Bonus Episode: The Long Journey to Really Understanding ESOPs

[Music] hello everyone welcome to the 21 hats podcast I'm your host Lauren Feldman if you've been listening to this podcast you know that we've been taking periodic dives into the world of Employee Stock ownership plans we started down this path because Jay gz was thinking about his own succession issues in a series of podcasts and conversations and seminars over the course of more than a year Jay progressed through the three stages of ESOP Discovery first he had his eyes opened wait a second if you're an ESOP you don't pay taxes then he got a little euphoric I think I can make more money owning 70% of the business than I do now owning 100% And then he confronted what I've been calling the ESOP industrial complex the big firm lawyers and Consultants that sometimes seem inclined to make esops as complicated and expensive as possible they want to charge me a success fee for finding a buyer even though they didn't find the buyer that introduction to Big ESOP occurred at a conference that Jay and sha busy attended in Portland and that left Jay convinced that esops are probably right for a lot of people but not for him and yet it was also at the conference in Portland that Shawn and Jay met Phil Hayes who takes a decidedly different approach than the industrial complex gang what immediately stood out about Phil who calls himself the ESOP guy and who has his own podcast journey to an ESOP is that he doesn't view his mission as selling owners on esops his goal is to help owners figure out which solution is best for them whether that's an ESOP or something else which is why Sean and I decided to sit down with Phil and have a conversation brought to you by our sponsor the great game of business about his approach the episode is titled the long journey to really understanding esops welcome Sean and Phil it's great to have you both here for the p year or so we've been presenting a variety of perspectives on esops and we're eager to get yours Phil can you tell us how this became the thing that you specialize in I just love the ESOP concept but I I think the greatest reason I got into it is I saw that there's definitely a gap in the industry and what I mean by that is that there's a need for for companies um first off to be you know really well educated in in the correct things of what is an ESOP how does it really work secondly I think that there's a a problem in the industry where and it's not it's not like this huge problem but there's a there's a problem where I think some people don't realize that an ESOP transaction doesn't have to cost you know millions and millions of dollars and so looking at that I had a lot of clients as a CPA firm that were being approached by these types of of saleside advisors and I decided you know what I'm getting questions from my clients from this I might as well just jump in and start helping them and and I found I loved it and I love esops and so I've kind of just pivoted my whole career towards doing this full-time you mentioned that there's a certain lack of understanding about what an ESOP entails are there particular issues that you think are most misunderstood yeah I think there's a host of issues that are misunderstood I know we kind of hit on the cost side is definitely one of those areas some of the things that are just commonly misunderstood is is this the structure of an ESOP and how it works with your employees what the employees part is in the ESOP what your part is um I think that's definitely a misunderstanding there's there's misunderstandings related to valuations and what a fair market value would work how that would work for a company I think overall the um a lot of people look at an ESOP as my lowest valuation alternative and I don't think that that's true so as you start talking to people one of the reasons there is a lot of misinformation is because there's different hot beds are geographically there's different places in the country that are I would say they're they're ESOP friendly and then there's other Geographic areas that are not and so what I mean by that is is there's a lot of advisers you know whether they're CPAs attorneys Bankers Insurance people all of them are great at what they do but they may not understand esops very well and so sometimes they either give misinformation or they guide somebody away from it so a lot of the you know education that needs to be out there needs to kind of penetrate The Advisory areas so that people are more educated especially in these markets that you're seeing they don't have a lot of you know good good information for these companies to think about that's really interesting especially thinking about it in geographic terms that had not occurred to me what are the most ESOP friendly parts of the country yeah I'd say for sure like Chicago Illinois is is very um friendly for esops um Ohio has great a strong ESOP chapter that um in Columbus and Cincinnati California is a very strong ESOP state in general um they're very very geared towards that then there's Parts in the Northeast and there's probably others that I'm missing but I just think in general those are probably the biggest ones that stick out diving into this issue over the last couple years i' I've gotten the impression that there's something of a Choose Your Own Adventure aspect to esops I don't know if this is a fair statement or not but it almost seems like no two are alike that there are a lot of decisions that owners have to make and and that maybe that's part of what contributes to the misunderstanding because there are different ways to do it what's your sense of that yeah I think the first thing I would say is as an advisor in going into it one of the one of the premises I start with is you know at the very beginning I'm not saying you should be an ESOP company and I have a concept I have a process that basically proves out the ESOP concept and as we get through it the first step the Second Step then I think the actual like you say the adventure how we actually structure the ESOP starts to come to light because there are some things that the shareholder can choose to do for instance they could choose Bank financing with a seller note or all seller note they could choose to use warrants in the transaction and SARS and they could even choose to do what we call a non-leveraged ESOP so there's there's different ways to to build it but they're all going to start with the same building blocks and if you do the process right in some cases I mean it's going to lead us to the right you know the right place for sure I've had people refer me business like hey help this company with an ESOP they definitely want to do a partial ESOP I'm like well we don't even know if they want to do a partial ESOP yet because we haven't really worked through what are their goals and objectives how are we going to structure this and there are are things that will get flushed out in the planning process in the very first two steps that will contribute to how they actually build that ESOP for them I'd say the other side of that is that there are some things that are just going to be standard for every ESOP first off it's a retirement plan it's like a 401k plan but it's a it's a retirement plan and it's built under the regulated guidance of the orisa and the Department of Labor in the IRS so no matter what you do you're always going to be within the regulations and your ESOP has to conform to that so however we pick and choose the way that we structure it it's not going to deviate from from the way the regulations are Phil you said you had a a process that you take people through to see if they're appropriate for an ESOP could you walk us through that a little bit let me start with the size too because I can it can kind of get all over the place when we're thinking about like what size of a company should even think about this and contemplate it honestly I've gone into done ESOP transactions for companies that have somewhere between say $ 800 to a million dollars in in net income or if we translate that into ebaa cash flow so the revenue isn't as important as the cash flow itself because the cash flow is going to give us a real strong indication of what we think the transaction value is going to be for the company and it's going to help us also to build out the models for how do we structure the debt so that's the first thing that so size in that is going to be you know you can you can go down as as I would say as low as that something lower than that is going to be problematic even with the way we structure the cost just because the cost benefit may not be there for somebody on an employee size I will say that if it's an escort we're going to want we're going to feel really comfortable with anything over 20 employees because we have to work within the 409 P guidelines which is the disqualified persons test I have done and I am doing an ESOP right now for a company that only has 10 people so that's kind of the just the general idea of the sizes that example you gave if you can can you you said they only have 10 people can you tell us uh what their eida figure is yeah their eBid is around a million5 so that's pretty small yeah yeah relatively small and this is why when we think about the cost as well we can build a transaction for a company that small and still be very very successful at making it work for everybody the company the own the owners the other advisers and and putting the whole thing together but they've got margin like that the 10 person company like that's an amazing margin for a 10 company yeah obviously that's and that's one of the things you have to look at with the employee roster too because when we do the allocation of shares to the employees in that case I'm talking about there's going to be a very strong benefit to those employees because there's so few employees so when you're dividing up the allocations for stock there's going to be to me 10 people in that company are going to have a tremendous opportunity to grow to get the shares and grow that company and and have a a very strong retirement plan going forward so besides the size what else are you looking for the first thing I would say is you know I'll spend several several meetings with people and I don't charge them for this I just conceptualize let's just conceptualize the ESOP and what I'm trying to get into that is like what are your goals and objectives and I'll tell you kind of some experiential things that happen like some people are really geared I can just tell when I talked to them they're so geared around you know trying to maximize the valuation that my advice to them is like if that's all you can and I don't mean to be demeaning or derogatory but if that's all you care about then I think you're better off just pursuing a strategic sale because when you try to say I'm going to do I'll try a strategic sale and I'll kind of look at that in combination of an ESOP your heart isn't really in the right place for an ESOP so I'm just kind of really being candid and and transparent about that because they need to see the big picture like they they love this company they built they love the employees you know they want everybody to have a future and they also do care about a market value so that's not going to be not important but it's going to be part of the whole equation so you know a lot of times I'll just try to give them some guidance my job is not to make every company that calls me an ESOP I mean that's you know in fact I don't not I don't necessarily talk them out of it but I'm I'm going through and filtering to help them to save some time to be like if you know is this really what you want to do so the process really starts there if conceptually it works and they get all the things that we're talking about then the very first thing we're going to do is is we're going to create a valuation model now the model itself is going to be um mimicking the model or the valuation work that's going to be done in say step five with a trustee and an independent valuation firm and there's a lot of like parts and pieces to that model that are important in my experience at looking at other advisers work because this happens from time to time where I'll be hired after somebody else I don't think that people put enough emphasis on the parts and pieces of that model they want to go from the model the valuation model into the feasibility piece which I'll talk about next but the key is is that the the owner and the key people they understand they need to understand the connecting points between their financial forecast their cash flow their say their cap rate their so the risk rating of the business their target working capital they need to understand the the mechanics and the correlation of all of these and they actually translate into a an actual real number instead of hey this is your eida and this is the multiple of eida it doesn't tell people a lot of information so that's the first piece and then going into that I I really stop everything I don't do anything before we we nail that down because I don't think it's really helpful for people to get thrown into this process and then suddenly they realize they're so deep in it they really don't even understand what they're doing with it which is is something I've experienced with with cents that have hired me after that fact yeah let me if you don't mind me pausing for a minute I think a lot about decision making you know how businesses often you know they're started by an owner founder and that owner founder is really a big part of the decision making organization how do you evaluate that the main thing is and this is what I love about esops is we have we have time to work through that individual you know they are the decision maker and what we have to be thinking about whether we do an ESOP or we're transitioning to sometimes I'll do like a management buyout like a a you know your your ke people will just buy you out instead of an ESOP or we'll do like some hybrid but either way whether you're doing an ESOP or not you're GNA the key decision maker has to start transitioning their role and functionally that needs to start taking place you know I think as early as possible so the ESOP gives us a lot of room to do that like let's lay out the the the road map for for how that's going to function and every company has a different culture right and and one of the things I always kind of look at is what is their existing culture right now which if you you know and you and you know this Sean and I'm sure you know this Lauren a lot of culture in a business is going to reflect the leadership so if that decision maker is you know maybe more autocratic or you know just very bossy then that culture is going to reflect that and so one of the things I'm always thinking about is the sustainability of the culture of the future and if it really is something that that let's just say it's the opposite the owner is just you know more of a democratic kind of person who gets everybody involved is a team oriented person you know obviously we can work a lot with that but the key is that we got to kind of transition to something and so the decision maker has to kind of want to do that as well and not be in that place forever why do you have to Phil because I I ask because I've heard different versions of this obviously this is a point of great interest for any owner who's contemplating this will it still be their company in some sense will they still be in charge will they still be making decisions and I've heard some owners who've been through this who have esops say you know what you control who goes on the board ultimately it's still your company you can just run it the way you always have sure no it's it's a good question Lauren and it gets to the the control aspect of of esops and how that really works I think that they do because it's healthy for the company let me just throw out one thing that I I think it's so important for companies to consider as having maybe one key decision maker before you even do an ESOP or anything else is thinking about their continuity plan and so if something were to happen disablement or they passed away for some reason suddenly what was gonna what's going to happen to that company what's going to happen to the value of that company and what's going to happen to their estate in terms of the value of transitioning the value into their estate one of my first esops I did was with um a good client of mine and I've known him forever before we even did the ESOP and he's now I think we did it four years ago and he's um 100% ESOP company he's 76 and he's still president he works 12 hours a day five days a week he loves working and and I when we first set it up he's like can I still do this I said yeah you can still do this you know if that's what you want to do so he's got a board of three people so it's 100% own ESOP there is a independent board member who used to work for the company but they passed the independent standards from the trustee then his son actually is on the board as well so his son is kind of um taking over everything his son didn't want to buy the company by the way in this in this situation but I would say if you asked him from a control perspective it would kind of align with what you're saying Lauren and other people have said the day-to-day decision making is completely the same as it was when he when he first started and the only thing that's kind of gotten you know when I think about the changes that have happened is he's he's accomplished what he wanted to which was the transition his ownership he didn't want to be um holding on to that stock and he's been able to kind of move through that so I would say that's the majority of the time you're not going to see a major shift in control even if you sell you know a controlling interest which is 100% ESOP what are um I'm kind of curious from an industry perspective what are Industries you looked at where you go through this process and you're you're like this is a really good industry for this type of thing and this is an industry that it's really tough or or maybe any and all work it's more a matter of ideology and structure of the organization yeah I I think that a lot of people that do esops they we all want to talk about industries that really work well and the reality is is there's some industries that are just going to be better for esops like I would say architectural and engineering firms there's you know I've got several I've done in my history I've got more coming into the into the future I just closed actually one Friday so a new ESOP company that we did and it works well because the individual employees get it pretty fast the owners get it there's a very strong teamwork environment in those types of entities I've seen and I've done several construction companies and they work pretty well assuming you know all the pieces are there and and culture is there and and it works with the decision makers I would say though I've done Distributors and manufacturing companies and Retail companies we're doing a retail company right now so I don't know for me I don't if I really look at it it's not as much to the industry it is much more in my opinion is it culturally a good fit you know and I look for things like what are they working on right now I've got several C that are great game of business cultures um so open book management I've got some that are EOS traction cultures so those are those are interesting to me because they they're working so much on the business already that esops just make sense because they're not just building business processes or getting people involved so I think is it is a lot of ideology and culture I would say the other Financial part of it is is the company really does need to have a source of predictable cash flow if some company has has this erratic behavior of cash flow then it's hard to build a model where we can put a lot of debt on the books and have this tax benefit if they're going to lose money in the next year and they're going to come back up so I'd say that's definitely part of it I'm gonna I'm going to go towards more the specifics of a good ESOP candidate toward as opposed to just good Industries Phil have you done any esops or seen any esops that just haven't worked for whatever reason no no I actually have never done one that hasn't worked in in fact before I did esops in our firm we have we've been doing ESOP work not the sell side piece but the Consulting piece on tax advisory since 1985 and we've had es out companies go through the you know the ' 0809 downturn and still and they're they're still fine so we haven't actually seen any companies go through that but I think the the main thing that I've seen with companies that do go down is you know not for our our experience but the people I talk to in the in the space is the structuring of an ESOP transaction I think is critical in how you go about it so I talked about like the valuation piece and we get into the feasibility models we're going to want to play out some scenarios to protect the company meanwhile making sure that the owner is getting what they should get from a cash flow standpoint so structuring debt is really important understanding the the actual quantifiable tax benefits and building that in the model is going to be important stress testing cash flow is going to be important and then creating back stops like what happens if this happens so so some of this is just good business planning I mean when you think about any company that's thinking about their future any company can fail tomorrow right it's a matter of of how they're going to um adjust towards changes in the marketplace a lot of times when people look at not selling their business to a strategic buyer one of the reasons they don't want to sell is because because they know their people don't want to work for a company that's only focused on profits they know that their especially nowadays I think the the new culture the new generations are are thinking much bigger than hey I just want to make I just want to make a lot of money so there's a lot of things that we are now we're getting into that are post ESOP services that I would call ESOP implementation services that help design Workforce Development Employee Engagement servic how do you recruit and build people so when you think about what we're really doing with an ESOP is we're leveraging um one of the greatest assets they have which is their people and you know at the very beginning when we ask the question what do you want to do this for and the owner is like I really want to do it to help my employees that's part of the that's part of the answer because that they already care about their employees enough to consider their future and the quality of life that they have so like I said I could go into a lot of the things like that but I think those are to me very exciting when we do an ESOP company or create an ESOP company because they get to use all those benefits to to creating a very strong business I want to address some of the issues about why there's so few businesses that have chosen to do this I mean we can all point to lots of examples but as a percentage it's a very small percentage of the businesses that exist in this country and I'm curious why you think that is a couple of things have come up I think part of it is we started call referring to what we've called the ESOP industrial complex and I to get a sense that some owners are kind of turned off by the bureaucracy that exists and I think part of it is as they talk to people who are in the business two things one is they they get a sense that a lot of it is aimed more at the employees than at the owners it's like okay great I understand it's wonderful for the employees why is this good for me and the other thing we've heard is that you know it almost seems like they think it's in their interest to make this sound as complicated as possible does that resonate with you at all yeah I mean if I had a very clearly stated mission statement on my podcast it's to it's to really help in that situation because I do agree unfortunately I think that there's a lot of ESOP professionals that make this sound way more complicated than it really is and I can't really know what the motivation is I mean we can always speculate like you know if I can make it sound really complicated then I can charge more money for this right that was Sean's guess I think right Sean call me cynical I think culturally the ESOP industry does suffer from a little bit of that instead of just saying let's just be straightforward this is how it works it's not for everybody because at the end of the day I just want to sleep at night I want to make sure I've done the right thing for people that we've worked with and if it's not the right thing for them let's do something else you don't help people by bringing them down the road where you maybe you can make money on them but that's not that's not really worth it so I think part of it too is professionals kind of congregate you know and so the attorneys and the trustees and and the valuation firms they like to talk about a lot of the complexities which is fun and and I think that's engaging but when you I I always tell this as as a new professional that comes into our firm your job is not to know everything about tax your job is to be able to take say for instance tax and EXP explain it to your customer so well that they understand it because that's how you become I think a very good service oriented professional you know and that applies itself to esops I think some of this honestly is just cultural shift I have just seen a massive change into what employees expect when they come to work what owners are trying to do in terms of make something meaningful you know actually create a place where they they both enjoy showing up for work and they enjoy being around the people that they work with and that idea has been expressed I'd say in the last five or 10 years as this idea of purpose and the more data is coming out showing that businesses that start from a place of purpose ironically often outperform financially those that don't have a sense of purpose and so I think an ESOP is is a much more natural extension of that idea of living a life of purpose I do think I see a change in um people's anticipation of what their career looks looks like right um what they want to do with their life so you you do see a new generation coming into the workforce that has some different ideas some of which you know play better in you know in ESOP because everybody's sharing into not just the ownership but the responsibility of of the future as opposed to maybe the older Generations were more keen to I want to make a lot of money and I'm not again there's nothing wrong with making money but they're main focus was the ambition of of Building Wealth I think that people are they're they're broadening their um idea of what a successful life looks like and I think the ESOP plays well in yeah into that cultural shift how about the idea that these things seem to be marketed more uh along the lines of this is great for the employees uh and paying less attention to what it means for the entrepreneur do do you think that's an issue I will say it needs to be a holistic plan as you kind of build it all so event we need to understand how the employees will be affected but at the very front end my idea behind the process itself and proving out this ESOP even work is you got to nail down what the individual owner is looking to accomplish and that's outside of all the other parameters of employees I've got one right now and we're going to do the meeting next week and it's a you know a single owner of a company really nice company and he asked me like should I have these people on the phone I said know let's just you and I talk let's just go through the first valuation model you know I want to hear from you without biased you know I don't want you to tell me what your people want to hear I want I want to know what you want and my goal there is to be able to have a very you know concrete conversation about can we accomplish what he wants out of this transaction because then as some as time goes on if we accomplish that then we can start adding on all these elements and eventually it becomes how does this affect the employees let me ask you a very specific question that came came up in our previous conversations we have a a regular on the podcast named Jay goldz he hit upon something that confused me and I'd like to see how you respond to it he started to think about it in in these terms he was thinking about selling 30% uh to his employees and because he doesn't really need the money it wasn't about getting the money off the table for him he would do it by a loan and let the employees pay him back directly but then he started to think about it and it occurred to him that they would basically be paying him in his opinion with his own money because they would be using profits earned by the company that would have been his if he hadn't sold so he came to the conclusion that if he did this transaction he wouldn't be selling the company to his employees he'd be just giving it to them was he right about that um okay so if I generalized everything first and I said okay the cash flow that is going to be used to pay J out is generated by the company is a true statement now if the owner is is looking to transition the ownership into whatever whether it's a sale to my um employees at an employee stock ownership plan or it's a sale of my key persons or I'm going to sell it to strategic buyer ultimately the owner is trying to get their money out of the business like what is it what's the valuation and how are they going to get their money out of business a typical structure of an ESOP transaction I would say most of ones I do will have some Bank financing and some seller financing which means the owner at closing is going to get a a liquid a liquidity event um as as much as the bank could lend on that ESOP transaction so they are getting something that's out of the company like say in that structure immediately that the company now has borrowed and is now in debt to pay back in addition to that they're also going to get the seller no but he's right about the cash flow it has to be the cash flow that pays him back now I think the idea is like if I just hold on to this then I'll keep the cash flow no matter what and I think that's where Jay went with it and that's true and the question for every owner is going to be at what point are you willing from a risk reward standpoint to hold on to that cash flow and then when you are ready now this is why some some ESOP transactions are partials because are not ready to release the ownership transaction or the ownership stock right now but maybe they are a little bit because they want to have some chips off the table and they feel like the valuation is enough to benefit them to make that really work but but that he's you know so generally speaking he's right but it's it's really in how you structure it if there's a lot of Bank financing for instance then he or she's going to get their money at the closing and now they've been paid say some percentage of the total valuation there's another issue that I've heard come up from time to time which is what happens when employees leave the business whether it's for retirement or if they just choose to change jobs and go somewhere else it can I gather put a company in a bind of having to come up with a a chunk of money to to pay out uh how big an issue is that there's not a concern like what I'm trying to do with a client is work through the anxiety points there's really not going to be because we're we're building models that really will work we'll go back and forth on those several times to make sure that it works for for everybody the company the individual shareholder so by the end of our plan we know where we're going to be we know we can weather a downturn so I think that's really important to if if your adviser is doing that work they need to do they need to get into the numbers really well and they need to everybody needs to understand what is going to be paid out so we'll burden the company for instance with all the compliance cost of an ESOP so you have to have an annual valuation you have to have um a third party administrator you have to have fiduciary insurance you have to have possibly a trustee involved so those costs are going to need to be in the cash flow models anything else that we're anticipating that's going to come up I have a client we're doing a deal right now and we know we're going to buy you know we're going to invest in two new stores that's built in the cash flow model so I think that's the key part of of getting to the next step if we get through cash flow valuation then getting through the feasibility model Sean has this affected your thinking at all uh is it as attractive as before more attractive less attractive no I mean I what I appreciate about Phil's way of working is it's it's methodical and one step at a time and there isn't a foregone conclusion that you become an ESOP and what I contrast that to let's say you hire a business broker to sell your business you know they want you to sell your business because they get paid on that percentage of that deal and I think anytime somebody comes along and says let's see if this is the right fit for you and I assume Phil you get paid by the step as opposed to by the completion is that correct that's absolutely correct yeah and that's one of the things like I don't I don't charge a success Fe so it doesn't even matter what we end up selling it for we just gonna we're going to do the best job and and I've had where we get into a point where we're not it's not going to go we're not going to go forward and I think what I've helped him with is like at least you didn't go into the whole big old nightmare of a bunch of money on this and you know realizing it's not it's not for you so I think that's that's and that is predominantly in the ESOP industry how it's done by the way is firms charging a success fee explain that what's the success fee well so an investment banking firm in a doing an ESOP transaction like they would do a sale for a strategic buyer they're going to just like in a in a normal what we call an m&a transaction they're going to have it look like that right we're going to go through the the due diligence process they're going to make an offer the trustees going to counter offer so they're going to go through all that feels like an m&a deal but it's really a regulated m&a deal if they sell the company for more money their percentage their fee is based on the sale price whether you and they're going to include in that um if they do Source Bank financing they're going to get a fee off getting the bank financing and there's a dollar amount connected to the amounts they're that they are securing for people and so on its surface it looks kind of normal because people are so used to you know an m&a model where I'm going to go get these guys to help me sell my business but when you think about an esap transaction the problem I have with that is that it's it's a regulated transaction it is the Department of Labor is going to have jurisdiction over the transaction over the valuation and at any point can go investigate that deal now if you look at case studies where companies have been sued as esops the number one thing they're being Su of is being overvalued now who is going to pay the price in that situation not the investment banking firm there is no jurisdiction the Department of Labor has over them they've done their work they're objective advisors whatever but it's the selling shareholder and the trustee that are going to have to deal with that and essentially the company because if they're found guilty of that they're going to have to Pony up some money to um right size it and it's going to it's going to be disruptive it's going to cost the legal money so I think there's problems with the whole model and and going back to some of the original things that's one of the reasons I got into this because I I do think that the way these transactions are being done is philosophically you know misalign with the purpose and the mission of being an ESOP I also disagree from the ethical standpoint I don't think you know there's nothing wrong with making money but you know bolting this whole m&a thing in here and you know and they're making a lot well isn't that the argument that they make Phil they say listen you had an you have options you could you could sell it to a strategic buyer or you could go ESOP if you sold it to a strategic buyer we would get a success fee so we should get the success fee even if you do the ESOP yeah that's definitely what they they'll come in and say well at least we can help you provide both paths and that sounds really nice but when you really look at the conceptual side of things I don't want to say like hands down either somebody is really an ESOP candidate or they're really not so that whole running down two paths to me is a very good way to manipulate the situation to get them to realize oh well I'll just spend the money on on an ESOP transaction but you all you've done is taking their their hard-earned retirement money you know Sean owns his own company I own my own company you know what does it take to build a company it's hard right so I I would not want somebody to take advantage of me like that because it's wrong so anyway that's why we've built a model that's purely advisory it's budgeted and we get our cost out on the front end like this is what it's going to cost now it's never perfect but it's going to be pretty close at the end of the day before anybody gets involved in any you know you know engagements or getting things started so do you think we have the right number of esops in this country or do you think that there are people who are looking at this and walking away kind of for the wrong reasons when I first started getting into esops doing podcasts and things I I realized like the statistics are really low like there's only 7,000 ESOP companies in the entire country right off the bat you're like this there should be more ESOP companies so I do think and it's hard to prove out exactly why people don't Veer towards this I think there's probably multiple reasons I think right right off the the rip I'd say there's not enough good education and I'd say unbiased education you know if you go to a conference and you think that the cost of the ESOP is 10 times what it really costs you're probably going to walk away from that thinking I'm not going to do an ESOP I'm too small and it's not going to work for me so I think that's contributing to it I'd say the second thing is what I noted before the people that they listen to the most are going to be their in their in their advisers at home and if the advisers at home are you know intimidated or they don't really understand it they're not going to advise it so I don't think that there's a strong in in the United States I don't I still don't think the CPAs have trained well on this then I think the idea too is that um there are companies that do become esops and they do sell and the reason that happens is become so successful at what they're doing they become such a great Target to be acquired by a bigger company and it's kind of contrary to the whole idea of mission of hey let's build this Legacy but it does happen enough so if you talk to trustees about their book of business you know probably every one every one of them is going to have some number of their ESOP clients selling that year it's just it's a truth you do have this input of new companies and you have this output of ESOP company selling so I think just to answer the question simply though I do believe that we should have a lot more ESOP companies throughout the entire country that outcome you just described company becomes an ESOP it you know performs really well it grows a lot of wealth for the employees and then it sells and sort of seems like is there any way you can mitigate that you know in terms of the structure of the organization or is it just like that's just a that's just a risk you know that's part of the deal I think it's yeah I think it's a good good question and i' and I've thought about that a lot too and thinking and discussing this with other like trustees the one thing that has to be like because it's a retirement plan there's a fiduciary responsibility that is going to hang over somebody and that's typically the trustee like they're going to have the responsibility to manage the Trust In other words if they get a great offer they might have to take it that's that's kind of where I was going with it yeah if they get a great offer and the trustees a fiduciary then they have to think about the the benefit of the employees and imagine you know having some nice retirement plan at $20 a share that you're waiting and then a company comes in and makes an offer at $50 a share you're like okay it'd be hard for the fiduciary not to take that I think that's the main issue for these types of things so it partly it proves out the concept of what I was saying esap companies outperform non- ESOP companies because they do become good targets but there's nothing that I know about that can can restrict that type of thing happening it's going to be a fiduciary decision first off it's going to be a board of director decision like the board of directors is going to be say solicited by a buyer the board is going to have to review that and they have fiduciary responsibility if it goes deeper and deeper into it and it's a real deal then they're going to get their trustee involved and they're going to have to make a decision so I would say that if the board of directors is not interested from a good business perspective in selling then I don't think that those deals are going to kind of penetrate unless you just have a very aggressive buyer that wants to get in there um and push it really hard I'm not sure what you mean by that are you suggesting that there is a way to turn away a deal that maybe financially looks good but there are other issues with yeah I mean if if the board of directors looks at it and says this is not the best timing for the for again being a board of director I think you you wear the hat of being a good business person for the company so you have these governance rules or or guidelines that say the board is really there to to to do what's best for the company that's their job and the trustee is there to do what's best for the ESOP then direct the plan according to its governance right so they kind of work in tandem the business decision itself rests with the board to entertain the offer if the offer gets entertained then the trustee is going to have to review it it has to go through the board first so I'm not suggesting that the board if they had a really legitimate offer could just circumvent the trustee completely but I'm saying that if they have like a business plan that says we're not really ready to go out in the market yet we're doing these other things it needs to make sense from a business perspective um for them to to not maybe take an offer so it does leave the possibility that you have a a business owner who creates and builds a business and decides to to go the ESOP route and with with the goal of creating a special place to work you know a a great company where people enjoy being employed that does good things and makes money pays people well and they sell it 100% And then one day in the not too distant future the people who uh are at the company decide you know what we'd like to take the money and that special place to work goes away right I think that's always a possibility my thanks to Shan busy and Phil Hayes 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 thank you both 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 21 hats .c that's l r n at21 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 podcast follow us on Twitter subscribe to the morning report at 21h hats.com this episode was produced by Jess thubron founder of blank word Productions okay now you can leave thanks for listening every one [Music]