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Suggest questionThis episode is a continuation of our tribute to the 70’s with this classic and memorable song that captures everything we want to say in two simple words: FREAK OUT…. I was inspired for this episode in having multiple experiences with clients throughout the last several years from mild anxiety to a little more than anxious when it came to certain parts of the process. Keeping in mind that this is for many the only time they have ever sold their business - it can be a trying time to say the least. The ESOP sell-side advisor needs to plan and prepare with the client to try and eliminate as many potential surprises as possible. But there are other reasons for freak out and this episode does its best to nail down those to prepare for what may come throughout your journey to an ESOP.
Transcript provided by the publisher.
<p><!--block-->[0:11] Hey everyone I don't know what you're doing today but I am working on esops. <br> And if you have tuned in today for this podcast I wanted to say thank you we are, in season 4 and we are working through some things that I think are hopefully very valuable to you as we start to continue to build this resource for folks that are thinking about. <br> Transitioning their companies to Employee Stock ownership plans so to start off today I wanted to start with this and then I'll tell you what this is all about. <br> <br> [0:50] Music. <br> <br> [1:29] Freak out dude okay 1979 and, based on this one in my last episode I'm kind of getting into the 70s I don't know why. <br> I don't know but it's one of those that just made me think of one of the reasons I'm doing this episode today it's just I've been in the middle of, a lot of different transactions and this one the song just stood out to me and of course I was about nine years old when this was. <br> This was released but I did grow up listening to it and you might recognize it so I'm just simply today's about Simplicity I'm just simply taking the concept of, this like freaked out and the topic today is freak out don't freak out on your ESOP. <br> <br> [2:18] It's going to be okay so what we're going to do is we're going to talk about what normal in a normal ESOP transaction there are. <br> <br> [2:28] Periods of time stages that I would say that are that are typical, that you can have where the selling shareholder or could be other people could be Key Management that stops in is a little freaked out by what's going to happen. <br> And there's a lot of reasons behind this this episode is really there to dial into some of those reasons for those that are, that are thinking they're going to go on this journey to knee something they're not ready or they're not yet there this might be helpful because you might anticipate some things in the process of how you're going to go about your own, journey to an ESOP and for those that are in the middle of a transaction or that maybe have done something before they're going to probably look at this and say oh yeah I recognize maybe that and in the rear and the reason that the bigger reason is, is so that we can anticipate things that might be points of anxiety. <br> And maybe help to prepare for what those anxieties might be and really just answer the question of what should you do, you know what could you be freaking out by on an ESOP transaction and why should you how should you work through all of that in your process of going through your own. <br> Employee Stock ownership plan transaction. <br> <br> [3:49] So I'm the ESOP guy and we again are on the journey to an ESOP podcast if you have an interest in our podcast, please go to our website it's at journey to an ESOP calm and you can find all of our episodes there in because we are in season 4 there's there's a lot. <br> So just take a stab at if you want to listen to some of those older ones there are pretty much by topic so that can guide you through the process, if you do I've had some people recently reach out and this a this is a question I've got I'm thinking about they're really not ready to do an ESOP yet so we're more than happy to kind of look at some of the topics, and go into some of those as well in more depth here or even get on the phone with people and talk through questions you might have so. <br> <br> [4:37] If you do like the podcast you know obviously share it with a friend because that's always helpful for people you know when they're thinking about doing something like this and, I think I think out of all the experience I have I think that most people are going when you go into the ESOP world and you're thinking about a transaction most people are going to really rely on the clothes, relationships that they have already and this is just a side note but as I think about that. <br> I think that's a really good thing it's just you really do need to know you know if those if they have a really good, if they have a good base of knowledge when it comes to the Aesop's so sometimes a friend can tell you don't do an ESOP because you know I knew this company, that the whole thing blew up and it was it wasn't you know and they don't really know any of the background they just have that story in their head so so always investigate these kinds of things and that's really the spirit of this podcast is to try to, investigate identify a tell the truth about Aesop's not you know things that we want to try to create as, towards the bias areas and all that and so and this this whole episode here is really just trying to straight go straight down the middle and tell the truth about what real experience is with with companies and people's going through this process. <br> <br> [5:55] So again thank you for joining today and as we start off this I want to kind of frame this hole, concept out a little bit deeper than just hey you're probably going to freak out and I'm going to start with this idea of why why would people in this in this process go into it and then have suddenly. <br> You know the sense of oh no you know this is this is you know whether it looks like I'm getting cold feet or it looks like. <br> Um I'm not really ready to to you know do the deal or whatever and it's and it's more the definition of freak out I just did this because of that would be fun, I know it's kind of obvious but, it's a wildly irrational reaction or a spell of behavior so this this kind of a irrational type of approach to what's happening. <br> <br> [6:48] Music. <br> <br> [7:04] All that pressure is got you spinning around okay so we all can can identify with this and as I was talking about the first thing I would like to just get into is I guess I would categorize this as the fear of the unknown. <br> And everybody reacts differently to this idea and this is this is something that. <br> I just say in general entrepreneurs a people that start businesses really understand the grip of what it means to have uncertainty. <br> And they are able to what is you what is unique and, I guess different in valuable from a person who's entrepreneurial is they're able to take the fear of the unknown and the uncertainty. <br> Do enough analysis you know to feel like okay we're going to go into this next step they don't know exactly what it that's going to bring about they might have some idea and some people are really gifted it, you know the probability of this is going to work you know this is going to this is going to be the my my opportunity or the this is the. <br> Probability of success and other people probably don't think about that I'm talking about other entrepreneurs they probably just kind of like let's just do it let's just go for it right so there's there's just a wide spectrum of how people. <br> <br> [8:27] As business owners in this in this is really the reason I'm speaking specifically to the business owner side. <br> <br> [8:35] Is because that's who we're going to do the transaction for even though affects the key management it's the business owner so when we talk about this idea of them. <br> Freaking out in the process of doing an ESOP it is. <br> One of those things where you just you want to kind of like lay out some of the foundational things to understand and there are cases where I've had like clients, that I'm like there's no way they're pretty solid on this and in them in the middle of it there's something that pops up that they're really anxious about and, so or doing today as identifying what those things are and I first started as I talked about the side relationships that we have I first started talking about. <br> <br> [9:17] What what it looks like to get information about Aesop's that's actually incorrect so I want to categorize this first piece in the idea of, not freaking out on your ESOP transaction as, creating a right expectations in the ESOP process and we're doing that very intentionally because what we want to do is avoid, the potential for something that maybe be just total derailment and a total waste of time of doing the ESOP, by somebody entering into a certain phase me like I didn't know that was going to happen and I'm not comfortable with that I'm not going to move forward and then you they've wasted their time, they're people's time they're the money they've spent maybe and even even in many cases like one of the topics that we have going right now is is when should I tell people about the ESOP so it could be, that the damage here is I've created an expectation in my organization that says hey we're going to do an ESOP. <br> <br> [10:22] Now you're not so so what that's really why we're really focused on this topic today because we really want to nail down the that part of it so creating right expectations is. <br> And I did I did start off the. <br> You know in the introduction talking about the amidst information or the misconceptions or the myths that you might end up picking up from other people. <br> That can create false expectations. <br> So why is that happen well first off let me say that as they talked about it before the information you get from from ESOP. <br> Associates are let me just say people that you know is varied and in cannot be can sometimes be inconsistent. <br> <br> [11:08] And when we do implicit information from other people that we have done business with in the past and we feel like. <br> <br> [11:16] They're their opinion really matters there's there's of course they're going to we're going to put that at the highest level because we already trust those people in general. <br> Now I've seen this where somebody has given just this type of wrong information and we've identified that may be early in the ESOP process where we actually. <br> You know said no that's actually not how it works it could be how the companies funded it could be the one thing I've heard from people is all my employees are, I'm going to have to pay for this well no they're not going to have to pay for this the company pays for this so so this is really like there's a lot of ways that you can get bad information and what bad information does is it creates false expectations or wrong expectations. <br> And so as we start off with this what we're doing is we're going to think about the things that will help create right expectations. <br> <br> [12:10] That are going to be important to lay out. <br> And help us now I'm going to I'm going to go a little bit deeper into the decision-making process for selling shareholders because I do think that's going to be relevant as we go. <br> <br> [12:25] Now there are people in business owners that. <br> You know I would say across the board if you if you own a company you are entrepreneurial if you founded a company your entrepreneurial if you took a note took over a company, your entrepreneurial but entrepreneurs they all think kind of differently a long a decision-making Spectrum. <br> So on one side of the spectrum you've got. <br> <br> [12:48] The decision making being done after a long and arduous process. <br> <br> [12:58] Of analysis and research and looking at all the different aspects that is the decision going to be a good decision and. <br> You know when you're making a business decision I mean there's a lot of things that go into place right I mean you're thinking of financing and cost and cash cash flow you're thinking of, your culture and your in your employees you're thinking of Market opportunities and new things that can come about from that decision or you're thinking of, what can go wrong and one of the things that. <br> As a an old old old career that I had in Commercial Banking that I recognized in myself as that like the banking people they are so focused on mitigating risk that they're they become. <br> They're very it's very difficult for a commercial Banker to go in and just be a business person after so many years in that career because they're always focused on mitigating risk and they're looking always at what can go wrong, now I know that's not universally true true for all the bankers but in general I think that's what happens in so in this spectrum of things. <br> <br> [14:07] It's okay, But ultimately the entrepreneur kicks in says alright I got enough information and it's time to make a decision right and then the other side of the spectrum is I'm going to just look at the information, I know enough now and I'm going to go ahead and make a decision boom and those kind of those kind of decision makers they typically make a quick decision without really getting all the information, and they're probably more susceptible to the freak out because they didn't consider something that they may have and this this is where. <br> <br> [14:38] When we just think about this idea of decision making to go towards the ESOP where you're who you are who you choose at its as an advisor is so critical because your information that you're going to get is going to be going to be, you know provided by them and so you want to make sure that they know what they're doing and I've talked about this before about making sure you've selected the right adviser but. <br> <br> [15:02] So so knowing that we have this this big Spectrum, entrepreneurial decision making from the over analysis to the know analysis at all and everything kind of in between is what you what you really experience and I'd say in general there's kind of a bell curve to this as well, and so being an advisor of course I'm tuning in the questions that people ask me at the front end I'm tuning into those questions and what I'm doing is I'm asking questions too, to look at have they considered this how they consider that because my goal in the process is. <br> I want to make sure that there isn't a high level of anxiety to the process for them. <br> I want to make sure that there's not any major surprises that they didn't consider and I want to lay out all those things as we go so. <br> I'm going to go into the sources what I would call the sources of anxiety and this again is to key in on. <br> Creating right expectations and to minimize any potential for freak out. <br> And maybe in some cases even eliminate it but again there's there's always a host of things that can happen in the transaction and. <br> So this is this is some of the things that we're going to focus in on the very early part of part of the process and also just as we go through the process keep beating the drum on hey we need to think about this and we need to think about that right. <br> <br> [16:27] The first is the business valuation and when you're thinking about anxiety why can this be a source of anxiety for people and have a freak out well. <br> <br> [16:38] One thing is if they get into the transaction and what's true about an ESOP transaction is that the valuation itself. <br> Is negotiated at a point in time. <br> After all of the work a lot of the groundwork has been done after we've hired a try transaction trustee in evaluation an independent valuation firm and attorneys, so there's there's been at this point in time we actually end up getting to know what the real valuation is going to be, there's going to be an amount of time that passes through the whole process and. <br> This can be a source of anxiety for people because depending on their overall. <br> <br> [17:23] What they have in terms of it being able to retire or depending on any of that type of thing there's there could be hey we really need the valuation to be XML. <br> And it might not even be for some people may they may not necessarily need all of the money. <br> But they want to know that they've gotten a fair market value so we definitely want to be in tune with the thoughts that they might have regarding the. <br> Potential anxiety of a transaction and so so so going into that part of it for people we definitely want to think about, how you're determining the value of the company and nailing down. <br> Potential ranges that would be realistic and without going into kind of like a lot of the depth on how that that can be done. <br> <br> [18:14] I will say that if you get into an ESOP plan. <br> And you're going through the process and you don't feel and I've had this I've had this happen on multiple. <br> Client engagements where they've been they've started down this with somebody else they've gotten into it and then there's been a question mark they just didn't feel comfortable with the way that the advisor was coming up with evaluation. <br> And so. <br> Because of that anxiety or you know discomfort they're like okay let me look around a little bit they haven't started they haven't gotten too far into the process yet so so it's kind of a natural place to ask questions and, and again back to the spectrum of decision-making this is another part like when you get somebody that is much more Analytical in their process, it's going to be let me consider let me really understand that this as opposed to the decision-maker that's like hey that's quick okay great that's the number great let's move on so. <br> <br> [19:15] The key here is is to feel number one that you know you feel good about the range of value that your advisors coming up with and number two that you understand that the math behind it are the the rationale behind it. <br> What I would advise here is that you get a little bit deeper than just hey this Market multiples, because we did a company the advisor did a guideline company approach and, look at market and the market approach and said you should be trading and this type of range of multiples now that could be absolutely the right answer but. <br> The one the one thing that I will say about the valuation side is important for people, is you've got to do a forecast that makes sense and that forecast really does need to drive in my opinion the value of a business through a discounted cash flow model. <br> And it needs to be consistent with the historical cash flow, unless there is a reason that the company has grown in whether its Revenue that's driving profitability it's gross margin drive and profitability it's a. <br> The the. <br> Infrastructure has been built now a lot of the new prophets in the future are cascading down to the to the net income but it needs to be nailed down and you need to nail down the a comfort level with the working capital. <br> <br> [20:36] And the target working capital in a lot of small closely held businesses particular on the construction side of things, they do keep a pretty heavy balance sheet and that balance sheet means there's potential for a high level of excess working capital that's added back to the purchase price and so this can be important to kneel down now, the source of anxiety evaluation to could also be on the other side hey we think it's going to be too high for our company even pay for. <br> And there's some reasons for that to happen to so what do we do in that sense so, so all of that would be coming up in the negotiation but it needs to be nailed down as you go through the process so creating a right expectation around the valuation is going to be really important. <br> <br> [21:23] The second thing I do see a lot when we're thinking about creating our expectations and minimizing anxiety and a transaction is is cash flow, now some companies cash flow when we think about cash flow there's a lot of elements to cash flow that are important to to really understand. <br> The first is as we think about it from predictability. <br> We go back to the source of what is cash flow right the source of cash flow. <br> Is the generation of Revenue in a company's business model that is. <br> Either predictable or not predictable and then either is recurring or not recurring or it's some level of both of those things are, it's some gradient of those and so some are some some company's revenues maybe hey we have this type of secure contract others they were bidding this and, you know so there's a again there's a bait major spectrum between revenue. <br> <br> [22:26] There could be a lot of changes in the business has cost coming up in the next couple years or so there could be some some, difficulty with say supply chain which we saw in the last couple of years in all of those can have definitely affect cash flow and this is why in order to again to try and level out. <br> The potential anxiety we need to do a very good job at building a financial forecast for a five-year period. <br> <br> [22:57] And so what we can feel good about I would say is is the first you know first two years right and general let's look really nail down the first two years. <br> And then as we go out 345 years of course, there's a probability factor that there's a lot of changes that can come legislatively or you know externally in different ways internally even we might have some major changes with our customers all that kind of can make your Ford. <br> Third fourth and fifth year of the forecast be difficult but we are going to be able to do with that. <br> <br> [23:28] Is play around with it from a sensitivity sensitivity analysis to determine the the major transition we're having for most companies that go ESOP now as a partial ESOP it's probably not it's not going to be as impactful. <br> Because we're only going to put a partial amount of the value as debt on the balance sheet that has to be supported by the cash flow of the company, and so and what we want to really do is nail down in the early in the process again to, create right expectations that the company's cash flow based on this forecast. <br> <br> [24:08] Is is in line or in alignment with the company's business model it's Marketplace its market share. <br> Its customer base its employees its competitive competitive environment that it's in the. <br> Particular issues that might be affecting the company as of the day or maybe future issues you know as things change with like say interest rates or things change with. <br> Um international issues and things like that so we want to make sure that that's nailed down. <br> In the cash flow side and we want to look at how do we make sure that that is leveled off with some margin of error. <br> <br> [24:50] And so we know that the cash flow forecast is going to be incorrect I've said this to a lot of people over the last several years of just talking about forecasting we know it's not going to be right and nobody's going to predict a perfect cash flow. <br> But the closer we can get to something that is much more probable. <br> Then the better we can build the ESOP structure to support the debt now some companies are going from zero debt. <br> <br> [25:18] To 100% leverage this up and a ton of debt right so how do we manage that debt is really important when it comes to the company's ability to manage through now as the business owner. <br> <br> [25:33] Of course the read one of the reasons you're doing an ESOP is because you're wanting your company to be able to. <br> <br> [25:43] Continue on and so part of the anxiety could be a I don't want to strap my company with all this debt and then it's a failure, and then I have to kind of go back and take over the stock again or I have to go back and jump back into the company so there's an anxiety there that, you want to you want to definitely nail down early in the process. <br> The other side is this is financially right the owner is going to normally have if we do Bank financing and seller financing they're going to normally have some liquidity at the front end of the deal. <br> So that from a risk standpoint as a seller that kind of takes some chips off the table but they're going to have a ton of. <br> <br> [26:21] You know weight are there's going to be some debt at the end that they're going to be waiting for. <br> <br> [26:27] That's going to be important for them to not feel anxious about how am I gonna get paid my money now in addition to a very good forecast what the advisor needs to do to nail this down as they need to properly estimate. <br> The tax benefits of a nice. <br> Because the tax benefits of an ESOP whether it be an S corp with a tax exemption or a c-corp with with the reduction in taxes based on the contribution and the deduction that follows is going to create. <br> A cash flow Source that's available to service the debt and those things are going to be part of the whole composition of creating a good cash flow so that's going to be important to kneel down early in the process to make sure that there is a, a predictable standpoint and the owner doesn't have to get into this like oh freak out like I don't have enough money to pay for this. <br> <br> [27:20] Music. <br> <br> [27:49] What are the contrast between freaking out and just enjoying the journey to an ESOP so to kind of continue on the episode what I want to get into now is talking about. <br> <br> [28:04] The other aspect so we talked about the valuation side you know having wrong expectations from people that might think they know what they're talking about with esops having the cash flow figure it out to where you don't feel like you're in. <br> You know the burden of you know the burden is that the company has the ability to pay you out and also on your side that you're going to get the cash flow out of the deal that you should get and that will be plan for. <br> So of course these are just normal normal things and I guess the thing that I want to say is that, it always kind of comes up differently for four different types of companies or individual shareholders and. <br> <br> [28:49] So some of these things may not be an issue for you others might and part of what I'm saying to overall is the better the ESOP process. <br> Then the better it is a smoother these types of things are in anticipating some of these freak out moments before you even get started, really is that the reason why we're talking about this this today and so the next thing we're going to get into is. <br> You know how is my bank you know going to support the transaction. <br> And one thing I will kind of start off with is again just going through a normal leveraged ESOP transaction. <br> It's very common to have the bank provides some liquidity at closing and so the what's happening there is the bank, is lending the money to your company. <br> <br> [29:39] And the the company then is negotiate we're negotiating with the bank and so some of this in terms of Bank financing can be a point of anxiety, in especially if the bank is changing there, their tune or adding more to it what we've seen in the last year as rates have come up dramatically from, you know 12-18 months ago so we're seeing just this in continual rate increase we're also seeing some banks posturing for potential recession. <br> Um and so one of the things I see two and transactions at least for the ones that I do and how I do it is I'm always pit. <br> I'm always thinking through the relationship of the bank with the client. <br> Not just for the transaction but also for the long-term basis which is why I really do like and I do think best practices probably an ESOP transactions is. <br> <br> [30:37] The incumbent bank if they have the wherewithal if they like ESOP transactions or they if they're the ones that can do it I'd like to work with them, because they've already have a relationship with the client so so stat establishing a new banking relationship I'm of course it's going to be a point of anxiety so if we're going to do that. <br> And that's the best thing for everybody involved. <br> <br> [31:01] Then we need to start that process early and that process looks like in the beginning steps when we finish the valuation and the feasibility model in those two steps getting the bank involved in the numbers and helping them to start their underwriting process early, if you're going to go to a new bank. <br> And you know that and then come at Banks not going to go then I highly advise getting a couple banks involved at least just to get a good idea of who can do what. <br> Um again Banks some banks are very good at issuing, what we call a term sheet that is solid that is almost basically the same thing as the commitment letter with a few edits other banks will maybe issue a term sheet quickly and then come back and have something different, so knowing the bank's approach is going to be important so asking those kind of questions early on in the process is going to be helpful, I do know some advisors do the banking thing at the end I think that can create a lot of chaos if you understand the way Aesop's close, they are a lot to make a closing happen and so if you're putting the bank at the end of the process, and trying to just kind of negotiate the best deal and put pressure a sense of urgency on the banks to do sharpen their pencil and do all the things that you think might be helpful. <br> <br> [32:24] To get the best transaction that might be a point of anxiety for the shareholders to to figure out like what happens if, they don't come back with what you're thinking so so the first thing in that is to do it to ask and engage the bank early in the process. <br> The second thing is to really again have more multiple opportunities with different banks I think one of the things I like about this approach to is it helps in other parts of the deal some of the questions that the bank is going to ask. <br> Early in the process are going to help us to prepare for the trustee and the valuation firm because they're their underwriting the credit. <br> They're looking at the sustainability of the company with the deal and they can bring a lot of reality and Clarity to the process. <br> <br> [33:14] So coming back to my cash flow discussion on on a you know trying to minimize anxiety related to the cash flow of the company be able to pay out the debt. <br> This will help I think also add some reality to that that the advisor should obviously be. <br> Engaged in and providing really good over views of those types of issues but the bank offers a whole nother level of, you know just an insight into what this what this really means now keep in mind, they're going to Veer towards the conservative even even when we do a pretty conservative ESOP they're still going to Veer more towards the conservative and their posturing, you know and I'm not saying posturing like hey they're trying to manipulate the situation but they are positioning themselves. <br> <br> [34:01] For room to negotiate their going to position themselves for areas there they feel like they. <br> I prefer to get all of these things may be in the equation. <br> <br> [34:12] Depending on the deal that might include hey we we really do want to a personal guarantee or we can live without one, you know so those are things that will be I think helpful I have had you know moments of with clients where they of the bank has changed things in the last few you know like month or so of the deal and we had this kind of pivot, in some cases we just said hey forget it we're just going to do seller financing. <br> I'm right now I'll tell you that some people when they start thinking about Bank financing vs. seller financing and you know it's it's usually if we're going to do bank finance we're gonna have a combination of the two anyways. <br> But there is there is a sense right now that if the bank is going to get. <br> An interest rate that you know is around right now we're in the seven and you know three-quarter prime rate so they're getting it something that may be in the low 70s on a really strong deal maybe in the highwomen, minutes or high eighths on a maybe not as strong of a deal or maybe the size of that anyway so the rates they're getting. <br> You know the seller has to ask himself hey do I want my company's cash flow who I'm selling my stock to to go to the bank or do you want to go to me and my willing to take more of the financial. <br> <br> [35:30] And I always say this for for a seller to think about this I mean they've already been comfortable with the risk of their cash flow going into these up transaction. <br> Not having the bank / you know providing financing again it's completely built around what's the best ESOP plan for the goals and objectives but not having, them in there does create a lot more of a smooth are a smoother transaction and I would say a less costly transaction when, you're going through it so that's definitely a way to think about you know smoothing out or anticipating some potential anxiety. <br> <br> [36:05] A couple other things I want to kind of hit on what happens you know what we're thinking about. <br> The future of the business and we've done all that planning what happens if we do have a potential downturn one that we didn't really anticipate. <br> And you know anything with with the way things change in our world anything can change dramatically so appointed anxiety could be for the, selling shareholder who now wait is waiting for their sub debt their Cellar notes to get paid and maybe accruing interest or paying out seller note. <br> <br> [36:40] What happens in a downturn I mean I have had questions about like if this whole thing blows up I'm gonna have to take my stock back and you know worst-case planning, in any business transaction of course is important and good but we can't live in like the worst case to think that that's the reality but we do need to understand that that we are not. <br> Nortre Dame this like we're not going to predict the future perfectly so building a plan an ESOP plan that has some back stops in it. <br> <br> [37:10] And there's some good ideas and I want to get too deep into that because I could be a whole nother episode. <br> If course stress testing the cash flows important thinking about how far my my forecast could go down playing out a scenario scenario if you do have, sizable contracts If This Were to go away overnight what would you do how would you manage that whole, whole issue and the reason this is so important is now not all of this is always true but I'd say in a lot of the cases, the company is going to go from really not having hardly any debt at all to having a lot of debt and that debt is structured, um in an advisory situation is going to be structured I would say effectively because we're going to have say typically the bank financing being amortized first and then, Salerno amortize second plus we get the benefits of tax and all that so so it's going to be structured correctly but still in the event that things don't go well. <br> <br> [38:13] How do we how do we mitigate the risks of a potential downturn and so it might be helpful for you just like in any business planning scenario to say if this were the case if this happened, what would we actually what would the board of directors actually do. <br> In those situations and I think that if you do that that's going to be helpful for you now it could be a list of items like Hey we're going to, do some things that this is our first you know planning list we're going to look at potential. <br> You know closing down what we were spending on capex for instance and maybe we were going to invest in something that we're now going to pull we're going to pull so we're going to take the easy stuff first maybe we get into, um looking at the employee base maybe there's some cuts that would have to be made there maybe there's a. <br> And office that may not work so there's there's always things that are going to be done but having a potential downturn plan I think is very helpful. <br> <br> [39:09] And then again there's there's a lot of things that are going to come up with anxiety one that is recent that I think is just in an interesting case study and a conversation as we kind of are betting right now. <br> On having the key people in place. <br> Bright and so what happens if I'm in the middle of my transaction in my key person says hey I'm out of here, maybe they didn't really want the ESOP or didn't get it maybe there was you know a completely different expectation what happens if that happens right so the nice thing about an ESOP now the. <br> In every company's got a different management depth in some companies are far more, along the timeline of doing their own succession planning so maybe they have a lot more depth other companies don't have as much depth or maybe the are even just starting that process. <br> So either way what needs to happen is Don't Panic if you do lose a key person. <br> Um being a be prepared to to work through that potential issue, and start identifying even people now in your in your team maybe the key person are the key persons that you have and the tier 2 group really is a strong backup or replacement or you have a strong recruiting plan. <br> The nice thing about an ESOP is that there is flexibility for the selling shareholders to phase out over time. <br> <br> [40:33] So this I would say this comes up and most of my e sub transactions where the selling shareholder isn't really looking to get out you know as soon as the deal closes and in fact if that's the case, I'm going to argue and say that we really need to think about other options because a lot of times. <br> <br> [40:51] The unless the selling shoulder has done all the work of succession planning. <br> Then they're really not prepared to leave the company at the very least they need to be part of the board of directors going into the next several years so, so again don't panic if something like that happens, be prepared in part of it is is when you how do you explain in messages correctly to your key people what sort of things in the ESOP are you are you using and maybe that management incentive plan, has to be dealt with a little bit deeper, of course including stock appreciation rights might be a really good idea be able to explain those very well one thing about ice I noticing this is again the ESOP bell curve is most of these companies have really good cultures and they have really good people, that can absorb that type of potential abrupt change that could happen. <br> <br> [41:48] So those are all things that I think are really helpful when we start thinking about, you know the idea of being in the middle of a transaction whether it starts or the middle or towards the end having these potential points of freaked out, we just want to be very mindful of that and have a plan in place so with all that thank you again for listening to the ESOP guy and check us out on our website journey to a nice up.com we will see you on our next step on this journey doing. </p>
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.
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