Summary of Podcast on EP18 - Dealing with Mature ESOPs, Repurchase Liability, Changes in Economy, and Re-leveraging - Discussion with Renee Jenkins with Holiday Builders - The Grid Wiki

EP18 - Dealing with Mature ESOPs, Repurchase Liability, Changes in Economy, and Re-leveraging - Discussion with Renee Jenkins with Holiday Builders

Journey to an ESOP & Beyond

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| July 1, 2024

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

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This episode features Renee Jenkins, a long-tenured employee of Holiday Builders who manages the company’s Finance and Human Resources functions. Renee offers a straightforward perspective on the challenges that can arise during the life of an Employee Stock Ownership Plan (ESOP) and shares practical solutions she has helped develop. The conversation is especially valuable for mature ESOP companies facing issues that may initially seem unsolvable, including repurchase liability, economic changes, and the possibility of running out of ESOP shares in the trust.

Renee and the podcast team discuss how thoughtful ESOP Planning and long-term infrastructure can support employee engagement, strong results, and sustainable company growth. The episode highlights the Benefits of an ESOP and the Advantages of an ESOP while emphasizing that maintaining a successful ESOP requires ongoing work and attention. For companies navigating post-transaction challenges, ESOP Advisory and professional ESOP Advisory Services can provide valuable guidance and support.

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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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July 1, 2024 [0:12] Hey everybody this is the ESOP guy and we are on a journey to an ESOP and Beyond and just so excited to do this episode today um we are launching into some things that I think are super helpful for companies um specifically today it is for companies that are mature esops and when we start thinking about some of the things we've talked about over the over the seasons that we've been doing the podcast. [0:36] A lot of it has been geared around you know creating the actual ESOP transaction and going through all of the steps of I would say kind of kind of just call it pre- ESOP type of things. [0:47] Um for companies that have been through that for you know and they've become mature esops we're talking about companies that have have kind of walked through they've done a lot of their um retirement of the debt. [0:59] And they're moving into some other things that I think are really important and even at a very early stage company that's looking at doing an ESOP these are things that that need to be considered and. There are definitely questions around this that we get asked from time to time on on companies that are just working through that so um so that is what we're going to talk about today thank you for joining if you're new to the podcast thank you for joining today and listening you can go and find all of our episodes on journey to an ESOP calm and um and go through that and please Rank and review the the podcast or rate and review the podcast it's always super helpful to get feedback from their so with that I wanted to introduce Renee um she is the CFO of Holiday Builders. And she has agreed to talk about some of these mature ESOP Concepts that that were alluding to Renee welcome to the podcast thank you Phil although I haven't gotten a promotion yet I'm just the controller I like to call you the CFO but maybe this will help the promotion so yeah um I don't know if my boss will like that but maybe all right so Renee who's the controller and does a lot of CFO work. Correct how about that that sounds good. AB absolutely so Renee as we start and and invite you into the podcast the tradition that we have is asking like the Icebreaker question which is hey what's your favorite movie and why. [2:19] Okay well uh my favorite movie of all time is probably the sound of music. Sound of Music and yes because all of the dancing and singing and you know the 1 Song what do you do about Maria you know so I always used to say what do you do about Renee. Right that's really cool um so I have the the mountain in the background so that makes me think of Sound of Music too yes the hills are alive with the sound of music so that is correct that is really cool let me just say that that is the first time anybody said The Sound of Music so that's really cool um for your and I have done a Sound and Music podcast called SAR um what is it. [3:00] Uh what is it SAR not what is it the what's the song that goes with the sound of music far and. Yeah I keep messing up the songa note that follows so no oh anyway I did kind of something on stock appreciation rights and so I kind of screwed that 1 up but anyway so thank you for coming to the podcast we really appreciate it um as we go into the topic here we're we're going to start a little bit more kind of higher level of of of mature kind of ESOP issues that you've dealt with. Um but let's talk a little bit about the company Holiday Builders how long you guys been in Esau. [3:37] Uh so we just celebrated our 25th anniversary we became 100% employee-owned in 1999 um and I think everyone uh we actually have some employees who have almost been here that long which is crazy. Yeah that is crazy so that's a that's a lot to go through and from 1999 to now um obviously like 25 years of you know all the things that can happen you know after the ESOP gets formed so um and you've been there for how long. Uh 20 years I just celebrated 20 years with holiday awesome so you've been through a lot of the ups and downs so great very much so. And you guys are as you go through your like type of ESOP you're an escorp100%. Obviously that makes that makes a difference in s versus C so as you as you go through that that means that you guys are tax exempt from income taxes correct. Correct and so um in in terms of that by itself you know and and knowing that that's an aspect that most companies have to pay income tax or distributions based on the the taxes has that been a a an element that's been really you know favorable for you guys in terms of managing the company and you know having extra capital or whatever to do things that you need to do. [4:57] Extremely so um as my president once said he goes I have to think of the distributions to our employees like almost our tax bill so um you kind of look at it in that way it it really. Being tax exempt has really helped financially over the years. Yeah yeah and I think I think that's really important too because when we model it out at the front end of a transaction it's like this is this is 30% additional cash flow every year and it just never goes away so that's that's pretty cool so um as we talk about the things that you do for the specifically for the company and really specifically to the ESOP what sort of things that are you involved in terms of just. You know responsibility or things that kind of come back to you and terms of just purely managing retirement plan issues or just the overall like you know requirements of your job. Um well basically umit wasn't my job to begin with to handle the ESOP Administration but um I. During the turn downturn of course you know everyone took on additional responsibilities and the ESOP was 1 of them for me um I'm basically the main point of contact between our third party administrator our attorneys our trustees and so basically everything is funneled through me at least that way 1 person in the company knows everything that's going on. [6:19] Cool because that way also you're the ESOP expert. [6:23] The whole I I I try to be you you well you know I like I like that though because it helps you know being 1 person you're kind of the Hub of everything that happens so you are you know you know what's what are the issues are and then as you get to you know obviously bring in the president and different people into those you know you you pretty much understand the issue and it's like you have the whole story kind of thing so um. So through all of the the years that you've been there you know some of the things like as you mentioned the downturn first first and foremost um 1 of the questions and people really get concerned about this is like if I do an ESOP and then the company has a downturn. [7:02] You know what are the ramifications of that so you clearly in my mind you know across any economy and any company any company can be susceptible to a downturn whether you're an ESOP company or not an ESOP it's just purely a. An economic reality absolutely the downturn that we're going to talk about with you guys happened I'm guessing in 2008 2009. Yeah it actually began in 2006 um really you could see the writing on the wall at that point in time um you know we had over 400. Plus employees and by the end of 2007 we were down to 263 and then it even went further down to their during the very very bottom you know we were down to 50 employees so quite a dramatic um decrease in our headcount. Wow so that's got to be um difficult to live through right and then come out of so so specific to the ESOP you know I know there's some some. Issues of obviously that payroll is a big factor in. [8:05] The ESOP because it's a retirement plan and we know that their the payroll kind of dictates the amount of money that gets contributed to the plan so when you set up an ESOP plan there's this this. Um structured process limitation and there's kind of a a contribution threshold that you're used to making every year based on that. Based on your inside note you know that correct yes so so let's let's break that a little apart a little bit maybe more from an educational standpoint first um. [8:36] And maybe I'll just kind of let you kind of explain like the the parts and pieces of that so you have you have your employee base you have the actual limitation on what the contribution can be on an annual basis and then you have this structured inside note that says hey on an annual basis this is what your your inside note payment is going to be um so talk about that a little bit and we'll we'll kind of talk about the questions related to what the downturn did to you guys. Sure um so basically you need to be able to contribute to the plan enough money for the plan to be able to make its loan payment um and with that you just hope that the terms that you've agreed upon in that note will sustain over time um during the downturn for us unfortunately we were bumping up against that. Threshold um to where we would be paying 10% excise tax if we continued to make those loan payments at that. [9:28] Dollar rate um then you add on to that you know you also want to contribute and pay out your employees so there was a multitude of issues that go into the loan the contribution level um and all of that I'm not really sure if that answered your question but no I think it did it's it's kind of categorizing and so so as we talk about excise tax I'm going to put that over here for a second and go back to like some of the basics like as you talk as you talk about the Insight note um the contribution that's being made on an annual basis is paying off an internal note between the company and the and the trust. [10:05] And what that does is it releases shares to the employees and there's a there's a Insight note amortization schedule that accompanies. The the deal as it gets structured at the very beginning and then what you're doing is you're running that inside note out to you know it's it's finality or its termination when you've paid off all the the note payments essentially. And so what happens though is that's dictated the amount of money you can contribute in an annual basis is dictated by the 25% limit of payroll. [10:36] Yes and that means as we go back to the downturn if my payroll you had 400 people is that right roughly 400 plus. 400 plus people goes down all the way down to 50 right so my payroll what it just just goes super low my 25% limit goes you know down to that number where I'm actually less than what I can actually contribute to the plan. Essentially from my from my inside note payment and that would trigger if that happens that would trigger excise tax yes 10% excess tax in in on top of that in the middle of not having a very good year right so like thank you government for putting that on us right. Right and it was you know I mean the loan payments have been decided prior to all of this so it wasn't likeit wasn't for any good reason let's put it that way. Yeah no it wasn't for any good reason but but it's the reality of of compliance and that and that's and that's part of what I think people think about like when esops we talk about esops we just have to deal with there is compliance requirements that. That whether they make sense or don't make sense they're there and you have to know the rules and then you have to figure out like how do you work through issues that can come like that. [11:48] In within the rules right so let's talk about like you guys went through the downturn then that happened how did you avoid paying the excise tax. Well thank goodness for us we had an outside trustee who was very knowledgeable in ESOP transactions and had a wealth of knowledge about different options that were available to us um that in conjunction with our regular ESOP attorney we were able to re um. [12:15] Not reamortize but we basically refinance the note into a more affordable payment that we could afford. You refinanced your inside note correct yeah and this is where it gets confusing for people because the inside note is separate from. Any of the outside note obligations that you have on initial transaction that could be the outside note to the shareholder or to the bank. [12:37] Um so when you reamortize the inside note um you're basically is it more just an effort of documentation red documenting the inside note. Read documentation because it's it's cash in cash out I mean it doesn't really um have any Financial impact to your you know your financials or your cash flow. Yeah so and this is something that I can tell you probably 80 something percent of all the new esops I do. There's usually confusion around the difference between the outside note and the inside note and when we say it's a inside note payment what we mean by that is that the cash moves from the company into the bank account the Trust bank account. [13:16] The ESOP Trust bank account and then it moves back into the operating account so it's basically going to be do what we call roundtrip. [13:23] And so it's not when we talk about the payment this is where it gets confusing because people are thinking oh I have this additional payment to make. But it's not technically an a cash flow payment it's going to be or an outside cash payment it's going to be inside. [13:37] The company and its really there to just release shares I mean that's what is that's what it's intended to do so that there's. Some order to that within that typically the inside note is going to be structured around an amortization schedule that matches the benefit testing of the company's payroll which basically is the 25% limit and part of that is to match the the amount of the benefit itself so sometimes an ESOP. Contribution could be double-digit return or or benefit to the employee whereas poor on K match is like 4% or something like that an ESOP could be like 12% you know depends on what everybody decides to do. Yeah but within that you also have like this idea of like if it's if it's if the inside notes not long enough. Then the company can create you know massive amounts of repurchase obligation because people are accumulating shares too quickly so. [14:27] Which is part of the issue too of reverting the note so in your case you had way less payroll so they reversed and um the in that case you would go at shorter in your amp schedule. [14:39] We went longer you went longer okay so you just okay so yeah because you had less of a limit so you went longer do you remember what you guys were at and what you went to in terms of the am. [14:49] I I think originally we had like maybe 20 years left on it or actually less than that I think we went to 20 years I think we only had 15 years left on it yeah so so then you stretched it out to 30 years or. Something like that yeah we we are stretching them out to 30 years now yeah yeah and so what's interesting about that is like when you do I think a lot of our 100% esops usually we kind of start with 30 as our Baseline like because I think that might work but then there's variables and the variables include the value of the inside note at the time of closing and then the other variables is interest rate and when you know and typically you're going to use an AFR which is an adjusted federal rate for the interest rate for the Insight note um yes and I'm assuming that's what you guys stuck to write it was more of an yeah and we continue to do so. [15:35] Yeah I've actually had I haven't had a lot of deals like this but we've had issues with how long that inside note gets you know because there are some variables that you can I've seen deals where we're like Hey we're looking at something like a a 55 or a 60 year Insight note I've heard of insight notes at 100 years wow crazy but but the reality is with those variables it's like it needs to work and so you know some of that's just trying to figure it out um I've had trustees be okay with actually doing something lower than AFR which so AFR isn't technically mandatory everybody's just really comfortable with AFR because it's an IRS approved. Right yes so so in a in a way the at the end of the day you guys kind of work through that I mean it was more of a doc of a paper deal it wasn't like oh my gosh it would have been silly for you to pay excise tax on something like that exactly because it's just a matter of of redoing it so. So as time goes on then of course you come out of the downturn in um your hiring more people. [16:37] Yep so what were what were the implications of of now you have um more people coming back into the plan um from. Lengthening the inside note so you guys were you know a shorter note now you're at a longer note what were the implications of moving back up and how many people do you guys have today employee wise. We're about 230 employees which I think is a good number um but yeah you you now have more people to manage and you have a repurchase obligation you know for that many more people so you you have to learn to look forward and see what that benefit level is and make sure that you can plan for it. Yeah yeah which is a good segue into we talk about repurchase obligation. Um some people that are like I don't even know what that is right so how would you define or purchase obligation for an ESOP company. Basically it's the money that you're going to have to pay yourself and your fellow employees at some point in timeand where does the money come from. It has to come from the company operating funds yeah has to come from the company right so so mindfully as a business manages itself right and it and thinks about financial responsibilities just like anything else right there is like this this thing this repurchase obligation that is always kind of at at the reality of being an ESOP company and and so part of that. [18:01] Is thinking about how does we purchase obligation um become a bigger issue for some companies and when you start thinking about maturity stop companies so so what are variables that make repurchase obligation um um you know a higher like when you start looking at that growing right what are variables that increase your purchase obligation that you guys are. Um have gone through or thought through or think through in terms of how you well for us it's mainly in tenured employee base um like I said we have multiple employees who have been here for over 20 years and that means that they've had an ESOP contribution every year of those 20 years so you know that you're going to have some very high balances especially when we are an aging population I hate to say it but for majority of homebuilders out there um you know we have an aging base we're just there's not a lot of young people coming in and So eventually all of us are going to retire 1 day included you included right um yeah so you so retirement obviously is is coming I think that's a good point too like the demographics of your population of your employees you don't have any control over that right I mean if. [19:13] You know people hopefully people want to work longer as well but at the same time um there's a point where it's not going to work right so so part of your repurchase obligation obviously is to look at the potential for when people are going to retire absolutely yeah and we we track that like literally employed by employee just so that we we know in the future you know when they could potentially retire that you know we are planning accordingly for that both from an operational standpoint and a Nissan Financial point of view as well. Yeah because they still got to do the work right so right yeah the stress of of I think every company has some of this at least you know at some level but the stress of trying to find um you know people. [19:58] And I would be careful like because younger people would be like you know you're kind of negative but people that can do the same amount of work or the idea of like the operational side of the like grooming people and and the reality is is that every generation Works differently I mean we all know that you know baby boomers Gen X you know the the Gen Z everybody has something to offer but at the same time they don't we don't all work the same or have the same type of thought process correct so from a pure operational standpoint how does that how do you guys I mean I really think it's pretty pretty um you know cool that you're looking at that issue just operationally so that how do you guys look at that now are you just building training programs or you're recruiting differently or what sort of things are you doing to try to bring in a younger group of people to start a blend the demographic. Well 1 thing that we have tried to do is um get in touch with the local colleges um we currently have uh scholarship that we contribute to University of Florida to their construction program. Um we've also worked with uh Florida Institute of Technology Here Local in Melbourne um just to try and get out there get in front of people and say Hey listen you know Home Building could be the right feel for you you know and also recruiting from our trades too as well and it's mainly Word of Mouth you know you you have a lot of people who have kids now who are younger and they kind of have lost their way you know and they don't have college isn't necessarily the right thing for them well you know trade-based school could be it. [21:27] Mhm yeah no I mean definitely because I think the change in the in the economy with some of the things is that the people that have skills are getting paid more than people without skills like if you can go to college for a liberal arts degree and be like all right well I'm going to do whatever but with skills it's like you do have an opportunity so do you see a lot of differences in in bringing somebody out of college. You know through what you guys have been doing from a training standpoint or is it just getting like I just got to get them started so they understand what to do. Just gotta get them out there in the field you gotta get the hands on um knowledge I mean even for me you know in public accounting I mean it wasn't so much the the knowledge of the books and you could read and do it but until you're actually physically doing the work it it really doesn't help you very much I would have to say Hands-On is by far the best way to go yeah no so so that's the operational side of it obviously that's something you have to think about in in your repurchase. Obligation let's talk about the actual study you get because it's like what do you actually get what's the document look like. Some of the things that sounds like you're you're doing a little bit more than that obviously you're looking deeper into each 1 of those. You know maybe employees that you're that you're talking about so if a maturity stop company gets a study what sort of information is on there and of course who provides that study which. You know I think it's a question of people always ask. [22:50] Well we've actually um explored a number of different options we explored um different software solutions to where we myself could actually do it myself. Go online and change scenarios um but I do highly recommend at least for the first couple of times going through your third-party administrator um first of all they already have all of your information they have all of your data they have your census they know what your population basically is consists of um and then you run through with that specialist like ask them questions like what would happen if we did X Y and Z or how would I if we did a loan here what would this look like if we did a contribution this year what would that look like. [23:29] And they'll actually they're actually very knowledgeable and they'll help guide you through that process and what you get at the end of the day is a nice little report that says. You know this is where we think your your your financial obligation is going to be in 5 years and 10 yearsand really you want to compare those different scenarios so that way you can see I mean that's the 1 that's going to speak to you the most if we do X I'm going to be at here if I do why I'm going to be here which 1 of those works best for the company you know for from a financial standpoint. So does it make you I mean you're the financial person for the company right does it make you like try to like say I'm gonna put we're gonna put a bunch of money away. Um just to have it ready to go or is it like I need some percentage of reserves to make sure that we're ready for that just from a pure practical. Financial management standpoint what what what do you do differently once you look at that from a budgeting standpoint. [24:29] Well you definitely do need to put reserves aside um you know we've tried as you know during a downturn obviously that's very difficult but during good times like now you know you you you would like to put those extra funds aside just to make sure that you've got yourself covered should another downturn occur. Yeah I mean and that's is that obviously hard for some sometimes when you want Capital to do other things with. Or is it is it like hey we just get it we're just going to do this and you're not are you fighting battles on that I guess is the question. [24:59] No not really because we realize that you know reinvesting in our company is obviously the number 1 thing that's going to make our ESOP grow and give our company you know our employees the best benefit but at the same time you know since we have been through a downturn. You can see what the ramifications are and so you you know that you need to also plan for those things as well. [25:19] I mean that's just that's just kind of healthy I think I think the concept can scare people into saying I don't even want to do an ESOP because I I mean I'm gonna have the companies have this big you know reports obligation we don't even know how we're going to get through that and so I think part of it part of the questioning is just like to try to dispense with fear related to things that are just the reality of of the way the business is structured you know and have you felt ever like oh my gosh we got this plus this plus this this this is more of a burden or is it just this is manageable because we're proactively looking at it. [25:50] I think if you have the right people around you it it you just are proactively looking at it I mean like like you said we're in an escort 100% so we're not paying taxes each year so I mean you kind of have to almost equate it to that as far as either way you would be paying the money out but but do you want to pay it to the IRS or would you like to pay it to yourself and your fellow employeesI like I like that question the answer is no who would want to pay for the IRS you know of course like and this is what's beautiful about these opiates because when you do pay it to employees what is really happening is you're transitioning the value. [26:25] Into their hands and that's and that was the intent and you know and then this is more of like. As I think about that too that idea with the employees getting that like I get the I get the value of the business right and some I guess from your experience how has that gone with them understanding that that's actually a major benefit comparatively to the company paying taxes they add just a 401k you know how how what have you seen I mean and and I think probably so for some companies it's hard for everybody to get it but what's been your experience with the employees regarding the benefit of this for them. [27:02] It it's very hard for them at first I mean you wait so long to get a statement it's not like a 41k where you get a statement every month and you know what you're putting in you know what your employer is putting in but then you also have to invest in that as well so it has been a challenge and it is hard but I can tell you once people see that statement and they realize the value that's coming to them they're they're so excited about it I mean they really do I mean you have employees who thought they would never be able to retire and now you have employees who are like oh my gosh I'm gonna be able to retire and I'm gonna be able to travel and I'm gonna be able to do all the things I've been wanting to do and if you look at that compared to a typical company who only you know contributes maybe 3% to 5% of your salary I mean do you really see yourself being able to retire off of that I mean you hope so you hope for you hope your kids are fine you know without the use of you hope like oh because you you know I think some people are like well I can retire but I got a really downsized the way I live my life you know with it's it's different um or the opportunities there right and if the company doesn't do well then of course it's not going to it's not going to vote well but if it does well. [28:15] You know they get to share in that yes exactly that's why we always we offer 41k too because we don't want you know the the the term is always going don't put all your eggs in 1 basket right so we also do encourage our employees to contribute to 41 because then at least you are Diversified. Yeah and within the ESOP there is the diversification rule that I guess it says something like if I'm over 55 and if it been in the plan for 10 years then I can pull some of that out right and that's going to create some repurchase liability and reinvested in the other areas how how often do you see people doing that realistically in your in your experience. I think it just depends upon whether your your company's doing well um you have people who are are willing to take their money immediately you have some people who are like I'd rather wait um I think it's just all on an individual basis and what they're comfortable with um which ultimately is what you need to be and that's why we also partner with a um financial advisor who we you know we say listen I can tell you what I would do but that's not maybe the right thing for you so you need to go speak with someone who's Savvy in that industry and can help you plan your retirement and whether you should take that money or not it's up to them. [29:30] Yeah that's actually a really good point because ultimately you do you do have a fiduciary responsibility like because we have a retirement plan right so. [29:39] You know the fiduciary responsibilities like hey each individual employee if you do have a financial advisor they're getting you know because they're making that decision on their own right risk and reward um and you don't have to be the 1 that that kind offeels like you're responsible to. Guide them right I mean at the same time it's in your stock so you're you know there's this connectivity thing that can kind of feel like you're um you're overly responsible for someone's future as opposed to being like you know that's your that's your choice whatever you want to do it's your future soum so that's really interesting so when you when you think about all of those things um. [30:16] You guys are kind of set to do what you need to do for repurchase liability but what as we get closer and closer to the end let's just talk about like the end of the inside note the shares are dwindling down um. What are some issues that you have in terms of getting uh working through that issue I guess the issue is like um at some point you're going to run out of shares in your trust. [30:39] Yep. And so H like let'sI know we're talking kind of we're going to get into this re-leveraging idea but when you get down to it um before we get into that I want to I was curious on. Motivating younger peopleversus the older people and the older people too have been in the plan a lot longer right so they it's been compounding and they've seen that they see their participant statements they're looking way different than the brand new person who's who's just starting right right how have you guys how have you guys um what have you seen first off on the younger people's perception of the of the benefit of being in an ESOP secondly just how do you how do you educate people on the on the differences to help them understand that if you do stay here for 20 years I mean it it can be a significant part of your retirement. [31:25] Yeah um it's kind of tough you know every Young Person's a little bit different so I think it's just providing them with the educational materials as much as you can and also having them speak to some of those tenured employees because when our stock value and they get their statements you know people talk and just say go talk to so and so they've been here for 20 years I mean obviously don't ask them how much money they have but you know you know at least let them tell you like I'm going to be able to retire and it's because I've been at holiday for this long I mean yeah I think once they hear the stories like that from other employees and participants it it really it then it's more real if that makes sense yeah it's it's an interesting thing too because I I was at the NCO Tampa conference in April and we were talking about this topic in in the session that me and this other gentleman were doing and um 1 of the things that we were talking about is showing graphically you know you can't really show people what. Everybody has that would be you know not their their business but graphically like compounded like all the years if you took all of those um employees together and said to the value of the plan you know if I started in 20 years and I look at the graph bar chart and be like all right this is what it's been doing right yeah. [32:44] That you know that's hard for some people to want to put down on paper for people but at the same time that's historically a record so that's right that was 1 idea that that we that came up the other 1 was just this as people talked about that after the session it was the idea that. You know as people left the company they're like hey you know I got 1.4 million dollars in my you know I mean they're actually saying that to people and I'm like well you know I honestly don't have I mean I'm not it's not my actual discipline anyway but I don't have any good advice except that's got to happen right some people are wondering about like I just got a million bucks or whatever um. [33:22] Which can be hold you know unbelievably motivating but I don't think people understand like 1 thing I try to help people with the employees like. [33:29] They don't understand the first off that the wealth creation in this country is from small businesses like people that have a lot of wealth. You know you know you can say they went to Harvard and went to a big company and made a but most of it is you know somebody started a company. That company grew in business the value that business became part of their their major part of their wealth and that's what I feel like esap companies need to communicate to their people like. It doesn't and that guy that started the company was thirty years ago and that they built value over 30 years it's the same thing with an ESOP plan it takes it takes a long time. [34:02] Because the value of the business is going to grow you know assuming everything kind of stays consistent um but it's just 1 of those things that I do I do see a lot I think part of the ESOP Community or world is like young people don't get it so let's not do it and you know I just think they're they're not giving people young people enough credit to see the bigger picture of things. [34:21] Yeah I mean it is a challenge I mean because you can put whatever you want to on posters and pamphlets and everything like that but I think until you hear stories like that it it really doesn't Peak their interest until then unfortunately yeah but you know some of the we have some Savvy young people who work for us as well and they're like this is something this is going to be a good thing right I'm gonna you know do very well and I'm like yes you probably will you probably are you guys say probably you know you can't I guarantee you you know yeah I mean if the company does well you'll do well you know yes that's the that's the right answer Phil right answer and if you do well in the company because I don't know if your allocations based on payroll but you know if you do well on the company you'll get more shares so um so cool I think let's so so thinking about like a stress issue of of. Running out of shares like first off is that stressful for you and the company and starting to think about how do we motivate people in the future if our plan doesn't have any more shares in the trust. [35:17] Yeah well we unfortunately um back when the downturn happened we were kind of forced to change the way that we did our distributions. So getting into the leveraging topic we've actually been re-leveraging for a number of years so that has helped us to plan towards the future of spreading those shares out over time because we did know that our original note was going to be paid off and you do have to think about a benefit level for your employees so that was 1 way we we're inadvertently forced into but it actually really did end up helping in the end. [35:51] Because you could at that point I'm just thinking out loud Maybe I'm Wrong you had a lower valuationyep. [35:59] And when you re so let's talk about like when you actually relever what are you actually doing you know in terms of the number of shares of stock and and how that actually works practically. Practically um so from a technical standpoint you know the company is buying the shares of stock directly from the participants who are eligible for distribution then you know they go into Treasury and the company will then resell those to the ESOP at an agreed upon price um we were choosing fair market value at the same date as our valuation was done 1231 um you can go ahead and sell it at a lower value um you need an opinion uh letter from your evaluators as well um but. [36:44] It does hope that you are able to get that fair market value that we kind of avoid double paying for something and you're when you you did this through the downturn your your value was lower so was it easier to do the re-leveraging at that point. I wouldn't say easier it was more of a practical standpoint since it's strictly a balance sheet transaction it didn't count towards that contribution level that we were talking about with the excise tax so I mean that was the main benefit for doing that at the time. Yeah so the and the main goal was to get more shares in the trust to be able to continue to release more shares down the road. Over time and maintain the benefit level you know trying to manage that as well you don't want to have I mean when our stock price was going through the roof you are providing a very high benefit level for your employees you know and you don't want to do too high of a benefit you don't want to do too low of a benefit you want to try and maintain that at some sort of level so by having the start the shares of stock uh be spread out so to speak over a number of years if you find out that your benefit level is low then all you have to do is make a contribution to the ESOP in the form of cash and that will help keep you at it it allows you more flexibility well in doing it like a re-leveraging program where you're doing it almost every year which is kind of what you're saying you're doing right. [38:06] We were doing it for a number of years um it just happened to be the right choice for us um you know you like I said through that rep the repurchase obligation study you know you go through those scenarios with them and you say okay if we did we leverage this year and then we do a contribution next year and then we go back to re-leveraging you know what is all of that look like and for us at the point in time it just re-leveraging made sense. Because you're managing all those issues at the same time repurchase obligation with the stock that you want to continue to release with the benefit you're trying to Target as well correct. As far as your valuation goes you know you had some obviously increased you had big stock price increases some years and other years you didn't have that um you I mean and I'm kind of saying this in a sense of a comment and also a question um the valuation increases that you saw were really kind of built around the idea that the companies EBA was higher right and the companies may be balance sheet was was better than it was in years past right so Equity value with cash accumulation um is there something that you can do. [39:12] To to smooth out the spikes like if you guys see a lot of that coming in but then you have a down you know a year that's down are you seeing more volatility that or is it how is it more smooth and then if it is is there something you can do to kind of help help control the valuation itself well I mean the market is what the market is you know and you kind of evaluators take that into consideration so there's really nothing we can control other than trying to make the business do well and be profitable um but again you know when your stock price is doubling and tripling it's a matter of trying to manage that benefit level and make sure that you're not over I don't want to say over benefiting but it's kind of what it is you you you don't want to provide too much of an over benefit and then you know really compound your obligation you know later on yeahright I mean that and that's the and I think that's part of what gets complex you know in mature esops because you have all these different pieces that are happening together and I I think what you guys have done really well is like you're you're getting good advisors and help you determine like what's the best strategy and and even what you shared about you know the scenario plan playing out the scenarios with a repurchase obligation like what if we did this what would that how would that impact so you can make really good decisions. Um and I think the other part of it is is not waiting for something bad to happen and be reactive. [40:34] You know correct now you have like oh no we have to kind of manage um you know a major problem as opposed to being kind of on top of it every year you know if there's anything the ESOP has told me is to be on your toes nothing stays the same yeah. [40:51] But I mean and that and that part like I said I think it scares people what we're talking about and that's 1 of the reasons I wanted to do this episode is to kind of lay out these things that are very doable you know in terms of as we kind of start to kind of close out the podcast um more focusing on like. Advice that you might have for companies either you know I always kind of break it down into stages but either companies are going into like a brand new ESOP or they they're a partially up and they're going to go to 100 percent or they they've just kind of been matured and all that so so things that practically would be good points for them to be thinking about and I think we kind of addressed 1 just roughly which is be on your toes or whatever um so what sort of things would you say that. People really that are looking at that should be should be attentive to or thinking about especially in your position in finance wise. [41:40] Well for an ESOP I have to say it is an absolutely great benefit I mean it is well worth the extra you know. Steps and Hoops that you have to go through but you know to see the smiles on your employees faces when they do retire is just Priceless and all of these things are manageable um if you get the right people with the right you know knowledge base behind you that they'll help you navigate anything I mean there really is you know hopefully no wrong step that you could do if you have everybody in on in the group with you listening to the PRI problems that you're having looking at your Reaper purchase obligation study looking at your distributions looking at your loan payments I mean you kind of need a good group of people around that to help you understand all the nuances and different things that could happen or you know become a bit so I would just highly recommend an ESOP to anybody out there I know that maybe the technical speak that we're speaking today is kind of scary but I do have I mean it is completely manageable you just you you have to be on your toes. [42:44] Kind of stay on top of it have a good team and um and really dig through issues and I think even going through the experience you guys out of the downturn and then coming back up I think that's priceless because sometimes people just don't know what they're going to do when they're going to get there so it's really a matter of of being prepared for that and knowing some of these things can definitely will change everything because is going to change so just being prepared is really helpful so yeah very helpful I mean the only thing that I would recommend is like you go into the nceo conferences you know go to those classes yes but talk to people ask them what their experiences have been because those are probably the best the best advice and best things that you can do is by getting that that just hand out and saying well this is what my company did and this is what our company did you know those forums for you to speak it is very very helpful. [43:34] Category because of my nceo cup that it's his timing is perfect um they gave these out at Tampa so I got 1 oh nice and 1 of the benefactors of that but um but everything we've talked about was great I think I just can't thank you enough for being um you know helping everybody think about these topics that because you've been there done that and I think that's part of what we're talking about the NCO it's like that's what people can experience is talking to experienced people that have worked I think that's the biggest benefit I think is like you're going to talk to people that are really knowledgeable about these things and. The intent today so like I said thank you very much Renee no thank you for having me I really appreciate it I just thought of what my podcast was was Tsar a note that follows so. [44:19] So anyway that's I was like what was that you know so it took me the whole time to think about it and I'm like yeah so anyway anyway thank you so much and um you know appreciate your time today. Nope thank you very much Phil so for everybody else thanks for joining the podcast today we will see you on our next step on this journey to an ESOP.

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Talk it through.

EP18 - Dealing with Mature ESOPs, Repurchase Liability, Changes in Economy, and Re-leveraging - Discussion with Renee Jenkins with Holiday Builders

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