on something there well you said on a lot of things that are really meaningful to us but one is how many people truly depend on a healthy company I mean it's your employees it's their families in some cases May their relatives you know their friends but then you also have your vendors all the different suppliers and that kind of stuff and I think that's meaningful when you look at the total impact of an organization and how frequently and and sadly how accepted it is that well it's time we're going to sell to the big guys and you know hey a lot of you are probably going to be redundant and you know no matter what they say look at what it looks like two years later and it's almost always drastically different yep every time and I have a lot of friends who are in that you know who have worked for companies like that that were sold and all end up leaving and especially Brad in our in our context because we're we literally because of the restaurants the cafes Etc I mean we have people who like come in two three times four times five times a week and so in a good way we're so integrated into people's family traditions now after all these years people come back to town I mean it's in in a really wonderful way that I'm very humbled to be a to talk about it's a big part of the town and it's you know in a good way like people that work here and they learn visioning they learn servant leadership they learn self-management and then they're on the school board they're on you know a committee at their church or their synagogue or their mosque they're contributing to community effort so there's all of these things that are happening that are kind of secondary to the actual work of the business but the reality of the ecosystem is it's spread far beyond what it means to have a quotes a job soari if I heard you correctly you read a book you heard about a company that did this a hundred years ago in the UK what made you think you could do it how'd you take the next step what made me think I could do it I guess when I have a good feeling about something I'm not always right but often there's something to it and I just do what I have typically done with so many things start talking of other people who I respect about it and with this one I actually got a lot of Nays saying because it really hadn't been done much in the US and there was a lot of you know that'll never work why would you do that you're giving away the company it doesn't make sense why wouldn't you sell it to the existing Partners who's this coming from Ari who's the skepticism coming from many people business owners Partners employees yeah yeah all of the above not from everybody and I understand it I mean it's was a different model it it goes against commonly held values about maximizing your value and getting your money out after Decades of hard work and in a way it goes against the entrepreneurial mindset that we're going to sell it to our existing partners and in 30 years they're going to flip it for a lot of money and it goes against the common value of extraction that you know to Brad's point that we wouldn't just turn around after 40 Years of hard work and sell it and move to Florida or whatever with all the new money that we got so we're basically gifting the organization to itself but we feel good about it and we're not we're we're able to get paid out make a living over time and and everybody hopefully can come out ahead but anyway over time I just kept asking like that's what I do I just I don't force it but I don't give up on it either and uh Maggie from Zin train Maggie bis one of the partners at Zin train was one of the people who thought it was a good idea and one day I don't know three years ago she called called me and she said uh hey I found this guy and I think he knows something about this Pro this program that you could talk to so uh he was a guy who had worked for organic valley and I called him and he said well I'm not really the expert but there's this place in Oregon organically grown uh is a large organic produce wholesaler and they have done this and they know about it and so I called the woman who was the CEO at the time she since moved on and we had a good talk partly about why esops don't work and then about why this can work and then they had basically spun out a small subset of a couple folks who were very passionate about this this type of program who uh essentially I describe it as like they were like zing zing trained but for Perpetual purpose trusts and so we worked with them uh alternative ownership advisors over about two years so they guided us on on doing this work before I asked Brad to explain how he landed uh on this as well AR I understand there are a lot of Concepts involved here and a lot of goals but any owner thinking about this is also naturally going to think what do I get for my many years of work and I just want to make sure we're clear it sounds like you're not getting a Payday at all this is a gift am I understanding this well it's it's it can be done in any way you design it within the legal construct of it Paul and I will get paid our salary for a while I don't know what we agreed on 20 years or whatever so we can keep living I mean I think that the idea of this is that it can be done in a way that allows the founders or owners to exit with Grace and do perfectly fine it just yes it is giving up the chance to turn around and sell 40 Years of zingerman for a lot more money than we're going to get the way that we're going to get it and that's where our ours is going to look different well I mean it is going to use the profits so I mean essentially it is giving away at the end of the today but they are going to use future profits to to to pay off a loan to Founders so there is a valuation there is a loan and it is going to get paid off but we do get a lot of flexibility as to how that happens as well and I and I suppose you could involve a bank if you want as well there certainly is a lot of flexibility in how this is executed you also could just write it in your will that when you die it goes into a trust as well you know and you get paid nothing and here it is so lot lots of different ways that it can be done all right Brad how did you wind up discovering Perpetual purpose trust and deciding that that was the right option for you guys well I think that the Genesis of it is that my business partner Ari and I both by the way are incredibly fortunate to have business partners that have become a part of our person and I think that's a key part too this whole conversation has to happen with aligned uh business partners otherwise it's going to be really difficult um for anybody but it started when uh my business partner hi and I were at a company that was acquired and we stayed four years after it was acquired and we didn't like it four years later it's really that simple at the time we mistakenly thought that we can't work for big companies what we've learned is since then is that we actually just don't do I'll just say shitty culture very well and so when we started the company we didn't know you know we didn't know a whole lot but we were certainly aligned at that level like we want to build the kind of place that we want to work and you know right or wrong that was one experience but it shaked us and and it and it solidified us on what we wanted to do so we we continue with that today like when we get done with this thing I don't want other people to have the experience that I had I mean it wasn't terrible I mean come on I just didn't like it I wanted to do something else and um we feel like we've built something that people really really enjoy coming to you know a place that people really enjoy working and that has a positive impact on them and their families and and everybody else that we work with and we think that's worth preserving so we have the big hairy audacious goal of being a hundredy old software company now most software of service companies you know the the goal is to have the giant payday and we think it's I don't know like Ari we are more than more than comfortable on the path Less Traveled and we want to see if this thing can outlive us and and last the be 100 years so that's inevitably like starts you on the all right well how do we do this you know employees owning it to us uh feels like capitalism at its best right like people getting to uh think act and feel like entrepreneurs and keeping that entrepreneurial spirit because they get to to participate more than they might normally in in the fruits of their labor and I think that's awesome and I think it's a maybe a remedy or an alternative to the capital ISM as bad guy that you know I I had probably programmed in my brain as a young lad in business school they taught you that in business school well you know maximize shareholder return like I think that was like programmed into our brains I see and and I think that there's there's something to be said for you know what maybe that's off and maybe a business does have responsibilities Beyond just maximizing return for their for their sharehold but as I alluded to I'm not getting paid nothing you know we have a profitable company I live a wonderful spoiled rotten life already and and we're not going to get nothing as we transition to this trust we put a value on it and and set a formula and and roll but the way we got to trust though is we looked at esops you know it feels like it's a it's been 10 years it's probably been four but we we've gotten to know a ton ton of esops and and ask a lot of questions about those very good friends and and values driven companies we also explore what I call like do-it-yourself employee ownership explain that there are a few folks one who's been super helpful is Carl Erikson at Atomic object in Grand Rapids Michigan we went up there to go sit down with him and and his team and say tell us about this and essentially he's slowly selling the company to his employees and bringing them on at into the fold as partners in in the escort okay great you know like it works but there's a couple things that didn't didn't quite work for us on that number one it's going to cap you at 200 participants we had some H1B non-citizens that wouldn't have been able to participate and it really lends itself to a a more sophisticated employee it's going to complicate your taxes you're going to be getting k1s you know there's no more 1040 e once you go down this road so those are the reasons that we didn't go for do-it-yourself employee ownership um despite it being our preferred option at the time we ended up uh going down the ESOP route uh in in the absence of better options believe it or not but we ended up pulling the rip cord on it about a week before we signed all the papers and uh it wasn't going to work the way we wanted and I probably honestly should have pulled the rip cord a lot sooner but that's my fault and we spent a lot of time and money explain what happened it must have been pretty intense to make a decision like that at the last minute well it starts with than competent advisers being honest who probably could could have nipped this in the bud sooner for us or said it doesn't work the way you think it does but that kind of opens us up and I'm sure there there's plenty written about what folks don't care for with Esa for starters they are comp complicated as all get out I mean I was laughing earlier uh learner is on my top five on strength finders so I'm not afraid to dig into complicated things I think I'm a pretty sharp guy and five months into an ESOP I was perpetually overwhelmed with complexities and having to have things explained to me over and over again uh not because I couldn't get them it's because there's 57 million different ways to do it and I think there certainly is a um a contingent of folks that think esops are almost intentionally complicated you're not going to put an ESOP in without an army of advisers um on the financial side the trustee side Etc I mean it's it's certainly an industry of in and of itself the other thing we didn't like is they're inflexible like if you make a mistake when you do it it is incredibly difficult to unwind you know because the the Department of Labor is your boss and they're going to think you're trying to take care take advantage of employees or you know the rule the trustees going to fight for the employees anyways I feel like I'm rambling on a little bit but they're compc no no no not at all I would hasten to add I'm sure all three of us know lots of owners who chose the ESOP route and are glad they did I know a lot of people who are you know they promote it with Rel religious fervor okay yeah I mean many good friends of mine too so some some call me after this but uh one of them is is what Ari and I hit on earlier that we love about the trust model is risk of sale we were only going to go to 20% Esa it was going to take us 10 years to get there but we were absolutely absolutely not going to go above 50% ESOP and the reason why is our company is recurring Revenue software as a service high margin it's all the sexy things that private Equity firms want to acquire and at the same time all esops get a you're not getting a great valuation you know when you sell to your employees I mean if you're trying to maximize your absolute maximize every dollar you can get out of your company no employee ownership model is going to be for you okay like that's not really going to work well for you or be your best option so we were fearful that if we got to 51% ESOP that a uh you know some private Equity well-funded Firm is going to come in and tempt our trustee with I I'm going to give your employees a 50% return today and have to do it out of their fiduciary responsibility and then at the same time the ESOP folks tell you oh we're going to put poison pills we're going to do this we're going to do that and what is it it's more complicated stuff that you got to figure out now to prevent something happening later and you just you just don't have any of that with the trust model and that is like straight away like checkbox number one that we love and it sounds like Ari does as well is that it's in a trust there's nothing you can do about it before we go there just what finally did it why' you pull the rip cord when you finally pulled it so what happened for us and and uh I had to go back and thank the person on the trustee side that when we were kind of summarizing what was going on I said just to be clear you know this is how we're envisioning it working and the person asked the question and then said it's not going to work the way you think it is do you realize that and I'm like what do you mean the gist of it is this our company generates cash and uses that cash to pay dividends out to the founders and that is the source of my income as soon as we take 20% of the company and put it in an ESOP dividend like that like cash dividends we were hoping would work like a loan the the ESOP takes that let's say 100 Grand and uses that hundred grand to pay off a loan or buy shares or however it works behind the scenes but to pay it off and then those shares would go to the employees that worked that year what I learned was no no dividends like cash distributions belong to whoever owns shares already in your company and so if our company was to continue Distributing a lot of cash it was going to put that cash very very rapidly into the hands of the few people the lucky few that happen to be working at our company in the next let's say three to five years and it would create this tremendous Have and Have Not situation and that is not at all what we intended or how we we thought that it worked and then oh there's another kind of ESOP you could do call called the contributory ESOP Etc but I think at this point we had seen enough and it was it was just not going to be for us was it a clean break or did were there ramifications that lived on well what I appreciated is that most of the advisers involved in the deal called to ask if they could help out of compassion what's very interesting to me is that the quarter so-called quarterback of our deal uh a law firm has never actually spoken or sent an email to us since that phone call shockingly to me it was an experiment in the beginning I'm like surely they'll call and apologize you know whatever but it's all fine it's just a bunch of money and time you lost a lot of money on it probably spent uh two over $200,000 wow but that's okay we're we're Beyond it we got something we're excited about now well how did you get on to the uh the trust idea there's two groups that are that are helping facilitate these right now in the states one is alternative ownership advisors who we actually had a call with a a a couple years ago and I I maybe we just weren't ready for it or whatever and then another one that we got turned on to called common trust and I think those are your two organizations that are doing a really good job at trying to facilitate these things and then there's one other attorney Christopher Michael who is is spending a lot of time on these so those those are kind of the resources as I see it in the United States today but uh one of our dear friends uh told me they were exploring this and asked me if I'd heard anything about it and I said well I'm familiar with the trust model but I hadn't explored it directly and and I think the time was right for us to to take a closer look and the fact is that these two organizations helping facilitate it really makes a big difference you know I know Ari mentioned he worked with them for a couple years we've been working with common trust since January um I guess December of 22 and here we are in April of 23 and we are embarking on the final stage which should take about three months so that might also help some folks understand that the time frame for us I would say more typical company than AR it's going to end up taking us under a year to dot all the eyes cross the cheese and and really model this thing is it an expensive process no much less expensive than the uh AR's laughing with far fewer ongoing fees as well so from that standpoint it's great a lot less than than 200 is that the case for you as well Ari well I we didn't price an es up so I don't know I found alternative ownership advisors to be wonderful to work with you know in the context of Brad's description we've all worked with experts in fields that seemed like they would work out well that didn't uh this is one that did and uh I don't recommend people that I don't really want to recommend and I found it to be quite helpful I don't have a lot of experience with this kind of work but it seemed fairly reasonable in the cost yeah I think I can explain why it's significantly less and that is that they're so much simpler like yeah we're going to have attorneys and and some tax advisors on here but we're not dealing with orisa laws and the Department of Labor is not going to be the boss of Ari AR's company me or my company and so when you have less government involvement I think everybody understands that things get a lot simpler and easier is there the equivalent of the trustee in an ESOP somebody who suddenly gets involved in the operations of the company yeah AR you're further along on that than I am yeah so again Lauren ours is a little bit different as you said early on so for us the running of the organization happens at the macro scale at our partners group will'll be meeting this Thursday it's where we make decisions like opening a new business or changing the benefits plan that impacts everybody Etc then each business of course is operating within its own and quote local construct so the price of a cappuccino across the way at the coffee company is going to get decided over there for us the intellectual property is only running the intellectual property and yes there will be a couple of boards set up uh we're actually in the process of putting them together but again just to be clear I mean really all it's deciding is on intellectual property issues in our world so literally it could go through the whole year and other than approving the budget it could really do almost nothing for the whole year I think at Patagonia it's different because they're going to still be running the company from the trust uh so it's a different situation what is the status are are you officially there is this a done deal yeah we signed the papers in December in the way that we work here using what we call our bottom line change process which is a change organizational change recipe where we're involving as many people as possible before the change is finalized rather than the old model of just announcing it and having everybody freak out this is really it's not new news to the organization I mean people have been in ever larger circles been brought up to speed on this as we were working on it so we could gather their input and weave that into what we're we were creating but we did the formal roll out in January uh again not a surprise really to anybody who was paying attention here but that was when the E newws piece came out was to the public was to to knowled that this had happened and I think like I said the papers Paul and I signed in a very unceremonious one minute action over at one of the offices and that was it did anything come up with employees you know I gather that the overall goal of keeping zingerman in the community and not selling to private equity and all that would resonate very positively but were there any issues that that did come from employees uh there's just a lot of conversations because it's I mean don't we don't have an esap and I agree with Brad it's probably simpler but you know all change creates challenges I mean there's no there's no change that doesn't evoke some emotional response from somebody or intellectual curiosity but in general for us uh there's really not a lot of if anything that's altered in the dayto day because the governance continues on a pace the way it's been for 29 years there's really no impact to the day-to-day at all it's just a chance for the I didn't get into this earlier but about 250 of the staff here own a share that we call a community share and they buy that it's like a co-op you can only have one share so I own one and 249 other people own one and they get a payout every year if there's a good year based on the profitability of the entire organization so that's where the additional ownership in the intellectual property will be moving gradually over time to the people who own the community shares right so not to them as individuals but to the LLC of which in which their share resides so yeah so they're they're not going to complain they're just going to start getting more money I mean somebody could complain but in general it's it's there's no major day-to-day impact the major change is they get a little bit more money each year there's always the confusion and complexity that go with any kind of change like this but in a good way I think most very few people here in truth have actually worried about us selling the business which as Brad knows is probably not the norm out in the business world but it's just the way we've run the business that it's never really been an issue Brad how about your employees did they know how close they came to becoming employee owners and are do they know what you're up to now yeah they do because I'm not good at keeping my mouth shut truth be told that weigh on me a lot I don't like being the person that says something really big and exciting and meaningful is going happen and then pull the rug out the last minute so that certainly weighed on me and so now I'm you know much more tight lipped about the current plans but you know we get questions like all of the employees will be participants in this and so I mean naturally the first question everybody asks is how's this going to affect me financially you know and that's fair sure but as business owners we have to think about governance as well and transitioning you know who makes the call in this business you know know when we're dead and six feet under so going to the trust is going to a very informal business but it's going to force us to put some more formality in like Ari has operated under for a long time already we're going to end up having a a formal board and then the trust will have what's called uh I believe it's called a stewardship committee that is there to make sure that the trust's purpose is being executed by the board and so you end up with some checks and balances in there but really that's about it in our case the way that it's going to operate is that the trust will uh will be compensating the founders and balancing the cash we have a model built out but what's great is we can change that model over time based on you know the situation on the ground three five and and 15 years from now but cash gets generated and the board will figure out all right we're going to allocate this much to Redeeming the founders shares and this much to to employees and as we perform better the employees are going to get rewarded more and more with some really really nice high-end uh potential for employees to generate really significant wealth and that's one big difference between the trust that that we haven't talked about that we should mention the esops you know all of the money that that goes to employees is um it's in a retirement account which is great like if you want to give me a hundred grand and you tell me you can only give it to me in a retirement account like cool I'll take it right but with a trust model we still have the 401K we can allocate money to the 401K for retirement but we all know that like younger employees uh really don't value retirement dollars as much as they value dollars here and now and as a business owner I've gotten to enjoy the the benefits of dollars here and now and the trust is going to allow us flexibility to do that in fact most of their compensation through this is going to be come out as just income so is it taxed a little more yeah do they have access to it right now certainly I don't know hopefully that gives a little bit of insight into how it will look on our end how many employees do you have we have 45 have you approached the subject at all with them or you you said you're being careful yeah yeah I'm I'm just not getting into details they know that we're exploring you know the alternative we settled on to the uh to the ESOP is this trust and that man we're really excited about it first off I could explain it all to them and and under five minutes which is lovely and it will be very simple and easy to understand the whole thing and how do how do they receive financial benefits and it's like keep this company healthy and generating profits like it it's a really simple answer so so they understand the concepts uh what they don't have is exactly how it will work out for them financially and and we're waiting to get some of the finalization on like so we can explain tax Concepts to them Etc so I guess I just have one last question for both of you and and it's something you referred to Ari in the in the beginning when you said you're kind of Paving the road as you go I think you also said there only like 40 of these in existence and that means you're a little bit jumping into the unknown you can't possibly know how this all plays out has anything happened yet that has given you pause that you weren't expecting and how much of a concern is it to you that there might be something down the road uh knock on wood nothing has happened you know Lauren Anything could happen to anybody sure well but you know you've spent your career building this thing and I know you didn't take this lightly I know you I know you thought it through absolutely this is a far more to all of Brad's points too I mean the other way is where I'd be worried like if we you know you you spend three years trying to find the company who's going to buy you they promise you a thousand things sure then you sell it then you're you start getting the calls from the people who've been there it's not the same this isn't work you know we've all heard those stories yeah of course over and over and over again I just heard one the other day and so as you know I wrote a piece in part one of the guide to good leading books that's called 12 natural laws of business number nine on that list is that success means you get better problems so essentially when you write a vision it's describing the problems that you want right because there's always problems and so are there guarantees of course not but I prefer the problem of banking or betting on the organization to do what it's supposed to do and can do and has done rather than praying that some mega million billion dollar company is going to actually honor the values because it's just time and time again they they don't and there's no guarantee I mean it's the company still has to run well I mean like Brad what did you say run it well or ruin it run it or ruin it yeah so I mean there's there's all you know we have to maintain slash improve the quality of our food we have to maintain slash improve the quality of our service we need to keep the workplace getting better all the time we need to run our financials well and those have never been easy I mean it's super hard every day from the day we open but if we can keep doing that as an organization then it's my belief that this gives the best possible shot that I know of to have a Zingerman's community of businesses healthy in an arbor 100 years from now or in in 2082 celebrating 100th anniversary long after all three of us have probably left the planet yeah Lauren do you worry about this thing that you created you know and you're stepping into the unknown actually that's what's so appealing about this like Ari and and I and our teams are writing down what is it that we love about our business like it's a great place to work it's a positive impact on the community you know it's all of these things and we are putting that into the purpose of the trust and throwing the company in there to protect it so in essence like that's really all we're doing is putting it in a protected place and then letting it get on with it I hear you but you have already had the experience of making a choice and heading down a path and thinking you were making the right choice even though it may have been more complicated at the time and there were things that concerned you but you made the choice and then decided that it wasn't going the way you thought it would yeah but but also recognize that that ESOP was only going to be 20% of our company right so we knew there was going to have to be other stages behind there at some point it it was sort of a let's get a ball rolling to get some some wealth into the hands of employees whereas this one's 100% And then we're getting on so that's another I suppose another check box for us on the trust model that I hadn't really thought about but I mean I see unexpected things this is not going to be particularly tax efficient Lauren so that is one thing that could come up for me in the next uh few months are you referring to uh that as an issue for the owners the partners or for uh the company the employees well for the employees they're not going to have the opportunity to get capital gains tax rates so it's going to be at their income tax rates and we're probably goingon to have to convert to a C Corp so somebody's going to do that math here in the next month and we'll take a look at it and go ah okay I mean it's it's it's probably going to be just fine but that's one thing I could see changing for the better in the future is is maybe we as I understand it the UK where AR's example originated and some others uh have I'm under the impression that if you put more than 30% of your company into a a trust to benefit labor to to benefit your employees that you cease to pay taxes beyond that or something like that I I I I think there might be an opportunity for that of course that might bring government Intervention which is you know frequently proven to be not worth the headache you're moving closer to an ESOP model at that point that's right that's right maybe I don't want that to happen maybe we get something for paying paying more in taxes in this model Ari well I feel good about it it's playing out positively there's no safe path forward there's always risks and like I said these are the problems that I prefer and it's really to me it's about you know I i' work a lot with the idea of organizational ecosystem as a metaphor so this is really about returning to the ecosyst system instead of what I'm going to suggest without trying to frustrate anybody I mean it's a colonial model where you extract the profit and ship it back to headquarters and it creates wealth at headquarters but over time it depletes the place and this is about keeping it in the place in a way that doesn't send to headquarters in Seattle or headquarters in London or whatever and even if People's intentions are good when they start those processes it just as we all three agree it almost never plays out positively and with this one as you said Lauren we don't know there's not 6,000 of these but I guess I would say that we Brad alluded to it earlier I mean we've made our work work by continually taking roads left traveled so we have I guess a lot of precedent with doing it in our own weird way and trying to figure out how to make it be uh be functional and healthy I just love everything Ari just said and you know and and if I I imagine we're both the same that on our gravestone you know here lies Brad he had a great life and and he screwed up trying to share it with the people that you know yeah they got them there you know really okay fine okay that I'll that one all right my thanks to Ari weag of Zingerman's and Brad Herman of text them all and of course to our sponsor the great game of business which helps businesses Implement open book management you can learn more at great game.com thanks guys 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 ren21 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]