Jul 2026

Meet Zolid AI

Here to help — Zolid AI can answer questions and provide insights. Free for now, with fair usage limits.

Your conversations are not shared with others. We may review them to improve Zolid AI.

Zolid AI may provide inaccurate info, so verify responses.

Summary of Podcast on EP1 - Warrants on an ESOP transaction with Will Rodriguez at Vision Point Capital - The Grid Wiki

EP1 - Warrants on an ESOP transaction with Will Rodriguez at Vision Point Capital

Journey to an ESOP & Beyond

Podcast

| January 11, 2023

Listen to episode Edit

Grid Insight

Using Warrants in ESOP transactions

Quick Summary

Sellers in ESOP deals might issue warrants (the right to buy stock later at a set price) alongside debt financing to get a piece of the company's future success. If the company thrives, the warrants become valuable, offering sellers a potential bonus on top of the sale price.

#Warrant

Who Benefits From This Most

Understanding the role and calculating the value of warrants in an MnA or EO deal structure

Exit Relevance: ESOP
EOT

Level: Advanced
Category: Courses

Ask Zolid AI

When should a business owner start succession planning?What advice do business owners who sold to third parties have to offer me?Will all of my employees become owners if I sell the business to them?

Episode

Detailed Summary

No detailed summary yet. Suggest a summary to help the community.

Suggest summary

Answers

No questions listed yet. Be the first to add a question for this topic.

Suggest question

Authors

No authors for this episode.

Add author

Mentions

No mentions for this episode.

Add mention

Original Description

This is the first episode of season 4 and as such we wanted to jump right into a valuable topic to help folks prepare for their ESOP regarding understanding how warrants are calculated as a potential benefit to the selling shareholders. Will Rodriguez with Vision Point provides a solid overview of the methodology of estimating the number of synthetic shares of warrants issued at the time of the transaction.

Transcript

Transcript provided by the publisher.

Show

Welcome everybody this is the the esop guy we are on a journey to an ESOP and excited to be with everybody today and talk through I think a very important topic which is how warrants work in an ESOP transaction and,  to do that today I've invited will Rodriguez who is the founder and owner of vision point capital.  In helped really kind of help us I'm on the side of how the trustee looks warrants and then as we go through this we're going to go into some example,  formats to really kind of help,  solidify how actually works from a math standpoint so I'm excited to have will on the podcast today and like always if you have an interest in this podcast please go to our website at journey to an ESOP.com and you can check out,  all the episodes and learn more about Aesop's so with all that will thank you for joining us today.    [1:04] Thank you very much for having me feel excited to be here great so we'll before we get started I wanted to just ask you like as we get closer into the holidays what is your favorite.  Holiday movie.  Of all time hands down Hands Down Home Alone the first couple not I don't know how many they had since then but the first one or two for sure home loan one when they're in Chicago Home Alone 2 when they're New York.  You are,  those are awesome okay everyone's that register a mi mi re do all right so put that put that on your list of movies it is one that is one on our list every year we watch that with the kids but all right so so jumping into this will has been on our podcast this is his second time,  but for those who have not heard will before will tell us a little bit of how about how you got into Aesop's in your current practice at vision point capital.    [1:53] Sure again vision point capital founded here in Tampa Bay area you know we essentially do one thing and that's we move business ownership better place,  and again of course using our services which of course ESOP advisories is no big big component of that you know we,  work with esops all across the country we probably were formed over a 200 in stock transactions,  in our in our 15-year plus experience in working with these thoughts and their related advisors,  and again we just let really generates right is the we call it the triple win right the win for the sellers the win for the company and the wind for the employees that you know Aesop's create you know and pulley / Community because again keeping.  Business no tie to the community and you know all the Goodwill that it creates you know it's really important in today's today's world.  Absolutely so well as we talk about this as we start going into the the topic of a warrant I think it's important because there's some people that are probably going to listen to this that.  They're like I don't even know what you're talking about what is a warrant and so let's let's start off with just explaining the.  Warrant is if you're we were explaining to somebody who's never actually heard about that and we're going to then like tie it into the transaction itself.    [3:12] You have to try to keep it simple right Warren start again kind of McCain to stop option so they holder the owner of the warrant is essentially you know.  It's value in the company stock over time it's usually set at a strike price usually a nominal strike price so again it's a way to incentivize.    [3:36] You know at the beginning of the transactions so maybe a seller to take a lower kind of stated interest rate especially you know in the ESOP transaction generally you know if we look at the capital structure usually there's senior debt so generally that's the bank,  and then there's subordinated debt which usually that's where the seller notes fall under right and they're just pure Equity so giving the of course the seller the senior debt has,  first right to do everything right it journalist you know the market rate is the market rate but that's that's seller,  that that subordinated debt you know again with it's really more akin to like Mezzanine Financing,  and so if you look at the mezzanine Market you know the rates are returned that's required mean you're going to see anywhere from 10 to 20 percent in up depending on,  definitely if we look at the current environment Orion right yeah the cost of capital has gone up significantly you know over the last year so yeah again it's just a way to try to bridge that Gap may be paying a lower amount of,  interest expense interest cash flow out in the beginning but then giving that warrant holder no kind of a second bite of the Apple in the back.    [4:46] Yeah so so I'll kind of say what he said but it just in a different way the the whole thing about an ESOP transaction that gets asked is how am I going to get my money,  and so the bottom line is you're going to get your money as the selling shareholder when you sell your stock  in exchange for that the bank is going to  Finance part of the transaction in most cases that's going to be the way the structure is the company's going to borrow the money from the bank they're going to give you that money as a liquidity event and then anything that's left over is going to be made up by the seller note,  and the selling shareholder has that the opportunity they don't have to do a warrant but they have an opportunity to,  utilize a warrant for some of the benefits that were alluding to when we get into this,  on the so the seller note itself is your as a selling shareholder your risk that you take by lending the money to the company to buy out your stock so in compensation for that risk just like the bank,  the the selling shareholder can get an interest rate now without a warrant that interest rates going to be higher,  with a warrant that's going to be lower and it really depends in the current interest rate Market what the actual rates going to be,  and like will had said you know kind of comparative to Mezzanine Financing the selling shareholder is taking more risk because they're at the back end of being paid.    [6:05] And so their rates going to normally be higher anyways in the senior debt and then the warrant on top of it really then incense them and the way that this works the reason people are okay with this structure.    [6:17] In general when I say people I mean the trustee who is buying the company,  and I also mean the bank and in some cases the bonding company is that the company is going to finance a leveraged transaction.    [6:29] And have a lower interest cost at the front end of the deal which creates more cash flow so the warrant is a very useful tool not just for the selling shareholder to get another bite at the Apple that when it's all paid off,  but also through the process of actually helping the company,  you know make the payments through this whole process so so that everybody wins in the end so the company does the trustee does the employees win,  and so that's why warrants a very important understanding their they're very popular to use in any sub transaction but they have to be used specifically the way we're talking about it so that kind of sets up the next discussion topic is,  the limiting factors using a.  Because they are a negotiated tool it's not something that as the sell-side advisor my role is to try to get the client you know the deal that they want and on your side will you're representing the trustee.  You know you have the limits on your side and so let's talk a little bit about some of the limits and using warrants for ESOP transaction.    [7:28] Right so as we all know right the transaction is kind of where the Department of Labor which is Guinness is the government watchdog,  Aesop's right now that's where they're going to really dig in and try to know make sure First Independent strike as Phil mentioned  he's on the sell side there's sell-side team he's working with the owner specifically and the majority of the time you know our firm is on the buy side working for the trustee,  so again we wouldn't,  B we would lead a financial advisor at valuation firm to their trusty if we work for this company you know in any capacity in the past because again our independence would be be blurred there so so again is he.    [8:07] You'd sell side no we're the buy-side we're providing our valuation and financial consulting to the trustee.  So again we look at every company you know.  Independently objectively and Spore example will give a an example company here you know later I later on but let's just say our evaluation comes in okay we got a range of 18 to 22 million for this company,  so again that's what I would relay to you know the trustee and obviously feels done his.  You know he's relates and similar message to his is side and so you know as we talked about I think on prior webinars Etc.  ESOP to are unique in that the sell side.  You know it's kind of reverse him in a the sell-side actually presents the first offer versus in a traditional m&a transaction usually knows the buyer presenting presenting but in and once the purchase price is negotiated right as part of that negotiation assistance not the headline price,  it's you know it's all the other stuff which again warrants will or will not be included and I would say about 50 percent of our transactions,  we have Sargent warrants you know or both right so again stock appreciation rights when we think about SARS but that being said we're focused on the warrants here so from our side as we.    [9:28] Negotiate we have to say well what is the proper kind of rate of return.  I'm right so if we agree on a high percent interest rate for the seller note we know kind of the markets probably 15 to 20 percent.  As I mentioned before mezzanine so you know maybe Target a rate of return which week back into the number of warrants.  That that equivalents to far as the shares you know for the Aleutian purpose but then again we have to always consider.  Again get the DOL or if it's arms-length that AC fairness opinions here what's.    [10:05] What's a pauper Mountain we can't be too diluted again you're paying 20 million dollars for a company right but oh we gave him 40 percent away,  you know instrument in tsar's you know without may be justified right so again it's all a negotiation process and facts and circumstances well so East it was looked at independently there yeah so kind of in,  keeping a little like you're talking about just so we really can explain it as far as the dilution happens the ESOP stock value in the future as we go from the,  close the transaction into the future directly affects the ESOP participants so the value of the stock itself.  Is going to be diluted by how much warrant gets approved and Tsar but we that's a whole nother topic but both of them work in tandem because they're both forms of synthetic equity.  That have to be considered when all of the the actual net negotiations is our over and so we can on the trustee side they can't dilute the stock too much because in that takes away from the ESOP.  Account holders and so so that's definitely one limiting factor I think another another limiting factor is just the cost of what.  The trustees paying for the transaction as far as between what the company has incurred in Bank financing in the cost of capital there,  and then in addition to that you have to pay for the wet what they're actually net paying for the stock which is a includes the purchase price.    [11:34] And it obviously includes what they're going to pay out with these warm payments as well as all the,  that goes into it so so if your warrant one of the limiting factors is the warrant could be a huge part of the purchase price when you get down to it so there's there's going to be a balance in terms of those that,  have to be considered and from a selling shareholder standpoint I think the part of this is to think about.    [12:00] Why would they want to have a warrant in the first place in because this question gets asked to me all the time and because they are taking some risk as the selling shareholder lending money to the company they're taking if they don't.    [12:13] First off they're going to lose some interest rate that they would otherwise be entitled to and secondly,  there are notes not going to get paid off they have to wait until all the seller know it gets paid off to get their money for the warrants.  So they're in a much higher risk situation and so the selling shareholders in my experience are okay.  And a lot of times with that risk because they've already lived in the actual cash flow risk of the company or and or they see the future potential for the company until as you know it you do three need help your clients usually with projections.    [12:46] Things on the front end right so you know the trustees as you said it's not just purchase crisis the deal and totality.  Right so again the trustee has got to know be comfortable with you know where we land out.  Kind of in totality where this deal now for example in my earlier example if I say 18 to 22 and say we landed at 18 right so we know we have some buffer.  So we may be open to more warrants in that scenario because we know we know we've.  Got a good deal we got some buffer versus if we're already at our Max 22.  I mean we're going to be very stingy on the number of warrants are how much more kind of want to give yep if we're already feeling like we're paying kind of at the top end of our range so again it's everything Flows In fact and circumstances so yeah kind of,  yeah it's I think and you know that is a good point because when you do plan a negotiation,  and or you're planning the ESOP you need to think about the you know maybe I'll give up a little bit more purchase price,  they have a little more warrant or vice versa depending on on the appetite for risk and there's the other side of the ESOP I think is just interesting.    [13:56] Because it's not just a pure Financial business deal for some clients it's hey I really want to support the company's ability.  To succeed in a indictment let me just say it that way I think that's critical to any ESOP transaction at the owner really wants it to succeed,  because they have a long-term stake in it but part,  the other part of it is just hey that's the right thing to do we want we want the employees to win and so these are variables that are going to play a role in how much burden that the company is going to have to you know go through to pay off all the debt related to it so.  So I think those are big in that cell if the projections don't turn out as planned right then those warrants.  You know I wouldn't be worth that much on the backend and so the trustee.  Against not you know they're not paying out because again it they didn't reach their projections in the value is not there yeah but look in the majority of the time we see that they hit their projections and you know they're getting a nice,  John the change at the end which is you know it's kind of a win-win as you mentioned that the company's growing in value you know may above the purchase price so therefore you know the owners going to get.  Some additional upside there yeah exactly.    [15:09] So so we get into the actual specifics in and just as we go through this we're going to get into your case study in a second,  the way that we talk about and this is why ESOP stuff can get confusing because we always start throwing out terminology for people.  And we just expect you to know what that means right so so as we go into that it's going to define a few terms as we as we start thinking about.  The the warrant as we said before is is connected to the seller note so the only connect the only way you can use a warrant an ESOP transaction is by connecting it to the seller know.    [15:45] It is connected to the the overall value of the business the way it's the way it's actually going to pay out,  but the actual connecting point is is that we're going to negotiate around the seller note and So within the seller note one of the definitions is we're using a term called internal rate of return.  Which really is just a finance concept that says if I have an investment.  What is the overall internal rate of return of that investment from the very beginning of what I invested in and then at the very end of all the payments received so.    [16:17] And if you would add to that but I just want to make sure that that's foundational to people they understand like that so it's going to be something we're going to talk about in terms of how we negotiate and nice our warrant in an ESOP transaction yeah and as you mentioned the,  B  the debt has been financed and subordinated meaning it's not first in line so therefore there is more risks and say for example you get a five to six percent.    [16:40] Bank financing rates are going up I mean we're seeing higher than that these days seems like.  So of course you're going to expect a higher rate of return it just if you were secured financing but you're not right so again it just gives justification for as we talked about,  you know the but maybe you know it's a five to seven year pay out of the bank debt for you see a dime maybe that unless you get interest payments you know where you going to lock your money up for seven years,  without any cash what would you expect a rate of return as an investor you know if I have worldwide amount of Investments and Alternatives I can invest in.    [17:16] You know I'm doing it my own personal closely-held stop here but what would I worry.  You need to compensate for that that lockup period exactly so so what happens in a transaction is.  On the sell side we put together an offer letter and then an offer letter we're going to have the like we said as we said we're going to have a purchase price we're going to have the the bank financing identified and the seller note identified,  with an interest rate for the seller know.  To negotiate with the trustee and then when we're adding a warrant we're going to add we want a warrant that is going to equate to a specific irr so that could be hey 15 percent internal rate of return.  Or we start at something higher and then the trustee comes back and then in that offer counteroffer scenario.  What will in the trustee are doing is they're reviewing that with what they're okay with Wills work,  and then they're going to come back and eventually between the offer and counteroffer we're going to settle on an internal rate of return.  So then like okay now what does that mean so so I want to kind of build that up but now we're kind of ready to talk through the case study to show actually how the calculations of that irr turn into number of shares,  and then there's this overall prediction of what we think it's going to end up turning out to be which nobody really knows it's just the way to the way to do the math because nobody can really be you know knowing the future so so with that.    [18:42] Is he missing kind of the.  Limiting factors earlier right and I meant to throw out like complexity right because you're going to see as we go through the scenario there's a lot of inputs that's again.  With their future projections are assumptions right we're making a lot of assumptions here and as far as what the business is going to do where it's going to be 10 years from now and also where the economy and.  The industry that the company is in is going to be so again we know this isn't perfect but you know obviously it's it's as of a point in time this is negotiated you know as of a certain date you know the valuation is that this this state and it's giving the best information we have,  at this point in time so okay so let's open up so we're going into a spreadsheet document.  And ya know Will's going to try to keep it where it's illegible.    [19:36] All right so we're going to start as kind of I alluded to before let's imagine we have a 20 million dollar and we're going to do a hundred percent transaction and.  Well feel as far as we haven't touched on this typically we see these in 100% deals but what percentage of non hundred percent deals do you still see warrants for me for me I'm still at a 50/50.    [19:59] Right yeah no matter controlling our presenter not still about the yeah and I just think because partly people are becoming more and more aware of the.    [20:10] The opportunity behind how warrant can can help fund the transaction.  And I know that part of that is helping the people help people understand the very front end of the planning process that there's a give-and-take if we decide to use them then maybe we have a little bit lower of a purchase price.  You know when you let it all out as we said there's it's not going to be just hey we'll just throw warrants in so there's there's a as we talk about complexity there's a lot of that planning that needs to be done in conversation.  It's it you know it's probably a lot easier just to keep it really simple at a smaller percentage non-controlling interest and then layer warrants in later,  but sometimes people just really like the idea of warrants and you know so we just have to kind of be flexible we're on the south side and one thing to mention that maybe gets is again this.  Most of our staff will require some type of CPA financials usually reviewed or audited,  right so again that's going to be accounted for the SARS or the warrants will be accounted for and when we mention stars and stop appreciation rights synthetic Equity but.  So again it you know that all gets kind of factored in your financial statements at some people over there they just don't realize what that means until you know you kinda have to go down the path of your CPA so humans it says I heads up.    [21:30] Alright so here we have 20 million dollar transaction we're assuming we can get 15 million dollars of.  Senior debt Bank financing which leaves us with a five million dollar seller note which games so very simple.  Math are so the 15 million dollar senior debt we're going to assume this is seven-year term 5% interest,  so you can kind of see the amortization schedule with 15 million principal getting paid down to zero over there seven periods so you can go interest and principal on that note.    [22:03] Then the five million you know essentially we're in this example we are assuming we're going to get the interest paid.    [22:12] In the same period so a lot of times but you will see is that there's.  These the bank won't allow any interest to be paid until they're paid off so this essentially would be accruing over time but in this example we're assuming that you know it gets.  Gets paid out as well at a 6% so here you can see a thing the first seven periods.  You know we're just getting paid or our interest stated interest rate and then we start you know since we have more cash flow we've grown and we got the ability to pay this note off in three periods so Total Team periods to pay off the total transaction debt.    [22:51] So you'll see these these debt schedules as far as the well the amount of debt kind of come into.  IQs are a bit off forecast that should be taken are you know we would take it from the valuation the projections provided by management and.    [23:09] Again for those on the call we talked about you did all its earnings before interest taxes depreciation it's used as a proxy for cash flow even though you'll see.  You know it's not pure net cash flow and for example usually have capex working capital in obviously.    [23:26] Taxes are usually a big component of cash flow out 30 40 percent,  so in this example I said it was a hundred percent transaction so we're going to assume we're 100% S Corp ESOP and so we don't have taxes anymore so that number you know obviously increases our net cash flow,  because we don't have to pay taxes which as you'll see when we start to service the debt right you know makes a significant impact.    [23:57] In our debt service so we're able to again if we have four point.  Poor million of Abaddon say net million a 3.7 cash our debt service is 2.9 you know for the first seven periods and,  and then we pay off the remainder over time and then again you kind of think look at what's your excess cash flow we know this isn't perfect by some of that cash flow may be used for,  for other items as well but again as we're sitting here at day 0 we're trying to model out you know kind of the best case scenario.  Yep okay now those are kind of the inputs yeah can I can I say something to you as you do this the reason we're going through the mechanics of the cash flow because it's building up to help us to understand how the actual warrants going to be calculated because,  at the end of the day what will is going to have to do is show where is the company in the future period,  assuming a couple of major variables here we can't assume everything but the major variable is we have Debt Service because of the transaction.  That's going to require the company to pay that out and then the things that he had summarized in that debt Services you have the senior debt which is the bank financing plus the seller know.    [25:05] In addition to that because the company is continuing to grow and have different things happen you're going to have more working capital required in the future.  And you're also going to have this capex which is the capital expenditures that the company has,  forecasted to purchase more fixed assets that they're going to need to continue the the ongoing operation so so part of what he's doing is just laying the groundwork to show like how do we get from.  After the transaction to the Future period and really have an estimate of what actual cash is going to be in the future and what the actual value of the business is going to be when we get to the Future so just kind of an another way to look at what you can put down so far.    [25:45] And as the of course we mentioned right who's crystal balls better here you know we would have spent a lot of time with management,  um for example it looks like these are kind of come from the first K you know we get a five-year forecast and then our assumption for what we are six to ten I think I just use a straight five percent.  Growth but again that this is all.    [26:08] I kind of understood as the valuation going back and forth speaking with management trying to you know get comfort and those from my side trusty side on What's the.    [26:17] You know what's the proper kind of for Cassie but I forecast cash flow before cast and again are we,  probably really seeing this company be able to hit seven half million you know ten years from now right maybe yes maybe no maybe we have I guarantee that I guarantee you one thing.  We're going to be wrong it'll be either it'll be either above that or below that we want it we just want to try to get it as close as we can.    [26:42] Yeah yeah as of time zero here like we're just trying to get the best.  Honestly negotiation in all the information on boats already as much as you can understood and agreed upon.  So that being said now we go to the more of the calculation side so what was our.    [27:02] What did you want to Target a 15% yeah so we're just we did a great job negotiating we get a fifteen percent irr.    [27:11] All right so I'm going to start out and just if there's we're going to assume there's a million shares outstanding and so then any additional warrants will be no in addition to that so I'm going to go with 150,000 to start.  And we'll see if it's kind of a circuit calculation through here you'll see me adjusting and getting to the number but at least this will probably put us,  in range Allure adjust as we go alright we'll go back for a second let's just talk about the details you have in this summary of purchase price table,  so what we'll what we're doing is we're starting off with the actual 20 million dollar valuation that we ended up negotiating.    [27:49] And then yeah and then you have from there you're basically just saying that this represents 100% of the company again that makes everything a lot simpler because we don't have a partial sale.  And then we're talking about when we say numbers of warrants agreed-upon we're talking about the number of shares because they're synthetic Equity they're not actual real shares but they're the number of shares.  Based on this.    [28:13] Negotiated internal rate of return of 15% and as will said it's going to be circular as we get into the details but we're going to start off with an assumption that we're going to have 150,000 shares that would be issued.  To the selling shareholder as part of their as part of their seller note correct,  anything else correct okay just a tad a stock strike price which is usually you know around a dollar for a hundred percent transaction heaven but before we lose this to the stripe this on the strike price that's technically your day to Price Right on a nice up transaction,  so let me just explain that real quick so if we negotiated a 20 million dollar deal day one.  The next day that that value goes down immediately because we just put 20 million dollars of debt on the balance sheet.  And so the only residual value we have is really the ESOP tax shield that we have as an S corporation so that's where the $1 a share becomes our strike price for these warrant specifically.    [29:10] Bright and Nuance of that is you know sometimes we have owners that hey the company's worth two million and they want to give it away for six but you know they agree to six,  so then as far as you know what's the day-to-day to Value could be argued that it's more than say a dollar  because you know we got a bargain purchase so any of those are nuances and whether you know where you want us to set the strike price or not that kind of come up sometimes but in this example we just to give you an arm's length 20 million dollar transaction,  unless we're just making simple math here so we're going to have four million dollars Viva at a 5x multiple to get a chart 20 million,  any get so this is your one so I think we've got 12 31 as our kind of day Zero so we've kind of keeps a flat for the first year,  20 million and so you know of course one year after the transaction instead of 20 million dollars a debt we got 18,  million which you know is come from this tab here and then we had a little bit of excess cash flow as as we said we're residual cash flow left over so that gives us to 2.63 million of equity.    [30:19] And then there's valuation discount,  Devon so again it's discount for lack of marketability it's essentially just think of a marketability discounts as you're not Apple not Google you can't sell your shares on the exchange you know get your cash in three days,  but an ESOP does create a put option where again you can get it redeemed it's just not you know not liquid cash so when you talk about Devon stink about it at that level,  that justification so as we talked about it for above there's a million shares outstanding,  that gives us a value of 250 per share and so if we set the strike price at a dollar you know transaction that would give us no year,  kind of increase to a dollar fifty a share which is Justified right because we pay down,  we pay down debt and we added some additional cash so again where does the appreciation come from it comes from you know kind of that.  That scenario so again just like as you pay down cash you can see the cast The Debt being paid down you kind of see the equity value really getting.  Getting charged increasing and we are making the assumptions that the company z b Oz growing say 10% I think for the first five years and then five percent as I mentioned,  in the later years and then of course we're assuming that okay.    [31:44] It's kind of standard it as a company grows so would the expected kind of multiple you know multiple it could achieve so again some appraisers may keep this steady constant throughout the forecast period which is fine some they account for that  that change so I've been going from a five to five point nine over ten years to me is reasonable but again that's kind of an appraisers,  judgment there but you can see the Enterprise Value go from 20 million to 44 million just on the cash flow current cash flow of the company.    [32:15] And then of course we've got the debt that's paid off after 10 years and then we have kind of that excess cash Above The Debt Service that we you know we've seen kind of getting build up from this schedule.  As its tracking along so again you know this number is probably you know would be adjusted or you know somewhat,  maybe reserved because who knows maybe we make some Acquisitions we did something else but then we have to be adjusted forecast so at a very basic level of keeping that constant but that would be something that we may need to consider,  and that may not be on the balance sheet and that's a good that's a good point it's hard to know what cash is going to be in the future but with the modeling like this,  you can't do a lot of business planning at this point for the company for five or 10 years we don't know they might buy a company  but the reality is in 2 million yeah they admit spend the two million but then this goes 2829 yeah exactly so it could it could Factor back into hopefully they did the right thing and they didn't have a,  problem with that but it factors back into the valuation so I think it's really a safe bet just to keep.  The the residual cash in there the thing I would say about residual cash too though in this is just some kind of a side point is that once you're an ESOP.  The company doesn't need to do anything but pay debt off.  And 100% ESOP the company's purpose in life when they start out is of course they're going to do what they're doing but my point is.    [33:42] There when you own the company of course the company owner is pulling cash out to do all these things but once it's been a hundred percent that cash just sits in there to prepay debt and then when it just so you're going to have a large excess cash line item,  ESOP companies that are that are successful that's very normal yeah very likely said we know that.    [34:03] We purses obligation rise at each component of Aesop's you know probably isn't that that takes time because if a litigate it really doesn't build up things of an allocated debt has been paid out,  but by your 10 right it could be a somewhat of a number so that again you got x amount of cash to pay it off,  you know there's a really really a challenge so that's a topic for a whole other discussion but we're kind of assuming that's neutral at this point and then now it gets to know your 10 we paid off and now we're you know able to pay off the  the warrant and kind of what's the warrant going to get paid off which this is where we get into a circular calculation and again I just got 10 million 560,000,  in here as a kind of placeholder for now for the more the actual warrant.    [34:48] For the warm payment so now if we take a look at kind of the sellers cash flow right we got the 15 million dollars from the bank.    [34:56] And then we made the assumption that you know we're going to get our 300 thousand dollars of Interest.  Paid and then we started getting our five million dollars of principal seller note you know paid here as well.    [35:15] Consumed and so now it's the question is how much is that warrant and so this is kind of where we set the circular Cal.  So again I'm going to try to solve for the exact number you can kind of see it's going to just going to build play it by ear here.    [35:33] What why are you doing that when I'll just comment on what Wills doing the whole thing with a warrant in the we're calculating the value of the business in the future so the per share value of the business as he Illustrated appreciation per share on as.  The one table,  is going to be a factor of the future value which is partly the ibadah that we've projected is partly the multiple that is projecting in the future.  And then it's also related to how much the balance with the balance sheet looks like so you have your Enterprise Value.  And then the future balance sheet is going to have no debt and you're going to have a residual cash that's going to so all of those are going to play a part in the future value.  Once the future value is calculated all we're doing is subtracting it - the strike price per share,  and then we're multiplying it times the number of shares that were estimating to come up with the actual warrant payment so you can see we had 150,000 that we estimated.  Our appreciation since the beginning was $58 96 cents to get us to 8 point 8 4 million and again I kind of backed saw I did a manual calc to do it you can do a some type of formula in Excel,  but against all the format but again that's just kind of a simplistic way and so now we can get to what our cash flow.    [36:55] So we said 15% was our yeah we Target in the 15% was that lucky was that lucky or good that we actually it was like came out to 15.1% as I are there was no luck there my friend your,  / you're really good at this so it is you know part of it is circular so we can kind of say well we're just putting well,  But ultimately what we're doing what we'll do in this scenario is like we negotiate it he'll go back do this math.  And this is where the number the shares come from because people are like well how do I know the number of shares is accurate well this is how we know because it's.  The future as long as his assumptions are reasonable then that should that should yield number of shares of warrants that gets us to that right,  Target irr and that's.  That's a big part of the whole process you can see it in the day right we had a 20 million dollar transaction but the in 10 years the seller actually gets 31 million dollars.  So you know it's a significant increase above third more than 20 million of course it's over teen years right there's.  Your money you would be earning a rate of return in the marketplace swimming you know not the recent Market but that being said you know 15%.    [38:11] You know if you invest 5 million and get targeted 15% over time you should get close to what this this amount,  give you now of course the.    [38:22] The offset to this is as a trustee you know what if it near 10 we're at five million dollars okay they're still appreciation but it's you know it may not it may be.  No a 5 million dollar payout so again the trustees like okay I'm we didn't hit necessarily the top side but you know I'm not having to pay out.    [38:41] The the warrant yep at that level I expected anyway so yeah there's a risk shared risk on both sides.  Yeah so that's what's I mean interesting about the whole process anything can happen so if the company goes down the trustee will be paying less for the company.  And if it goes up it could be more than the 8.8 I mean the 150,000 shares could be if he's at nine million in ibadah in the future period,  the nice thing is the seller is going to be able to be rewarded for the value of future business and so.  So that's that's I think an interesting part of it there's really no ceiling to the warrant payment it just is this the only thing is both sides are motivated right so you had a twin you dollar company that's now 45,  intrinsically you know neither the cash so again why wouldn't right we kind of share.  Share it be motivated to share that that growth is again it's kind of a win-win,  as well so it makes sense it makes sense and the cash is going to be there it's like the if they're doing that well,  they're not spending cash another thing so the cash will be there to pay off the warrant so I can some people are like oh my gosh if they had to pay 10 million and in future value for the warrant,  but that would be only if the company was hitting the the ibadah targets.    [39:59] It has in has the cash so if it's not valued it's not valued and so it does self-regulate I think a little bit more for people,  because when I think people gravitate towards - like oh they're going to have to pay a lot of money in the future but they are only going to have to pay this money out if the business is truly valued at that level.    [40:18] Write and say the cash wasn't wasn't there right then say this is 0 what's that going to do is going to lower the share price and a lower the the amount that's picked out.  Even if the even off they hit the even alright so again kind of manage or that cash is going because again you would think at this stage.  That you're putting your money to work at some level so against us not being wasted so what are you going to do with your kind of excess cash give you're not paying taxes you're out of debt in make some acquisitions.  Additional capex grow the business yep as you can.    [40:56] Well that's great I think I think just as we as we close out my thing is it's really really at least for my experience in working with people it's very.    [41:05] It's easier to understand a concept like warrants when you actually see how the math works and so for that I just think I think you for that will because it's,  I think it's there's a lot of numbers here but when you break it down to the fiscal periods and you start really just thinking about the items here.  I just think it makes good logical sense to and there's different people saw this differently this is kind of how we approach it but you know you may solve and get,  different inputs right but we should be relatively close at the end of the day yeah so maybe you come up with 175 and come up with 150 again it's a negotiable item yeah that again was a good deal is a good deal for everybody that's yeah that's the key thing.    [41:46] Yeah I think that's a good point to there's there's probably a few different ways to do this that but at the end of the day it's all going to be pretty close to what we're coming up with so.    [41:57] Well great well so with all that I wanted to kind of say again thank you will for for walking us through that it's a big topic and they're probably going to be questions that we just created for you but that's okay talk to the people that you're.  You're comfortable with and in The Advisory world if you want to email me on the journey to an ESOP you can always do that.  But the big thing we just want to make sure you understand how they're used so that you can ask the questions in structure those in your transaction if you feel like that's something you want to take advantage of so.    [42:27] But thank you any final comments from you.    [42:31] Beginning just love being a resource and the ESOP space and he any questions or follow-up happy to happy to help.    [42:40] So with that so much for having me on appreciate it you're welcome and I'm sure you'll be on again another time to do some more math for us so so alright sounds good thanks with that everybody have a great day we'll see you on our next step on this journey to an ESOP.

More from this show

EP21 - “Create Amazing” Interview with author Greg Graves, Retired, Chairman and CEO, Burns & McDonnell - ESOP company.

Podcast

EP22 - Before it Erupts - Kaboom! Working through business volatility

Podcast

Ep6 - Mt. Everest Part 1 - Revenue Planning

Podcast

EP1 - Journey to an ESOP & Beyond - Special Message

Podcast

About Journey to an ESOP & Beyond

ESOPs are gaining traction. In the "Journey to an ESOP & Beyond” podcast, Phillip Hayes explains the process of the ESOP transaction and addresses ESOPs from a business owner’s perspective. The "ESOP Guy" illuminates the simplicity of ESOPs as he debunks common misconceptions that ESOPs are immensely costly and complicated.

Curators(1)

People who have contributed edits to this page.

Jun 26

Zolid AI

+0/−0

View revision history