EP33 - Interview with Greg Daugherty ESOP attorney with Porter Wright from Columbus, OH to discuss the ESOP pre-funded strategy.

On the ESOP guide, you are listening to Journey to an ESOP, our podcast on how ESOPs are created and how they're designed and, and really just going through the whole process at the very beginning from um conceptual phase to actually um applying an ESOP to your business strategy. So, um, to do that, we've created a podcast and we have a whole group of podcasts available to you on our website at journey to an ESOP.com. And what we're, um, if you're tuning in today, what we're gonna talk about today is what we call pre-funded ESOPs. And to do that, um, I've got the the privilege of uh discussing that topic with Greg Doherty with Porter Wright, and Greg is our 3rd, is a 3rd time member of our podcast today. So I wanted to welcome him to the podcast and say thanks for joining us today, Greg. Thanks for having me back, Phil. Great. So, so we're going to talk about a concept that is out there in the ESOP world, which we, we're basically calling pre-funding ESOPs. And uh when I go through the idea behind it and just kind of Greg and I'll talk a little bit about the idea of what it really is, but essentially a pre-funded ESOP is when you're putting your own, your company's money in the ESOP ahead of actually transacting and selling the the stock. In a normal ESOP transaction, what's happening is You're actually selling your stock, there's a leverage transaction, and you're gonna, you're gonna end up putting the actual stock in the trust. In this case, what's happening is the company is actually putting their own cash on a from a an ESOP contribution level to take some of the tax advantages. So we're going to explore that in, in terms of the definition of it, then we're gonna talk a little bit about um just the process of doing that and then we're gonna wrap that up with the idea behind what are the advantages and disadvantages of that type of strategy. So, so with that, Greg, um, let's just talk a little bit about the structure of that and I know you said you've kind of been involved in that before. Um, where do you feel like that is a good um solution for some, for some companies when they're thinking about the ESOP strategy? It it's a great solution for a company that knows it will do an ESoft transaction, and really I think. If it's already in the process, it's had a feasibility study, and, you know, maybe by the end of the year, it can't, you know, close a transaction or it's still early, but it knows it's committed to, you know, having the ESOP purchase stock in the next year, and so putting a tax deductible contribution in the ESOP in the first year, you know, gives the company, as you said, a tax, you know, tax savings, puts money in, uh, you know, to help. Buy the stock back. Uh, I, I'd say, you know, I think the ideal situation is probably. If a company knew, say 2 years or 3 years from now, it's gonna do an ESOP and it wants, you know, to have this ESOP purchase stock and it says I've got, we've got some extra cash, we're gonna put cash in year one, you know, create an ESOP, put the cash in the ESOP in year one. It's a tax deductible contribution, we'll put cash in year 2, tax deductible contribution, and then in year 3. We do the, the EA buys the stock, and maybe there's enough cash to buy. You know, the stock and the seller can finance the rest. Maybe we get bank financing, but the point is with the cash in the ESOP already, it's a less leveraged transaction than it otherwise would have been. And it kind of provides a piece of equity in addition to debt to finance the purchase. Yeah, and I think like so so going into this idea that sometimes people get into a position when they want to do an ESO. And they're, they, they're ready to go with a leverage transaction and they're actually looking for a liquidity event, which would mean they're going to go get bank financing for part of the ESOP transaction. They're going to walk away with, with some type of cash out of the transaction. So in this case, really, there's, there's, I think a lot more forward planning in this type of scenario. There's not a need for liquidity right at the beginning of when you're starting the process of doing your, you know, your feasibility and you're creating the like planning side saying, all right, you know, uh, clients are looking at now, I just want to, I'm looking at it in a horizon of time. And I don't need the money. I also don't necessarily need a lot of other financing either. So it would kind of imply that the company is in a place where they have plenty of cash going on. Is that kind of true? That's right, that's where it comes up as the company, you know, maybe it's just that the banks aren't comfortable with it or maybe they just don't want bank financing, they want the flexibility of seller financing, so pre-funding it allows the seller to get that cash payday. And then it can just, you know, finance the rest of the transaction on its own. Yeah, meanwhile, meanwhile, take the tax advantages in the process of planning. Um, I just got, I just got an opportunity with the new ESOP today and I mean, they're, they're not looking at really pulling the trigger until 2023. So they could do, you could do something like this, this, even this tax year. I'm just gonna say if you had enough time to put the plan documents together, which we'll talk about the process, but it's not something that I would say for me, um, I have seen a lot in. In terms of what people are thinking about when they think about ESOP. So that's why I thought it would be a good topic. When you had this situation, Greg, what, what were, you know, in terms of your cases that you dealt with, um, what, how did it come up with, you know, because you don't see it a lot either, do you? I know, no, it's, it's rare. You know, I, I think, you know, for most companies that they have. If they have a significant amount of cash and You know, they have a strong relationship with a bank that is comfortable with ESOPs and familiar with ESOPs. Then, you know, probably the traditional fully leveraged transaction and the bank financing, you know, ends up being the cash payday to the seller, you know, minus the transaction costs. That works well in most cases where I've seen it come up as a company. Maybe they, their longtime relationship is with a smaller bank or a community bank that maybe isn't comfortable with EOPs. And a lot of times with the banks, with, with those types of banks that don't do a lot of ESOP transactions, they don't want to finance the change of control. So they don't want to say, OK, we're gonna lend money, and then the cash goes out the door. But what they will do is they'll do a refinancing. And so where it comes up is you have a company that's strong and the bank says, look, we don't want to lose you just because we're doing an ESOP, but Our credit guideline and, you know, they have a strong relationship with their banker, but then you have the credit people up top saying, look, just as a policy, we're not gonna do this. So they pre-fund the ESOP to cause they'll kind of to your point, they don't need the cash today, but in a couple of years they'll say, OK, this allows us to get some cash at the transaction, we can finance it entirely ourselves. We still have a line of credit, you know, with our longtime bank and we keep that relationship and then usually within the next year that bank will turn around and say, OK, let's Do a refinance and take out a portion of the seller financing piece. It gives the seller a little more cash and it uh it's good for the company because the bank debt will typically have a much lower rate of interest than the the seller debt and so it's In a way, it's a little maybe a little lower payday upfront, but then because of that refinancing happening quicker, they, they probably get more, probably get more cash like over a three-year period than they would have the traditional way, but maybe a little bit less cash. Yeah, it's a commitment when you're putting when when you're putting your cash into the trust. It's a to me it's a commitment and I think you need to have a lot of cash. So let's, let's go into the details. So you have, um, we'll do, we'll do our best because we don't have a whiteboard. So you have the company. Um, you have the ESOP, which is newly created and you have the shareholder over here. So the, so what's happening is, is you're able to put 25% of the total payroll, so you could go up to 25% if you choose. Um, into the ESOP. So if I had a payroll of, um, let's just say $8 million I could go up to $2 million each year in a cash contribution into the ESOP. So mechanically, that's what's happening if you have a 401k profit sharing, you'd have to take that into account too, yes, right. So yeah, so subtract any of that and assuming, assuming in this case that you didn't have that and it could put the full $2 million in. Um, and the company had plenty, I mean, I think I got to keep saying that the company had plenty of cash to do that because $2 million a year is, is tied up and it's in the ESOP trust. I mean, you can't just access the cash, is that right? Yeah. So that's right. It's a plan assets. Now, once you put that money in the ESOP, that's an asset of the ESOP, not the company anymore. So hard times come. You know, and we have another problem recession wise or whatever. It's stuck in the trust, right? So, so we'll get into the disadvantages, but I'm just gonna lead, lead into that. So over, so let's just say we did this over a 5-year period of time and we were just consistent. So $2 million goes into this ESOP trust each year and at the end of 5 years, you have, you have $10 million of cash. Now that the advantage right now. Um, or the tax treatment right now is I took the $2 million off my taxable income each year. Yeah. So I, whatever the taxable income, take $2 million out. So, so if your tax rate was say 30%, um, you've just saved 30% of the total $2 million each year. So now I have more, more money from taxes that was created for the shareholder. So that's, that's one obvious thing that's happening in terms of, of the planning side. Um, Then within a certain period of time, now the ESOP's going to have to buy out the stock or buy up whatever percentage of stock. So at that point, um, there's going to be some, that $10 million is going to represent some value of the total business. And it could be 5%, 10%, it could be more or less than that depending on what the valuation is. And at that point, the, well, before we get there, the employees side of this right now is that they are actually having a retirement account. With a cash value to it or the valuation of the cash, whatever that is, so they have a retirement account of $10 million. They have a profit sharing to back up. I mean, so like if if somebody wanted to implement this prefunding strategy, what they would do is they would first create. ESOP plan, the board would adopt a plan very similar to how the board adopts a 401k or a profit sharing plan. In this case, they're adopting a profit sharing plan that is intended to invest primarily in employer stock. That doesn't mean they have to, that the plan has to acquire the employee employer stock the next day. It just means that's the purpose why we're creating this plan and You know, for the first few years in the life of this plan, the company is making cash contributions, and so the participants, you know, have accounts and it's just invested in cash right now with the intention of building up the cash to to buy stock, and then a trust is created as a qualified plan, you know, there has to be a trust has to be funded and in the assets of the plan are held in the trust and they're protected. Uh, in bank, you know, in the case the employer goes bankrupt because those assets, as I said previously, those are assets of the trust, those are assets of the employee participants, not of the company. And so you're right, so for the first few years as the company is putting cash in the trust, the cash is allocated to accounts of the participants, and they have They have a retirement plan. They have a retirement. Exactly. And so, so one of the obvious questions from anybody is gonna be that, OK, now I have, we're 3 years into this model that we just talked about and created and um 10 people want to leave the company. And obviously, we're gonna, we're gonna talk about vesting. So let's just assume you did a normal 20% vesting a year. And so, so with that, what is, what does the company now have to do for those people that are leaving the company? Right, so, you know, maybe that so they would be partially vested, so to the extent they're not vested that money gets forfeited and it would be reallocated to the remaining participants in the plan to the extent that they were vested. They'd have potentially distributable event, and if they wanted to take a distribution, they could, uh, if they wanted to wait, uh, they'd have the right to do that as well, but that's their money at that point and they'd be entitled to a distribution if they wanted it. Right, so, so you could have people. That walk out and they get some of their money, some of that plan money, so those assets, which is probably not your intention, of course, um, but it's realistic because every company is gonna have some kind of turnover. Nobody's, you know, um. So I did the math real quick. So you basically under that structure, tax-wise, you would save $600,000 a year on $2 million contribution. So that could, I mean, that, that's one of the reasons I think people would look at this and say, well, I'm putting $2 million in. I know I'm going to do the ESOP, and I'm saving $600 a year as opposed to planning the ESOP over 3 years and not doing anything. Um, as opposed to paying taxes on that $2 million a year to, you know, to buy you out or in a pre-closing distribution. Yeah, exactly. So, so the board adopts the ESOP plan. You set it up and let's go through real quick. A normal transaction, we have to hire a trustee and that trustee hires a valuation firm and they also hire an attorney to represent themselves on the transaction and then. The company has the sell side advisor who hires an ESOP attorney like Greg. And um and then we do, we do the sell side and they do the buy side, and we do leverage transaction. And so you have all these expenses related to that type of process, and of course, including getting the bank financing, other things like that. Um, in this type of transaction, literally all you're doing is hiring like Greg to do the plan document design. Is that Process wise, that kind of right, you, yeah, you have me do the, you know, write the plan document, write the trust agreement, and to your point, you don't have to hire a trustee at at this point. You can, you need a trustee, but the trustee can be yourself or anybody at the company. Um, there's no need for an independent trustee at this point because We're not valuing the stock of the company yet, we're just making cash contributions. So the documentation you need is to prepare a plan document, prepare a trust document, and then you adopt prepare resolutions to have to, you know, take the formal corporate action to adopt the plan and trust. Piece of cake. Well, relatively, it is compared to a normal transaction for sure, you know, um, it's even, it's probably like there's another transaction which is the non-leverage ESOP where you do have like a evaluation involved. In this case, you don't even have to do a evaluation because so it's, it's probably the cheapest way to get an ESOP set up, you know, because you're just having to pay Greg, not these other guys. So, so it's pretty good. Um, so, so from a cost standpoint and a process standpoint, that's kind of how that works. Um, with the going forward, there is a bit of a, is there, I know we talked about this a little bit, there's a bit of like a window here that we want to, you know, kind of respect the IRS for for a second and say that the anticipation from the IRS is that you're actually going to have a real ESOP. So in an extreme example, if I set this up and I let it go for 10 years, and I saved $6000 a year in taxes. And I have a ton of cash sitting in the trust. Um, what would the, how would the IRS look at that in terms of, of that type of structure? Cause you kind of, there, we're kind of anticipating that we need to pull the trigger. You had indicated like, you know, 123 years, um, how, how far would be too far? There hasn't been any rulings on this, but most commentators will say between 3 to 5 years. I don't, I don't think anybody is really comfortable pushing it beyond 5 years. I think some, some of the more conservative ones would say it should really be purchased within 3 years, I'd say 3 to 5 years. And some of it depends on circumstances. So here's the, here's the risk. So you, you know, we said in an ideal situation we're putting money away for a couple of years, maybe year 3 or. Yeah, maybe even year 5, you know, maybe we intend to do a year 5. You know, we purchased the the stock, and we have our ESOP, but a lot of companies ran into this during the recession, you know, the last two recessions, so, OK, great, I'm putting money away. And I may have good reasons, yeah, that the tax benefits are great, but maybe I don't wanna. Work with a bank. Maybe I just want entirely seller financing as flexible. I'm thinking, you know, altruistically for the company, but then the Great Recession doesn't hits or COVID hits, and all of a sudden, the value of my stock has declined, you know, you know, extremely low level. I don't want to sell my stock now, but the problem is I'm bumping up against, especially if I've waited 5 years to do that. The IRS, to answer your question directly, is going to say, well, wait a minute, the longer this goes on, it doesn't really look like you intended to buy employer stock with us. So the IRS would say. You don't have an ESOP. You've got a profit sharing plan, and that's not the worst outcome in the world, except it becomes a lot more difficult to do and to use the money in that plan to fund an ESOP, because at that point, once you have a non-ESOP profit sharing plan. Then it's a plan that's subject to ERISA's duty, you know, you know, it's all these plans are subject to ERISA fiduciary duties. One of those duties is to have a diverse investment menu. The ESOP is exempt from that because it's designed to invest primarily employer stock. But if the IRS says it's not an ESOP, now it's a plan that's subject to the duty of Diversification and if you want to convert that profit sharing plan to an ESOP, now you have to make a fiduciary determination that the participants are going to have a better retirement outcome, investing primarily in employer stock compared to a broad range of market investments. That's a tough standard and most, most of the time. You know, a company wouldn't want to do that and they say, well, we'll just need to just create a new plan document. Right, right, that's what you want, that's what you want to avoid. So that's why if you're gonna do this, it's better to do it sooner rather than later, you know, if you, if you have a plan of doing it within 3 years, then maybe something happens and you push it to 5 years, you know, then. You know, that's an easier story to tell the IRS and say, oh yeah, we always intended to be an ESO. Yeah, yeah, because you have enough window there, we were planning on, you know, getting there. Now, that's a good point on the profit sharing plan because, because people don't probably even realize that, you know, to have to be the fiduciary to show diversification kind of there's a whole different realm of, of thinking. So, but understanding that they do have those fiduciary duties when you get into this, so. Um, one of the, one of the thoughts I had read too as we went through the whole process, you would have to have after it's set up, you would have to have a third party administrator, right? to to manage the yeah, like any other plan, yeah, someone to administer it, keep track of the account balances, you know, like to your earlier question, if someone's entitled to distributions, um, you know, what the You know, what, what those amounts are and and everything. Yeah, for sure. So, so that's gonna be a small cost as well, but you're not gonna have the ongoing annual evaluation and other compliance costs as well, post TSOP. So good, you fix your camera, that's good. Um, but no, it's a very interesting way to go, and I think sometimes, you know, as we, as we now break it out into some of the the benefits maybe and um advantages of that strategy with maybe then talk, we'll talk a little bit about the disadvantages um as we go through it. So clearly, I, I kind of already identified, you know, you're gonna have some, you're gonna have this tax advantage as a company to put this money away each year. And hopefully, you know, you've got the cash to do that. So that's gonna be clearly An advantage. Um, I like what you talked about on the banking side. I think some of the advantages are, you know, getting your bank comfortable, um, especially when you get into the financing conversations with people. I'd say most people want to stay with their incumbent bank, right? Because they've they've just been there for them for so long and they have that comfort relationship. And when you get into a leverage transaction, um, it's hard sometimes to stay with the same bank because, you know, they're not always gonna understand ESOPs. You know, sometimes it's, it's an interesting conversation because sometimes if, if a company, sometimes the company has been with that bank since it was a startup, and the company's grown to a point where it really needs a larger bank. You know, one of the, the mid-size regional banks or a larger bank that happens to have experience with the ESOPs, but probably even for non-ESOP reasons, having a larger bank might make sense, but at other times. The banking relationships great, yeah, maybe the company's grown and the bank's grown with it, and the bank continues to be able to. Service them and facilitate the company's growth. Maybe that particular bank isn't interested in ESOPs or isn't comfortable with ESOPs, but there's no reason to. You know, break up that relationship when, you know, there's other strategies available. No, that's, that's good. Um, the other thing that we talked about, I think it was an advantage and we'll just maybe we can go into a little deeper, is like the plan, the planning side itself, you know, and I would say most of the time when I'm talking to a client, we're, we're in that stage where they want to get it done sooner than later, you know, there, there's not usually that, hey, well, let's plan this over, you know, let's look at the next 5-year plan or work backwards, you know. Staged transactions. Most of the time people are like, OK, I'm ready. Something triggered, you know, the event. I'm ready to go. Um, so when you're thinking about the advantage of, of this strategy, um, talk, talk a little bit about the idea behind how, how it would be helpful to, to have a little more time to plan the ESOP with using the tax benefits here as well. It would be helpful because a lot of times. It, it would be helpful to have more time just to do due diligence on the company or, you know, to help, you know, think about if you're gonna sell a house, you know, like what do you need to do to prep the house and get it, you know, in great shape and, and everything, and you can take that time to do the same thing with your company, like maybe there's informal or oral agreements with family members or former executives, we can put those in writing, you know, maybe we can look at. You know, are there some expenses that maybe we're more personal in nature that we've been running through the business? Let's clean that up. It gives you an opportunity to clean some things up with the business to help attract a higher valuation. And in the meantime. You're getting tax deductible contributions to help fund the purchase, you know, a couple of years down the road. That's good. I think, I think to hover on the valuation side, I think having a very good valuation to me, you go into this, this on the advisory side, having a very good valuation model that helps connect the dots in, in quantitatively between the, the actual number that's estimated in evaluation at the current time. So we, when you start this planning, And, and really understanding the risk side. So how do you connect the dots with what type of risks that you have in your business that actually increase valuation and actually decrease valuation. So some of the things that you can do in the initial planning is, is really doing a risk analysis and talking about things like non-competes, you know, things like concentration of customers or things like um supplier chain issues that you might have, or, you know, employee issues, things that actually are real risks and Um, you know, we've seen them happen in some, some cases, like Greg and I've seen this happen where they actually, the risks actually materialize like with COVID, some of the risks of business actually materialized, and the company experienced the downward valuation before we even got into through the ESOP process. I mean if you're, you know, another that you probably point out to a lot of people is, you know, how concentrated is your customer list and if your business is dependent on one or two customers, take the next couple of years to find new customers or new product lines or new services you can offer to protect yourself. Yeah, I mean, so having a couple of years out is just, it's a lot more fun when you're thinking about it. One of the things I do too is I'll, we'll build the forecast. At the very beginning, step 2, and the forecast helps us to kind of kind of look at the business plan and have a conversation around like, what if we do hit, you know, our best case, you know, middle of the road case and worst case. And so now we can quantify those in evaluation model saying, well, if we do hit the best case, we should be here. And what that can do is you can now play with the forecast and back into the model to say, well, you know, maybe our number really is, you know, let's just say $20 million. The guy wanted to get $20 million out of the business and they were at like 10% right now. What at what point can we show this thing to be really a $20 million dollar evaluation? And then say now, go back to your 3 year plan and you now have a, uh, you know, a business plan that says, hey, this is what we need to hit in the forecast. These are the initiatives to de-risk the company, and I think there's a, there's a real advantage to that because it's, it's partly not just a pre-funded ESOP strategy advantage, it's just pre-planning the ESOP in general, um, to get to where you really want to go and and make it a real smooth process and not this, you know, let's try to pull it all together and then, you know, and Greg will test this. One of the things that happens in ESOP transaction is you get hit with a, um, you know, deal structure, so the trustee isn't super comfortable with everything. So they require a clawback, which means basically they're going to have a purchase price reduction if you don't hit your e-bi of targets in that forecast. And some people are comfortable with that and others may not be comfortable with that, but you know, you can kind of eliminate some of those, some of those deal structures by doing some planning like that. So, so any, any other advantages that you can think of that might be helpful, you know, as far as people thinking about because it's like I said, it's rare to see this structure, but specific to the pre-funding. No, I think, I, I think we've, we've touched on it, you know, if you think, you know, having, if you know you're gonna do this, but you think having a couple of years to prepare. And you and you have a strategy for those couple of years, and it's not just oh let's take the can down the road, but it's oh hey, yeah, I've been thinking about. Maybe acquiring, you know, a new division or selling a new division, you know, so prepping the company, you get the tax benefits and, and again, you You've talked about the strategy with your incumbent bank. And they have a, you know, they say, hey, we don't want to finance an EOP transaction, but we can certainly, uh, you know, refinance the seller guy. Exactly. So let's, so one of the thoughts I had, and we haven't really touched on it, I don't know if we should categorize this in disadvantages yet, so you can, you can help me with it. It's when you think about ESOPs, you immediately on everybody should just think immediately employees, right, because the first word is employees. Um, so employee connection to the ESOP when it's just funded with cash, and is there an advantage or disadvantage, I mean, in terms of how the employees perceive this type of plan? I'd say It's probably neutral. I mean, I don't, they're, they're not gonna, it's not gonna be an advantage because they like we said, it's just a profit sharing plan, so I think their view is. Oh, OK, it's a discretionary profit sharing plan. You know, that's no different than any other profit sharing plan you might set up, you know, maybe there's some motivating factor there, but they're not gonna feel, they're not gonna feel the same. You know, sense of purpose, I guess that that they would feel once the plans invested in employer stock, and that's probably why you're thinking maybe this is a disadvantage because if you know you want to do this for your employees or one of the advantages of an ESO in general is that it's a recruiting tool, a retention tool, and so the longer you wait to actually buy the stock, you're delaying. You know, those retention, recruitment benefits, you know, for your employees, the longer the employees are gonna take to really feel the sense of buying and commitment to the company that they have with the ESOP. Yeah, yeah, so that's kind of where I was going. I think it is probably neutral except Um, they're getting a benefit when they haven't put anything into it. So that's one nice thing. Like the 401k, they're putting their own money within this kind of plan. The benefit is the company's just putting this money in there for them and so they'll, they'll have access to it if, if they leave, um, which we'll talk about. So the, and then the culture side is how do you connect them? I think the disadvantages is how do you connect them with the mission of the company and really understanding that their value of their retirement. is, is correlated in conjunction with the value of the business so that they can start looking at the better I do here, the better the value of the businesses and we all start doing better in our retirement. I think that's the, that's the disadvantage. I think it's really hard to connect people just to just to cash that has no ability to grow. Right, when it's when it's stock and you can say, hey, if you do well, the company goes well, and here's how many shares of stock you have and that, you know, you're getting more shares each year and the shares are going up in value, so it's a benefit that compounds. Yeah, you just don't get that with cash. Exactly. Um, so, so let's walk through another scenario that I had and I was thinking about. So you, you have in this case that we talked about, we have $10 million and we're in the 5th year, and we now we're going to do a transaction. So the ESOP at this point is going to buy stock. And in that, are they going to take the $10 million of cash? And buy the stock from the owner at that point? Is that how the transaction would work? Yeah, so the, you know, this is where you'd hire the the independent trustee and appraiser, and they'd come up with the value of the business. And Assuming it's, you know, you could do it in one of two ways. You could say, OK, maybe the $10 million represents a third of the business and we're just gonna sell a third of the stock to an ESOP and the ESO's minority shareholder, and it's not leveraged, you know, fine. I think the more common way is to say no, if it's a third of the business, then, OK, it's a $30 million transaction, you know, $10 million is paid in cash to the seller. You know, from the proceeds in the in the ESOP trusts and then the remaining 20 million, uh, the ESOP would issue a note, so the ESOP would pay cash and then issue a note to the seller. So that 10 million though is directly buying that stock. So that 10 million, is that directly allocated then in that first year? Then that would be right, that would be allocated retroactively. You see, you see where I'm going with the disadvantage? Yeah, I think so. OK, so here's, here's the disadvantage. Um, if you have $10 million of say it's $30 million valuation for that whatever portion of stock you bought, $10 million is already pre-funded, then $10 million of stock immediately goes into the, into the accounts of the participants. Now, they already have accounts set up over that 5 years, so they already had something in there anyways. But now they have 10 million, they, it's all stock. So now, the potential is they got so much to, they got so much so soon, I guess one third of the total trust is allocated all that stock. So now, my participants, we don't have that slow process of allocating out um stock on an inside note. So fully leveraged 100% ESOP transaction and we do like a 20 year inside note. Then we can kind of slowly release that stock over 20 years. People have the long-term plan of, I'm gonna build value over a long term period. Now they have $10 million of value in a very relatively short period. So that, that to me can be a disadvantage cause too much too soon with repurchase liability and all the other aspects of, of, you know, feeling like they, hey, I've got Suddenly, I have a million dollars in my account. I don't know, it's probably not that much, but suddenly the, you know, the employees when they terminate and, you know, again, if they're not retirement eligible, you can delay when you actually pay them. But now they're entitled, now they're entitled to have the company buy the stock back and so it's another, that's a faster cash. I suppose you could say maybe we keep, we still keep a portion of the 10 million in the plan. For repurchase obligation reasons or, you know, for whatever else, and we use some smaller portion to buy stock to help. Allocate the shares over time to your point, but that's gonna be a lot of negotiation because the trustees, I mean, the trustee wants the stock to be transferred to the employees as soon as possible. This is a plan to benefit the employees, so they're not gonna want too much held back. And then if you're the seller and you've been putting this money away in part. To help buy you out, you know, how much would you really want to leave in the plan anyway? Yeah, you're sitting there thinking, oh yeah, I want that that's part of the whole pre-planning thing too is you're gonna want to have something coming out of this, you know, and not have to completely be dependent on the bank. You know, so, so that's the, that to me is like a disadvantage in that you really do need to think about how much you want to let it accrue. You know, like if, I think on our our our example, maybe that's too much money or, you know, depending on the size of the company, it probably all is all relative. But maybe you just did it for 1 to 3 years and it makes it a little bit easier than you're just taking a little piece out and you're doing that. But leaving a bunch of cash in a very early new ESOP in that trust seems kind of silly to me because you have You know, it's gonna be a while to repurchase liability really hits the company. Yeah, I mean, it's probably better to play, you know, a couple 100,000 or 500,000 a year in for, you know, 2 years, you know, maybe 3 years, and then do the transaction. I guess the, I think the real point is don't get clever or greedy with this strategy. There's. It can work. But there's kind of a, a narrow, you know, path to really make it work well and once you start Deviating from that, you know, you can start causing some unintended consequences. Yeah, I think that's really, that's really good. I, I like the idea though, and it's, it's interesting. I think it's just, like, I think there's probably a reason we don't see it happening a lot, um, and it may not be necessarily right reasons or wrong reasons. It's just for maybe people don't really even think they can do it. Um, that could be one of the reasons. When you, um, when you come back to the, the advantages of it, I was thinking about the, um, the idea that you If you're in a good position right now financially, I, I think our, our country and a lot of the economy is good again, you know, you have, you know, a lot of companies are just doing really well right now. And they're, but they're, they're not yet ready to do this. And so I think some of that advantage would be, you know, take the tax, take the tax benefit now and then kind of get yourself ready so you don't, you know, it just helps you kind of get everything ready to go. I think that's one of the advantages. Um, and, and using your cash wisely when it's put away and you don't have to think about it. So that to me would be one thing. cost wise too on the transaction. Do you think there's an advantage to um reducing the total cost of a transaction? It might a little bit. I mean, certainly doesn't add to the cost. I mean, what you're I mean, you're gonna have to establish a plan and trust, you know, anyway, so you're maybe getting some of that out of the way or smoothing some of those costs out, you know, over 3 year period instead of all at once, you know, the plan and trust, it's not that expensive. I, I kind of think it's more having the money in the plan to help buy the the stock. I think it makes just the conversations and the negotiations with the banks and with that kind of. Yeah, with the trustee just a lot quicker and easier yeah yeah a lot easier to keep the relationship with your bank because no one's gonna really feel like, oh we have to. Figure out a way to finance this because now we know that there's money in the trust to do this and. Yeah, I like, I like the idea and this would just be, I don't know if this is even a good idea or not, but I like the idea of taking some stock, maybe a small amount, maybe and contributing that in conjunction with this, in order to connect the employees back to the company's stock. Because I think with without that direct link, it's really Hard to say, you know, we, you know, we're an ESOP culture, we're an employee owned culture. So I, I that, I don't know if that would be a good idea or a bad idea. Just, you know, like, even if you did a small percentage of contribution of that stock plus the cash thing, you know, and, and do it in combination. What do you, do you think that's an overdoing it? You know, it's an interesting idea for the reason you said, at least give some employees some connection to company stock. I don't see that done. As much. My guess is that's not done as often because if you know you're gonna sell. Within a short period of time. That's true. You're not gonna want to waste, waste your sale on, on a small contribution. I, I, I just see that like the non-leverage, small, a small non-leverage where we're just contributing stock more often than than that where it's like, hey, here's 5%. We're not ready to do the transaction, but we want to get people thinking about it and it's not enough to worry about anybody, you know, but right, we're basically saying we want to have some sort of stock incentive. Type of plan we've decided that ESO's the best way to do it, so we're comfortable reserving maybe 10% of the stock, you know, for an EP. Yeah, no, that's cool. So, so anything else you want to add to the conversation? I think we kind of hit what I wanted to do is hit the what it what it what is, you know, how it works, what it is, and then just the process and then kind of go through the advantages and disadvantages. I think we, we covered a lot of that. I think, yeah, I think so. I mean, I think I'd say it's, it's worth thinking about. It's not. For every ESOP transaction, maybe not even for most ESOP transactions, but there are situations out there where It might make sense to say, hey, let's, you know, take a portion of our payroll and make some tax deductible contributions for a couple of years to You know, get a, get a head start on, on buying us out. But when you do that, you know, it can, it can work well, but again, don't, don't get too creative for your own good with it you know it's kind of. Yeah, kind of take your, take your time, I think, and also always ask your advisors, you know, what their opinions are. I think that's the, the best thing you can do and get comfortable with, you know, what they tell you and ask, you know, and that's why we're doing this so you can ask the right questions and at least, at least know about it, so. So with that, that's pre-funded ESOP strategy with Greg Doherty and the ESOP guy. So it's a lot of fun, Greg. Thank you so much for for doing it today. Yeah, I had fun too. Thanks for having me. Great. So with that, thanks again for listening to the podcast. And if you haven't subscribed to the podcast and share it with a friend, it really might be helpful for them. Um, and we will look forward to our next step on this journey to an ESO.