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Summary of Podcast on EP35 - The Grinch - evaluating the ESOP versus a third party buyer for your company - The Grid Wiki

EP35 - The Grinch - evaluating the ESOP versus a third party buyer for your company

Journey to an ESOP & Beyond

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| December 24, 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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In this episode we evaluate the issues that selling shareholders will likely run into when considering selling their business to either a private equity, venture capital, or strategic buyer. This episode is inspired by questions that come up from selling shareholders on the alternatives to selling their business to an ESOP. It is helpful to determine whether the ESOP is a good direction and can be confusing to evaluate this option of selling your business.

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Open hole to Santa Claus.  Not really this is actually the theesopguy and we are on a journey to a nice app this is our Christmas edition podcast today we're going to talk about the.  Opportunities when you think about your ESOP in comparison to the sale this is what this is what gets asked a lot so.  How the Grinch Stole Christmas should I sell to an ESOP versus other opportunities and we're going to talk about this other opportunities are today but as we do that before we do that we're going to start off with this.    [0:49] Music.    [0:54] He slunk to the icebox slank hide the who's feast.    [1:05] It took the who-pudding.    [1:07] The roast beast Green Dot that icebox as quick as a flash why that Grinch even took their last can of who hash.  And he stuffed all the food up the chimney with Glee and grinned the Grinch.    [1:30] Stuff up the tree and the Grinch grab the tree and he started to shout when he heard a small sound like a cool the doll.    [1:41] Excuse me maybe you should sell your business to an ESOP dot dot dot okay so why am I using the Grinch guys first off it's Christmas time and I like this movie and it's going to be super fun to watch I haven't yet watched it,  if you do this in your traditional Christmas.  Holiday time and watch a lot of Christmas movies that's what we do and it's just fun,  and I don't know why I was talking to somebody about this I don't know why we watch the same Christmas movies over and over and over again.  But it just you know what's going to happen right and it's just fun and it's just kind of like that theme anyway so the Grinch is one that I think is such a.  You know when I was a kid and then they remade it with Jim Carrey which is the one I'm showing just a great Christmas movie and.    [2:30] What I like about it and how I'm going to connect it today is we think about the types of people I don't want to infer anything negative about.    [2:41] You know a private Equity Group or a venture capitalist or strategic buyer and not at all because they're quality people they're doing they're doing their thing their business thing but I do want to say that what we do kind of want to think about is.  The question that gets asked about should I sell my ESOP shipment should I sell my company to a nice.  Or should I sell it to these types of organizations and I think there's a very,  direct difference between the two I mean I think that when you think about.  If you're thinking about selling to a private Equity Group a strategic buyer of venture capitalists what needs to be said in that is that it's probably if that's on your mind then I would just always advise you to run down those roads because.  There are things with relative to an ESOP that are much more,  holistic in the sense of other opportunities or goals and objectives that you might have and so you might already be convinced that this is not really the road for you but I do think that there are some people that do ask that question you know from time to time.  I'm quite actually quite frequently and so this is going to be dedicated to really the overall aspects of the those types of buyers and some of the things that I think are going to be.    [4:01] Negatives or disadvantages that need to be thought through in terms of.    [4:06] In terms of really thinking about that as an option so that's what we're going to talk about today in the podcast.  And I hope that you enjoy it and if you do appreciate the podcast please share it with a friend it might be really helpful for them if they're going through the ESOP process.  And,  also you know look at our website at journey to and ESOP.com if you are interested in exploring any new podcasts or any new types of things that might be helpful for you and your own journey to an ESOP,  so with that I'm going to get as we go through this process I'm going to.  Encourage you also if you have questions go to our website at journey to a nice up.com there's a place where you can send a send questions in that we can either,  directly respond to you or we can talk about it in another podcast so so you can participate that way.    [4:58] Music.    [5:37] Here we have the Grinch celebrating his great victory over the who's Whoville and so as we segue into the,  the podcast topic and we get into this a little bit deeper I wanted to obviously use this as like you know one of the things that just in general.  I think it's very important is you have to think about the sale of your business and when you're inviting people into,  that process I will say that just because of specific story after Story of experience with people.  It's a very.  Difficult process because you're inviting them into what you and your team have built in terms of this.    [6:27] So so the mindset here is that you as a selling shareholder or you as a key team member of a company where you really working towards,  the potential selling your company,  then you have this alternative I could look at an ESOP ESOP or I can look at these other buyers right so we're going to get into the other buyer side and as a second so we as we think about it.  It's a very difficult process honestly with both either ESOP or not but one of the things about.  Buyer of an ESOP as opposed to the these buyers that we kind of collectively are going to group them in this category here in a second,  r-really there's a real different atmosphere between the two right and so kind of the this idea where the Grinch comes in and he's it's all about him you know he's going to win even though the buyers,  that I'm referring to are not going to position themselves as as.  Transparently is that right there not number one there but they are thinking about what their sells their business will have they're going to make money on the deal.  In an ESOP environment one of the things I want to kind of pull out is that it's it is a collaborative.  Process even with the buyer in the truck with the trustee because they're thinking long term they're not thinking about how much money they can make on the deal in fact they're thinking about really what.    [7:49] How they can really benefit the company going forward and so because they're really thinking about the employees.  And so that's as we start off you know with this idea of if I just start off with this topic of should I sell my company to an ESOP or to a different type of buyer.  I want to start off with that concept because I think that's that's foundational to know that these are way different different roads right and.  And I want to make sure I say this a bunch of times today that it's not I'm not saying that these buyers are terrible right thir there's serve a purpose,  financially in the financial markets and it's were when I'm trying to get to is for those that are thinking about selling their business and they're dealing with this,  fork in the road I could I could go this direction I could go this direction,  what I'm hoping to do today is deal is deal with helping you make that decision and move closer to what you think is the right thing and it may be the advantages here within these other buyer groups are going to outweigh the disadvantages that we're going to get into.    [8:57] That's going to be the mindset and when it comes I want to kind of really clearly lay that out as we get into it.    [9:02] Now the first group of buyers that we want to think about our private Equity firms and private Equity firms what they do,  is is distinct in that they invest the money that they are.  Collecting on behalf of the fund and funds investors so generally what's happening is that they are raising capital and then they're employing that capital and a lot of times they're using debt to purchase these companies and so there's,  roll a bigger a bigger picture right there's going to be a portfolio of companies that they're investing in,  sometimes the private Equity portfolio companies are going to have a lot of similarities and are going to have some,  potential resources are advantages that are going to help,  potentially the subject company that they're putting into this portfolio other times there's a very big diversity in a very big spread of those of what kind of companies they are.    [9:57] The premise behind it is that once they put all this together it'll be more valuable at some later point because it'll be paid we've rolled up these companies,  we had ibadah of this but now as a combined group we have a stronger and a higher level of ibadah which is going to.  Really increase the potential opportunities of a higher sale price when you get down to it so so that's what a private Equity Group does and.  One of the things that we when we think about that from a disadvantaged standpoint is.    [10:31] First off is just the loss of control so this idea of control I've talked about talked about this in Sony different conversations with companies that are thinking about Aesop's and it's in it's one of the ones I wanted to lead off with because.  When your are selling out to a private equity and a lot of I mean it's going to kind of group these guys together as well at this point is a lot of these other types of buyers you are entering into.    [10:56] The.  The final part of your role in the company right you're you're basically saying I'm giving up control and that needs to be really.    [11:08] Solid in your mind now that for some people of course is going to make some sense.  For a lot of different reasons which we can't always know.    [11:19] What those things are and but we do know that they are there are definitely some things that that need to be.  You know thought through and and there are a lot of people that when you think about losing control of their company they're dealing with.  You know that's a really hard that's a hard pill to swallow so so in a private Equity Group what happens is they're usually going to take over and.  You know maybe replace that person or persons with.  They don't they're keep key leadership or management and so that's going to be really important to understand like what's that going to feel like when it happens and what does that look like for an ESOP,  the typically there isn't a loss of control even when you're selling a controlling interest because the the board of directors in this in the people that are really running the company prior to the ESOP and then people that are running the company,  after the ESOP are going to be the same you're just going to have other governance responsibilities like a board of directors with an independent board member.  And you're going to have an trustee typically independent trustee that's going to have,  with the management of the plan to make sure that the plan is a plan is being correctly administrated and also to monitor the board but in general there's not a,  loss of control so that's going to be the first thing that we think about so as we think about the private equity.    [12:49] Opportunities quote-unquote we want to kind of consider that obviously loss of control is an issue I wanted to say this as well as we start thinking about the next one.  The thing with the private Equity Firm is that their purpose and I think this is going to be true for all.  Major Financial buyers like private equity and.  Venture capitalist their purpose is to make money right so it's desire on a private Equity though normally their desire is to roll this stuff roll these companies together.  In and then a period of say five years sell off everything and make substantial profits.  So clearly when you think about that the negative behind that if you're a company management or ownership,  it has built this company over all these years clearly what comes up frequently in conversations with.    [13:43] Selling shareholders that are thinking about this as an option is that you have to understand it's not just I'm selling to private equity.  It's going to be this the first and they're going to make major changes to my company is that in five years this thing is going to.  Be gone in a sense right maybe it might be in the form of something else but it's for all intense purposes it's going to be gone so that,  totally eliminates that the potential for any kind of Legacy moving forward in the business so I think that's really important,  now on the Venture Capital side.    [14:18] There may be venture capitalist at work that are investing in an early stage company that's going to have some high potential for growth but both of them because they're concerned with primarily.  How much company the how much money the company can make their focus is not going to be for sure on the employees the culture.  You know not not that they don't not that they want to bad culture but because the priority when you're running a business it's like you're,  you're prioritizing things and if you prioritize culture sometimes you're going to give up something else maybe maybe you can make more money if you if you,  require the employees to work way more right and but that's not your culture that's not part of what you do so I think that's an important aspect as we think about it and I think that's fairly intuitive for most people.  But I think it's spelling it out as important so when we in combination of loss of control,  you're definitely going to be dealing with the types of buyers that we're talking about here categorically are going to be there to make money on their deal.  And if they're paying you a premium which is going to be obviously you know the advantage to this for the selling shareholders is I'm going to cash out at The Highest Potential dollar.    [15:35] And it's your business it's like if I'm going to sell my my car at The Highest Potential Diamond you have every right to do that but.  You know you may want your your car to go to your kids or something or you want you may you may want your car to go somewhere else and have other other potential benefits to other people your business here when you sell it you're trading that.    [15:59] Premium sale price for other things and that's what we're pointing out with the other things are going to be.    [16:05] Now the second thing is kind of in connection with that so we're still thinking about private equity and then we're weaving in Venture capitalism as well because I think they both kind of fit together in this in this next one  there is definitely a potential for the company to suffer more employee turnover so when the new buyer comes in,  they want to they are not there I is not on how how do I make the employer the employees lives better,  and I'm not saying that like just like course they care about the employees right but they really care more about.  The the overall objective they came in they paid a premium for it they're there to make money on this thing so the employees,  and the culture and the things that are maybe maybe we're very very sweet and kind of wonderful for the business and employees so far are going to start to.    [17:01] You know start to wane or fade away so so that's something that you have to be concerned with as you start thinking about you know the what's going to happen afterwards now this is a very important point.    [17:15] So of course what this means is that the employee turnover might be a major factor.  And employees after the fact after the deals done made say hey this isn't going to work for me I'm I didn't sign on for this.  I'm going to jump ship I'm out of here and now the company has to deal with that in their performance and trying to measure up to the things in the future now if you if you sold a hundred percent of your company and they gave you a hundred percent of the cash for it probably don't care,  but because that's the company's problem or the are the buyers problem but if you sold it in a lot of stress deal structure happens with private equity and Venture Capital where you are going to have some performance metrics as an urn out.  Then you are going to care because the financial performance of the company dips that could affect what your overall purchase price is so so I think that's clearly a negative that can come up I think in both types of structures are both types of buyers and,  private Equity or Venture Capital depending on the structure of the deal.    [18:15] The other thing that's going to come up that with with specific to private Equity is that the company has been funding the the companies that the transaction itself is going to be funded with debt,  and so what's interesting about this is that.  In a while in a truly leverage buyout scenario right I mean in the event that the company they go to the transaction so we put all this debt on the balance sheet.  Which is very similar to an ESOP deal turn transaction by the way because we're going to be leveraging that as well.  Do what the couple main differences between the two is again going forward if we're if we are at all concerned about the company having a cash flow burden of that debt.    [18:58] Then it because we're part of the company going forward,  in a private Equity deal then this is this is where I would say that this is meaningfully different for an ESOP company yes we have debt but we are probably going to be a tax exempt or a tax-advantaged company,  whether we're an escort for and ESOP which means that even though a nice app company is going to carry a good amount of debt to pay off the purchase price.  They're going to be subsidized by the Internal Revenue Service or our government,  to make those payments because they're going to be tax advantaged in on an s-corporation that means they're going to be tax exempt so that's definitely an advantage over this where the company is paying out all that debt after it's paying its taxes as well.    [19:47] In addition to that the debt structure for an ESOP,  is usually broken into pieces so you have Bank financing which is going to be your senior debt placement which would be paid first.  Now we defer and push out other expenses for principal and sometimes interest on the seller note the seller financed piece,  and that means the company can afford a lot more debt because of the combination of the debt structure and also the amount of.  The debt structure in the amount of taxes that are being saved whether they're an S corp or a C Corp which create cash flow that will help.  Reduce that so clearly if you're going forward on a private Equity deal in,  having to deal with the negativity or the being part of the company and your buyout is is.  Anticipated to be dependent upon the company's future cash flow then those things are going to be problematic for you.    [20:49] As we get into like the idea of a venture capital type of situation there could be again a good amount of money coming into the deal for you to make it make sense as a selling shareholder  the thing is like now and I kind of relay this a little bit differently some in some cases we are considering.  Selling a portion of our company and so I want to talk about that for a second because,  a lot of times we think oh we're selling a hundred percent so so if you're only thinking about selling a part of your company portion and you're considering,  a venture capital type of partner because at this point in the equation you're thinking about I'm selling my business I want to bring in I want to bring in a financial partner now the,  part of this is the advantage for the selling shareholders they're going to raise their going to first off take some chips off the table at a hopefully hopefully a very good premium,  what the value of the stock is worth secondly they're going to be able to fund more Capital into the company,  with a financial partner now that what can be a learning about that for them is that they can and they can say okay well we can grow our business a lot stronger and I have had this situation multiple times in my career with,  with clients we can we have to have more Capital to grow our business with a you know certain kinds of business models.  They simply just require a ton of capital to try to get to the markets that they're getting to could be the product development side it could be other things.    [22:16] So that this looks like a very good opportunity for them to do that and so so the main thing is is I have to compare that to a partial ESOP and as I do this for the podcast what I'm thinking about our.  The negatives of having a Venture Capital Partner are pretty problematic in that.  In my opinion in that there the risk first off your you're partnering with a company.    [22:42] Not a an individual that you see eye-to-eye on and have a core value relationship with and and a commonality.  The Venture Capital firm as I said is a company that is designed to make money.    [23:00] And so there and they're there and I'll get into this a little bit too as we step into some of the other negatives they are there to make money and they also are extremely,  sophisticated when you get down to it they have to be right they have to be extremely sophisticated not only financially,  but also legally so now I've got to tango with a an entity that's going to be lawyered up,  with the probably the best attorneys in the country their advisors that due diligence quality of earnings reports evaluate your company and all the different angles are going to be highly sophisticated now.    [23:39] That's fine and that might not that to me that's a negative for some companies right so for some others like that's fine we can we've dealt with very complicated things now when you're inviting somebody to be your partner,  in your company from a long-term standpoint.  I think that they can that can be kind of scary and I think so when you start thinking about that the due diligence and this is also true for for a private Equity Firm the due diligence can be pretty,  pretty hairy they can go in and really get you know it can it can all start off and it normally does all start off very,  wonderful lots of flattery by these by these types of entities that are saying oh we love your business we love what you've done you're so you're so incredible how could you ever come up with such a great idea you know they just start flowering the owner with all kinds of,  messages that help they're the owners egos just start to kind of just blow up right they know their dick,  they know what they're doing they're getting in somebody really excited and I'll tell you just kind of on the other side of that thing I don't like that at all I think that people should just be totally real you know and,  I get it like their financial people in this is you know they're big the way that they do their business.    [24:49] But it kind of makes me yeah turn a little bit inside my stomach thinking you know somebody is so.  You know easily flattered and then they sign this letter of intent and to get into this deal and they kids deeper and deeper and then things suddenly start getting thrown at them that we're not there before.  And it gets uglier and uglier and sometimes though there's deals will blow up I mean I've seen it happen it's blown up but I have seen deals where Venture capitals capitalist Venture Capital comes in.  And next thing you know the real - is now in partnering with them they have all the legal you know when the documents are done it's going to be an advantage to them unless your attorney,  and you negotiate something so hardcore but in general you know it's like going to Las Vegas the house is always going to win right that you're going into that,  dealing with people that this is all they do.    [25:46] So in my experience and in some cases I have seen a very good business idea be.  You know with a business business founder founding owner taking the risk of that idea employing capital and then building this really good business but then knowing they needed capital and then they went this direction,  and then in for 25 years finding themselves actually out of the company that they created completely so all of that being said is is if you go into this with a partial concept of like yeah I'll bring in some capital,  you know we feel good about it I'm not saying that's going to happen nobody knows exactly but I do think that that's a negative,  that I've seen happen and then suddenly that person's prop for a proprietary.  Content or whatever they created or whatever even just founding a company can be just so difficult is going as just kind of evaporating on them and they're now they're out like there didn't they don't even matter,  and I talked about like the loss of control clearly that's part of the loss of control but literally loss of ownership.    [26:51] If the company's performance kind of falls off a little bit and so you know that's that's really problematic now think about that in terms of.  Comparing that scenario where we were just talking about the partial sale with a partial sale Esau.  And the partner that you're bringing in on a partial sale ESOP is a,  that is a required qualified retirement plan that benefits the employees so we get this boost of energy in our company that really helps the employees start to be connected,  indirectly as indirect not directly but indirectly as beneficial owners to the vision of the company on top of that,  we get to to fund that with debt.  But that deck gets paid with the subsidy that the government gives us as we've talked about so so when I think about a partial sale of a company whether to be a partial sale is a private Equity or partial sales of venture capital I'm super.  You know confident on an ESOP side I'm not super confident on that on that side if you're going to sell a hundred percent of your company.    [27:57] Then I think definitely and you're and you're really concerned about getting the highest premium and you have private equity and venture,  companies looking at it then I think that's that's a pretty good direction if you if that's all you care about but if it's a partial I would say definitely I think an ESOP is going to gets going to make a lot of a lot more sense when we start thinking about,  the buyer groups.  So as we as we transition now from into that and two more of the Strategic buyers which really is very difficult like I can we can go all day long and talk about.  Private equity and Venture Capital because they represent a by a financial buyer that their businesses are created their business models created to Great to make money off the purchases of companies.  When you think about a strategic buyer it can be such a spectrum of all kinds of types of buyers it could be your competitor,  it could be a vendor it could be a customer it could be simply a you know a company with the same vertical industry it could be you know there's a lot of scenarios.    [29:00] Of who they could be they can sometimes come in with with great complementary,  advantages to the overall deal because they have they have these different pieces of the business model yours fits perfectly in the puzzle and because of that,  they're going to be like hey we're going to pay you a premium and so that can be really advantageous they could be trying to expand geographically they could be looking for you know an opportunity to take services that don't,  that definitely complement one another and put those together there there's just so many different types of strategic buyers,  so what I want what I want to do is obviously think about those.    [29:41] And just think about the negatives that could come up and looking at us at a strategic buyer and I actually have this situation going on right now with the client we're not going ESOP but we are talking about the potential sale of their company.  And he's experiencing some strategic buyer types of information that are coming and he's really at the beginning steps of doing this type of deal and some of the things that we've talked about are what sort of things  in the East and the process of going through,  I guess the ma process really when you start thinking about it that have to be dealt with and so let me just highlight a few things I think that are going to be important for the selling side of the,  MAA process we started thinking about it you it depends on and again I'm just focusing on strategic buyers at this.  But it really kind of depends on the,  what your opportunity in the marketplace is and and a lot of times when you're in this in this type of scenario that I'm getting into you're going to have a cell site advisor and Investment Banking firm that's going to help you walk through these things so they're going to give you advice.  So that they can put this deal together and you can you know pay them a chunk of your value of your company at the end of the deal and so if you're going to do that.    [30:57] Then it's going to make sense in your process of doing a sale to a strategic buyer to go through especially if you have a.  A solid.  Overall business that has some marketability to it which means there's going to be a lot of buyers interested in your company for for whatever reason I mean you guys you know have put together something just really unique and the market wants it,  so let's just keep that in mind if that's the case and that's you the investment banking firms are going to want to build this into the process so they're going to want to.  Put together something is in terms of the pitch book that's going to be very very attractive and go into the marketplace and find this many buyers is possible that really fit within what your what your criteria are.  And there's there are some ways you can guide that obviously you can say I only want buyers like that we're going to continue on my business or whatever is important to you,  you can you can build into that that first part of the process is to start to get all the all of your bids so they're making contact with buyers,  you're starting to get some bids on the on the business and.    [32:09] You're going to have to qualify the bids at that point right so you're going to have to go through and an interview and look at their information and really qualify and based on your goals and objectives,  and then from there you're going to want to then receive the letter of intense and review those from,  getting to that point where you've signed a letter of intent that provides the buyer.  The potential buyer route so we're going to scale it all back to one potential buyer that's going to that's going to you're going to sign the Li and then they're going to have a right of exclusivity which just means nobody else is now looking at,  and then they can move the process that then can move into due diligence where.    [32:49] The buyer is going and starting to look at everything so so calm you know.  My think about the ESOP process this this kind of works similarly but it's much much more reduced and we have the Department of Labor reviewing the transaction so,  the due diligence as I said for private equity and for Venture capitals here it's going to be the same thing it's going to be very very time-consuming and it's going to be very detailed it's going to be very,  back and forth in terms of questions that the advisors are going to have and it really depends on the buyers team and how deep how deep they want to go,  and so I've heard those types of things can be just absolutely and anguish type of situation or they can kind of go easier but just keep in mind that that's going to be part of the process.    [33:37] So then all that gets done the board finally approves it and then they go to you go into the documentation phase and so from there,  you're signing the deal and everybody lives happily ever after so going into that what I'm wanting to say is some of the things that will come up with a strategic buyer that I think are negatives.    [33:57] One of the things that can come up that you need to be obviously very very in tune with and this is what some concern I had with the one at the one example I was kind of referring to earlier is that you are.  If you have a strategic buyer that you has some level of knowledge of the industry.    [34:16] There could be a really you know you could be giving up confidentiality and trade secrets in the process of you know putting all the stuff together and I know that we,  we say hey we're going to sign a nondisclosure agreement all right raise your hand if I sign a nondisclosure agreement you know in the last year I've obviously signed a lot of and over my career and similarly to other types of legal documents,  the thing is with a legal document it may make you feel really nice like a nice cozy blanket,  but when in the end if you actually have to go legally pursue that ND a now.  You're going to do it probably right but the the effective ability to sue on a non-disclosure agreement is going to be difficult.  It's going to be difficult because the way that the Wall Works is just it's not straight it's not clear you're going to have to put legal costs into that you're going to have to feel pretty good about the case,  so even though you sign a confidentiality agreement or a non-disclosure agreement don't think that that's something that you're going to probably that will probably completely protect you.  So that's that's a - right and so the - behind that is because people are gonna say well you're protected under the ndaa is that you are giving up really important information.  Now I have seen this just so you know I've seen this in a full transaction with one client where they saved all of their they had some very heavy Trade Secrets and they had in this case they had.    [35:44] The actual formula of a chemical that they created and they weren't going to share that formula they knew everybody can validate that it worked because I had all these contracts.  They were super successful they made a lot of money so they saved all of that trade secret to the final closing none of that was disclosed so,  in the event that this is you know you're going to go down this road be very careful about what you disclose to a competitor or,  to a customer or anybody that's in the industry that might be you know coming in coming in till review that so you don't give up something that's really critical.    [36:20] So    [36:22] Some of the things that will be also negatives as you as you have to think about this is now if I have a strategic buyer now think about this for a second and just keep.  The plant it and then say all right you can deal with it as you as you want but if I have a buyer that's bigger than me,  is it likely that they're going to keep my finance person my HR person my all of some of the infrastructure that I've built in my company,  and the reality is is probably not right because and you know it's not the buyers fault they why would anybody have two controllers or to HR people you're not you're going to have systems that they're going to immuno plug into your business.  And that's going to be a negative right there the company's people are not going to be maybe maybe because it's just true sortie check by there will still be some type of really good culture.  As far as guaranteeing positions that's going to clearly be a negative.    [37:17] And then another negative is just that you as you think about this you've built this Legacy you've built the brand you've built,  solid culture and in your community or you are who you are to the community and all of those things have to be thought that they're going to be.  Changed modified and some ways eliminated.  In some ways you might your company might not even have an office in five years just just keeping that these are just that the negatives that you have to think about.  So all of that going into the idea that you have potential opportunities within the.    [37:56] Sell-side.  Is to kind of categorize some of those and I and I may not have fun you know unearth any major Rock for you today but I think it's important to just kind of lay out what I think is a very good overview of things that companies have to think about and go through,  in comparison and I think I would kind of like finalize this in a way that,  the main thing that I would say if you're going to go towards an ESOP.  You think that that's your primary possibility and you're considering these other options.    [38:29] It probably makes sense for you to put the ESOP on hold and go through those opportunities first.  I find that the ESOP deals I've done our much.  The ones I've done that have gone through both of these the company has learned a lot more going through this m&a process first and pushing the ESOP second some people want to go through the ESOP first and then compare that to the m&a process.  And you know that's up to you but but I think the reason I say that you're better off.  Going through the the full ma process whether it be a private Equity Firm a venture capital firm or strategic buyer.    [39:09] Is that you're going to root out some of the some of the things that you don't really aren't really aware of in the I guess the biggest negative that I would say that I haven't touched on at all.  Is the comparison in the value that you're going to get four strategic sale versus versus an ESOP sale.  And ultimately that's what's really Weighing on people's thought process of,  if I sold it there here I'm going to get a bigger number if I sell here now an ESOP sale is going to be,  fair market value and we've talked about a lot of the valuation things in terms of,  what am I actually getting for my company its fair market value that's concerned with and considering primarily the forecasted cash flow of the company as long as it's reasonable and compared to history.  So as a seller you're not taking less than fair market value that's the first thing in an ESOP deal so when I compare the two opportunities.  That is going to be and I have a 12 times multiple on a strategic sale and I can get a seven times multiple on the on the ESOP deal well clearly right off the get-go you're going to have a potentially higher valuation,  for the Strategic sale with all the negatives that we just talked about.    [40:24] And that certainly might outweigh it now what picks up the ESOP deal when you compare the value is that if I'm a c-corporation and I can save 20%,  on my taxes because I have a capital gains tax deferral well now my 7 times multiple versus my 12 can kind of start moving up in that.  And then on top of it if I can also structure a warrant on my seller note then that can also buoy up that number as well to get me closer to potentially what the original deal was,  on the other side so.  I kind of wanted to make that statement the valuations themselves can sometimes be deceiving on both sides and that really does take some time to to.  So if you do go through this process one of the one of the reasons I if I go backwards one of the reasons I mentioned do this first because,  I think that people think that they when they think that they all they care about is money when they start really looking at the negatives I just pointed out,  then they're going to be satisfied that they've done their homework here and then when they get to the ESOP it's going to be very clear and very straightforward.    [41:34] I also think that there's this potential to confuse your key managers your key leaders in the process ultimately I've seen it kind of worse than that they've confused the employees in the process so,  I would just definitely strongly encourage you to be as confidential as you can and going through these processes before you know exactly what you're going to do because I,  I think the employees deserve at least if they know it's one way or the other there's a lot of impending xiety that could be created unnecessarily in the process  so I hope I hope that helps I know we kind of got into a lot of different types of things but I wanted to round it out on the at the end here just to kind of think about how that might really really be helpful,  to you going forward in your in your journey to an ESOP so with that everybody Merry Christmas have a wonderful Christmas time and have a Happy New Year and we'll see you next time on this journey to and 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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