Ep. #325 - How ESOPs Work: Myth Busting, 1042 Tax Deferrals, Warrants and Executive Comp Plans

Keith and Steve how are we doing today Ryan how are you I'm sorry I Gotta Laugh we keep doing that and I should I should direct that towards someone so Keith this is our third or fourth one now and it happens every time so uh I just got to get a good chuckle out of that so Keith I'm very excited to have you on the show with uh Steve and I and why don't you give everybody a little bit of your background and what you guys do yeah I'll take the lead there Ryan since we kind of fumble on the intro there you I run a business succession uh business succession planning practice out of Washington it's a 10 10% Team National practice we help business owners decide when to sell how to sell all the various strategies to include esops on the back end of it we we run really a family office inside of a leading bull ret Bank to help them with holistic wealth management on the back end most importantly I'm a proud father of two little girls I have a nine-year old and a foury old to keep you honest um those are the things that matter nice I got TW twin girls that are almost six man so I yeah support yeah um so so Steve I know you wanted to T the first question so why don't you go for it yeah I think you know to get more I've known Keith for I don't know three four years now uh that I met Keith and starting to a know a little bit more about his practice and and I think you know what really can talk about his practice is this myth that we've talked about on other podcasts that we've done this is our third or fourth one I think we've done Ryan and uh excited to have this uh employee ownership month uh so thank you for doing this but the myth that's out there is that that uh you know esops are complex and expensive and more complex and expensive than other exit options and because of that I think that's one of the keys to why esops are not more you know used is there's just these myths and misunderstandings so Keith I know you bring like you said a holistic approach you're a business owner I'm here to help you can you address that myth right up front about esops being more expensive and more complex uh versus other options since you get in there and what do you tell your clients uh and how do you work with them yeah a great question I I think there's a little truth to to every comment you know esops are more complicated so let's kind of unpack the question there's two two two questions within the ask there look an ESOP is going to be more complicated Steve than an outright sale to a third party you outright sale to a third party you're going to take a company you get an offer from a buyer you look at the after tax proceeds of it and you either say yes or no and you're kind of leaving the company more often than with an ESOP you know you you're you're understanding you know a tax efficient transaction that is going to have an element of complexity of understanding what it means to the company what it means to the employees what it means to you as a seller oftentimes you're going to stay involved with the company but but complexity should not be a reason not to do a transaction because complexity just means it's something new and what's beautiful about ESOP transactions are there's an entire Community out there of professionals whether they're lawyers or investment bankers or wealth advisers or CPAs or trustees or individuals on the valuation side that this is all they do each and every day and so to me complexity is is resolved with Clarity and the key Steve is before you make any big life decision and selling a company is a life decision we need to get the information and so all the complexity goes to the side if a business owner can pause exale hire a team of advisors to properly explain and communicate what the ESOP actually means to them in their families what it means to the company what it means to the employees how the transaction works and what I've always found is if the client can repeat back everything that you've just explained to them then you've done your job it means they fully understand it and then we take this complex transaction that's no longer complex because we've educated the owner and We compare it to the alternative methods of a management buyout or selling out right to a third party and we've positioned our clients well to make an informed decision as to what's the right path for them to monetize the business so that's how i' handled the complexity is you're going to educate a client but through education you're allowing them to make an informed decision the mistake I have seen which is part of the the spirit of the question is clients hear the word ESOP their their incumbent attorney or their incumbent CPA or their incumbent wealth advisor has never done an ESOP they've never done it they simply say oh those are complicated so the owner never has the opportunity to figure out if it's a pable solution because their trusted circle is just GNA say it's complicated so they walk from it which is really failing the client so complicated they walk from it or they don't get paid to do it because they've never built out the practice so therefore there's some sort of building protection right right so they want to protect themselves from getting replaced so they just tell the clients complexity around your spot on with that and and that's failing the client which is obviously you know as a service provider you go to work each and every day to to serve your client and and you want to make sure that the client has all the options front them so the cost the cost to to me Steve is a myth I I really do think it it is you know if you go to sell a company outright to a third party and and we are completely agnostic I work at a a leading bank that has a capability of taking a couple company public um and doing the road show or having them go find a strategic or financial buyer helping them with the management buyout or an ESOP and here's the reality if if you take aund million company I'll use that as a baseline um typical ESOP deal $100 million Enterprise company and they go to sell out right to a third party they're going to hire an investment bank or more often than that and they're going to hire a corporate attorney and when you look at the fees that a business owner is going to pay or a board is going to pay to sell a business outright to a third party between the investment banker and the tax or corporate attorney you know you take that as a waterfall and you compare and contrast that to what it's going to cost to hire the village of professionals because there's a village in an ESOP deal you're going to have six or seven service providers but what I have found is if you look at us side by side the ESOP transaction Steve actually is condensed it's lower outright aggregate transactional cost than an outright sale and it really should be lower and and the reason is there's a much higher probability of execution the reason investment bankers are able to charge a higher fee and should charge a higher fee for an outright thirdparty sale is they've got to get paid for all the transactions they go to market for and they never get paid on because they can run a process and work a deal for six months to 24 months and never get the bid that the owner is going to take and all of their fee was on the back end with the tail so what I have found is the the investment banking fees on an outright sale to a third party are much higher than they would be on an ESOP transaction because on an ESOP transaction you have a much higher probability of closing the transaction if you set the expectations at the onset so with an ESOP what I would say in summary is the myth is that the transactional costs are greater than an outright sale you have more professionals involved but I think as a side by side they're going to be equal to if not lower and more often than that I would say lower now the second part of the the fees are you know to keep an ESOP in place you know it's going to be awfully expensive and here's the Reality Steve there are going to be fees and expenses that the company is going to have to pay once you have an ESOP in place that they're currently not P once you have an ESOP you have to have an annual valuation it's required sure right now they're not getting that you have to provide a 5500 through a third party administrator but when you look at the ongoing compliance costs they should have an ongoing trustee you know every company in my opinion should hire a trustee and they should they should be paying a trustee because the trustee serves an important role but when you take the cost of the trustee these are the ongoing fees and the cost of the valuation and the cost of the third party administrator which are real fees and then you compare that to the tax savings that the company particularly if it's 100% fly owned escort you know if you have that same $100 million company that's right now taxable and then ultimately becomes tax exempt and we quantify what the tax savings is for the company and you compare that to the fees that they're paying to keep the ESOP compliant we no longer view the ESOP as being expensive keth that I know man like I'll tell you what every time I get that push back in one of our trainings or something I'm like wait a second on a million dollars in cash flow and you're saving 350 Grand if you're in Minnesota like and you're going to complain about 35 or $40,000 like if what doesn't make any sense because because the expectation wasn't set at the onset right and and Keith in this this the spirit of this kind of conversation I I think you know one of the things that I always hear as well is the you know there's a Delta between the intrinsic Financial value of an ESAT compared to the Strategic transaction value of a third party and there's a spread especially over the last three years where the you know synergies and the back office stuff of a of a third party sale Enterprise Value could be more on a strategic or a private Equity sale compared to an ESOP but if you actually ran the net proceeds calculator over four to seven years of The Upfront cash the tax advantage salary warrants and the mes financing what is your thoughts as far as like how to compare the net proceeds of two different transactions like that very well laid out um so so I think here's the here's the messaging that I tell clients when it comes into thei the financial planning side of the equation because he you have to you have to run a casual analysis to figure out is the amount of money I'm going to receive in this sale on an after tax basis enough to maintain my quality of life or my burn rate of what I spend every month and what we' often found is you know clients are too young to sell because they spend a lot of money and the company's not large enough so we do need to take a look at that but what you're asking is is the ESOP GNA net the client more cash in their pocket than an outright sale and and here's here's really the disconnect is and and it's a push in a pool because the ESOP Community is going to say the eso's going to put more dollars in your pocket the non-op community I e sells side m& Bankers that don't get paid at esops are going to say we can always get you a higher multiple and and really the truth's kind of in the middle let's go ahead and and and set the table an outright sale from a strategic partner strategic buyer is going to pay more in purchase price than an ESOP will an ESOP is going to pay fair market value as defined by a financial buyer so the the the purchase price of an ESOP transaction will likely be lower than the off offer from a strategic buyer but I have often seen that the purchase price from an ESOP will be equal to the same offer that a private Equity Firm would offer because a private Equity Firm is often be treated as a financial buyer when you dig a little bit deeper what I have found is the ESOP will net the client oftentimes more cash in their pocket than to sell outright to private Equity or even a strategic buyer that's paying a premium for the following reasons and then I'm going to get into the negative if you sell out right to a third party typically they're going to want you to stick around for one or two years and they're going to want to cut bait right they want to recapture all of your salary to have profits to the bottom line so as a seller we'll use the same $100 million example you're going to sell a business you're going to pay a capital gains tax if you sell out right to a third party you may have a salary or an earnout to some extent for a nominal period of time and then ultimately you're going to walk away and you're left left with a lump sum of cash that you ultimately need to live off of and don't you think Keith I'm curious Maybe that's the size of companies but you said cap gains on a third party sale I often see asset sales or a lot of uh non- tax advantaged ways of deal structure happening yeah buyers want to buy assets sellers want to sell stock you know there's there's a big spread there between paying ordinary income or capital gains but but with an ESOP you know with certain structures you can elect 1042 which we're not going to get into on on this topic right here but there's a provision that allows you to sell the same hundred million company with a certain structure and permanently defer paying the capital gains tax so you know you're going to save the 20% federal tax you're going to save the 3.8% Medicare Ser tax and you also have the ability to save the state tax so let's just use a blended average of that's a 30% possible tax savings on that $100 million sale but additionally with a 100% sale with an ESOP these are leverag transactions where you're not getting all cash of Clos so what's more often than not is the seller going to have some form of an employment contract where they're going to continue to stay on board and active with the company at least until that entire sell note is repaid so let's just say it's a seven-year deal when you build the cash flows Ryan you have a $100 million sale if they elect 1042 they can save up to 30% in taxes in my example between the state the Medicare C tax and the federal so that's a 30% premium in taxes they can continue to draw a salary oftentimes at a reduced salary which I won't get into why but they can continue to draw a salary for a period of called seven years they're earning interest on a seller note because they're not getting all cash of close so maybe they get $40 million cash of close with a $60 million note which is an obligation to the company to pay them they're getting interest in cash flow on that note and oftentimes they'll get a second bite at the Apple isn't the no pre-tax too if they El 1042 the proceeds from the seller not will come to them tax deferred or the right structure they'll never pay tax but on that on that note though Keith isn't that note also they're earning the interest on the pre-tax dollar of the note not the post tax dollar of the note correct they're earning the interest on the outstanding balance of the note so pre which is pre-tax right yeah yeah and then they're paying and then they're going to pay a tax as they receive the interest orary income but but what's really cool in these deals is so they they've sold stock they get some cash up front they don't pay a tax they have a salary they're still getting interest on the seller note a seller note is paid to them they can avoid paying a capital gains tax on that and then to compensate them for the risk I'm going to get into the negative in a moment to compensate them for the risk of waiting to receive all the money call it over seven years with these structures a lot of the sellers will get a second bite at the Apple where they'll carry Equity back in the company in the form of a detachable warrant so when you do the waterfall they're receiving the100 million out they can avoid the capital gains tax on that so that's a 30% spread in my example they still have a salary they have interest on the seller note and they get a second bite at Apple which could be significant because that means they have 10 15 20% of the future value of that business so to your point when you do the waterfall on an after tax proceed the ESOP will often put more cash in the owner's pocket than just selling the business outright and paying a capital gains tax now here's the variable the variable is risk because in my hypothetical example if they sold $100 million to a third party and they paid a tax of 30% between the state in the federal they're left with net $70 million in their bank account if it's all cash right so they've drisk and they have that 70 when you compare it to my ESOP example if it's a $100 million deal let's just say that you can go out and raise $40 million of Bank financing to lend at the company all they have at the close there is 40 Which is less than the 70 so my waterfall I talked you about is going to net them more money but it's going to net them more money over seven years and the risk is do they believe the company is going to remain profitable and sustainable to be able to deliv and pay them the back end of those payments so to get back to to the way that we run our practice Ryan one of the things that we always tell clients is to do an ESOP you need to believe that your company has sustainable reoccurring profitable earnings and you have have fire in the belly to want to continue to to work to protect the profits because if the company doesn't remain profitable all the Excel work that we do and the financial modeling of that waterfall it means nothing because you're never gonna get the back end of the money this is so awesome I'm smiling Ryan because I hear he just repeated you like fed him if you ever listen listen to Ryan's podcast I think he used three of the four words gonna use sustainable predict predictable and transferable ke Steve beat me to it man I was like I was sitting there smiling the listeners are probably thinking that we like like had some sort of back like you know prep call for this because I like I always say yeah doing an esap is predicated on building a good company that has sustainable predictable and transferable cash FL and you've got energy to keep going so like like you just you probably said a little bit more articulate than I did but like I just love it man it means there's some truth in there right let's hope so we're both saying it but but any it was nice to meet about a minute prior of this call well Ryan I think you know the the purpose of you know we we broke broke these up into different sections and and one of the things we wanted Keith to talk about today was 1042 um we never wanted to get into the the Deep weeds of 1042 but um we definitely want to touch on that and I think where where I would start with 1042 is you you mentioned the basics of it of of that 30% savings in tax let's start with this on a question on Section 104 to it's only available to C corporations and so can you talk a little bit about how much it's being used with your business owners is there a size business a sector can you just kind of give us a general feel for whether we talk about 1042 a lot but does it get used if not you know just a little feel for that so Keith can you just give us a quick overview of what a 1042 is because I I think a lot of people bring that up they're not really sure about it they kind of know there's a correlation of a 1042 and a 1031 but that's kind of the basis of their knowledge of it but not really sure about how that implies or what the implications are on a transaction yeah the the the the analogy we often give is the 1031 because people understand real estate so it's always nice to to kind of give a parallel is something that somebody understands and then you build upon that so what is 1042 it's it's not something that a bank created it's not something that Wall Street created it's a section of the Internal Revenue code uh it's a section of the Internal Revenue code called section 104 it's been around since 1986 and so what's comforting about that is this is not new um it's something that's been around since ' 86 it's been tried it's been tested um the structures that we've created have evolved and become better for clients to help them shelter paying any capital gains tax and and candly permanently avoid it with a step up in basis so what is it it's a section of the code that says if a seller of an active us operating company sells stock and they sell at least 30% of the outstanding shares to an ESOP and that's 30% in aggregate it could be multiple shareholders clubbing together to get to 30 okay okay it doesn't have to be one shareholder but if multiple shareholders within a company if the ESOP after the deal owns at least 30% of the shares anywhere from 30 to 100 and at the time of the sale the C corporate it was a C corporation then the selling shareholders have the ability to elect 1042 which means they will sell stock to the ESOP ESOP is the buyer of the C corporation stock they receive either cash or cash in a note a blend and they have the ability if they reinvest the proceeds equal to the dollar amount sold to ESOP within 12 months they have the ability to transfer their cost basis from the company into other active us operating companies which could be another Private Business it could be active us listed stocks it could be active us listed bonds there's a series of of Investments that they can go into but what they're doing is they're taking concentration of wealth in an active us company they're selling it to a willing buyer they're receiving cash in consideration in the form of a note often they're taking those proceeds and they're saying I don't want to pay the IRS and taxes I'm going to benefit from a section of the code and I'm going to reinvest in America I'm going to reinvest in another active us operating company and then they pause they pause because at that point when they've reinvested they've avoided paying tax they've transferred their basis but if your client's Ry or anything like mine they also want liquidity so what they then do is they look at whatever they've reinvested into and they figure out if they can then borrow off that to get their liquidity so I want to make sure for the benefit of the audience that I I don't leave people with the wrong message so 1042 is not going to give you a 30% tax savings that was my example here's what 1042 will give you it will give you a tax savings equal to the federal tax rate on long-term capital gains which is 20 plus your state in which you reside every state has a different state tax and then 3.8% Medicare s tax if you're a C Corp so I was using a 30% as you know the rolling average like in the state of California your tax savings which is a third of our business uh in the state of California your tax savings is closer to 35% because they have a 13 plus percent tax rate in the State of Florida or Texas it's a lower savings because there's no state tax right so in that scenario you're only saving 23.8 so I would say in aggregate on average when you look at all the deals I think 30% is a good kind of threshold conversations like this all right so that's the technical answer um you know how frequently are people using 1042 I I think it kind of goes back to something Ryan and and and he and he put it put it the right way of people protecting their relationship I think 1042 is is not you used as frequently as it possibly should be used because it is complicated but like I said earlier it it's only complicated because it's new Once once you hire somebody that can explain it to you and model it the complexity goes away and the right way to make your decision of should you or should you not do 1042 should you or should you not sell as a es Corp or C Corp should be based upon information what I think is a mistake Steve is for any business owner to make the decision to do 1042 without looking at the ramifications of not doing 1042 conversely no business owner should immediately go into transaction saying I'm not going to do 1042 without looking at what 1042 would mean to them do the modeling be objective and let the math and the structure of the deal dictate as to whether or not somebody should do it and what I found is because 1042 adds another layer of complexity there's a lot of service providers that will tell a client it's easier just to do an escorp transaction or you save more money at the corporate level which you do you do save more money at the corporate level of the es Corp but it doesn't mean that 1042 is not the right structure so so the way I would answer your question is there's more transactions in my opinion that are done non 1042 than 1042 I think there's more far more es Corp esops done than C Corps um they're easier to do uh and I don't know that the decisions to do an escorp deal should be done because they're easier I think that they should be done because oftentimes it's the right thing for the seller got it yeah yeah such as if there's really high basis in the company there's no reason to do 1042 if if the owner is worried about the company being able to delever and pay back debt an S corporation deal is going to likely be able to pay back the debt far quicker than the C Corp so my my answer would be let the math let the modeling dictate to the structure don't let the Simplicity or the ease dictate the structure I was just going to say you take a margin loan against your stocks and a different uh different entity yeah and and and so based upon how liquid the client wants to be or based upon what they've reinvested into there's there's instruments that have been created specifically for 1042 where clients can get a loan to value anywhere from 50 to 70% back by a blue chip dividend Equity portfolio or up to 90% backed by an ESOP bond which is a long-term debt instrument of an active us company that has certain mechanisms to protect it from interest rate risk and credit risk so a client can reinvest their bases borrow up to 90% off that and then when they have the cash they can go do whatever they want with it they can you know buy real estate they can put it on their mattress they can go on the market they can go by Art it's their capital and they've permanently avoided the tax with a step up in basis that that at a very high level is how 1042 Works to come back to your question and use the 1031 example it's it's very much like a 1031 where if you sell real estate and you come into cash and you don't want to pay tax you can go buy another piece of real estate and then you Excel and you pause and then if you want liquidity you can take out a mortgage and a mortgage is a loan back by the real estate which is a non-t taxable event now the client has cash and they haven't paid tax on the sale to real estate so it works very much like the 1031 with real estate so um the the the once CE I hear or once I watch people's face when they hear this they're like it's like the dog that wants to go catch the car and so one of the things you know people like well either knee-jerk and want to go change into a C Corp immediately or like because like what is I don't know what the stat is out there Keith but like 5% of ENT small or private heal companies are C Corps these days so it kind of goes back to the applicability like for someone that's not a C Corp right now what are the kind of the what's the timeline and implications of changing into a C Corp and then going down this route yeah so I've got to I've got to at some point during this podcast put this out there right because we can't give tax or legal advice that work for big bank so not so what we will say is the the really smart accountants and lawyers that we surround our clients with are going to help them with the proper tax advice to say um if you are an ESC Corp there's a way to dissolve your s and go C and then you wait five calendar years before you flip back to the yes so the bulk of the 1042 deals that we do are for companies that actually came to us as es Corps because to your point there's there's more s's than C's and so what happens is it's all math they look at the modeling they say all right if I sell my S corporation stock I'm gonna pay a capital gains tax equal to the federal rate and the state rate so I gave 30% as a blended average earlier well clients don't like to pay tax if they can avoid it so with with a smart group of advisers they can essentially say well model out the math of if I dissolve the S and I go C which allows me to do 1042 and not pay a tax what is the harm that does to the company right because the S Corp is very clean the company's not going to pay tax extent that the S corporation owns the stock and so with the CC Corporation they have the ability to have deductible contributions in that fiveyear period while they're waiting to go back to an S so where the math is really cool is can can the client get the best of all worlds it's called the S to C TOS conversion can they get the best of all worlds where they dissolve s and they go C they sell C corporation stock to avoid the personal tax but they don't want to put the company in a bad scenario so while the company has debt outstanding affiliated with the ESOP and they're operating as a C Corp can the company create enough deductible contributions in that fiveyear period of time by making a cont contribution off the company's balance sheet equal to 25% of payroll just outstanding with the loan and sometimes a deductible dividend so you're able to mitigate or zero out a lot of what would otherwise have been deduct uh taxable income the company's making deductible contribution to the ESOP which is a retirement plan ESOP gives it back to the company they pivot and pay down debt and if you can work through that math over five years you then flip the company back to an escort and now you've got the best of all worlds where a seller sold stock they avoided the personal tax you were able to make the company pretty darn tax efficient in that fiveyear period of time with the tax deductible contributions and then you flip the company back to an S and the company's operating tax exempt and again what I would say Ryan is it's not that that's the right structure for an escorp today but it's the wrong thing for the company to not look at that structure to figure out can they pull that off versus just going the escort route they really should be objective and have individuals that are going to look at both structures so Keith you know you talk about the C Corp to or S Corp to see back to S and and what we're doing and and I love the fact that you have that knowledge to help clients because often clients just don't get that advice to say we should at least look at it may not be right but why not look at it dream for me with a for a little bit and that is you know I've been doing this since 1996 and I think the same bill has been in Congress since the very first time I went to the hill in 96 to try to get S corporations on the same playing field as C corporations and allow 1042 we finally made a little tiny blip we're in a in a part of a retirement reform bill that's supposed to be hitting the floor and maybe get a vote and but if it happens 10% of the gain of an escort would be uh defer not 100% dream for a little what happens to the creation of esops if s corporations are allowed you know an owner of an S corporation is allowed to defer 100% of the tax do do you think changes a lot or just changes what we've what you go through to get there with the 10% rule with 100% if the 10% I think we could talk about 10% I don't think 10% is going to move the needle at all I why I I just don't see that as make sure we agree with that yeah I was just gonna say that's a lot of work for 10% deferral no no no no so but what what let's dream and let's say we get it to 100% but what's that do for the usop world what's that do for smaller businesses I I have my opinion but I'll let you talk yeah I think that this is you know not to be qu but I think it's a common sense answer you're increasing legislation in this hypothetical example of enabling companies or or business owners to make a decision where they can sell stock and pay no tax and the company can operate tax exempt from the beginning all for the benefit of this company growing and then Distributing shares to the rank of follow employees of a growing entity where they now are accumulating wealth that they can rely upon in retirement I mean that's the whole concept of this is with a 100% holy owned escort that the business is growing in value which is benefiting all the individual shareholders who otherwise would have no ability to have equity in this company so I I think the the derivative effect of increasing legislation to make 100% holy owned es Corps eligible for 1042 would just simply be dramatic increase in the amount of employee ownership because it's an additional tax savings to the decision maker because the decision maker to do an ESOP the decision maker to do an ESOP and elect CRS is the business owner and and the common sense approach is what business owner would not like more tools or more options to be able to make decisions where they're keeping 100% of their proceeds and not paying a tax so it would Dramatic Lift to the amount of e off activity in my view and the economic growth that the overall e Equity growth in privately held companies and the just the the the whole ability for these the the rank and file like you said Keith actually grow Equity is good we're a consumer Le economy we need people to be able to afford to buy stuff right I just you know Steve and I were rallying after one of our last uh recordings it's like my God what that would do for owners actually getting off and doing something instead of being stuck in their company because they have to pay the taxes there's like a you know on the smaller companies you have SBA Loans or conventional loans that's you know you're so you're paying the taxes the company still has to pay pay the taxes on the proceeds the company still has to pay taxes you have to service then the the bank debt and then it's like you have no room for growth and then the employees don't get access to it so it's like you just freeing up that whole you're you're you're greasing the wheels to be able to actually make that happen and and actually get people to act and the abuse you know if if you think about it I haven't heard this but I think maybe one of the pushbacks is you know is this a tax Loop is it is you know is every business owner going to go out there sell their business to their employees and then it's taxfree and then nothing really changed they still run the business all that the mechanisms that are in place nowadays with the Department of Labor and the where this industry has gone it's just ridiculous to to think that way so I would agree 100% with Kei that it would just open up we we would have so much more employee ownership but we just can't get there so so Keith this has been a lot of fun man I really appreciate your style and very uh very well thought through um answers man it's it's especially on a complicated topic like this so I appreciate a lot what where can the listeners find more about you and your firm Google where where else where else what what about our answer Google you didn't say Bing I mean come on man is it so we you know we We R the capital ESOP group we're based out of Washington DC within UBS and if anybody want to reach out you know our obligation is to make sure with the 10 person team that that we should have the bandwidth to get back people same day awesome thank you so much for coming on the show Keith thanks Steve thanks for having Kei appreciate it so good morning Stephen Miguel how are you and I'll let Miguel go first because Steph and I are learning good morning I appreciate uh being part of this podcast thanks for the invitation hey Ryan it's good to see you again uh think what we number five now number four number five they're all rolling together you just like sit there waiting like we G who's going to talk first um I'm excited for this uh for this conversation um because in our trainings when I'm talking about esops I so many times um the owners are talking about like hey I got this key executive or I got this team that's been with me forever and they're a little bit older and what am I how does it how does that impact their ability to to you know get their share that is um you know fair for them but also then how do we you know help recruit and hire other Executives and so I think there's a really interesting conversation that we're going to be able to dive into especially from your perspective itive Miguel but I want to te up to you Steve if you want to kind of just introduce Miguel and then we can let Miguel your relationship with Miguel and his firm and then also we'll let Miguel do his background okay sounds good yeah Miguel and I uh have not known each other for a real long time but Miguel is a a national service provider for eox and a great supporter and Ambassador for employee ownership so I'm excited to have him on today um Miguel paradus from prudent fiduciary Services uh in the Los Angeles area and I will let Miguel just want you introduce yourself and just tell us a little bit about uh how you got into the employee ownership sphere and uh just a little bit about what you know what your firm does sure Steve uh so really briefly generally my background is a business background I have a business degree I have an MBA spent most of my career early on in the financial services area uh most notably I was um part of an corporate audit Department of Mass Mutual Financial Group Fortune 100 company in in Massachusetts and as part of the my auditing duties I audited that firm's retirement plan platform um and in my final year there I started focusing more on fraud detection fraud investigation and there was um an event that led me to uh an interaction with the regulator of retirement plans there was an unfortunate incident that occurred where Mass Mutual rep borrowed some money out of a 401k borrowed money out of a 401k planon quot and uh promised to put it back but um so the regul the Department of Labor has an agency under its umbrella the employee benefit Security Administration and this agency launched an investigation into this unfortunate incident it was my job to help the agency understand the steps that the corporation had taken to rectify the issue during that interaction the Department of Labor official turned to me and said you know Miguel very impressed with your work and your back background we are trying to bolster our ESOP enforcement uh program and we think he'd be perfect for that so that's when I first really started learning about esops and I pursued that opportunity and I joined the Department of Labor agency in their Los Angeles regional office cool and through training and and really uh the the intent was to to have me help really focus on that ESOP enforcement program so um I was at the department for 12 years I oversaw a team of 10 investigators and really was delegated that offices ESOP enforcement program uh and and was essentially the in-house ESOP uh expert for that agency office on the west coast so my team and I we reviewed hundreds of esops while I was there uh we talked about we looked and reviewed uh ESOP transactions the ongoing administration of esops really always focusing on the ESOP fiduciary so we wanted to understand what the trustees for example are doing in the space are they fulfilling their fiduciary responsibilities to the ESOP to the participants and so that's really where I cut my teeth in the ESOP bace during those 12 years I learned all the ins and outs of esops and and developed a high level of expertise relating to what a what it means to be a good fiduciary what are those missteps and issues breaches Etc so around 2016 I was just I was just gonna say Miguel it's such a such a cool perspective because after even talking to Neil it's like who manages Neil right so it's like you know you kind of get to I think it's just uh super fascinating probably for the listeners because they always trying to wonder like put faces to the people that are actually part of the process ongoing so that's super cool with your background yeah it it it was definitely a unique it's it's a unique background for a practicing trustee and it was one that really again um was was was vital to me uh really learning everything about esops and specifically becoming a fiduciary expert uh and then around 2016 I realized that there seemed to be a need for good independent ESOP trustees in the space and I realized bades I was GNA say is that from 12 Years of like seeing what they're doing like huh they're just missing some good ones there was I we saw some good trustees and there were some that I you know like oh wow uh this little surprised that some of them didn't have a a proper understanding or appreciation for their fiduciary responsibilities and I realized that I could take the expertise that I developed in and the best practices and be a practicing trustee myself I developed a a passion for esops as a as a regulator of esops and I said you know I I think I could be a practitioner and Leverage What I've learned and quite frankly execute that role of trustee better better than than than anyone I had s seen in in in the industry at the time so I made what was a pretty difficult decision in February 2017 I left the department and formed prudent fiduciary services so I'm I am the the president and founder of prudent fiduciary services and I'm very uh grateful that I was right there was a need and and my unique background as a former regulator has really resonated in the space and so we've we've grown tremendously we've helped over 200 companies across the country form a new ESOP as a trustee of that ESOP um and since 201 also come in as a successor trustee for for many other um existing esops uh We've we've built what I think is a really great uh ESOP trustee team I was able to lure away four of my former Department of Labor colleagues from uh from my time there three of the four our attorneys with a lot of fiduciary expertise and certainly ESOP experience and expertise we also have two in-house accredited senior appraisers as part of my staff uh former CFO of anop medical companies with with me full-time and others so we we're now 16 full-time and really proud of the team that we've put together and uh again every one of us works very hard to to help uh uh to help with way any way we can in the ESOP space in particular as as a as a fast growing trustee organization that's awesome that's congrats on the the the success and and it's while while helping people so like you're successful and you're helping other people uh um move into something that's pretty cool steve you want to kind of tee up the topic and kind of like set the stage because I think uh I'm I'm pretty excited for this one because I know that these uh conversations are ones that I have all the time you know I think you you teed it up a little bit before but I think we want to talk a little bit first of all about selling shareholders and uh what stock uh you know Equity Equity outside of the ESOP looks like uh what value looks like in an ESOP and then spend a little bit more time talking about what you teed up Ryan which is how do the key Executives uh play into all of this uh we know it's broad-based ownership but how do we how do we reward and incentivize uh key managers so let's start with this question Miguel and that is how often do you talk with selling shareholders how when you talk with selling shareholders how often do you find that they put value on things like leaving a legacy in their Community being able to continue on as a CEO or board share and any other other things that you think the ESOP brings as value which will break us into the next question which is what is value and is there a myth about ESOP value but maybe let's start about just your experience and working with Shar selling shareholders what they what they tell you yeah absolutely typically on the front end of an engagement or a potential engagement uh in particular if I'm being interviewed for a potential uh engagement as trustee for uh for a new ESOP formation I'll be interviewed by the seller and they of course asked me a ton of questions about my background and experience and the role of a trustee but I oftentimes get a chance to ask questions and that one of the things that I always want to understand is okay Mr selling shareholder you have other options why why in ESOP and of course I'm very passionate about ESOP and I have a good idea why but uh and they'll start talking about some of these some of these different um aspects of of selling to an ESOP as compared to the uncertain of selling to a third party and all that that could bring right massive change loss of of of all control uh the uh and so when you sell for example to a third party um and somebody else is going to come in and that selling shareholder many times is you know that's that's the exit they're they're the buyer says thank you very much Mr seller we're going to take it from here and and so what what it does is it many times jeopardizes the culture that's been built if you have you know maybe the buyer will start talking about redundancies and and firing a lot of the employees that have helped build that business and so that then that could sometimes you know selling to a third party obviously it happens very frequently and it can go well but there's there's always a risk of that really going sideways and so some of the benefits of selling to the ESOP trust for a seller of course that we talk about in these discussions include being able to keep what you've built keep keep the culture and have your employees not only build on what might already be a great culture but take it to a whole new level now that you're becoming employee owned and uh and instead of having one or two owners you now have a company full of owners and everybody and and and when you do it right having a a companywide common uh view of of that employee ownership uh mindset and and really can can can be a very go from maybe a good culture to an extraordinary culture and as you guys know have shown that employee owned businesses are are are tend to be more successful than their nonemployee owned careers and more resilient have have better long-term success and so and and that's because uh because uh you know everybody has skin in the game instead of just the value creation going to one or two people it goes to everyone so that's keeping the culture keeping what you've built and then absolutely for the owner to be able to to still stay in very involved and lead the and that that notion of control is actually something that is very important and is really on the front burner of a lot of us practitioners in particular because my former colleagues at the Department of Labor have really made this a Focus right they'll they sometimes have taken the position wait a minute we have an ESOP that's paid um consideration for a controlling interest of a company does the ESOP have control in fact and so what does that actually look like and what does that mean and sometimes I think my former colleagues have mistakenly overstepped in terms of having an unrealistic expectation of the trustees role and they almost seem to advocate for well the ESOP paid for this company and the trustee should be somehow involved in running of the business and as you guys know that's not the trustees role certainly a good trustee has an an oversight role as a responsible shareholder to be comfortable that there's a good order of directors in place and they're going to vote the shares owned by the ESOP in the formal election and re-election board but truste should not be involved in strategic decisions I'll give you an example if uh and I I use this example recently I think it really resonates if uh Amazon wants to do uh an ESOP and Jeff basil says Hey Miguel we want to hire you as trustee but do you mind if I stay on as president and maybe stay on the board and kind of direct this transition over time and if I said as trustee no Jeff we're good I've got this you know the es so yeah how is that you know again the Department of Labor wants the trustee to think about what's in the best interest of the employees at all time and the ESOP participants well how is how is taking the keys from Jeff Bezos once we we convert to an ESOP in the best interest of uh of the employees it just doesn't make any sense and so that's a great aspect for a selling share shareholder in that they they it allows for a reduction of that succession risk because they could stay on for as long as they want to be involved of course assuming that that selling shareholder um is acting in good faith and is being an effective leader and and of course we'll talk about some of the things that help align the ESOP and that selling shareholder in wanting to wanting to make sure that the company's growing and doing well so those are those are other uh intangibles uh and then just you know being able to as a seller being able to to to make what you've built and make it even more Dynamic you know that I see a lot of sellers that excited about the potential of of rewarding their employees rewarding those that have helped them build this business and and and see and and having the the foresight to see the potential for what this could be in the future and so those are some of the elements that we talk about and I think those are you're not going to get from selling to a third party Miguel I want to throw out a a concept too because uh that we teach a lot in our training that is this you you have to separate your leadership management role from the equity ownership role and so many times when people call me like I want out it's like well they usually want out of their job they don't want out of their dividends so like like when we clarify that you know esap the to your to your exact point become a wonderful mechanism for someone that wants to monetize the asset that they've grown but still want some degree of control over the strategy the you know the future Direction you know if they're burnt out that's you know asap's not going to solve that in a bad management team but I think what you just hit on you just you can I I just I bring up the concept because I talk a lot about that on the show like hey you got this leadership management role and then you've got this ownership role you have to figure out what you want for both and they don't have to be simultaneous and so many people think that they have to be like you said s to a third party they generally come correlated and they both walk out but like this is it's an interesting option to manage the future culture and strategy because you're still involved into the leadership aspect if you so choose that kind of kind of teas up I think you said Steve and moving into like as then once you're truly just as a leader once you become an esap and you got an executive team it kind of moves into them what does that mean for them as a as a leader of this new entity that well you know the esap that's no longer their personal piggy bank per se yeah and um you know to to wrap up on the selling shareholder piece I think we've talked about this I think with every guest and one of the myths that I'm on a mission to make no longer a myth um is how much truth is there to the comment of when you sell to an ESOP you don't get the value that you you know you don't get the highest value you can and um is there any truth to that is it a myth is there somewhere in between I think most people think there's somewhere in between but Miguel could you talk a little bit about that that comment that people make that you can't get the high you can't get the value you deserve I guess is a better way you can't get the value to Des serve selling to an ESOP and much of that comes from the topic of the day which is stock appreciation rights or warrants can you talk about how that how that helps to cause to to fix that statement uh because of the fa market value yeah absolutely uh I I do think that it's it's an incorrect myth and but it's not a straightforward answer but I'll I'll tell you here that the F the basic concept of an of an ESOP transaction the de you know from a regulatory standpoint the definition is that a trustee for example goes through their diligence process and they have a mandate to ensure that the ESOP pays no more than the fair market value for the stock that it's purchas purchasing but it doesn't say that the ESOP is prohibited from paying the fair market value so I always tell selling uh sellers that as a trustee I'm committed to a good faith negotiation I'm going to represent the ESOP but I understand that it's got to be a win-win it's going to be a win for the ESOP and that I'm going to advocate for the employees and the ESOP but I understand that it's got to be a willing a a price point and terms that are at Market that means and the fair market value among you know the kind of the primary definition is what is a price that a willing buyer and willing seller would come to in the marketplace where where each party is you know the buyer isn't under a compulsion to buy and the seller isn't distressed and under a compulsion to sell but a you know that that willing buyer and willing seller fair market value concept and so that that means that the terms have to be agreeable to a seller and be indicative of fair value now the ESOP is a financial buyer they aren't aate the ESOP isn't a strategic buyer so there may be a firm that sees some value and is willing to overpay just to get into a particular Market or to be able to have access to a particular client's customers and and and will have some inherent synergies that they're willing to pay uh a strategic premium and so in that scenario yes it is true and that's specific scenaria which isn't always the case that the ESOP cannot uh pay a strategic premium however most of the times the ESOP is paying fair market value through a robust and and good faith diligence and negotiation process now there are other aspects in ESOP in terms of the favorable tax treatment I know that uh there was a session on 1042 and and and that you know those those financial rewards to a seller uh and certainly we'll get into a little more detail things like warrants for a seller that allow uh the seller to you know warrants feel free to go right into it Miguel yeah seriously feel free to go right into this yeah like the technical nature of it so you know as I've said we we've been involved in many transaction of over the last five and a half years and the overwhelming majority of those have a warrant component as you know they will have typically an ESOP transaction will have some Bank debt some senior debt uh and but but in almost every instance the seller also finances a portion of of of that transaction and will will write some seller notes and warrants are a key part of that because as you know when we're talking about risk to return Concepts that seller is holding at the end of the transaction subordinated debt and they're in what we call the the position of the first loss position in other words you know they're they're G they're they're bearing uh really a huge uh part of the risk of this company being able to continue to do well and be able to repay that obligation and so what warrants is allows the ESOP Company to pay a reduced coupon rate where they don't have to pay 10 12 133% coupon rate commensurate with the return that that type of note holder requires for the the Lo risk they're taking but you know maybe the coupon rate will be you know four five these days probably more like five six% current interest rates but then allow that seller to have an all-in return of maybe 11 12 133% with with warrants which which as you know are you know kind of stock option like instruments that allow the seller to be paid over time if the company does well and is repaying the debt and is growing the value of those warrants grow and really what's great about this tool is not only does it allow the company to to pay have lower cash payments cash interest payments which are supplemented by that warrant but it also aligns the incentives now you have a seller that of course wants to be repaid but also will have Financial rewards in these warrants if the company does well and and and performs well and and uh if they underperform those warrants guess what those warrants aren't going to be worth as much as they otherwise would be and so it's aligning the so Miguel can you can you can you unpack just a little bit yeah no I love where you're going with this your your spot on is like explain a little bit more detail like how that won't work so if someone foros instead of the 12% interest rate coupon rate and they choose at like six how how does that like what exactly is a warrant like the stock option how does that manifest in towards like kind of the equity alignment like you're talking about like mechanically how does that work yeah so so warrants are are synthetic Equity that are uh that are provided to a seller they're they're uh as part of an ESOP transaction and they're very common in in really in in in many m&a transaction action they're certainly not just the creature of the ESOP space they're they're very common in in all types of corporate transactions what it does is it's uh there there are warrants that are granted at closing and they're negotiated in good faith and they're typically negotiated in terms of an overall return so there are calculations done that will say okay this seller is requiring a 12% all in return and so we'll say okay well we're going to provide you with the 6% coupon rate on your note and that other 6% return is represented by whatever the appropriate number of warrants 100,000 units of uh of of of uh this the synthetic Equity whatever the number turns out to be and so they are issued post closing uh typically there is an initial strike price that represents that post closing Equity value at issuance and the return that that seller gets is when it you know then there's part of the negotiation is the term of the warrants Etc and so the value that that seller gets is the difference between that initial strike price and then the growth of of that Equity value in the company over time and a payout uh at the end of that warrant term for the difference between that initial strike price and the the equity value the strike price at at maturity and so that's how it works and again a very effective tool cool because it provides that return that the that the the selling shareholder requires for that subordinated debt in the marketplace but also aligns if the ESOP is doing if the company's doing well and is profitable and even exceeding uh its expectations that warrant's going to really increase in value and reward that seller and to the extent that that seller is still involved and helping Drive value that's a real win-win because when the company's doing well the eso's doing really well and so if if the company maybe just middling along and and not doing as well as as everyone expected for a variety of different reasons then that the the the value of those warrants uh will also reflect that middling performance and so again it aligns those incentives really well and it's a you know again in my view an effective tool now they aren't without some controversy uh again my my former colleagues um I think are are becoming a little bit more um certainly I think educated on warrants and how common they are in these type of corporate transactions uh but I remember early on that sometimes the there was a concern about well wait a minute the ESOP is is purchasing 100% of a company that say it's 100% ESOP implementation transaction and you're giving away 20% of the equity in in this warrant shouldn't the ESOP only PID for 80% of the price that it just paid and that's that's really an incorrect conclusion and oversimplification because you're not giving away 20% of the equity I mean certainly warrants are measured in terms of their dilutive impact from a cash flow perspective but all the stock is owned by the ESOP this is a synthetic Equity instrument that is purely an effective financing tool to provide an appropriate rate of return for a seller that's what what it is and and and based on future growth right so like the esap has to grow so the the 20% comes from the future growth which what I love Miguel is like if you think about the comparative like the the comparison is like you know so many people like I'm G to sell to a private Equity Firm because then I can roll 20% and get the second bite of the Apple but you have a boss you the general partners and the limited partners and you have no technically you're just an employee this you have the second bite and you have a lot of control like it's like so similar but yet potentially even more advantageous if you're bullish on your own company yeah and and absolutely it could be very advantageous for the seller again that it aligns the uh the goals of the ESOP and the seller and I you know and there have been times where in the instances you could show that that warrant has protected the ESOP in that in the alternative instead of paying a 12% coupon rate where that rate of return is guaranteed it's you're writing a check you're paying that 12% interest if you don't have any warrants in instances where there is some you know the performance isn't isn't what it was expected the overall payment to the seller is less than that what you would have otherwise paid if you had no warrants because again they're performance-based and so that's uh there are there are many instances where that's the case where that having these warrants have have been has been beneficial to the ESOP where there's been underperformance because the uh the cost the ESOP has been considerably less than what would otherwise if it was just a straight coupon note so yeah absolutely up to you Steve because that this is a great entry point I think yeah because I've watched you know it wasn't part of my career to to to really think about and to see what the warrants were for the selling shareholders but I can tell you the more I pulled myself away and started working with these sub companies uh it's amazing to see how interested and how involved the selling shareholders are because they hear about these at closing they promised this you know not promised but you know this is how we're getting to the the return of 12% or whatever that number is but it's all so foreign to them they they have these warrants and all of a sudden about year two or three in and they see the strike price was at you know the issue price was $10 and now the share price is sitting at you know 60 or 70 it's amazing how interested they are in their warrants and interested in interested in how can I get I mean I've got four more years until this thing you know before I have to turn these in so it's it's amazing to see how involved they are how they let their employees kind of run with it but yet still think okay I need to be here for them I need to be that Mentor um which brings us into the next thing is these warrants are also available uh at closing time for senior Senior Management key Executives uh future Executives uh same sort of concept but I think there's in my experience there's performance warrants just like what you have for the selling shareholder and maybe even some retention warrants can you talk about how you take this concept then beyond the selling shareholder to those key Executives because I think that's like Ryan said that's probably one of the biggest questions he gets is how does that work how if this is broad-based ownership how do I get my key management to buy into this yeah well I mean it's a great Point Stephen and you're exactly right ESOP is very egalitarian right it's broad based it's it's meant to to Really reward all the employees and and so how do you target some of those key leaders the key drivers of value specifically Inc and incentivize them yes they're going to be participating in ESOP but you know certainly as the ongoing trustee for an ESOP company I want to be comfortable that the board and the leadership team has those tools to be able to reward those key drivers of value those Key Management to be able to attract key Executives and and to be competitive from that perspective and so that's that's certainly in the best interest of the participants and something that I I think is very important so it's the only difference that Steve is that these are typically referred to as stock appreciation right so but it's very it's it's almost identical to a war in that its synthetic Equity has a initial strike price and and the same concept over time they vest and and those key executives are rewarded by that growth in the value of that synthetic Equity that they've been granted uh and you're right so so stock appreciation rights part of a management incentive progam program that's very common place when we're implementing an ESOP and as I said I I view those in in a very positive light in that you want the company to have those tools to be able to reward and retain and retain and reward key Executives driving value and so typically the that program is the at least the parameters of of that uh uh synthetic Equity program the the uh stock appreciation rights are part of the overall negotiation the the TR the sale of the stock the stock price the financing the warrants and then if they're contemplating a stock appreciation right for management then that's part of the overall negotiation as well so you know when you say negotiation Miguel you are you say when you say negotiation you're talking like what percentage of the esap transaction would be a sar part of or something examp yes what how many SARS specifically are we talking about in terms of again a percentage of equity dilution even now there is no actual Equity dilution but that's kind how you measure it and then okay well let's say you want uh a 10% block of of equity delution for uh set aside for for Key Management okay well we have 10% are they all going to be retention SARS which means that they're they're granted right away to those key Executives or they're granted over time but but there aren't any metrics that need to be me met for granting they're meant to to to help incentivize and retain key management or are they used more of a carrot maybe we'll have some percentage that our performance SARS and so those will be granted only after those Executives have helped the company meet these performance objectives typically tied to uh some sort of earnings uh objective over the next number of years and so typically we'll see let's say if it's a 10% block we'll see 5% retention SARS where the board can grant the leadership team can grant those to Key Management right away or over time and then there's another 5% that has to be earned that those key leaders need to earn that before it could be granted and then they could start uh seeing the uh the appreciation from from that standpoint and so typically there are that's the difference between the retention SARS and the performance SARS but again um those are those are very effective tools to incentivize those those key leaders to help continue to drive value and be rewarded in in that synthetic Equity where with the payout once those those um that synthetic Equity matures the Delta between that starting price and that the current value at the time that they're exe that they're executed the the better the company does the higher the equity value the more those uh SARS are worth and the more that those key executives are rewarded so again aligning the interest because when the company's growing and doing well and increasing in value that's nothing but but but good for the eso participants as well so I've never heard it broken down into a retention in uh the carrot like that I really I really enjoyed that and what is it is it accurate to say Miguel that like the retention would be the retention chunk or classification could be uh applicable to like the the question I always hear is like hey you know we're going to do an esap and you know Steve's on you know my key executive and he's 65 but now we're doing the ESOP and Steve's not going to be able to get rewarded for his 30 years at the company because of you know X Y and Z so is retention part of like helping people vest and you know getting some of those people that have been with you for a long time or is that more post post transaction yeah it's a good question um typically the retention SARS are for are really just that you want to reward key Executives right away with the granting of thear so that they could start um being uh being able to take advantage of the growth in that Equity value from pretty much from day one the day they're granted instead of having to Grant aars after they've already reached some performance levels and then the value creation that they get to participating participate in is from that point forward um got it you for for there to be value though as you could imagine you do need some time from the time that they're granted to to be able to have at least a few years of growth so that you can build that Delta between that initial strike price and that fair market price of of the stock at the time that you exercise that SARS and so if it's somebody that maybe only has a year or two left with the company at the time it's granted it's not going to be that much of a of a reward because you just don't have the time to do it and we have seen some of our uh because that is that that is right it's a little bit of a conundo because ultimately when you sell to an ESOP it's a it's a retirement plan it is it's it's a long-term plan and if you're younger and you have more years to be able to participate in the ESOP and get that the the the allocation of stock year after year after year and with that not only are you getting more stock as you know you're you're also participating in that hopefully that increase in the value of all those shares that you receed U the more Runway that you have the the you know the greater the the expected value of of your ESOP account is and you've got a shorter Runway it's it's not quite as effective but we've seen some of our ESOP clients do special bonuses for to reward uh some of those key Executives at at the closing you know kind of s you know a transition bonus or something like that because that could be more effective if you've only got a year or two left in terms of your service when we're implementing an ESOP got it and just for the listeners Steve is not [Laughter] no I'll add on those performance Stars one of the things I've seen recently that's really cool to see is that you know Senior Management on the retention SARS in a company that I know um they're still receiving payouts on a performance basis I think the retention Stars might be might be done now they're long enough into it but there are new people that have come along on the management team that they feel are a valid part of the growth and helping them to earn extra dollars for these performance stars and I've actually seen a management team uh they could issue new shares to to new you know an HR Director or you know a business operation manager coo someone who's come in grown up in the company and now deserves that um I've actually seen them take SARS away from themselves because there's only a certain pool of them to say look we you know we realize that these people are helping get us to where we are we need to you know share in that because we don't have enough to share you know we don't have enough performance to go around so it's been really cool to see you know that that working together like that and and add new key Executives so um yeah it's been fun yeah and it's something that the board um you know typically you'll have a board maybe you'll have a compensation committee and that's part of what they should be discussing is we've got the SARS program do we need to alter it a little bit maybe if certain SARS have have sunsetted the you know maybe reup some SARS make them performance-based and so that you can reward those you know those Future Leaders in the company and have the tools to do it so yeah absolutely it's it's really always from a from my perspective when I look at those things I just want to make sure that it's always about relative fairness right is it you want it's got to be in the best interest of the participants and that it's in their interest when you have a leadership team that's that that that's incentivized to do well and to help the company grow and to add value that's certainly in ESOP best interest but if they're granted half the equity and it's really deluded to the ESOP that that can be Overkill so it's always about a good reasonable in incentive plan that's relatively Fair overall to the ESOP but still effective to to reward key key management that's something that from a trustee that's kind of always uh what I want to get comfortable with and and Miguel it's so crazy everything we're talking about it just aligns every single person it aligns the the the previous seller the executive team the board and towards that Equity growth I mean so many times like I've heard people in you know maybe some older esops where it's like hey we're focused on net income I'm like what like what you out of all people shouldn't be talking about net income you should be talking about the share price and Equity growth and this is really getting everybody in line to make sure that you know even the person that sold is still kind of beating everybody over the head like Equity growth exactly right no it they're great tools and again that's that's when you're really humming as an eastop company when there all the incentives are aligned and everybody's acting in good faith and working hard to to grow the company because at the end of the day that's what it really comes down to is the company needs to be profitable over the long term and do well and that's when when when the magically happens C I love it Steve anything that we haven't covered no I think we did did it well Miguel at Great explanation of how this works it's a I think it's a a key component there there's so many things that happen in an ESOP transaction that are are foreign to selling shareholders and everybody involved and I think the SARS and warrants get overlooked too many times talked about I think they get talked about during the transaction but when the education is out there it's just too deep you know you don't want it's hard enough to teach people what an ESOP is and you go that deep their eyes are already glossed over so I think this is a super important topic and I appreciate you coming on today Miguel did we miss anything that you wanted to cover before we wrap up no I I think it was a a fun conversation and uh if you come up with any other topics I'd love to be a part of it again so really uh thanks for doing this I think this this this podcast series is is really cool and uh I can't wait to listen to that's awesome Miguel where does everybody find you well uh yeah you could find me at www fiduciary services.com or www. prudent fiduciary dcom either either one will get you to my site uh again we're based in in Los Angeles but we have a true National practice with ESOP clients from Honolulu to New York City and everywhere in between uh and you could always find us at I'm a frequent speaker at the different ESOP conferences I'll be speaking in Vegas in November and uh we'll certainly be part of uh the N so that's ESOP Association conference in Vegas in November and will certainly be a big part of the NCO conference coming up in in April 23 but we're we're at every major conference and uh stop by and say hello Miguel thanks so much for coming on the show and Steve thanks so much for setting this up thanks guys this was fun that's right the rest of your day take care