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Suggest questionThis episode began from the meeting we had in Portland OR this year when I got to meet with some folks thinking about going towards an ESOP. Former senior editor of Forbes - he created the Small Giants Franchise…he now has his own podcast called 21 Hats. Loren is a wealth of information - all of this leads to an interesting dialogue on ESOPS.
Transcript provided by the publisher.
<p><!--block-->[0:12] Hey everyone this is the ESOP guy we are on a journey to an ESOP am so excited to. <br> Hang out with you guys today and do this interview with Loren Feldman Loren Feldman has his own podcast called 21 hats. <br> And I actually was interviewed on his podcast not too long ago. <br> Regarding Aesop's of course and some questions and things that we talked about I thought we were were interesting and I thought it would be very helpful to include him on our podcast. <br> And just kind of what they're doing and how they're doing it as a resource and you know things that are available out there for people to be thinking about and least listening to what 21 hats is doing as well so Lauren I wanted to kind of welcome you to our podcast. <br> <br> [0:55] It's a pleasure Phil thank you so much I'm really honored to be here great so-so. <br> 21 hats what I was thinking before we before we get into like what you do and all you know and how you do it one tradition I have with people because I do a lot of movie. <br> Podcast metaphors. <br> What's your favorite movie and why and it can be any movie you know that you feel compelled to tell us. <br> About how I'm so bad at these questions because my favorites Change Daily if not our that's why such a great question because super hard. <br> <br> [1:32] It is hard I guess I'm trying to think what movie I've watched the most often it, it might be the the three Godfather movies I also love Apocalypse Now yeah that's a good one yeah obviously that's leaning in a Francis Ford Coppola Direction now those are good those are all like I mean. <br> Again it's kind of more like you know I love The Godfather movies too and just kind of tells people something about you in a way that's a little indirect you know, I love getting lost in a world that I don't really know yeah and I think those are great examples of that that's cool well great well again thank you for joining the podcast today and why don't we start off with you know you have a podcast called 21 hats you also have a kind of this this business mission, in mind that I think will be helpful to kind of explain so how would you explain your podcast because the name of it is is obviously it's not about hats right. <br> <br> [2:36] It's not yeah and there is sometimes on confusion there but. <br> I've found that when most people get it they get it and they feel kind of like they're joining a club the idea is that to start and build a business you have to wear a lot of hats and my thought is that 21 hats is, here to help because, no one can possibly be prepared to wear all those hats you there's just no one can have all the background you need and there's there's really no. <br> Training for it except I think the best training is to be number two to someone else who's starting a business, and I think MBA programs have gotten a lot better at teaching entrepreneurship but there's nothing like actually doing it and you know you find the year prepared for some things and less prepared for others and you need to find help, the the help that I've been think is most useful is talking to other people on similar Journeys and that's what I've tried to encourage. <br> <br> [3:35] So so you're able to then kind of just connect people from all over the country that are CEOs or business owners that, that are have something in common and that type of thing so so typically what are the the types of companies that come to. <br> Into your world a little bit like what are they all over the place different types of businesses or their industries that you're seeing more of. <br> <br> [4:00] They really are all over the place they tend to be owner-operator operated they. <br> <br> [4:09] You know I picked that one of the reason things I liked about the name 21 hats is. <br> I didn't want to name the excluded anybody so what you know if you include the term small business for example that turns some people off some people consider that a pejorative. <br> I don't but I understand you know if it's your business it's not small that seems to diminish it and I picked a name that I. <br> <br> [4:33] I hoped, I would encourage people to think if they find something valuable here then they belong and I didn't want to I didn't want to turn anybody away so we do get a mix but it tends to be, companies I would guess between the size of you know quite small to 20 million dollars in Revenue up to around 100 employees we have some that are that are bigger than that but they tend to be outliers and that's kind of the mix that we have on the podcast it's it's a good diversity of industries of people of regions, you know a nice mix from somebody who's building trash enclosures somebody who's building high-end custom conference tables someone who has, the largest picture framing operation in America just a real mix and a cookie company so and it Cookie Company right why not pretty right so cool yeah I like that because it's like it's, it's more about the who the owner operator is and those types of companies size-wise. <br> Makes sense to me because they are wearing that many hats I mean they're it's a hard position to be in and and I had a client meeting today with somebody and. <br> In the end the questions that we had were working towards an ESOP and we're trying to work through their key people but one thing that you realize is to keep people don't always understand what it is to really own the company they have their role and their important. <br> But to wear that many hats I think there's there's a lot of. <br> <br> [5:58] Just misconceptions about what it is to be a business owner I think sometimes people think oh you're you're going to take all the money out of the business and you're making all this money and you know and it's just not true I mean these guys are putting a lot of money back in the company every year, they're making it work they're going through really hard times you know with covid changes and things like that so it's it's a reality so it's nice to probably have everybody those CEOs get together I think you modeled. <br> A little bit after vistage is that true. <br> <br> [6:26] To some extent we have a weekly conversation I have about 10 regulars who have been participating in this podcast on a weekly basis for the last three plus years, I talked to three of them every week and and yes to some extent it's kind of a conversation about. <br> What are your challenges right now what are you dealing with is there anything you'd like to kick around get feedback on and you know the underlying premise is that it can be very isolating running a business for exactly the reasons you were just describing not everybody understands what it takes and, an individual business owner may or may not have someone to talk to about it you know it's probably not appropriate to talk to employees about big decisions especially if the company is not doing well your you know significant other or your spouse, may or may not want to know when things are going well may or may not be in a position to offer and you kind of real help or support your friends may be very smart but have no idea what it takes to get a business off the ground so. <br> You know this this is an alternative place to go where you hear other people on similar Journeys. <br> <br> [7:35] Now I think that's good I actually did participate when I was the I was the CEO of our firm for about 10 years and I participated in a. <br> In-person CEO meeting once a month and and I found that it was to be honest it was like the loneliest job in the in the firm and we had. <br> <br> [7:52] Even if with Partners you know is like you know just to so many things come across your desk and things you got to deal with or or have a vision for, and so to have a group of people that you could bounce ideas off of and we used a program called traction, cos as like the model sure I know there's other ones like like great game at business which we'll talk about a little bit but I think in general I wanted to kind of say, you know that applaud your effort to pull together I think it is definitely a need and and as we connect that to the podcast here. <br> There are people listening that are running their own business and maybe the main issue they're dealing with right now because you're listening this is. <br> His hey what do I do with my business you know how do I transition is an ESOP the right thing for me is it something else. <br> And so when I want to get into some of those things you know that you've come across that might be helpful for them. <br> To think about in and I've said this on my podcast a million different ways but but my job here is not to convince you to become an ESOP company. <br> I think he stops her the greatest thing ever and I've dedicated my whole life to him but they're not for everybody and, better for you to know early on then to be going down the path and spending a lot of money and then realizing so one thing I was going to do is learn start with the story of the of the company that. <br> <br> [9:12] Pull they did all the ESOP work and they pulled the plug at the very end and I think that's an interesting story because I think it really is. <br> <br> [9:20] It's a question that people want to ask like why would I what would it what would stop me from doing the ESOP right and so so those kind of stories I think are valuable to people, to think they'd better you know it's nice for them to know there's value for them to know now as opposed to doing all this this work. <br> <br> [9:38] When they could have been doing something else with their time and their money so tell us that story real quick and then we'll talk about some things that you guys have done to help companies. <br> Sure well along those lines just so you know I got interested in this because one of the regulars on the podcast got excited about doing podcasts and he dug into it pretty deeply and that's how I ended up meeting you because he got he got excited about doing. <br> Yes yeah and that's why he went to the event in Portland with another regular on the podcast and they met you, the one who got excited initially decided not to do it for a variety of reasons but that led me to a conversation with a couple of other business owners. <br> One of them is the one you referring to who came really close the and this is somebody was very active in a bunch of organizations that I know well he he went around the country meeting with people who had successfully gone through an ESOP transition and we're thrilled with it and, as you know far better than I, there are a million different ways to do these things everybody's got a slightly different flavor they all adapted slightly differently and he wanted to, you know try to figure out what the options were invested years and in the process decided to do it he and his partner co-founder decided to do it. <br> <br> [11:02] And got within a week of signing the papers had told the employees that you love has come and she spent over two hundred thousand dollars oh my gosh yeah and pulled the plug at the last minute. <br> And honestly he gave an explanation on the podcast that I did with him that I didn't completely understand it was about. <br> The way the. <br> <br> [11:29] It was about the way he would he and his partner would take money out of the process it. <br> The person who is doing the ESOP said to them at the last minute it sounds like you may not realize how this is actually going to work, here's how it's going to work and it wasn't what they expected okay and I can't explain it any better than that and he was reluctant I think in part because he was reluctant to go into too much detail about what it was about. <br> But you know it was you know understands again being concerned and he I think the overriding thing that he discussed was he just felt every step of the way as if. <br> <br> [12:12] There were people he was talking to who wanted this to seem more complicated than it needed to be as if they felt, unless I make this feel really complicated you're not going to hire me so I'm going to try my best to convince you that you need my help right you couldn't possibly do this with anybody else or on your route right and that really turned them off a little all along and I think had something to do with it yeah that's log that's his that is so aggravating you know and that's and that is something that you know personally I'm so. <br> <br> [12:46] Driven towards helping people to understand it and make it simple because it is a lot simpler than people have made it sound like a jet I literally just got a new client and the reason they they were working with somebody else and they pulled the plug and they came over they were listening to the podcast. <br> <br> [13:01] And in the first conversation I had with them I'll just share with you like that the work that was being done to figure out whether or not the ESOP was feasible. <br> Was very. <br> <br> [13:13] Limiting like there it was limiting in the sense that they weren't able to really look at scenarios like what if we do it this way what if we do it that way what what's going to happen to cash flow, how is cash flow going to be affected not only by the tax benefits but also from the structure of how we create the debt and how we, put that in there's a lot of variance there there's a lot of changes and things so they weren't able to go into the modeling and say alright what happens if we do some scenarios. <br> And so in I don't know 15 20 minutes is we started talking about the process of doing that. <br> <br> [13:46] She was like look let's I'm just done I'm going to click just send me an engagement or let's just go and I'm like all right because so I think that's part of the process that is happening that isn't well is not happening people are not getting into those scenarios really early in the process. <br> There shouldn't have been a surprise at the end right there there really shouldn't have been whether it's an ESOP transaction or something like that somebody you know didn't say what they needed to say so that's and it's to me like to spend that much time I two years I mean the money is terrible to right. <br> But that's a lot of time right to develop you could have been doing a lot of other things so I thought that was a very honestly a very interesting story. <br> Um that I think it's important for people to think about. <br> And it's more about asking the right questions listening to this type of resource other resources that are Beyond just the conferences. <br> You know and we've I know we talked about the conference's before they're helpful in some sense and other sense they're pushing the big guys out as the main people that know esops and. <br> <br> [14:53] That's not always the the all the information right and they are the ones probably making it more complicated than it really is well that's exactly why you and I got to know each other my two podcast regulars went to a conference and we're turned off by, the way it seemed to be set up more to benefit the the big companies the big sponsors what we started calling the ESOP industrial complex, and less to help the individual owners trying to figure out what's up and, might you regulars met you and realize they had met someone who was talking straight to them and they were very much drawn to that especially given what else they were observing exactly now we're and now we're friends I've got one of your guys is coming on the podcast in a couple weeks so Sean and I are going to do one of these oh excellent so. <br> So let's talk about some other things that you guys get into and your podcast that are you think are helpful for companies. <br> Reasons people listen to you one of the things in this might also kind of Veer into. <br> Other opportunities for exit are things like that that you guys have been exposed to which I think is great to mention and talk about because again it's not about being an ESOP it's about finding the right thing for somebody, that fits what they're trying to accomplish so where would you want to start with that in terms of your background and some of the content that you guys been working with. <br> <br> [16:19] Well I would raise if this is of interest to you I. <br> I picked up on something that I didn't know about esops a couple years ago at a conference. <br> Where I was talking to somebody who had done an ESOP and was thrilled with it but had discovered a concern that he had an anticipated and that is that he and the other people who led, the he's the decision to go ESOP we're now thinking about the possibility that having. <br> Chosen to do this because they wanted to preserve a company's culture a place that they thought was a great place to work they had now begun to focus on the fact that they were getting closer, tune not just changing the ownership structure but going through a succession process or somebody else was going to take over the business and they haven't really focused on that previously but it now occurred to them that they had set in motion something, they could ultimately end that special culture that they had created because they have no way to control what happens with the Next Generation that takes over running the business and in fact what they realize they they'd set something up where the people involved. <br> Arguably have a fiduciary responsibility to do something quite contrary to what their initial inclination was and that is sure you know if a. <br> <br> [17:45] A bigger company comes along and makes a big bid that offer might have to be accepted and that culture might disappear so. <br> That's something we've talked about a good bit and I think it's something a concern that you know was also part of the decision of the company that we were talking about the pulled the plug at the last minute they realized you know where. <br> We're going through all of this this is really complicated this is really difficult and is it even going to leave us where we want to be in the end ring yeah which I think is important I mean I honestly look at the ESOP as a way to do that because if you got. <br> <br> [18:23] You've got to still do the succession planning correctly right you still got to have you know because the individual shareholders will be on the board. <br> Typically every time they're going to be on the board of directors so they're going to have influence away the company guides their culture. <br> But if your if your succession planning process is leaving you with with a gap and this is where I would say it's an ESOP might be difficult is when. <br> You're really trying to get out and you haven't done the succession plan in. <br> I would people say to me hey I want to I want to sell my company as an ESOP but I want to walk out the next day I'm going to tell him it's not going to an ESOP is really not a good thing for you. <br> <br> [19:04] And because you're going to still have to do the succession work. <br> <br> [19:08] The debt structure confused they think it's the one in the same thing as if an ESOP is a succession plan and it's really not it's you obviously now it's a tool yeah it's a tool you can use to enhance your succession plan like. <br> And use it for retention purposes and, use the tax benefits to pay off the debt early and and all of those things are helpful there's some SAR tools you can use to retain key people as part of the ESOP but that's one of the things that needs to be developed in even in your podcast sure I'm like. <br> Succession planning needs to be at the top of people's list I mean we're who's getting any younger right, I just released one called Benjamin Button or not we're not Benjamin Button where we're not getting any younger so I'm sorry you know it's more complicated than a lot of people realize until they find themselves in the throes of it you know the, the business that I told you about the owner is Jay Gould's who has a picture framing business and a home store in Chicago he's the one who got excited initially about an ESOP, he helped me understand some of the the motivation for this and that he's he's in his mid-60s. <br> <br> [20:16] He loves what he does and he's not looking to you know get out of running the business he doesn't want to take up golf he doesn't want to move to Florida if he you know, if he can run his business until they carry him out of his office yet what he'd like to do and if that's 20 years from now he will be a very happy person so here's the thing. <br> <br> [20:39] What does he do to prepare for succession do you everybody says the first response is well hire a good number to well, you know that's an expensive higher it's a good bit of money and who wants that job coming in as number two to somebody who wants to keep running the business for it possibly 20 years do you want to wait there for 20 years for your opportunity to run the business it's not the easiest hire to make so my point is just, that's succession plan can be more complicated than people realize it is in the thing I say about succession plan is break break it into pieces break the ownership transition plan, and this in a management succession plan into two pieces in some cases. <br> They completely aligned like there's this perfect alignment with timing and everything else in other cases we may work on the management succession plan and keep the ownership away like we don't even mess with the ownership transition right. <br> Because we in that case with J his problem was I remember talking to him about is like why would I sell my company to an ESOP. <br> And have my cash flow be paying me out when I can just hold the cash flow. <br> And I said to Jay I'm like yeah you're right I mean it doesn't make any sense if you're not ready to transition the ownership right then then you're not in a good spot to be an ESOP. <br> <br> [21:56] Exactly and it took him a while to figure that out yeah no yeah talk to a lot of people before he fully understood it yeah and that's and that's something that I think is good for people to think about like yeah you're right if the cash flow is yours sorry to yours. <br> You'll keep it every year you keep it you have the risk of the cash flow going down and so so why would people transition their ownership is because there. <br> So I have another example of this but it's the complete opposite the guys like I don't I love being in the business and managing it but I don't want the ownership anymore. <br> <br> [22:29] And so we did a hundred percent he stopped he still he's like he's like 76 runs the company Works 12 hours a day he just loves working. <br> <br> [22:39] So he but we've completely transition because he didn't want to be thinking about like his estate and his kids and he actually had plenty of money anyway he just wanted to get that done and he wanted and honestly in his case he's like I really want the employees to have. <br> So he got a fair market value we're paying that debt off as we as we as we as we speak so it's really going to be about. <br> And identifying clearly what the goals and objectives are of the shareholders before you even pick up a pencil and start writing down anything or paying any checks it's like, really make the list like where do I see myself in then figure out from there what work needs to be done and it may not be. <br> You know I may not be the ESOP right. <br> I have people that want to get out ownership and management immediately but they've done nothing to get to move that dime right that the dial there. <br> So I had like all right well if that's the case don't do an ESOP go sell it to a buyer. <br> Who is going to replace you and have the money in capital to run the company without you like that's your best option. <br> <br> [23:48] Right and in that case like I know you mentioned there's something I thought it was interesting this thing called team shares or there's some some stuff happening in the in the world just to expose people to you know different opportunities that people might. <br> Really maybe more be more in line with what they want to do right so. <br> <br> [24:07] It's really interested me that there just seems to be a lot happening in this space a lot of evolution there yeah they're just so many different ways to accomplish these kinds of goals team shares is a really interesting one I had I hadn't heard of them and nobody I talked to at heard of them until I saw I saw story I think in the Pittsburgh Post-Gazette about a business that this organization had bought and it was it was started by some. <br> <br> [24:35] Pretty young co-founders who were looking to. <br> Help small businesses find a way to transition, but also wanted to encourage employee ownership and they've created a mechanism where they raised Venture Capital they buy businesses with the plan that right away I think 10% of the business goes to the employees and then over a period of 20 years the employees, ultimately come to own I think 80% of the business while this company retains they say in purple and perpetuity 20% the plan is to never sell any of these businesses again, and it's you know a really interesting Solution that's only a couple years old so who knows, but they bought over 60 companies and it seems to be working I asked him, but the one thing they haven't figured out I don't think it's either you know well I'm sure there are a lot of businesses out there, as you just said that haven't really done a lot of planning haven't thought this through and you know it may be a situation where the owner is too involved in the business it's not even clear that they can sell it this company team shares says they have a solution to that that they want to roll out. <br> <br> [25:51] I don't know what it is I can't wait to hear I think it's a really big problem and if there is a solution that would be a great thing now that's why it's cool to have like another option for people to think about you know that. <br> When you get down it down each of these paths before you jump into one of them you just want to know that that's going to work so parently. <br> They have a an offer that people can't refuse just kidding I wanted to use the gun I'm not making it yet but they're working on it make you an offer to figure it out because yeah heaven knows there's a need for it yeah for sure so but that the point there would be you know again trying to connect people to different ideas. <br> I know your your podcast is sponsored by the great game of business. <br> And for some people they're like that are listening like yeah I totally know great gaming business and I'm and I know clients that I have are already part of that. <br> For others there like they don't really know what that is tell me about tell us a little bit about the great game of business and how do you guys support that too with your podcast. <br> <br> [26:51] Well they are my principal sponsor on the podcast and they're a terrific partner in this they, they have a really interesting story they were started by a guy named Jack Stack about 40 years ago he was part of a team he was the I think he was the union leader in a International Harvester shop in Springfield Missouri that International Harvester decided it was going to either sell or shut down and Jack and his Union colleagues said wait a second we want it and they wound up. <br> This was when the interest had I think they got a loan with like a 20% interest rate but somehow use that loan to buy the plant. <br> And then just kind of followed their instincts which was you know none of us know how to run a business we're all doing this together so first of all they in kind of invented open book management, but then they also went in the direction of employee ownership and it was enormously successful that plant. <br> Turned into something called Springfield remanufacturing which is now known as SRC which is kind of a. <br> <br> [28:05] A mini conglomerate they kept buying businesses I think their annual revenues are now over 600 million they have some of those early Factory workers retired with you know million dollars of equity in the the company that they took over many of them retired and then use that Equity to buy another business or start another business and became entrepreneurs again well it's just an amazing story but they also created the great game of business which is their organization which encourages other companies to do what asrc did whether it's just the open book management piece of it or, going all the way to the east side, and it's it's amazing to me because they have a cult-like following they get hundreds of businesses that come to their annual event they are, really strong in a number of companies I couldn't ever number of countries around the world especially Australia for some reason but. <br> <br> [29:11] You know it's not like they're a household name there I talk to lots of business owners who've never heard of them it's kind of an interesting mix I don't think there is well known as they should be given the results that had but their main focus is open book management the idea that nobody knows better what's going on in business then people on the front lines seeing how it works and there's no reason not to involve them in the conversation so the idea is that, they teach, employees you know Financial thinking how to understand what drives the business with the idea that they can then be part of, the discussion of. <br> <br> [29:52] How to improve operations if things are going well you know where is the problem if things really aren't going well and you know there's the possibility of layoffs looming as happens in a recession or something like that. <br> There's a conversation about you well you know maybe instead of laying people off we all take pay cuts we want to come up with a solution that, you know preserves as many jobs as possible it just it changes the Diane Dynamic so that a lot of owners feel as though the weight of the world has been lifted from their shoulders they have the, the opportunity to involve other voices and you know encourage other ideas, yeah but again just as you were saying about Aesop's it's not for everyone doesn't make sense for every owner some people try this and decide they don't like it it's hard work because you can't just throw it in employees and you have to bring them along yeah you're truly stepping in you've got to be committed to that to that totally different business model. <br> And I see it as a totally different business model where you're you know you're embracing there's a great thing about it like people do. <br> Better understand there's an education that they don't really you know your employee rank-and-file doesn't really understand some of the Dynamics. <br> <br> [31:05] Of say working capital or you know changes in insurance for payroll or you know things that just as a business owner or is it just, come at you you know and the changes in interest rates right now and the cost of capital you know so so Concepts like that don't actually occur to people that are just. <br> On an 825 run in the you know the normal thing that they're supposed to do so I actually I I applaud companies that can do that because there they are making a commitment, to flush out and be so transparent with everything and. <br> And I see that as a hesitancy in some cases like I don't want to be transparent with everything because it's going to create issues that I got to deal with you know and so that's this but you know what's interesting sometimes the employees don't want it either they don't understand the motivation initially and sometimes their first reaction is wait a second. <br> That's your job why you tried to make me do your job yeah and there can be some real skepticism there, and you know I don't blame an owner for a who encounters that from saying you know what this is this is hard work and if the people I'm doing this for them yeah don't want to do it I'm not going to force it down their throats yeah there's something about working 8:00 to 5:00 where you go to go to home and you don't even think about it. <br> <br> [32:22] You clock in your clock out. <br> <br> [32:25] You know you don't know so you don't worry about it so but didn't you now you have all the stresses need those people and there's nothing wrong with that yeah so long as that everybody's on the same page and understand say yeah you know what people's motivations are, so while one of the things I wanted to mention that for is because I think a lot of companies that are thinking about a nice. <br> <br> [32:44] Or they're in that transition and things that you're doing and what we're doing a line in that we're trying to help a business become more profitable. <br> We're trying to help a business become more valuable in the sense so whether they're going to do an ESOP or sell to a strategic buyer or whatever else they do, that they have to be continually building the value of the business in great game of business is one of those ways if you can you know I and I've seen it with esops that I've done where companies before that and then helping them through that process I've seen the great game of business help them, to increase the awareness of profitability and hitting goals, and that has generated more profits which is generated more value and you know we've cast I think you're putting on your finger on such an important point but one thing that surprises me and you would know this better than I am curious what you think about it. <br> I think a lot of people who sell Aesop's in particular to some extent the the notion of open book management. <br> <br> [33:42] They tend to focus on what it means for the employee and obviously that's an important element in this and no business owner would consider any of these things if he or she didn't care about his or her employees that's an important part but but the people who are going to make the decision to do this are the business owners and sometimes I think that's another reason they walk away because they feel like, everything that's being sold is aimed at well this is great for the employees they're going to love this and retention is important and you know employees are important but the profitability I think. <br> That should be higher in the list of benefits I suspect it do you see that the same way yeah well I think it's all it's like to me I see it more like a holistic piece of the puzzle like I'm gonna put the whole puzzle together so. <br> The employee benefit and the employee retention is going to be part of the puzzle piece. <br> Meanwhile what we're doing is we're addressing a very meaningful way for the owner to move their Transit their stock out and transition that part of it out. <br> By then the other puzzle piece is plugging in the tax benefit so now the company is tax free. <br> Using that cash to pay out the owner and meanwhile as they do that they're going to increase the value of the business. <br> In the profitability the business that benefits the employees so. <br> <br> [35:04] So that's why when thing people think about there is a holistic puzzle piece pieces of an ESOP that need to be put together. <br> And they need to have they may have different values to different individuals like the selling shareholders they may prioritize the value of what they're coming out with like the fair market value of the buyout. <br> <br> [35:26] At the at the same time they may also then also look at how this is going to benefit the employees going for it because they feel like they owe the employees something. <br> And so now we have the benefit for the employees, we also want to create a sustainable he's up so nobody gets strapped like we don't we can pay out the owners without a problem the employees will meanwhile start earning some some reward as well so I think it's it's being very aware of all the puzzle pieces. <br> That are going to be important to build in your plant your ESOP plan to make sure that it actually is going to work for for everybody and that's why I was called like it's a win-win-win for for, everybody if it's not a win-win-win for everybody for an ESOP that should be a flag that says hey we're probably not a good candidate for an ESOP. <br> <br> [36:12] So I don't know if that answers your question but that's how I look at it and we could be completely focused just on the employees and that's imbalanced it does I think there's some owners who look at it a little bit differently than the situation you described in the sense that. <br> <br> [36:26] They don't feel they owe it to their employees I think there's some owners who feel like if I provided a good job and a good environment and good pay. <br> That's that's enough I'm not obligated to solve those problems after I'm gone that's true either gone from the business or going from the planet. <br> But they they do they would like that to happen they want the best possible outcome they just don't want to take assume responsibility for it happening and that's why I think if you sit down with an owner and are. <br> Pitching these ideas that the first discussion should be all right this is what it means for you and you know part of it is as I truly believe your company. <br> May end up being much more profitable doing this and not just because of the tax implications but because you know you're involving your employees in a different way it creates a different Dynamic their marketing possibilities people people like to support companies that are employed better employee-owned yeah well here's and here's one that I just did a presentation yesterday to the FI CPA and I entitled it not Aesop's not just an Exit Plan. <br> <br> [37:42] The point is I've done a lot of these apps that are partial sales so so let's just take a different approach for a second we've forget the exit plan for a second. <br> A partial ESOP how can I use in a Cell thirty percent of my company. <br> <br> [37:56] Now I engage my employees at that level I keep 70 percent as private equity. <br> <br> [38:02] You know I stopped I owned already I grow the business and then I sell to a strategic buyer. <br> <br> [38:08] Now the employees are going to benefit from that sale right in a smaller chunk I'm going to benefit as the owner. <br> And I'm going to leverage the value of being an ESOP company because I'm going to retain and motivate people. <br> So that we're all stakeholders in that endgame that's it is an exit there but it's not an exit plan for the ESOP transaction it says strategic plan to get my valuation higher. <br> That's a way to look at it and Jay Gould with me. <br> <br> [38:38] When he was thinking about doing this he could he when he got excited it wasn't par-4 exactly what you just described he was thinking about doing 30%. <br> And he wound up doing in a pretty thorough analysis and convincing himself that he could actually make more money owning 70% than a hundred percent because of the employee engagement and the marketing opportunity presented by having employee owners involved yeah there's a lot of statistics on. <br> The sale of existing ESOP companies that are partial, that get a bigger a bigger multiple at that time so so and meanwhile it's kind of nice not to pay taxes for that portion right it's kind of nice for I mean those are like the sidebar stuff that I think is helpful but I. <br> I think it's a good point because I think sometimes people are only thinking this is I'm going to wait until my exit right I'm going to wait until my exit. <br> But there's a lot of things you can do with it that leverage the opportunities. <br> And there is something magic about the new the 30% that you're right there's real you want to 30% couple things on 30% if I'm an existing c-corp then I can all then I can take advantage of the 1040 to capital gains taxes. <br> <br> [39:50] So that's why 30% now the other thing is is that. <br> <br> [39:54] Transaction costs if I do something less than 30 you know might be not worth it as much too because I'm still going to have a fixed amount of transaction cost so 30 is about the. <br> The probably the lowest I would say if you go lower than that the other thing I would tell people is like let's just say you want to just get started. <br> You do an online you can do a non leveraged ESOP where you contribute the stock like 3% 5% of the stock that you have at a lower valuation that year right then what you're trying to get to. <br> <br> [40:25] And so you we can deduct that contribution from your taxes so we get it we get a some of that back by just making the contribution. <br> Why would somebody just give the stock into like the into the employees hands that way well they're they're a lower valuation and they're going to try to use that to leverage and an employee on. <br> <br> [40:45] But I would say never do that unless you're seriously committed to doing another. <br> Another tranche because 5% will get you through a couple years and then people are not getting any more stock so it's kind of going to lose its benefit over time. <br> <br> [40:59] Does it that's a very you know different different type of way to go and it but I've done several of those as well. <br> <br> [41:06] And be kind of like we're getting back to me and I wanted to kind of finish off with with you and just kind of like I know you do other things in the podcast so maybe maybe. <br> And I look at those are kind of speak to those a little bit and then we'll kind of look like clothes with you know some some wisdom that you might have for people. <br> <br> [41:23] Well thank you I you know I spent about 20 years covering business owners and Entrepreneurship for some big media companies Inc magazine Forbes Magazine the New York Times. <br> And I felt there was something missing that we in the media focused too much on select types of companies primarily venture-backed companies in Silicon Valley and missed the, much larger world of more traditional businesses so. <br> <br> [41:53] I started 21 hats to try to serve that audience and try to build a real community and it's yeah yeah I'm going step by step I'm going slowly but I've got the weekly podcast I've got a daily email newsletter, that tries to aggregate the most important news of the day for business owners some of it comes from obvious sources like the The Wall Street Journal some of it comes from. <br> More obscure sources but the goal is to put it all in one place so you know nobody has to go looking for what's most important that day. <br> I've got a monthly CEO Forum that we do over Zoom and I just had my first in person event in Chicago we limited it to 20 people but it was, kind of a three-day peer group conversation that we held the over meals and on a cruise down the Chicago River, and we explore actually went to Jay Gould's has picture framing operation and also explored how he does what he did does the whole idea of being what we were talking about before that it can be a very isolating experience and you know people do have the option to join groups some people would rather just listen then participate in the conversation so I'm trying to offer as many different options as possible they can just listen to the podcast or they can join something where where they get to speak to. <br> <br> [43:21] And the hope is that by comparing notes on a whole range of topics ESOP is just you know one of the topics that we've Hit Upon that it gives people a chance to learn from the experiences of others at school I think that's a great mission, I think people are like we talked about earlier they're there it's helpful that for them to have a fellowship of other people. <br> <br> [43:42] That are like-minded and in the same position and with the world being smaller at this point right because we you're in New Jersey right and then. <br> Other people are all over the country they can tune in and we can and that's what this is about to just connecting people. <br> That's a great point and it's funny I'm not sure any of this would have gone the way it has without the pandemic it was the pandemic that taught us that we could, do some of these things virtually and I would you know I started the podcast right before that. <br> But but a lot of it has happened because we've gotten used to using the technology that was there before but that's true yeah, video conferencing wasn't a big deal yeah so the silver lining of that pain pandemic is definitely the lot of these types of resources. <br> Comfort level people are just dealing with this more and it's helped it's helped a lot of us that way so appreciate it well thanks for being on the podcast today any any final words of wisdom for for people that are thinking about an ESOP or anything else for maybe people are just dealing with things that you think are kind of important for them to know. <br> <br> [44:48] I guess the the only thing I would stress is just I think wherever you find it there's just so much value in talking to other people there's there's just there's nothing that prepares you to own and run a business, fully and finding your, group somewhere whether it's an industry group or group of owners I think is just so important and I get to the live event we just had we kind of did a. <br> <br> [45:20] We had people throw out ideas what's the main thing you want to talk about and then we took votes on it it was something that I didn't anticipate that the thing we ended up spending the most time talking about was how big do you want to be. <br> And it was cool yeah it was just a really fascinating conversation and you know there were some people the the largest business in the room is an ESOP that's has 140 million dollars in Revenue, there were there was a you know there were businesses in the room that were below a half a million dollars a year in Revenue but they shared many of the same concerns they you know they're in they have different perspectives they're in different places but they're thinking about, how quickly do I want to push this do I do I want to take an investor do I want to bootstrap there just a whole range of options, and those options don't necessarily go away you may make a decision today but two years from now it may look different and you may have reasons to reconsider, and it just it's so helpful to have other people to to share perspectives with and get their thinking before you make your own decision, it's cool I totally agree with that so well once again thank you so much Lauren for joining us today and. <br> My pleasure Phil I really enjoyed the conversation I would do it any time sounds good so for those listening thank you for listening today check us out at journey to an ESOP.com. <br> <br> [46:45] And enjoy your next step on your journey to an ESOP. </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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