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Summary of Podcast on EP30 - Dancing with the DOL - interview with Wayne Isaacks - The Grid Wiki

EP30 - Dancing with the DOL - interview with Wayne Isaacks

Journey to an ESOP & Beyond

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| October 25, 2022

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

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This episode covers an interview with Wayne Isaacks - ESOP trustee (attorney and CPA) to better understand how an ESOP could be interacting with the Department of Labor. Wayne and I cover a case study that he was involved with and illuminate some best practices and alleviate DOL concerns for companies heading toward an ESOP or existing ESOP Companies. There is some wisdom here that I think is solid related to how to respond to a DOL investigation.

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Everyone this is the ESOP guy and we are on a journey to an ESOP so glad you could join us today.  And wanted to kind of make sure that you as you tune in if it's your first time I wanted to say thank you for listening and Welcome to our podcast if you have an interest in this podcast please go to our website at journey to an ESOP.com.  And what we do from time to time as will do different topics and today we get to do an interview I think on a very important topic which is the Department of Labor investigating Aesop's and what that's all about so it.  Time's the Department of Labor will investigate an ESOP own company and they'll they're looking for specific issues or problems within the how the ESOP was set up and they want to make sure that they've,  protected as a Department Labor protected the employees,  from any potential problems that that got may be created with the ESOP so so going into what we're going to go into today is what the ins and outs of a Department of Labor investigation and to do that,  I thought it would be a great idea to have Wayne isaacks back on the podcast this is his second time,  part as part of our podcast Wayne is the principle of isaacks and Associates he is an existing ESOP trustees been working on Aesop's for a very long time,  he's not only a attorney but he's also a CPA,  and he resides out of Houston Texas so with all that I just said it went to say Wayne welcome back to our podcast.    [1:40] Sure thanks for having me feel great always happy to help where I can and help educate people on the east side.    [1:49] The ESOP Journey awesome awesome.  So for the audience listening some of them some of them are completely brand-new to Aesop's and so when we even say Department of Labor they're probably saying hey what what's that all about and so.  Really nice op is a retirement benefit plan it's a qualified benefit plan so it's going to be,  and it's going to have to comply under the Department of Labor's guidelines and specifically because it's a retirement plan it's got a the Department of Labor really is there to protect.  The employees within those within the scope of those types of retirement plans.  So when you think about all that some people that are thinking about doing an ESOP might be thinking hey is this,  you know is this gonna is this for me or is it not for me because of having having to deal with the Department of Labor or potentially having to deal with the Department Labor so some of what Wayne and I want to talk about today is just lay that out a little bit,  and give give some background to that so when a from your perspective Wayne when the Department of Labor is looking at an ESOP to potentially investigate it what are they actually they looking for.    [2:54] Well first you got to see like how does it one thing to keep in mind is you know as you said the he sobs as a pitcher plant all picture plans.  Are there qualified plans are subject to the Department of Labor rules in the employee retirement income Security Act of 1974 and the regulations that deal will,  makes riff for the governance of Aesop's for things he's UPS can do and couldn't do these are the Department of Labor is also the watchdog.  For Aesop's and so they have a department will call it Epsilon is what they call it and they are charged with.    [3:35] I used to work policing by the esops they investigate Aesop's if there's a reason sometimes I'll investigate just as a random investigation to train people sometimes they'll start an investigation because there was a complaint participant.  And as I said they'll select Aesop's for investigation now the investigation is what they call it an IRS when they look at something they call it an audit and Iris examination or an audit.  The East the Department of Labor,  those investigations are divided into multiple regions there is a region in Texas are headquartered in Dallas is reaching its in New York they're all over the several regions in the country and the regional.  The regional officers of the DOL Absa select plans for examination and they when they do it they send a letter saying you've been suggested selected for examination,  and we want a lot of information about your ESOP invariably they always look at the ESOP  the original transaction or research transaction and they pick that up and ask for all the documents all the records and then they'll want to interview the people who were involved in that it would be the sellers.  The trustee the company executives.  And then they'll look at the ESOP transactional documents they also want to look at the valuation and so a major element that they always look at.    [5:04] It is the valuation and the terms of the ESOP transaction because they want to be sure that there hasn't been a violation of the Arisa rule.  He stopped cannot pay for that adequate consideration for the price of a stock and that the terms have to be commercially reasonable and fair to ESOP so they'll look at the term of the notes are special rules relating to ESOP most,  look at the interest rate that look at the payout terms but mostly they're looking at the price and how we determine.  That the price was fair so they look into the valuation and in many cases they will do it in their investigation some people think it's arbitrary some people think it's predatory because they don't like what the deal will.    [5:50] Say sometimes but after their investigation that y'all will not not always but.    [5:57] I've heard enough say okay you value the stock too high.  For your interest rate was too high or some other element of the ESOP transaction was fair to the Esau.  What they look for is not just the absolute price but they look at how the valuation was conducted was it conducted in accordance with sound valuation principles.  They may have a different opinion of that compared to our appraisers that we use and they will also look at.    [6:27] How the transaction was negotiated and were the parties the east of the the trustee side by side,  where the independent where they truly independent that if they hadn't worked for the company before they're not beholding to the company,  that the appraisers were qualified and that the trustee conducted a nick.  A real robust and honest negotiation of Esau price and did the trustee and a financial advisor.  Investigate the financial circumstances the company its Outlook projections to come up with fair value the company so they look at all that but often enough they will say.    [7:09] You paid too much and here they don't always tell you why but he'll say you paid too much yeah thank you violation of erisa so often I mean when I look at that issue and let me and again I'm trying to keep make sure everybody keeps,  on track with this because some people are like so Brandon to Aesop's some of the things that you're talking about Wayne to are,  they dictate because of the process that you're talking about you have to have an arm's length transaction it has to be a real negotiation they they inadvertently dictate the way of a transaction should be put together so if an ESOP transactions put together the correct way,  which is you're going to have a trustee like Wayne does who hires an independent valuation firm on the buy side,  and then you're going to you as the selling shareholder are going to hire your own advisor to help you walk through what you're going to negotiate on your side then you're going to have an arm's length transaction so keeping that in mind that's going to help.    [8:06] Support the if the Department of Labor ever looked at it that's going to help,  support that this deck actual value that that was negotiated was what Wayne had referred to as adequate consideration that the trustee paid what was a fair market value for the company so so partly,  as you talk about that I wanted to kind of point out to people as they are listening,  should be should people be worried when we talk about the government investigating your company I mean that's going to throw some flags up for some people should people be worried about that Anna normal ESOP transaction.    [8:44] No no As Long as You Follow As Long as You Follow what we call a proven process where you have.    [8:52] Detailed evaluation of the companies.    [8:56] Financial background and circumstances it's management its competition its outlook for future future profitability.  Is it a sound company should you question is should you invest in this company should we at trustee invest in this company for a pension plan for the for the participants so they look at our process they want to make sure that we have.  Made it we call it due diligence we're a buyer you know did we do the due diligence like any mergers and acquisition.  Transaction the buyer should dig into the company and make sure they understand it when they decide how much they can pay for it what are the risks are all suits are there,  chances of losing business what are the likelihood that your banishment can continue what it's doing so they want to see that we've done a detailed process  detailed in the examination that interview people we looked into things we evaluated their financial statements so they want to see that we've done that so we should have a pretty good record,  absolutely and that sweet yeah that's the point of this podcast is to help people understand like if you're following what we're talking about doing the process this way then there's the confidence in that is that you're not going to have to be looking over your shoulder,  you know saying oh no does it mean you won't ever be investigated no,  but it will mean that you go if you do get investigated that there are you should have a high degree of confidence that you're going to be absolutely fine.    [10:20] Right and so when the trustee a knowledgeable trustee specificity it's good to have an independent trustee you definitely have to have an independent financial adviser.  And there's someone who is experienced in conducting the dot this process and documenting it so they can show The Dol.  That it was done.  Prudently that it was done thoroughly and that and that we have good documentation if you don't have good documentation they'll say you didn't do it so we in our community,  we take great pains to investigate things and the document so a lot of the money you spend with a trustee and a financial advisor which may seem like a lot of money.  But it's for us to do the work and to document this process so that one we've done a right job for the participants didn't pay too much got a evaluation and the other one that we negotiated a price we didn't pay absolutely top dollar.  And finally that we are prepared to demonstrate.  That process to DOL when they investigate so so we feel confident that we can defend our transaction our process our price.    [11:29] So you shouldn't be worried that you're just you've got a problem just because you did an ESOP absolutely over the list.  DOL does investigate and then sometimes you know they're a little bit self-serving they like to say well.  You know you we did like the way you turned and we didn't like the way the price turned out we didn't thank you.  You know you relied on the appraiser property that your appraiser maybe wasn't qualified enough or yeah you just paid too much sometimes I'll tell you why sometimes they'll just say you pay too much and then  now you're in a,  you're Crossways with the DOL right yeah so let's let's get into some let's get it I know you have some case studies let's talk let's break that out a little bit to get some more examples for people to think about yeah how it would actually works so  so I know you sent me one recently that you were looking at can you describe the kind of the overview of the DOL case that you get you are part of our you were looking at them so in this case in this case we had a large company that had already had an ESOP  place and it was a successful company and it was making good profits.  The prophets of Billy the company and looking back entirely justify the price they paid.  And what they had was some key some key shareholders in the company retired.    [12:49] And when they retired they sold some of their stock to other participant other shareholders so was 40% they brought the company from a like a 20% ESOP to 45% he saw.    [13:01] The second transaction and in that process they sold some of the stock to the ESOP some of the stock to other.  Other shareholders and they all got the same price that we used for the that they that the trustees in that case in a financial advisor used for.  Negotiating the price for the ESOP transaction now then they sold the stock the stock that was sold at an ESOP was sold O notes.  And the notes had a nine percent interest rate and they had a price that we determined was figure the DOL in that investigation.    [13:39] First thing you got to keep in mind is just like a three-year investigation process okay yeah dll takes its time and when they come to you,  I usually come to you and there's a statute of limitations 3 years of first statute limitations six years is a second statue  limitations so when they come to you and they're close to that three-year statute limitations the first thing they give you a long with their request for documentation information is a request that you extend the statute of limitations now during their investigation  so it won't for clothes there you know to exact.    [14:19] Concessions to order to change something so first thing they want to do is yes sign an extension of the statute so going into like if it's 2022 right now they can audit all are they can investigate all the way back to,  21 20 19 right so right now it's a three-year statute to 19 so then why would you why would you agree to extend the statute of limitations.  Or do you have to you don't have to but there's consequences if you don't,  so the first reason the deal well needs time to conduct its investigation and so one of the thoughts is we really ought to give them time to conduct a pregnant their own prudent investigation and look into things,  if you don't agree to the statute extension The Dol only has 12 remedies they've only got two things they can do they can go away.  That's their they are real and they don't tend to go away right and the other thing they can do is file a lawsuit,  ouchie they'll file a lawsuit and say you violated a receipt your,  your transaction price was too high it's a prohibited transaction and what are you going to do about it that's not a good position to be in and if they sue you here's the thing.    [15:31] If they sue you you get a new batch of people you're dealing with is the litigators if you extend the statute you're dealing with the investigators got it better people so,  so what I have done and what these people did in this case is they continued to dance with DOL they stay signed the statute.    [15:51] And and continue the investigation and there.  Trustees their Council their financial advisers all pretty much opened the books show them everything they did and I'll call it dance with the DOL until they're done with their investigation and.  And and the deal well could come back and say you violated erisa and and we.    [16:16] We want you to come up with a remedy in that case you still want to dance with the DOL and work out a remedy because if you go to a lawsuit.    [16:23] They just try to whip you know and that's extremely expensive Perry and at the end of the day somebody loses and freak it can be you can win your case or you can lose.    [16:35] And the consequences are pretty harsh in that case sure so what they did with these people did is they dance with the Pol this is a case where I mean I'm involved with this company because there are now several years later selling the whole company,  for Fourteen and a half times earnings which is way more wow than the price they ever paid for the stuff that's awesome stock price,  like six times earnings way back and yeah in 2009 when they did this transactions 2009 transaction wow we'll keep in mind they just recently concluded the dll investigation.  Not too long ago about a year ago okay and so the when I was doing my due diligence to get in as a trustee for sale of the company whole company they said wow  you know we just finished up with the DOL and we was almost five years that we danced with the dll and they came to us over and over again more than at least three times to continue to extend the statute of,  and they did they extend the statute of limitations and at the end of the day this is one of those surprising cases because we often see.  We often hear these horror stories about the dol hammer and companies are suing them or finding a big violation of risk in saying you had a prohibited transaction,  with the DOL did in this case is they finally said a closing letter after three extensions of the statute of almost 5 years of Investigation.  The deal will finally decided these were the good guys mmm.    [18:01] That's what you want them to know you want to know you're the good guys you got nothing to hide yeah and you showed him everything and you Justified and the deal well in their closing letter said.  Why we don't agree.    [18:13] With everything you told us particularly we don't agree that you prudently relied on the appraiser.    [18:21] For the valuation of the company and we don't agree that that the price you pay was.  Was entirely correct and we don't agree that the nine percent interest rate you charged on the ESOP vote was fair.    [18:40] Look at the time.  We are going to take no action because you changed your processes on how do you pick and select an appraiser and and and how you would deal with a note going forward I mean they actually.  Resolved all this and decided these were the good guys and they've improved their process for new and future transactions.  In other words The Dol wanted the ESOP to be healthy they wanted the company to be in a position where it might sell more stock to be so and that you've corrected your.    [19:12] Way you do it I'm not saying it was anything wrong with the way they did it but at the end of the day the dll wouldn't admit that there wasn't but they said we're taking no action.    [19:21] Which is like great news let me ask you is great that yeah so so so real logistically they get the investigation who for the company is handling the investigation is it is it there.  Is it the company's attorney is it the company's trustee who's involved in managing through the investigation.    [19:42] Interestingly it's the company as the sponsor okay go to the company first okay and the company then we'll usually engage their what we call a Rissa Council their ESOP counsel the people that are knowledgeable and understand these.  DOL processes to handle the investigation and make sure the DOL gets all the things at once and.  And that they get good explanations,  the trustee doesn't run the investigation but trustee has to respond to it and and because they interviewed the trustee and they look at the appraisal and ask you know how you handle it and what you did and they look at the negotiation process button,  interestingly the trustee done running the trustee might be liable for this Transit but they do front of the trustee doesn't run.  Sometimes the trustee does have a lot to say because it's their insurance in there are concerns about it the trustee also has to sign,  you all the parties have to sign this extension statute so.    [20:42] What in my experience we've had cases where some of the cases that make the news that make the case law where there have been tough results for.  Get a deal well lawsuit.  Happened because the trustee or the company refused to extend the statute and said her lawyers tell us we don't need to extend the statute anymore,  we think you are off base tol we don't agree with any of your conclusions and we're just not going to extend the statute anymore and boom  DOL Scout one thing it's got a Hamrick files a lawsuit now you're in soup so my my recommendation is to be.    [21:21] Yes to dance with the DOL show them that you're the good guys and that you got nothing to hide and explain what you did and why you did it and then if they come up with.  Something they want corrected you negotiate the correction,  as opposed to do it through a court a lawsuit yeah you're going to be better off like in this case so specifically there was a few things they found,  but then they ended up just saying hey just keep going don't worry about they didn't even have any any damages right on the hip  yeah no damages no correction though revision of the transaction all those things happen sometimes and I'm not saying you should worry about that but this too is one of those,  clear cases where there's three things in that letter any one of the three things that the ideal well disagreed with,  I don't have often seen when we look at the lawsuits.    [22:10] For the exact same wording that they used in the lawsuit to say you had a prohibited transaction and and you violated erisa and you breached your fiduciary duty and we want a lot of money hmm thankfully he saw  so here was a case where they danced with the DOL and show them they were the good guys DOL finally satisfy themselves.  They did not this was not an ESOP that they wanted to hurt and it was just it was there were no players in this transaction,  that were they didn't need a pound of Flesh to justify the need to hang anybody on prove they're the bad guys or restrain them from being a saw trustees or appraisers and so they literally just said.  These three things that are frequently could come out as a violation of erisa and they they said they were violations but.  But would result the prohibited transaction and in do that they said go and sin no more yeah so so that was a that was a,  validation of something that I've run into in my practice where I have had a deal investigations on my own,  not of my where I was I was at not as a well one is a trustee and one is a quarterback when I used to do quarterback work like you do we're where we just danced with the deal well show them everything they want and we ended up with know,  no bad result yeah now that's that's it I've heard over and over again from.    [23:36] Some trustees some lawyers will say you know,  tell the DOL take a hike and we end up in a lawsuit and I'm concerned that that's just a blatant yes who make more money in that's that's kind of where like underneath all this I'm thinking to myself okay.  First off if you who is your irisa Council because they're the ones that you're going to probably going to going to guide you,  in so typically the company is going to go right back to the Arisa Council that,  put the ESOP transaction together is that kind of true or is that okay it's common yeah but sometimes they'll go get litigation counsel that used to handling litigation right and which is a different department and the transaction guys anyway.    [24:18] Well it's lawyers who make their money handling litigation okay so I think that's your car beeping.    [24:27] Yeah I had to start it back okay no problem kids it only runs so long and then and then I had to crank it back up knows it's about here in the Sun and they are do you want but not what you sweat if you.  So I'm not so if you're a law if you're in one of these situations and they and someone's advise you to not extend the statute you need to get yeah that's great advice get a second opinion get a second opinion because  right the reason I say that is would you rather.  Would you rather have a judge or a jury decide how much you're going to pay the DOL or would you rather negotiate your way through this transaction correction even if they ask for one yeah,  well yeah I mean so kind of intuitively let me say it this way because I don't know if this is true or not wouldn't I mean if you're a Rissa attorney.    [25:13] I'm just going to say this and it's probably just not not a good thing to say but if the Arista turn is going to stand to make a lot of money on a lawsuit versus I'm just going to be education yes yeah versus I'm just going to kind of help,  a three-year investigation go through the process would that would that motivate them to give their.  Clients the wrong advice sir I know it's not going to ever happen I'm not going to say that but you can read between the lines I know I know whenever you whenever you lock it up.    [25:44] Whenever you tell the DOL take a hike they're not going to do that now that's not going to happen and when you when you refused to extend the statute like I said they either have to go away or sue you and they sue so now you're in the soup and what does it cost,  I had a case where the deal well said you paid too much and we want this transaction corrected and.  And I handled that transaction as a quarterback and and the my trustee the trustee in that case.  Was happy for me to handle it because we open the books we play we were the good guys and with a DOL so they wanted a correction to the transaction,  I was able to get with the Dallas Regional Office of the DOL and asked the investigator what do you have in mind mhm and they said they that we had you know a great big boat,  the company was a 2008 transaction.  The economy went to Pieces after that the company really lost value and they weren't able to pay this note and the dll said these are just never going to be out from under this note we'd like to see that go away so we restructure the transaction where the seller took back.  Majority interest in the company in exchange for eliminating part of the note.  And then we still had an ESOP those partially sub and no penalties no no no fines and and.    [27:07] They approved they approved it and then so yeah we had to restructure the transaction but it costs about thirty thousand dollars.  It legal and accounting fees for a two-year process very reasonable yeah that's very reasonable Soul where the seller said well if I had to take back some stock you know I wasn't getting paid on my Note anyway yeah that's a lot better results,  that having the DOL come in at Pop me in a lawsuit for two or three or four.  Million dollars of damages to the east side plus yeah the litigation cost would have been  yeah easily a million dollars yeah that's that's where I was wondering like what is it what would it cost to do defend in a lawsuit it's about a million bucks right I mean.  In can be easily yeah because the the way it goes the time thanks yeah the time the amount of time that it's going to take because you're dealing with the government.  In a lawsuit you're going to go back and forth back and forth and lead the attorney fees are just going to be cranking up for you know for all of that every time they touch the car,  attorneys fees in the initial stages of that once it starts as a lawsuit all the information that you exchange back and forth with the DOL is in what we call Discovery and subpoenas okay and the lawyers handle every piece of paper,  and they deal with it it caused hundreds of thousands of dollars to go through the information exchange to get ready for the lawsuit yep when.    [28:36] We just handled it we handle this directly with the DOL give them everything they wanted to know because we didn't,  they're going to get it anyway they're going to get them they're not going to get well you know so yeah yeah and the worst part about this thing that gets me going is is it hurts theesopguy  right because we're all his money comes from me because it hurts the employees right the Department of Labor is there to try to help them if  if they have to lower the hammer the company's hurt ya sellers are hurt it takes a lot how much does it take out of the management team to deal with a lawsuit disrupted really think really devastating yeah I think this is such a good such a good podcast way and because I'm telling you,  these are critical decisions if they are important and I think every good business person has to always in their business career make a decision like do I sue,  or do I settle right in and I think most every single time I've been in that situation I'm like it's just doesn't make sense to try to go after a lawsuit let's resolve it resolve it through negotiation,  and I have the app so I also talked with frequently some people who.  To regularly deal with DOL in their investigation department,  and I'm told that the most of the DOL they just want to make sure there's a square deal in the fair deal for the ESOP yeah and just show us the show us and,  maybe they maybe they come with a contrary opinion but you can always resolve even.    [30:01] Even a even a determination by The Dol that you had a prohibited transaction if they want to see something corrected,  you can correct it a lot cheaper yeah with my ghost then you came with a loss yeah I think that I think the big thing I wrote down was just why would this ever why would you ever go after why would you ever,  want to engage in a lawsuit with the Department of Labor,  it's because your ego like your egotistical you're thinking oh you know I'm whatever that would never make any sense right I mean would there ever be a reason to go head-to-head.    [30:37] I don't think so I mean I really don't I don't think so yeah I don't either I mean I so yeah financially but anyway so what we're saying is how do you bulletproof yourself in an ESOP.  Things We Said at the beginning of this podcast is do it right you know,  have a fair valuation documented have your professionals that are working on the the trustee side,  make sure they have a reputation and ability to not to do it right and document it and have a real negotiation they like to see a real negotiation and then.  If if if if DOL investigates it comes up with a you know.  Extend the statute and then work through work it through with negotiation make the make the lawsuits and the last thing that,  they need to do don't make them do it yeah don't make him do it do you know like just in general within the ESOP Community how many.  Percentage-wise how many arrests attorneys are dedicated to litigation versus how many are doing transactions do you have an idea of that I mean I know where we're all part of the same ESOP Community but I'm just curious because it's.    [31:47] Well I will say this I don't know the percentage but a lot of the top law firms to handle the litigation along with handling Aesop's but most of the litigators,  don't for me sobs okay they come in and help mitigate and they get hired.  When the DOL comes in to investigate and people well we're going to want to get the best lawyers we can.    [32:11] My suggestion is get lost make sure that's a lawyer you get to handle this and advise you is not leaning towards.    [32:20] Triggering a loss I think that's the key like we keep hitting the nail down on the head there it's like yeah make sure I mean I always want to try to give people good advice.  It's hard to say all right every situations it's going to depend and that's always going to be something everybody's going to say and and it's true but.    [32:38] I guess the biggest advice here is if it's if they're leading down the trail of a going into a lawsuit with the Department of Labor.  And there's a very you know.    [32:49] Modest way out with a day like Wayne says dance with the DOL which I love that I'm going to I'm going to title this dance with the DOL because I think that's greater dance with the deal with dance with the DOL because I'm 30 grand over a couple three years or two to three years versus,  you know a million plus the potential pain out the yeah you know paying a pelican maybe a lot more than that to resolve a deal with Finance with it,  to resolve it with dance with a DOL but I promise you will not even believe how much it cost me to do.    [33:20] When you go through litigation and the other bad part is if you do the litigation you're going to have insurance let's say entrance your Arisa Insurance fiduciary Insurance can cover a lot of this and your dno interest going to cover lows but what happens.  The insurance company is putting out a couple of million bucks on this defense and maybe even more on the.  And what do they want to do they don't want to stay don't want to write insurance for it or their rates go up so this came up for me.  If my career because we're having one of the biggest challenges is getting good in getting adequate insurance and reasonably priced  yeah insurance for fiduciary and and,  or directors insurance and so I started asking the insurance companies you know what the deal was and they said well we have so many claims now we don't have so many claims we have a few big claims  and then I talked to the people who were involved in the litigation of big claims cannot tell you that over half of that I've talked to.  The thing that triggered the lawsuit was the refusal to finally a finals day when they refused to extend the statute while I'm not seeing a do L won't Sue right out off the bat yeah won't Sue anyway because they usually don't.  Ad and it's a notorious cases.  Phil you know about we go to the ESOP Association read these cases and you go to the players in it what happened this is well we you know we.    [34:46] Her lawyers told us not to extend the statute we did and so the next thing you know you're going to sponsor wow.  Can it yeah can it be just that simple right just wait off right you know you know it's not rocket science no it's not but I think part like I said ego and then  people are smart people this the ESOP world is full of smart people and so it's convincing when they say no we have a good case.  You know and this is why boom boom boom and I think that any good ESOP transaction every every one of you know good transaction you're going to have a good case.  But the bottom line is why would you want to go into a lawsuit and spend that kind of money when you can just go through the motions with the Department of Labor and deal with it step-by-step.    [35:33] And once you get in a lawsuit.  The fundamental results of that lawsuit is out of your hands you know it's two-thirds out of your hands you know if they go to a trial.  You'll get you'll get a judgment either you win.  And a lot of people a lot of times you do the sellers could lose and be hit for some significant damages and so it's not you get to just adjust your purchase price.  Let's say in the case where we exchange the note for some stock don't pain really I mean we revised the.  But if the dll it's sued and said you paid eight million dollars too much for this stock.  They would have hit that seller for an 8 million dollars in Damages yeah yeah on top of the other that you got a damage judgment.    [36:25] And you hadn't even been paid your eight million dollars on the boat yet I'm not trying to scare anybody now of course not yeah just good old advice don't go into a lawsuit,  yeah so you got to Bear you got a bears come to your Camp you know if you could,  should give the bear what it wants this not your leg maybe okay exactly give it your you can give it your lunch box you know where you can redo it like a 1 then the other thing is to recognize,  a lot of a lot of the noise in the ESOP Association legal Community is that the ol is just a big Predator is after esops,  so I wanted you to know that I don't believe that's the case I don't either by experience yeah dealing with the DOL they really are for the most part,  just trying to get a fair transaction for the ESOP and they're willing to work it out and that's and that's their job right when you get down to it and said yeah you know it's their job they exist for a purpose and I do I agree to I think it gets talked about like hey there they.  They're the enemy they're the checks and balances between you know a good ESOP.    [37:29] Community web of companies there there yeah we are glad you are there I mean because you know years ago there might have been some cowboys out there that just did Aesop's any way they wanted to now if you deal with advisors who are members of the ESOP Association,  the nce,  Hyo who regularly maintained a ongoing continuing education who come together to work on best practices and exchanged stories and knowledge about this,  we work hard to do it right yeah and so get a good advisors make sure it's well documented.  And that I know if you're working with Phil  I've worked with you till on transactions you said among very well to start with you help explain to your clients that yep we're going to do a lot of work on this  due diligence and on this valuation work and then we're going to have a negotiation that it's going to result in a price that might not be exactly what the seller wanted in the top dollar we're going to come out with a seller.  Price that the seller is satisfied with if they want to do the deal and then we believe is defensible yeah and then the seller can sleep at night and then everybody else can and it we got it can win at the end of the day.    [38:42] And we've got it documented and if the deal welcomes to investigate we're going to immediately build a reputation with the DOL and we're the good guys  let me ask you a quick question as we finish what if the trust Dee wants to do the lawsuit but the company doesn't like our or vice versa.  Because it sounds like you have to have a collaboration between the trustee and the board of directors going into the investigation is that is that possible.  It's possible but it's not likely okay unless it unless because at that point in the investigation stage there's almost.    [39:21] There's almost no way for the DOL to be saying we want to hit this trustee with big damage.  Okay they're just they're just that you don't have that going on in the investigation stage and then the resolution stage yeah.  It could be you got to be careful who you some trustees at trustees have been in a lot of lawsuits or they've been in a lot of.    [39:47] Probably if you want to make sure they haven't had a lot of those I think within gol is after them yeah I think it was at the DOL.  I was going to say the ones that the dll is really after they've already gotten an injunction,  say that those people can't serve as a trustee going forward yeah and it might not be on too many of those left it might not be a bad question when you interview trust a trustee hey how many lawsuits have you been involved in I mean that's it,  that's well it has,  or investigate give us the process of what you've gone through and yeah yeah so I think that's that's a really a very valuable thing to know and I think,  as we as when I finish the topic it's like we want to make sure I we started with this and we finished with this is that.  Theesopguy action is not risky from the Department of Labor standpoint and it's because of what we're just talking about.  So don't hear it we can handle it right and that the point of this conversation is to help you make sure you handle it correctly and that you're getting good advice going into it and not bad advice.    [40:49] But you know and that's what one of the big challenges people who are thinking about doing an ESOP have is how much is this is out of my control you know.  What am I getting into it's not out of your control if you know these things you work with good advisors if you keep this in mind where they when they fear is deal elephant come in and do something to them and they don't anything say about it I'm stuck.  Don't let your cell you want you don't have to be in that spot now you don't and you can you can manage you can manage the process of something.  Does come up yeah and so this happens with business owners all the time somebody Sue's you for some crazy reason right well you do about it negotiate.  Resolve it you settle you try to stay out of the faucet.  You know you manage these things you may not like it but you just do it you just had its part of business is part of the what happens though it's yeah it doesn't have to have an outsized,  I know exactly so well great I think this was very very helpful thank you so much Wayne for for chiming chiming in on it a really important topic and,  you know as always we appreciate it buddy.  Checking out our podcast and with that will sign off thank you for listening and we'll see you on our next step on this journey to an ESOP.

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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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