Employee Ownership for Small Business Advisors and Exit Planners Webinar

so with our webinars they're amazing because they are welcome to both sipas and non-stepas alike um it's a great way to stay connected and collaborate with um other members here on the team um we always have a great amazing guest like we do today and we discuss the topic we do open the floor for Q a following the presentation so if you guys utilize the Q a box at the bottom we'll go and get to questions afterwards um so I would like to discuss today's topic employee ownership 101 for small business advisors and exit planners and joining us today is the amazing Stacy Smith the project equity which helps businesses and communities discover the power of employee ownership which ensures owners retire well employees gain equity and businesses stay locally rooted so with that Stacy thank you again so much for being with us I will give the floor to you wonderful thanks so much Deirdre and hello everyone I'm thrilled to be here it's a privilege and an honor I'm gonna share my screen and get us started um so I'm just gonna ask Deirdre is that good yes wonderful super so welcome everybody um as Deirdre said we are project equity and we're going to talk to you about employee ownership we're really focused on your role as cipa's exit planners um cfps other things like that we think there's a really important role for you all to play so it's great uh it's great for me to be here um we're gonna first talk about why employee ownership is relevant today um and how you can make it relevant to your practice and then I'm going to go through just some high level Basics about the three main forms of employee ownership esops worker cooperatives and employee ownership trusts and then I'm going to talk a little bit about what's next and where you can go for more information in fact we do have a cipa qualifying course uh that you can take on our website and I will talk about that when I get there so what are we talking about when we talk employee ownership so it can mean a lot of things as I'm gonna talk about it today it means this we're talking about broad-based employee ownership which is really where all employees have an opportunity to become employee owners so it differs a little bit than when we're talking about Equity grants or stock options or even a key management buyout all of those are terrific and of course they do involve employees gaining ownership but they're usually limited to key employees or a few employees so we're really talking about how can that ownership cut across or be available to all of the employees if we look at that definition right now we're looking at about 15 million employee owners in the U.S today so um really relevant to your practice here and why we want to talk to you all is selling a business isn't easy and you may have had that experience with some of your clients so we have some data and I'm going to show you some of that in a minute over half of business owners in the US today are 55 or older um like myself and it may be time to start thinking about doing something else for those folks and and today fewer than 30 percent of those businesses are going to transition within their families so that Gen 2 gen 3 group may just not be available you might not be interested and so passing it on in family may not be an option on top of that we find in the data only 20 of businesses conclude a sale so just take that in for a minute if we talk about that then 50 percent of businesses small businesses lower Middle Market businesses and Middle Market business don't have a path to exit I keep going the wrong direction here so there is interactive data on our website project hyphen equity.org that talks about this and in this interactive screen you can click on your state even your county and drill down and look at the profile of uh where the demographics are and the age of these business owners we call it the silver tsunami um of retirement here and if 50 of these retiring owners don't have a path to exit their business employee ownership is a wonderful option so why is it wonderful it really ticks all the boxes if you will so a lot of these business owners who have devoted their career um and their energy to building up a business they're interested in preserving that Legacy in some way it may be because they feel very connected to the community and the businesses played a role in the community it may be because they have developed really meaningful relationships with their customers their clients or their suppliers their vendors but the legacy is important to them when you talk to them they're also really interested in getting a market value exit in some cases they would love to have tax benefits I mean maybe in all cases they would like to have tax benefits and they're really wanting to reward their employees keep their employees in in the business and do that so employee ownership is a path to make all of that happen on top of just making sure that the business sells right so many other real compelling um stats around employee ownership is in businesses that have this broad-based ownership scheme we are seeing quality jobs and much more Economic Security for the workers in some cases we are seeing those workers building a lot more wealth a lot more than they build with just a W-2 paycheck we'll let you look at these stats here but higher wages much longer 10 years so you have a stability in the workforce and we see the net worth of the household increasing as well the businesses themselves are also growing stronger um so profit margins up higher than their peers so sales and employment growing faster year over year and the owners themselves your clients the folks that you are really engaged with what are they going to get well one they're going to conclude a sale and they're going to do it at a fair sale price so just because they're selling to their employees they are not taking a discount on that sale and I'll talk more about that in a minute they get to retain some influence on the pacing and the process here that is not the case if they have somebody else coming in to buy it they're going to be subject to the buyers timeline and needs and as I mentioned before and very compelling for many selling owners is they get to preserve the Legacy uh their place in the community their relationship with their employees their relationship with others who have helped them build that business so looking at it through the lens of your practice um this may already becoming obvious to you but let's talk a little bit about it um you get to retain more clients after that tradition transition to your employees so now you've got a new set of owners to this business right and that potentially opens up a pathway to having more clients in your practice once the selling owner gains some liquidity there's more assets under management um with uh with the liquidity from the selling owner and if there is retention of the business depending on what your practice looks like you're also going to see that business grow Additionally you can distinguish your practice from others if you are at the table understanding and introducing employee ownership as an exit pathway with your clients so we like to be participatory and engage you so I'm going to ask a poll question I'm going to ask Deirdre to help me definitely I love cool questions um question number one which of the following is true about an employee ownership transition a it can increase Employee Engagement and retention B it can help a business become more profitable and increase growth so see it can create a powerful succession option that provides Fair let's see my little thing is blocking provides fair value and a valuable on a flexible timeline to an exiting owner or D all of the above if you guys want to utilize the Q a box for your answers I'll have a Stacy let us know which one's correct yeah I see some all of the above coming in which means you guys listened thank you that is awesome that is awesome so that's right it does all of these things and you know obviously I'm a fan um and that's why because it can uh do all of these things so I'm gonna keep going and we're going to get into talking about what form does employee ownership take okay so something probably somewhat familiar to you we've got esops Employee Stock ownership plans we've got worker cooperatives and we've got something known as employee ownership trusts so an ESOP is actually a retirement plan okay and in the retirement plan is the equity of the business and that Equity is allocated out to the employees in the business and the value of that Equity increases over time and the employees can access it when they retire a worker cooperative very different so it's a more direct and participatory ownership structure where um the the members of the worker Cooperative have one share and one vote they share in profits so it's not retirement wealth it is this year every year wealth um that they get and they can also elect and serve on the board of directors and employee ownership trust a little bit of a hybrid of both it is a more customizable form of employee ownership it's new um in the United States much better well uh much better known in Europe in the UK in particular um it can be adapted to have many of the characteristics of a worker cooperative and also has that real-time quarterly annual profit sharing as its wealth building mechanism I'm going to go into details on each of these now in a minute I'm going to talk to you about give you some examples of companies that have gone down this path so Delta pipeline right about um 68 employees it was a second gen business already there was not a third gen but more importantly Craig Danley um the the former um owner and now president and CEO of Delta pipeline he was really compelled by employee ownership and wanted to see this business which is a a infrastructure uh business in Southern California really wanted to see this move into the hands of his employees he thought his employees have really helped Drive the growth of the business in the long-term success of the business so in 2017 he transitioned it to 100 you can see his opinions here but the interesting thing is he's still president and CEO which gives you an idea that this exit of the the equity and exit operationally don't have to happen at the same time that that's another benefit of employee ownership they can happen at different times and at the pace that the owner wants to do it at how Fine Arts Services a different situation here this was already third gen there was not a fourth generation to do this they are also they are fine art storage and installation it's a niche business and it is a consolidating business we see private Equity coming into this space aggressively and finding these small businesses and rolling them up and really not taking good care of them and so Scott at how the the third generation owner of this business said absolutely not that is not what's going to happen to this business he moved into um uh he made the move to take the business into a worker Cooperative structure there are about 40 employees doing great and really making a statement in this consolidating industry third example hummingbird wholesale so this is a food manufacturer organic food wholesaler and manufacturer and they have gone the route of an employee ownership trust it's a partial so um Charlie and Julie sold 49 of their business to the employee ownership trust um and they will sell the other 51 in about five years when they are ready to fully exit financially and operationally so we've got these I mean the these each of these demonstrate the range of flexibility that we have with these employee ownership structures I hope so we've talked a little bit about you uh the advisor and how this can benefit your practice um I'm gonna throw these bullet points up here look at them but I'd invite you um to really look at these yourself and figure out what resonates with your practice do any of these bullet points resonate with you do you have other bullet points that really resonate with you I mean you've got differentiation you've got um every every selling owner has a built-in buyer group they may not know that they have a built-in buyer group their employees um retaining a business client in your practice growing practice revenues um Etc these are all potential benefits to your practice and we urge you to sort of think about what's really true for you in your practice so how can you engage your business owners in this direction and help them consider employee ownership um so then so one thing is to start to spot opportunities early so you know your practice you can review your practice and say okay when are these folks potentially going to start wanting to have these conversations we recommend that business owners think about this five years maybe more in advance of when they will really want to do it now many of them don't want to talk about it that early because they may be a little bit in denial they may think that they'll be you know able to run the business much longer than potentially their spouse wants them to be doing that or things like that so the earlier that you can get in with dropping some seeds planting some seeds with your your clients the better because particularly if they want to grow the business if they want to increase the value of the business before they go through a sale it's better to think about this early rather than later you know that anyway because a job with your exit planning but begin to introduce employee ownership and provide some general education education to them so that they know that if there's another item on the menu for them when they're really serious about thinking about this and you can refer clients to other service providers like project equity and many others who are in the space to actually help facilitate and provide the technical assistance to move the business through the process if you want if you're totally jazzed about it like we are and you want to get more into it think about incorporating some employee ownership Services into your practice where you're getting deeper in education talking to other stakeholders and advisors about the the the your owner your clients stakeholders and advisors um you can conduct feasibility assessments so it's really the due diligence process right where we're estimating the value and providing some employee education helping to quarterback the transition process bringing that ecosystem of technical assistance providers to the transaction as it moves forward helping to identify financing I can talk a little bit more about these things as we go on but there's there's lots of ways for you to do a light touch on this in your practice or if you're if you're jazzed go deeper we would love to see that um so oh sorry I've got a little uh formatting issue here apologies but we think of the employee ownership um transition process like this and this is really common for other technical assistance providers whether those are ESOP providers or worker Cooperative providers Etc the early stage of exploration this may go on for a while this is planting those seeds it's having the periodic conversations when when folks are ready it's getting deeper into that education really giving them the case studies giving them the vocabulary giving them the examples showing them how the transaction might happen if they want to move forward it's time to get into feasibility this is our due diligence practice right we need to look we need to get under the hood of the business and really look hard at it right if there was going to be an external buyer coming in they're going to come do their due diligence that due diligence still needs to happen even if it's going to be the employees buying it so we're looking at the value of the business business the potential sale price we're looking at management capacity of this selling owner wants to exit operationally right away we got to figure out like who's going to run the business next do they have a number two do they have a bench have they prepped a management team to take over we're really developing the timeline for the transaction and we're also often engaging the employees and seeing if the employees want this to happen almost always the answer is yes but it's an important question to ask and have answered um if all looks good in feasibility move on to transition right this is where the rubber starts to meet the road we're getting a we have an ecosystem here we have lenders we have attorneys we probably have some CPAs who are looking at the the deal and understanding the impact um you know uh so we're structuring what the future business is going to be is it going to be an ESOP is it going to be a co-op is it going to be an employee under trust what are some of the things that we need to do to the underlying business do we need to convert from an S corp to a C Corp etc etc we're also looking at what is going to be the governance structure the management structure does the seller want to retain a role in the process so we're doing all of these things as part of Designing the transition and implementing it we're also going out and getting Finance these are externally financed these are leveraged buyouts right because the selling owner wants some cash out of the deal now often they are most often they will be also be carrying a small percentage of a seller note but we bring some outside Capital to these deals Banks Community Development Finance institutions Etc so we've we've gone into the market we've found the financing and we're ready to close the deal project equity and some other organizations out there really continue with the now employee-owned business in the final step which we call Thrive which is we want these now employee owners to understand the responsibility of ownership and understand how to manifest that so that this business can continue to thrive and hopefully grow as an employee-owned business um as I talked um I went through some of this you know how the actual transaction takes place right we're gonna create the employee ownership vehicle um we're gonna have a a Target sale price that's going to be finalized and uh deal terms are going to be negotiated and finalized we're going to have that loan in place or loans multiple loans and then the business is paying that loan off over time through future earnings so the individual employees are not paying back that loan they are not on the hook for that loan they are not giving personal guarantees they are not having personal credit checks the business is the borrower and the business pays off the loan that's a really important distinction it's what distinguishes broad based employee ownership from the key management buyout where individuals have to go get the financing themselves so what changes after the business becomes employee owned this is often a question that we get and I think it's an important um to be able to talk about it early on a lot doesn't change okay operations don't change we don't want that to change if this is a going concern and a successful business that has a good business model keep it going management same thing so we're still going to have traditional management structure senior leadership departmental control if the selling owner is going to exit that will be a shift right to a new CEO or a new general manager or whatever it is but what does change is we have governance we have oversight in every form of employee ownership um and so it's traditional board of directors in the board of directors operates just like many like any other board of directors out there it's fiduciary oversight looking at financial performance looking at strategy overseas seeing Senior Management supporting Senior Management and ownership changes right so we're moving ownership from a single or two or three owners into this broad-based mechanism so I've talked a bit about financing and that's one of the things that we just love about broad-based employee ownership is that as I said you know the business is really responsible for taking on the debt and paying it back we have senior debt um that we will put in place um usually it's about four to seven years um we can do 40 to up to 70 sometimes 80 percent of the sale price through senior debt we're getting that as I mentioned from banks cdfis credit unions Etc ins we will always have Junior debt as well typically that's going to be a seller note or an earn out um in the case of an ESOP there might also be some warrants in place that may have a longer time frame to it if needed and is usually the smaller percentage of the sale price there are other sources of financing out there and some deals call for these other sources of uh financing we can put in place some non-voting preferred Equity that has dividends attached to it we can also put some Mez debt in place if we need it and in rare instances we might have a little bit of employee Equity that is the case with worker cooperatives but it is always de minimis it is um you know it is not a notable portion of the sale price so here's a sample transaction for you guys to look at I'm not going to read this whole slide but I I encourage you to look at it this is a very typical illustration of the type of transaction that we're going to do in employee ownership so you'll see the top line numbers there we're looking at Revenue we're looking at ebitda um we've got a valuation number most employee ownership sales are going to happen between three and five x ebitda so sometimes as high as 6X ebitda but we are not when we say fair value it's fair about it's not strategic value these are not 10 12x ebitda deals but they can be as high as five or six so we're usually looking at a couple of different um scenarios here sometimes we put an earn out in place because the business the the selling owner has put in place the infrastructure the plans to really grow the business and even though they're exiting we want to make sure that they do get some of that upside so we can put an earn out in there in some cases there can be tax savings so in the case of an ESOP and um a worker Cooperative capital gain on the sale of the business can qualify for a section 1042 deferral of capital gains it's not often taken but it is available so all right I'm going to jump into a little more depth around an ESOP so Employee Stock ownership plan it's the most common form of broad-based employee ownership you all probably heard about it you may have done deals which is great it is a qualified retirement plan when we say qualified that means it is recognized under the employee retirement income Security Act erisa as a retirement plan it's very similar to a 401k but instead of having a diversified um rule of investments in the plan it's primarily the stock of the company and so the the TR the Employee Stock ownership trust owns the equity and they allocate it out through the plan to the employees um and it is also it was created specifically to be a vehicle for the purchase of stock at fair value for the benefit of the employees um it comes with a lot of tax um positive tax implications and in order to gain those tax benefits right it has to comply with erisa and with the Internal Revenue code so it has a high level of compliance but it has a high level of benefit in return for that compliance so interestingly and this is the only vehicle that we have like this and it's sort of a unicorn in the world um in the United States at least so the company has the ability to deduct the principal and the interest payments for the debt to pay out the selling owner so of course interest is always tax deductible but that principle being tax deductible mean is meaning that that purchase price is really um uh neutral there with with the tax benefit um the other thing of course is the employees are deferring their income tax on the value of the stocks until they retire they are not recognizing it and they are not paying anything until they hit retirement and they are often in that lower tax here um so I'll let you read this again this is the the tax savings rule of thumb there's a lot of ways in which um the ESOP confers tax savings at the corporate level at the selling shareholder level and again at the employee level so we put in place governance though um and this is true for all broad-based so we are going to have a board of directors um as I said it's a very traditional board of directors um it is um elected by the ESOP trustee so as I mentioned the the assets um the equity of the business is held in trust there is a trustee to administer the Trust on behalf of the employees and that trustee has a role right they are the shareholder of record and as such they vote in the election for the board um the board is going to hire um and uh um uh supervise the management team the offers the officers of the company and you see then you know management will be managing them to the company just as they would in in any other situation there's no change between that relate that relationship between management and employees those are um traditional supervisor um relationships there so esops are powerful Wealth Builders there are many folks who have become millionaires because of their ESOP account it is a it is the most powerful wealth building mechanism we have in employee ownership it is a hundred percent funded by the company and gifted to the employees that's actually true of all of the um uh uh forms that we have except uh a worker cooperative and I'll talk about that distinction um and the account grows over time so in an ESOP the business will have an independent valuation every year that independent valuation um pegs the price of the stock in everybody's allocation account and folks get additional shares allocated to them every year so that account is going to grow significantly over time um and all of these forms of ownership are conferring benefit to active employees so if somebody leaves the company they take a new job they retire whatever it is they cease being part of the ownership structure in the case of an ESOP their Shares are bought back by the company the value of their account rolls into an IRA whole question number two dear uh yep question number two and then before I get into the question again um I noticed there were a couple people with hand trade if you could please use the Q a function we'll definitely get to your question at the end of her um presentation but poll question number two Employee Stock ownership plans or esops are a retirement plans that own all or part of a company on behalf of his employees B totally owned by employees who are like board members C trust overseen by a stewardship committee or D stop options available to all the company's employees you guys can drop your answers into a box and then Stacy will let us know what's correct I'm trying to get over here and see what you guys are saying so um they are certainly a they are retirement plans that own all or part of a company so we can do a partial sale in an ESOP they aren't necessarily wholly owned by the employees because in some cases we will do a partial sale um and in an ESOP the trustee elects the board um that trust is overseen by a trustee not a stewardship committee and these are not stock options that's always a tough thing when we say ESOP it's ownership plan not option plan so the right answer here is a there's some trick questions here though so don't feel bad all right I'm gonna dive into worker cooperatives less well-known less understood um Really Gonna um be a a valuable vehicle when we get into smaller businesses so esops are really good lower Middle Market and up and if you've got these um clients who have smaller businesses you know maybe only 50 employees or less um we can look at the worker Cooperative the the exciting thing about employee ownership we have a vehicle that works for everything from like a 10-person firm to a 10 000 person firm so we can really scale um the employee ownership uh vehicle based on the situation here so what is a worker Cooperative apologies I'm getting a little formatting thing here again um it is a business owned and governed by its employees everybody has an equal vote so if you are a member of The Cooperative or an owner of the Cooperative it's one share one vote so all the voices are equal in that way and the board of directors will be made up of a majority of the employee owners not everybody but the majority will be employee owners and uh profit sharing is annual and it uh and it's paid out typically in a formula that formula is heavily reliant on hours worked or contribution but there can be other things um in the formula as well um this is the one vehicle that we have where employees make a choice so they opt in to the worker Cooperative so it's possible to be an employee in a worker-owned Cooperative business and not be an owner you don't have to choose to be an owner so you opt in and they do that by paying a something called a buy-in which is a small amount of money that just signals that they are coming into the cooperative and they receive again that one share one vote for that buy-in it's a flexible business form different states have different staff shoots that we use to form the cooperative and all that profit sharing that patronage and worker Cooperative that is tax deductible to the business um and as I mentioned before selling owners can qualify for Section 1042 they are much less costly to set up and maintain over time and ESOP gets to be quite expensive to put in place and maintain over time because of all those tax benefits um a worker Co-op much uh much later uh lift to get in place um we have Democratic representational governance in a co-op right because the worker owners elect the board directly themselves not via a trustee and they are eligible to sit on the board as well um so you can see sort of how it works here the majority of the board of directors is elect is from the membership elected by the employee owners same thing it is supervising and supporting management who in turn supervises and supports the employee owners I talked about the buy-in um this is it is a varying amount of money and each Co-op makes a choice about what that buy-in amount is and it confers the rights and responsibilities of ownership it is something that is returned to the owner when they leave um so the balance sheet in a worker on Cooperative the equity section is going to have a line item for every employee owner with their buy-in amount there um I talked about this as annual profit sharing it's um it's uh the term is patronage in an employ in a worker Cooperative um net profit typically at year end it can be done quarterly um and there's formulas in place here the board is going to sign off um on the amount of patronage that can be conferred at any given time and in some cases um some of that patronage is retained it's not all paid out in cash immediately but some of it is retained and paid out over time and that's just a cash flow management process for worker cooperatives and we get to pull question three full question three there we go each employee owner and a worker Cooperative holds a single voting share a true B false what do you guys think I see mostly A's a few B's I'm scanning through it is it's true or a uh true or a is the answer here it is one share one vote in a worker cooperative okay last form I'm going to dive in this is the employee ownership trust as I mentioned it's a little bit newer here in the United States um we've got a lot of track record overseas with this we have a trust again the trust is going to have some or all of the voting shares of the company held on behalf of the employees um typically we are using something called a Perpetual purpose trust as the vehicle here and the interesting thing about that is the perpetuity so business owners who really want to protect their legacy over a very long time Horizon are looking hard at eots because it really protects the business from a future sale it makes a it creates a very hard high Bar for a future sale esops are often purchased um down the road 5 10 15 years down the road but if that selling owner really is looking to protect the business over a long time Horizon and eot could be a really great fit it's very customizable often we're putting in place governance structures that look somewhat like um a worker Cooperative again the this is free to the employees they are opted in when they are no longer employees of the company they are out of this and again we've got that annual or quarterly uh profit sharing piece here uh this looks a little complicated it's a lot of the same principles that we just talked about we do have um the trust which is overseen by the stewardship committee there is a trustee in this case but it's what's called a directed trustee so it's really just an administrative function it's that trust stewardship committee who really um is the voice of the trust and the voice of the shares um in this case we also have a board of directors at the company level very similar structure there and again we um I've talked a little bit about the the profit sharing here annually or quarterly we typically put an allocation formula in place so that it's transparent and fair um and it is taxed that that um allocation is usually comes in the form of a bonus and so is tax deductible for the business okay deep breath um I'm gonna say where do we go from here and then we're gonna turn to your questions and I've been monitoring a little bit there's some great questions in there so let me just talk about um where to go next um we can support you and your clients um we regularly educate advisors such as yourself and we have I'm gonna show you in a minute a link to our website we have as I said a super qualifying uh course there that goes into much more detail than what I did today and you may want to visit that if you want to get some more information there and um we love to help you become a candidate spotter you know employee ownership candidates um we love to do that um we can directly support you we can act as referral sources we can refer out to others we don't do every we don't have the capacity to do all the transactions ourselves but we are part of a large Network and we are always very happy to refer things into that Network um so uh we uh these are some of the things to think of um when you are looking to refer out to um employee ownership technical assistance provider like a project Equity or many other firms out there you want to make sure that they can do a comprehensive feasibility assessment that they are going to be really Hands-On and providing that transition support to the client there's a lot of hand holding there um and that they are really qualified to help assess and support management transition where that's needed you want to make sure that you're referring out to folks who can find the money um the transaction financing is really important to be really important to your client to get that cash out at the time of that so you want to make sure that folks can do that um and it may be important to make sure that they can also provide some post-transactions support as necessary and finally you know go to our website um there's a page just for you that project hyphen equity.org advisors and then there's also um a consultation page so if you have a client in mind if you have a candidate in mind um who you think is ready to hear more about this and get started and be in conversation you can also go to our page for a free consultation that's really for the business there um we're happy to talk to you as representatives of the business in that case so yeah let's dive into your questions does that make sense now Deirdre yes definitely thank you so much for all this information um Stacy we're going to pull up some of the questions that we have we have some really good ones in here like you said um it's gonna start kind of just in the orders if they came from um Andy the next question is is there a way for a high net worth clients to participate in the lbo OR financing of these transactions as a private lender slash alternative investment love it um that is just a wonderful question I'm so excited to get it the answer is yes um if they don't have um an investment fund vehicle that they are actively in right now um we can talk to them about what a pathway might look like for that very exciting perfect thank you for that um our next question is from Eric this question is the ability of the ESOP to build wealth for employees is that in comparison to other retirement slash pension plans yes um yes and yes it's in comparison to just um a regular business um in comparison to the other forms of employee ownership and in comparison to a 401k or pension plans most privately held businesses do not have pension plans and they don't have a path to a pension plan but they do have a pass to a 401k but because the ESOP is invested in the company stock if the company is growing and well managed over time it builds it can build an outsized proportion of wealth in that case you can answer a question Eric I'm Clark his question is are there any particular industries that are currently hot for esot planning yeah great well Clark I'm going to expand your question not just to ESOP planning but to employee ownership planning right and ESOP is is one tool in the tool kit here I I would say um first of all we've seen this happen really effectively in almost every industry again because we have different Vehicles we can we can do things in across industry and size and geography um really important what's hot right now is I mentioned um at how Fine Arts Services there are a number of sectors right now that are susceptible to private Equity um coming in and and buying things up those are hot for employee ownership because there are many owners out there that despite the you know promise of a 10x sale price they are not interested in what private Equity is going to do to that business as soon as they own it um and so we see that consolidating in logistics um in um Mental Health Services in um across a range of Professional Services um this is really hot and it's really an important thing to look at um perennially manufacturing construction design etc those are all traditional employee ownership Industries next from Michelle and IRS notice was issued last month regarding esocs any concerns that the increased scrutiny from the IRS um generally the ESOP Community has been sort of grateful for this because it's clarifying A lot of things um and ensuring that uh Rogue players are not gonna um make the the broader industry susceptible to to um bad action so um no no I think it's it's generally seen as uh you know better to know than to not know thank you um I do have another question it seems to be these options wouldn't be great for businesses that have fairly regular turnover as just the nature of the industry they would like to know your thoughts on this yeah I love it this is a really great great question um so um we do this regularly in the retail restaurant food service industry where we have the highest turnover and they work typically that's going to be a worker Cooperative or an employee ownership trust most of those businesses aren't large enough to do an ESOP and then ESOP does not work well for a high turnover business and ESOP does not work well for a particularly Young Workforce because they aren't as interested in retirement benefits um but a worker Co-op and an employee ownership trust can work in a high turnover situation and it can drive the turnover rate down because people are hungry for that stability let's see Roger the question is how do you determine buy-in for work or Co-op great um it's customized to each Co-op and it's you in in and the participants in the co-op are going to have an influence on what that number is it's usually a number that is attainable for everyone and feels you know meaningful to everyone as well it is often um done as a payroll deduction over a year or more so that to really make it accessible so if it's a one thousand dollar buy-in right they can do a twenty dollar you know per pay period deduction until they hit that number so it's it's meant to be accessible but it is custom every time thank you let's see I'm gonna go to our next question let's see how does the worker Cooperative work as an exit plan for the founder slash owner um okay well I mean it works just as as each of the other ones does so a worker Cooperative is a way of owning the business um across the uh the the breadth and if I'm understanding your question Clark um the the the uh the worker Cooperative is gonna buy I it's either going to be a stock sale or an asset sale they're gonna buy from the selling owner either the stock or the assets using this outside financing so that the selling owner can exit in that way it's the same whether it's an ESOP or a worker Cooperative or an employee ownership trust the same is going to be true expensive see our next question is from Catherine she wants to know how long until the employees can join the eot um that depends it's a design decision okay um typically um I would say we see most folks doing six to 12 months uh before they can uh participate fully in the eot people and hot Industries I see this again I'll just jump in I think I sort of answered the last one broadly um here I would say that the industries um you know employee ownership trust small to lower Middle Market businesses mostly what we're seeing worker co-ops typically small businesses maybe a few pushing into that lower Middle Market that's talking about size not industry um worker cooperatives you know we we are seeing those a lot in retail in food in really um what I'll say Niche uh businesses uh where the workforce is really unified it also works really well when people are in the same place um so you've got that physical proximity to each other eots might be a little bit better if we've got a distributed Workforce um and there's some other things there but but really um yeah yeah we we can do all kinds of different things everything thank you I have a lot of people they're just saying great excellent presentation yes definitely thank you um and we'll actually share more information of where they can find other articles um and to reach out to you as well um Jake wants to know how does an efop plan get money into the owner's hands as they are simply giving the shares away and many owners need funds for retirement Etc upon exit yeah no none of this decision none all of this is a sale so in every case whether it's the ESOP the co-op or the eot the equity is being sold and purchased by The Entity with the outside financing so absolutely so in almost every transaction we're going to have a liquidity event event at the time of the transaction for a certain portion of the sale price so there is going to be that cash coming into the owner there are some situations where the deal will be a hundred percent seller financed and so they're just going to get paid over a period of time um and there's different reasons for doing the transaction that way but in most instances the owners are going to get some cash up front for sure perfect thank you okay um I have a question and I believe it's from taji um Can ethos be invested in the company itself and or in publicly traded stocks it's the company only it's either company stock or cash um it is not a vehicle you can still have a 401k plan and that 401k plan can invest in mutual funds and other equities and that kind of thing but the ESOP is only for the company stock and a little bit of cash thank you and Eric um as far as your question I'm not exactly sure what particular matter you'd like additional studies for but I will go ahead and drop the information Force Daisy that you could reach out to her as well um Thomas wants to know if so if a selling owner is a profit driven I'm sorry if a selling owner is profit driven which Industries are best fits for esops well Thomas every selling owner is profit driven that I know of so um and uh again I'm going to take your question and broaden it out from ESOP to employee ownership you know and I've talked a little bit about you know we've got Vehicles here that will fit for almost any industry um and as I I think I mentioned before you know we're seeing sale prices here ranging anywhere from three to sometimes 6X ebitda if you've got a selling owner who is just convinced that they can get 12 you know 10 or 12 x ebitda for their business they should go try to get it um it's rare I mean only 20 of businesses are selling and concluding a sale um and we've had a lot of folks you know come through do a feasibility oh my gosh this is so exciting I really really want to do this wait a minute I think I can get a better deal down the road and they end up coming back you know 12 18 months later because they couldn't they couldn't do what they thought they could do but they should try your own shade um your question is you said that an ESOP where the interest in principle was deductible when there's a loan how does that work yeah um it works because ESOP is governed by erisa and erisa allows and and the IRS um it's a dual code thing allows for the the the the business owned by the ESOP to deduct the principal and interest from taxes um uh for on the debt that bought the uh Equity uh so that's how it works it's it's a tax deduction um at the end of the year those principal payments and and interest payments okay let's see if a couple of you guys have great questions by the way um I know we're running pretty close to our time limit for any questions that we can't get to again I'll drop her information you guys could reach out directly for any of the slides for sure to connect with them um I do want to get to Kevin's question what happens with any of these structures if the business owner passes away before the financing is paid off it's a great question um yeah so so um if it's the if it's the bank financing that the business is paying the bank back it doesn't matter because it has nothing to do with the business owner anymore if the selling owner holds a seller note and passes away before the business has paid the seller all of that note that note transfers into their estate the the business still owes that money to the estate a couple more questions and then we can close out Jake wants to know um Can the sellers negotiate how they get paid um over time versus all at once and can they maintain a share of the business and receive dividends or payouts of some kind yes yes and yes um it gets into a lot of different details that and I'm mindful of time but yeah there's a lot of flexibility here um to how things are structured for sure perfect thank you and a lot of thank yous and great presentations as well and then our last question before we close out William wants to know how do advisors get paid in an EO deal similar to a sell um to PE yeah great question it's kind of up to you so a lot of advisors are it's it's fee for service and with some technical provider technical assistance provider it might be upon performance um and closing the deal and so we see different models there mostly in the employee ownership space we see fee for service perfect thank you so much for answering those questions for us I am going to drop your information in the Q a um so if anyone does want to reach out to Stacy or project Equity I do have um an address I would like you guys I don't know if you have access to the chat box for everyone to say I can drop your information here and then also there is a course that is super approved as well that you can reach out to them um and of course on their website as well you can book a free consultation with Stacy and her team which I think would be super beneficial all cells and I want to see hopefully all of you guys can see that in there it should be learning at project hyphen equity.org to reach out to them and then also for the CPA CE course I'm going to drop the link to that as well hopefully you guys can see that if not I will go ahead and just tell you what that is it's going to be www.project hyphen equity.org advisors and then that is their information again Stacy thank you so so much for being with us yeah super informative again anyone that wants the slides or access to working with her I have dropped the information in the chat box um I just wanted to say to anyone any of our current cepas who are part of the credential plus tier this webinar will be art class and available to view at a later date for you um and then we also do want to invite you to check out any of our other webinars on Epi seminars.com please share them on your linkedins I wanted to thank you Stacy Peter um in the background with project equity for being with us today thank you guys so so much to you too thank you and thank you again to everyone that joined us today I hope you enjoy the rest of your evening and we will talk soon thanks everybody thank you take care cheers