EP12 - Discussion on second stage ESOP transactions with James Bristol and Sean Sullivan with Waller Law Nashville, TN.

Welcome back. This is the ESOP Guy. We are on this journey to an ESOP. Wanted to thank you so much for tuning in today. This podcast, if you have not listened to it before, it has really been produced to help companies or selling shareholders think about an employee stock ownership plan as a viable option for either their succession or their exit plan. And it is a podcast that's been available for the last year or so, so there's other episodes if you are interested, please check out our website at journey to an ESOP.com. Now, it's common for those that are going to enter into an ESOP transaction um to do maybe only a portion or partial sale of their stock. And we call this the first stage transaction. So what we wanted to do today is really go into discussing the second stage ESOP transaction. So what comes after that? And and it really is connecting in, in this ESOP second stage ESOP uh transaction, it's gonna connect with the idea of utilizing a redemption of the stock versus a sale of the stock. So we're going to go into that topic and, and to do that today, we're going to have the privilege of interviewing both James Bristol and Sean Sullivan with Waller Law out of Nashville, Tennessee. Waller is a full service corporate law firm with its primary office in Nashville, Tennessee. It has over 270 attorneys, including satellite offices in Austin, Birmingham, and Chattanooga. Waller was founded more than 100 years ago and represents some of the largest companies in the US as well as many mid-sized and family owned businesses. So, but before we begin, I wanted to remind everybody to be looking for the ESOP Guy live webinar coming up for April 28th at 2 o'clock. We're gonna cover ESOP valuation. If you're interested in that, please go to our website again at journey to an ESOP.com, and there's a place to register for that. Also, if you like the podcast, please subscribe to it and share it with a friend. So with that, I just wanted to welcome James and Sean to the podcast today. Thank you guys for joining. Pleasure to be with you. Thank you very much. So, so with that, oh, I'm sorry, go ahead. Well, thanks for having us. Great. So with that, um, better, the best place to start is to give everybody kind of a little bit of a background on your, your guys's overview of dealing, you know, specifically with ESOP in your careers. Uh yeah, thank you very much, Phil. I'm James Bristol. I've been practicing law for about almost 35 years and I started to work with ESOs in the early 90s and have worked on multiple transactions uh representing both trustees and companies uh in, in transactions on the bulk buying the sales side. Uh, and we've also worked with Department of Labor Investigations, ESOP litigation. So we've been, uh, we've seen a lot of ESOP in our, in our time here on this earth. And Phil, this is Sean Sullivan. I've practiced at Waller for about 22 years now. I've been working on the ESOPs, you know, throughout that time. I find it to be one of the most satisfying aspects of my practice. Uh, it's, it's enjoyable whether we're the company or the trustee, uh, and to see the successes that the companies enjoy after the ESOP is in place. That's great. And I think we all in the ESOP community, we all kind of like have a very similar take on it. It's a, it's an enjoyable place to practice. Um, one of the realities of ESOP transactions as we, as we kick this off at the very beginning of the intro is using partial ESOPs or selling only a portion of the company, um, really is very popular for many reasons. Um, what happens is that you'll sell one piece or even do a contribution where you do a non-leveraged ESOP, and then at a later date, you'll come back and into into a, uh, the next tranche or sale of another percentage of the company. When you guys look at this, you know, in dealing with some of the transactions you've dealt with. What reasons do you see that people look at breaking up the sale in stages as opposed to just doing a 100% sale? Well, there's a variety of reasons that the company may consider only doing a partial first stage transaction. One is just to spread out the financial cost of the ESOP, that, that the company may be concerned, it cannot afford a 100% transaction. There's a what's known as a repurchase obligation that goes with an ESOP, and the company may be concerned that it simply doesn't have the, the cash flow to. Uh, handle all of that, at least on the front end. So it may want to spread out and just do a, a partial transaction. Another really common reason is because the owner just wants to retain control. Uh, maybe he wants a 30% liquidity event, but isn't really ready to retire or walk away, so it retains the remainder. And maybe the perhaps the most common is the company is just getting a toe in the water and wants to see if this is a good, if they are a good ESOP candidate, and so they do a partial transaction just to see how that works for them and for their culture. Uh, and so they do that, see how it goes. 3 to 5 years later, they come back and decide if they maybe want to go as a 100%, uh, ESOP owned company, if, if it was successful with the first stage. Yeah, I would agree with that, Sean. We see a lot of, a lot of these um partial ESOP deals where if you do the 30% ESOP, there's some tax advantages that you can get that are really, really pretty sweet, and a lot of times people do it just for that reason, and then they have a runway and they're looking at a succession plan. We did the first stage now and then 5 to 7 years. We'll do a second stage when we're ready to retire or ready to bring in new management. So yeah, we see an awful lot of that. Yeah, I think that helps with bringing in management over a period of time, so you're not forced to try to work that out initially. One of, one of the reasons I see too is just that the owner has this sense that the company is going to grow in value and I guess a benefit that they get is they get to sell at a maybe a higher value in the future, of course, they're taking risk there, but at the same time, if the company grows, their next transaction could be worth, you know, more than the first one. Right, absolutely. It's a good way to plan. It's a good way to take some money off the table for the owner, uh, while still enjoying future growth, uh, that, that he's anticipated. So you do a partial transaction, you know, reinvest that money, diversify it, but as you say, he's still got that upside for the future. So as we, as we think about that and going in now, now preparing our, you know, the listener for, hey, this, they may some of these guys have never maybe even done their first transaction. So just keeping it in mind, the, the goal of this episode is to, is to think down the, down the road. If you're gonna do a first stage transaction, then we're gonna kind of talk about what would happen on a second stage transaction, um, to think about how do you connect the, the overall long term plan. And when we, when we think about this, the selling shareholder again now is looking to sell another portion of shares. Um, what we want to do then is look at the, uh, the way that those transactions are structured. And one of the things that comes up is the redemption versus a sale of stock. And so before we, we jump into what, you know, why you would do that, I wanted to just kind of like make sure everybody understands the terminology. So could you, you know, really just define what is the redemption of stock versus what is the sale of stock to an ESOP and the differences between the two? Yeah, yeah, sure. Uh, a corporate redemption is, is a transaction where a shareholder sells his stock back to the company, and these happen all the time, uh, in the, in the news lately, you've heard about stock buybacks and all a good thing or a bad thing for companies and public companies to buy back their stock. That is actually a redemption, a type of redemption. We're talking about here in a privately held company context. Uh, would be with corporation buys some or all the stock back from a shareholders, and what that does is for the other shareholders who are not redeemed, uh, they suddenly have a whole lot more value. So if there's two shareholders, and one guy is fully redeemed, the other shareholder becomes sole shareholder. So that's, that's how it tends to work in the private context. Selling to an ESOP is basically, uh, uh, you know, if I'm going to sell my stock to Sean. Uh, I'm selling to another shareholder and the ESOP becomes a shareholder. Uh, so you're selling, you're not, you're not redeeming, not reduced number of shares that are outstanding, you're just selling from one party A to party B and Party B is the ESOP. Um, and the, the difference is we'll talk about this as we, as we go through this. There's a there's some regulations and tax considerations when you sell to an ESOP that you just don't have when you do a corporate redemption. Mhm. Yeah, so there's some ways to um manipulate the two different ways to approach it, not manipulate, but, um, approach it. And so as we get into that, um, I guess the natural question is, why would somebody want to do a redemption versus the sale of, of just go ahead and sell it to that, that new shareholder which is now the ESOP. Right, so if in the second stage, if you have an EOP and say the ESOP owns 30 or 40%, something like that, and uh the remaining shareholders are fully redeemed, uh, the ESOP becomes the, the sole shareholder, uh, just because there's no other shareholders, all been redeemed out. And, and so we often do this rather than in the second stage transaction. After the ESO's established rather than selling directly to the ESOP, because you can also sell those shares directly to the ESOP. And, and there's some reasons for doing it that way, but there's a reason, reasons you may not want to do it is because whenever you sell to an ESOP, uh, that is regulated, you get the employee stock ownership plan is uh regulated by the US Department of Labor and also by the Internal Revenue Service and the Department of Labor puts a lot of uh Has a lot of oversight, responsibility and how ESOP transactions are done. Uh, you can't do it unless you satisfy what we call prohibited transaction exemptions. In a redemption, you just kind of bypass all that regulatory complexity. And there's a whole lot less risk on the sellers and on the company, because you don't, the Department of Labor doesn't have regulatory authority over redemption. So that's usually the biggest reason why we do it that way. Yeah, so less risk when you, when you, um, when you work it this way, let me kind of throw out like an extreme example, when you're thinking about like the value of the what you're doing for the redemption. So you're, if whether you're doing a redemption or a sale stock, the valuation is going to come into play. And so let's just say the company was worth, you know, um, on a fair market value that supports an ESOP transaction, $20 million. Could, and this is an extreme question, but could you sell, could you redeem the stock for 50 million? Well, that's probably going a bridge too far, I would say. I know that's why I'm throwing it out because those are the things that people think about, right? Yeah, that's a good one. Well, that's the kind of situation where I've advised clients to redemption. So what do we have to do? Can we rely upon the last valuation that we got? And the answer is, yeah, probably sort of. So the thing that the trustee of the ESOP can't let you do is if it's worth 20. Redeem at 50 million because at that point, yeah, ESOP is the sole shareholder at the redemption, but the company, the company overpays for the stock, and under corporate law, state corporate law, that the ESO trustee has rights to block that sale, uh, because it's, uh, it diminishes the trustee's value in those ESOP shares. Uh, so yeah, those are the kinds of things you sort of have to avoid. Uh, and I was saving 40 million is too much, OK, by the way. No, no, I know, I know. That's why I threw it. I I made it. I just wanted to, you know, like, you know, people are like, well, I just do my redemption for a, you know, you know, double or triple the value or whatever, and I just want to make a point that that there is, it's not like this wild wild west thing where you can do whatever you want on the redemption. There's going to be some controls. Um, but let's go back to the first stage though. What if you did a redemption on the first stage? Um, where you haven't had a trustee involved. And then you move in and you're like, well, I've redeemed the stock, and now I want to set up an ESOP. And so now we want to contribute the ESOP from the Treasury stock. Um, in that case, where, how would the evaluation be set and again, could we do something on, you know, unethical there? Well, yeah, I mean, the biggest issue on that kind of transaction if you first redeem and then you, you either sell to the ESOP, and if the ESOP buys it through a loan from the company, typically how that's done, uh, that valuation has to be done by an independent appraiser and the, you know, it has to be no more than fair market value. Uh, and so in, in that it's the same sort of thing, the appraisal firms gonna look at the amount that the company paid in the redemption. And uh well, that will, that will uh inform the second stage of that of that transaction. So typically the way it's done is that the redemption and then the sale of the company are done for exactly the same price in a single transaction. Right. I kind of, you know, that's, and I'm I'm kind of making this point in a in a, like I said, in an extreme way just to help people really think about it from the standpoint, you're really kind of doing the same thing in terms of the steps and You know, at the very beginning, you're gonna want to make sure you know what your fair market value is. And you, you also kind of want to know, even though you might be doing a redemption, then sale, um, it's not necessarily just a fair market valuation, it's the evaluation that the trustees valuation firm is going to do using methodology around how ESOPs are valued. You know, and and distinctly, you know, like making sure that you've looked at a kind of cash flow, the forecast is, you know, makes sense and, and all of that, it's basically an ESOP transaction, but we have this other step. As you said, it really helps to, as we're going to get into it deeper, to reduce the risk of the transaction because it's a something that is regulated by the Department of Labor. Right, right. That's why people do it that way at times, to try to take some of the risk off the table. And Phil, you make a great point, and I'm glad you used extreme examples because while this is a way to take some of that risk and scrutiny off, it is not an opportunity for abuse, and you do sort of see people talk about this as though there's no law if you do it this way. There's no there's no way you could be scrutinized, if you do it through redemption and it's just not, not true. And it's not an opportunity to be abusive, but it is a way to to set up your transaction uh and in perhaps a safer manner. Yeah. You know, and, and then I guess a deeper question is, you see some transactions where they do some percentage of redemption, and then they do some percentage of of a sale. Um, why would they not just have a like a 100% redemption and then the sale? Well, um, in those transactions, you know, a lot of times there's different financing considerations, uh, you know, they, I see these things structured because they may have a They may a company may have a big construction business, for example, it may have a bonding requirement so they can do work and so they, you have to be creative sometimes in structuring so you can keep satisfying what your surety wants you to do if you need to get bonding for your projects. Other companies are more highly leveraged and taking on too much debt. It's not something they want to do, so they will, they'll do a redemption they'll contribute shares from ESOP just to keep, uh keep the debt as low as possible. So there there's a variety of reasons that easily the kind of financial that I see. Yeah, it could be because I want to do a partial tax-free exchange for part of the shares that to sell, which requires you to sell directly to an EOP. Uh. Yeah, that's a good point. You know, in terms of when you get into the details there, it's like now you're talking to the advisors going through the transaction, figure out what, what's the most important thing if you're going to be able to do something on the tax side, then you may end up end up creating a strategy around that versus just completely reducing all the risk related to the transaction. Or reducing the risk. I don't say completely reducing it. Right. Um, so, so as we go through the second stage transaction, you know, the EAP then has this, this portion, either they're this, they're the sole shareholder or they're, or now they're, they're because it's still partial, they're a partial shareholder with the whole company. Um. And of course, this, this becomes a great deal for the employees. What sort of things should we be, you know, I could say special considerations that should be thought about prior to moving into that type of transaction? Well, you're looking into, uh, if you've got a second stage transaction on the horizon, uh, and one thing to consider is your existing EO participants and those have allocated shares. When you do a second transaction, the value of those shares, if it's leveraged, will go down, uh, immediately, and it will take a little time to recover from that. Well, if you've got somebody who's been participating in these stuff for a few years and uh you're getting ready to retire or happen to become disabled, you know, they can lose a ton of value through no fault of their own just because we've done a second stage transaction. Uh, there are ways that you can plan that through what what's known as price protection, where the shares that are in their accounts will be protected for a period of time so that they aren't hurt by that transaction. And that's something you can discuss with the trustee really, even at the time you're doing a first transaction, but certainly when you're looking to to expand the ESOP ownership so that some of your people who helped you build this company, you know, don't lose out uh through no fault of their own. So that's certainly something to consider. Talk about with the trustee. So a couple of other things I'm sorry. I was gonna ask you a little bit deeper on that just before we jump into the other stuff. um, again, for people that have never heard of price protection, um. Is it just kind of explain exactly what happens, like the company is um uh securing that price and, and how, like, what are the mechanics behind that in terms of as part of the transaction and, and the trustee has to buy off on that obviously. Absolutely. So you'll also hear this referred to as floor price protection. And, and what it says is that and as, and, and there's different ways to structure it. But typically, uh, they'll say that shares that have been allocated to employees who've reached retirement age or die or become disabled. will be Valued at no less than the price they were at the before the transaction or valued without regard to the second transaction, any debt that the company took on as part of that, and they'll be protected like that for say. 5 years so that the stock has time to recover from the second transaction. So you'll enter into an agreement with the trustee and you say, if the stock is worth less than that and this person retires, the company will make up the difference. Now that reduces the value of the remaining shares that that the trustee is buying in the deal. So by doing that, by protecting those, the the selling shareholders may get a little less value. The trustee will take that into account. So, it is a good reason to think about this, you know, even before you do your first state transaction is if you're planning to do something else in 5 years, You, you may want to be thinking about we're also going to protect the people who've already gotten shares. So there may be a little bit of a haircut related to that. There's also other types of protection. You could say, look, it's never going to be less than $1 amount, uh, that, that's one way that that it's done too. And, and again, that's not forever. That that may last only 3 years, may last 10 years, but it won't be protection forever for those shares. Yeah, I mean. Yeah, you have a 60 year old who is ready to retire and pull their shares out and then they did another transaction and it just dumped his retirement. So he gets to, um, he or she will be protected in that environment. I, um, obviously, it totally makes sense. And then so the company just comes out of their own cash flow and for the specific people that are leaving and Or do they also get that for divesting shares if they're in the divested, you know, divested period of like 55+? That's, that's an interesting one there on that for, for those who are it's become more complicated, uh, because of some recent tax uh guidance from the IRS of what do you do about employees who, who just who can diversify but don't have to diversify and how do you provide them price protection? I'm, I'm seeing more of just purely. And more limited just death, disability or retirement, uh, being protected the protected class, where you're forced to sell, yeah, exactly, when you're forced to sell, otherwise you're going to need to ride this out with everybody else and just wait till the shares were covered. Yeah, yeah, I mean that makes more sense, right, because it's they didn't have a choice. They were really having to get their shares out and then they got penalized because of the company. You know, next transaction. And, and going into that too, I just want to kind of make sure people understand the reason the value goes down is because the now that the company is taking on more debt to um pay out the next stage and so that will immediately Um, reduce the value. So in, in ESOP world, we have the day one price and the day 2 price, and the day 2 price has been affected by a more leveraged balance sheet, holding everything constant, those those payments are made, we come right back up over the amortization schedule, um, you know, assuming nothing else changes. So just to kind of make sure we point out why, why we're gonna have a reduction in the whole price in the, in the next stage. Or in the evaluation. Yeah, that's right. Yeah. So, so, OK, so let's jump into some other considerations. I know we, we talked a little bit about the uh the price protection. What else should they, should be be thinking about? Well, uh, one other thing to, to really be thinking about is what are the consequences of a change of control. So if the ESOP owns 30% and now they're going to go to 100%, that you may have other agreements out there where that's going to be considered a change in control and something will happen. You may have, you may have a line of credit or, or a loan with your bank where You can't have a change of control without their uh sign off. Uh, you may be, if you're an engineering firm or architectural firm, you may be licensed in a number of states where you're, you're, you're, you're servicing clients and you have to, to do get special approval to have a change of control. So you had to tick through all of that. I think James mentioned binding requirements. Yeah, you see with the surety, uh, they want to prove this, uh, and they, they don't want to see, you know. Um, seeing your dad, and there's things that you, we can do to kind of work through those. I'll tell you I've also seen it in in provider agreements where we had a client that was a distributor for some large manufacturers. They had changed and control issues in those agreements, and what we find, uh, Phil, is that most of these, most of these parties will agree to it. If they don't want to see someone hostile come in or a competitor come in and take over their loyalty. Distributor, but an ESOP is usually just fine, but you still have to kind of go through that. I've even seen it where we have one where a customer has the right to sign up on a change of control, and, and that's you just never know. And so when you're planning this, you get with your counsel early on and look through your agreements. Well I've seen lease agreements that have changed the control rights to them. So it's, it's just something you got to do. I've never seen it be a problem except for when no one thought about it till the last minute. the last minute, you know, you're trying to move heaven and nerves, get the deal closed and like, like the worst time ever, right, to try to worry about that, right? And you're trying to close it down, yeah, no, I think that's, that's prudent. So kind of building a, a checklist of things way before you get to the transaction, um, so you're not running around scrambling. Um, absolutely, you know, the one other thing I would mention is a lot of times when you, you're doing that second transaction to go to a 100% ESO, you're doing it so that you, the company can become an S corporation, which is a great deal because it it basically the company is not taxed and the ESOP is not taxed. And so you have tremendous tax savings that could be used to pay down debt or, or grow the company organically or, or uh but There are very technical tax rules that need to be met with that. Uh, we, we refer to that as 409P. And before you ever really get into the second stage transaction, you need to be talking with your consultants to make sure you're not going to have a problem with that testing, uh, and, and that it involves very complicated rules. Yeah, let me, let me, let me summarize them kind of briefly because I, I, we talk about this all the time with, with clients. So essentially with 409P what Sean is alluding to is that the company, um, the ESOP itself, when they have the shares that have gone into the ESOP, um, the deemed shares, no one in the company in the ESOP portion can own more than 10% and they become a disqualified person. And that would erupt a problem with the holy SA and your S corp status. So you'd lose your Scorp status, you would have excise tax. And so the first test is to take the, the payroll census and determine if you took all of those shares and fully allocated them, is determine who would have, if anybody, more than 10%. And this would happen if you have a company that's very small in terms of number of of employees, that could be part of the reason. Um, the additional test is you, you have to aggregate the family members, so anyone of lineal descent. And then in that test, you can't have more than 20% um ownership of those deemed ESOP shares. And so, you know, and then there's some, some further ones, but the idea is you, you really are looking at when, when doing the test, any potential disqualified persons. And for an IP also can be, it's not an annual thing, it can be tested at any time. Um, and so you definitely want to know if you're edging close to that. And if you are, um, say turnover happens, you lose a key person or multiple people, that could throw you out of a 409P or throw you into a 409P issue. So, so definitely an important element of planning and You know, whether you're doing a, um, you know, a, a Corp to an S corp or you have an S corp right now and you're planning to do an ESOP, that's, that's one of the things that, that, that just needs to be looked at early on and, and constantly always be thinking through that. Absolutely. So, um, if I go back a little bit, I'll talk about the change of control thing too. We talked a little bit about the idea that you're gonna have a list of, of things that might affect your business that would be, you know, definitely uh an effect on, you know, what would happen in that, you know, like third party you're dealing with. Um, but one of the other issues that comes up is if your company has sold on a, you know, a small percentage, say 30%. That first tranche, that first stage, you're going to the evaluation itself is going to be impacted. Because you're gonna have a, a discount for lack of control. And so we've, we've talked about this in other episodes, but what that means is the evaluation enterprise value price is gonna be reduced at some percentage based on the evaluation for not having the control. But then when you turn the corner and you move over to the change of control, um, in a sense, you're getting a premium, but really what's happening is, is there no longer is a discount attached to it. So your valuation should be higher when you do that next tranche where you're actually selling the, um, you know, portion that goes over the, the 51% or whatever the control um portion of stock is going to be. So, so that is a good thing on the second stage because you you should not only get more maybe hopefully because the company grew in value, but also because you, you no longer have that that discount. Yeah, we've seen that as well and in reality, that's exactly what happens. Yeah. So, so with, with all of that, is there, you know, anything else that we've, you know, we talked about the Corp S Corp. I think that was very good. Is there any other considerations that we should be thinking about, um, when, when planning out the second stage transaction? Well, let me just mention briefly, if I can, Phil, the, the role of the board of directors and the role of the trustee, uh, because it, it, it may not be apparent, and a lot of closely held businesses are run before they go to ESOP land. Where the, the owner, maybe there's two owners, um, a lot of times I see the owner and his wife are the members of the board of directors, and they don't have a lot of, a lot of meetings. And when they do, and they're also for the shareholders, right? So, uh, there's some corporate hygiene you have to start keeping up with when you have a minority shareholder being the ESOP. And you have to have, uh, uh, you know, routine meetings. And one of the questions I get a lot is, you know, can the board of directors, you know, can the ESOP trustee fire me? And the answer is no, uh, ESOP is a shareholder, not a director. The ESOP trustee does not come on to your board of directors. So the board of directors is, is, it's got the ability to hire and fire anybody, uh, but they typically, um, You know, the the seller tends to stay on the board of directors, and if they want to do the redemption, it's a board decision, not a trustee decision. The trustee needs to be informed about it because it's a significant transaction and it may affect the trustee's rights. Uh, but this is really done from the perspective of the board of directors and under corporate law that applies to directors, they have to treat minority shareholders fairly. And so the way in a way it's a different set of rules that applies to the ESO trustee, but the point I'm trying to make is that while there are rules, you need to be fair, we talked about that, and you can't pay, you know, 3 times the price and the redemption. The directors have a lot of, a lot of discretion, a lot of how they want to structure it, how long. They want to pay off the notes, all that, um is the trustee watches the transaction if it's a second stage redemption, but doesn't necessarily participate in in all of the negotiations. Right. Yeah, I think that's a great point. I think that there's, and this is one of those points, James, too, like, you see so many people have misconceptions about ESOPs, and one of the things they say, well, I'm no longer, you know, in control of the company or I've got completely lost control. And I think the balance that balance here is, I think there's a portion of this that's definitely real, like you have a trustee that's monitoring the board, um, but the, the true effect of that isn't as maybe as extreme as you might think and it, and You're not sitting there on the board of directors and worrying about, you know, what's the trustee gonna do. As long as you're working kind of like, and I would just say, doing the right thing, right? Just doing the right thing according to what's right for the company, um, and not trying to push it. So that's right. And I can also assure your audience and assure you that the trustees, I know they're in the EO trustee business, they do not want to run your company. That's not what they do for a living. Well, presumably you're the one who built this up, and they're going to trust your business judgment, you know, until proven otherwise. It's very rare. I, I've had one situation in all my law practice where the trustee said we. Fire the board of directors and one time, and the reasons are actually pretty darn good in that case, the board of directors are really pretty much checked out, but most of the time the trustees are not going to second guess what you do. They'll raise issues and concerns on the second stage transactions that are probably worthwhile to listen to, and you know you need to kind of work like you say, do the right thing, you know, be fair, and so forth. What, what happens if, what happens if you have a, a, a company that did a first stage and they haven't, they, they don't have an independent trustee, they have an internal trustee, and you move into a second stage transaction, you're gonna obviously have to hire a trustee for the transaction, right? directly to the trustee. Yeah, well, like the first stage you have, you have basically, um, an internal trustee. So you maybe a small plan and you didn't need an independent trustee. And then you move into the second stage, you don't really have an established independent trustee. Right, right. Well, we, there's one recommendation is, is that I always think it's good to have an outside trustee. First of all, it's a preferred way to do it, and if you're, you're going to have an inside person be the trustee, they need to get some independent advice from somebody and to tell them how to, how to handle any conflicts of interest. But in the second stage, um, especially if you're now the ESOP owns majority of the company. Uh, it's really hard for somebody who is an officer of the company, maybe a board member to also be the trustee of the sole shareholder of the company, because the sole shareholder has certain interests that will at times conflict with what the board of directors might want to do. And the board has to treat that shareholder fairly. And if you're the trustee, and you're also on the board, you're also an officer, you may have some pressure on you that, that you really can't deal with appropriately. And so there may be, you know, close calls where the, you know, if you are the trustee and only think about the trust, the ESOP, you may decide one thing. But you have a paycheck attached to doing what the what the board of directors wants to do. And so we call that they call that that paycheck conflict. Now who's writing your paycheck may may color your judgment. Yeah, so yeah, that's, you're right. I think in those situations and a trustee is really important, regardless of how the transaction is structured when you're going to one. 100%, yeah, exactly, because you're definitely right, some mature EOPs that own a small percentage of the company or 30% or less, it will have just an internal trustee, but once they're looking to move to 100% ownership, that's a really, certainly they're gonna need one if if there's a sale, but they, they should have one anyway thereafter to just retain that that trustee. You just don't want any problems, you know, and, and I think that the key is like, you know, the internal guy or the internal trustee is, um, and I use guy for everything. I'm sorry because I'm the EA guy. The internal trustee that they basically have fiduciary responsibility and, and again, we could talk about that for an entire hour, um, but that means that they're responsible to those participants and The Department of Labor is looking at that and it's a pretty serious, um, you know, it's a serious type of responsibility. Um, you know, when it, so kind of like as we finished this, I want to talk a little bit about the Department of Labor because we kind of kicked into that a little bit. Um, I did one episode just, I think I'll, I haven't actually released it, but I'll probably be releasing it before this one. And it was all about the Department of Labor and I just covered some case studies and just talked about, you know, what, what comes, what actually is happening when they're coming after a trustee. Um, in this case, what we talked about was, because we can use the redemption versus the sale stock, we're gonna mitigate, which I like the word mitigate that risk of having, you know, a a potential issue because you, you know, as, as James had said, um, the actual sale of the ESOP is a, is a regulated transaction. And so doing the redemption, and of course, doing it the right way is going to lessen any risk. Um. You, how would the Department of Labor look at this transaction or this type of transaction, and what, what sort of things would they be looking for if there was any kind of problems with the redemption, then a sale to the Nissan? They're looking at what did the trustee do. Uh, I don't know that the Department of Labor has gotten their arms around this, uh, the second stage redemption, because it's not, it's not that, it's not like brand new, but it's not been the predominant way. Most second stage transactions have been historically been you sell directly to the ESOP, um, and, and there sometimes you, you still want to do it that way. So this approach that we've been doing is, is more of a I wouldn't say novelty DOL, but they probably don't have their arms around it. Uh, but they're so far as the stats and regulations go, they don't have the, they don't have the authority that they would if it was to sell directly to the ESOP. Uh, the things that trigger their authority just don't happen in these kinds of deals. And so, uh, it's, you know, if I'm the Department of Labor, I'm like what the ESOP trustee did, uh. You know, the ESOP trustee at that point, you know, was he prudent? Uh, you know, hey, look, you know, I own 30% yesterday, today on 100%. What's wrong with that? And so it, it doesn't give the Department of Labor a whole lot of fodder, you know, to go after. So we're, it's one of the reasons we're a big fan of this approach. When it works, we think it really helps a lot. It's definitely harder for the Department of Labor to make it, make its argument. It's more of an indirect argument from them. They will one day find it a very abusive situation and we'll go after that. I think they may be just waiting on the on the right one. Uh, when someone goes too far, and, and they have ways of getting there, and I think as James mentioned, it's, it's going to be a breach of fiduciary duty by not taking action under state law or they should not have agreed, there's a contribution attached, they should not have agreed to. Uh, accept those shares at least something like that, but that's more of an indirect way of getting at it versus a direct transaction between the trust and and a selling shareholder or the company. Yeah, that's, that's the difference, and that's why you've mitigated, not eliminated, but mitigated risk. Yeah, your example, your extreme example for illustration purposes of paying $50 million for a $20 million company, um, that that might, that might get their attention. Yeah, that's the case they're gonna bring one day hey, let's wave a flag. Our thing and just say department can give us, you know, and exactly. So no, I think that's, I think that's good. I think, you know, people kind of do, you know, they better understand the, the examples they understand just doing the right thing. I, I think as we go into it, you know, you're better off doing the redemption, you know, just being done with this with it why not, right? Um, as opposed unless there's a compelling tax reason and all that, just do a redemption and do a sale of the stock. I think that's kind of the Some of the final points that we're kind of leading to, at least right now. So, so kind of from there, let's, as we kind of wrap it up, is there anything else that you guys would, would want everybody to really understand before we, we, we kind of sign off on this episode? Well, just say that, that, you know, we're probably going a little deeper here. If you've not done an ESOP transaction at all, we're talking about today maybe uh something down the road for you. If you've got an ESOP, I think it's probably more relevant if you're partially owned, uh, but, but I would say don't be, don't be overwhelmed by all the information, uh, you know, get good advisors to help you through it and you know, we've been through these these pathways, uh. And, you know, confident counsel and confident advisors really makes a difference. Yeah. And I would just say, you know, when you, if you're doing a first uh EA transaction, it's not going to be 100%, just be thinking about, hey, what, what would our general timing be like for second stage transactions. And so you can have some planning for that. Keeping in mind you don't have to do it. You can stay a minority ESOP forever. That's right. And, and so you've got a lot of flexibility there to see if this works for you, for your company culture and how successful it would be. It's a good point. Yeah, I think even sometimes people are like, hey, you could even sell the company down to down the road to a strategic buyer having a partial lease off. So you're not putting yourself in a corner by doing it. Right. Yeah. That's right. Well, guys, great so much. I just wanna say thank you so much for, for your time today. And I think just what you guys brought. I think it is, even though maybe a little more ESOP, um, the more advanced ESOP, I think it helps to ask the right questions because I think if you're gonna do a first stage partial, it's gonna be helpful to think about what your next stage might look like. So I think that's the, the value of doing this. So again, thank you for your time today. Thank you for having us. Thanks for having us, Phil. Great. So as we, as we close out, I want to remind everybody to, if you like the podcast, please subscribe, share it with a friend, um, have a great day and we will look forward to our next step on this journey.