EP38 - Interview with ESOP company - Southeastern Surveying and Mapping...Brian Garvey - Orlando, FL

Welcome back. Thanks for tuning in. I'm the ESOP guy and we are on a journey to an ESOP. So this podcast is a resource we produce to really help those folks that are thinking they might want to consider converting their companies to employee stock ownership plans. If you are new to the podcast and you have an interest in other episodes, please go to journey to an ESOP.com. Today, I am excited to have the privilege of interviewing Brian Garvey with Southeastern Surveying and Mapping Corporation in Florida. Brian is a client that went through the entire ESOP process from the very beginning and now has an existing ESOP company that he's part of. Um, he went through the process as part of the company's corporate management. He serves right now as the existing ESOP company's 4 directors or one of the 4 directors and focuses primarily on the financial and technology operations of the company. So as we go through the podcast, if you like what you hear, please subscribe, share it with a friend. Also, if you could rate and review the podcast, that'll be helpful for others as they're looking for resources like this to better understand ESOPs. So with that, I just wanted to say, Brian, thank you so much for joining us today. Well, thank you for inviting me to be part of your podcast, Phil. I've really been learning a lot by listening to your programs. I'll start off by telling your listeners a little bit about our company. Uh, Southeastern Surveying and Mapping Corporation is a geospatial consulting firm. We operate primarily in the architecture, engineering, and construction industry. We've got 215 employees spread across 8 offices in Florida and Alabama. And we're lucky enough now to be in our 3rd year of operating as a 100% employee on ESO. Yes, that is pretty cool. So it's kind of fun to do this episode on because I, you know, we worked closely together on this, on this process. Um, so I'm excited to, to get to kind of go through that over the interview and just kind of talk about some of the things that you experienced along the way, and I think that's, that's gonna be helpful for people as they look at this as a possibility, um. I went through the process at the very beginning with the selling shareholders, and I was their adviser. And for me, the process really went through its normal steps. But what we did is we really began considering a management buyout versus an ESOP and as really two options for the exit planning of the existing or the former selling shareholders. So Brian, from your perspective, can you cover how you experience the transaction and and really kind of in general as part of being one of those key employees um that was taking over the business at that time? Sure, early in the process, like you said, we were really talking about a management buyout, and so part of this was discovering the concept of ESOPs and you know what an ESOP was and how it might fit into this discussion. Our corporate succession team consisted of the two majority shareholders who were going to be selling the firm. As well as 3 minority shareholders who were going to continue to operate the firm after the sale, as we kind of started exploring these different options, there was a lot of education on the part of the leadership team looking at the pros and cons of both the concept of the management buyout that everybody was familiar with and the concept of an ESOP transaction. And really this was about learning about ESOPs and the concepts of employee ownership. What what would an employee owned firm look like? Um, and then as you mentioned, working through the various financial projection scenarios for each of the two options. Once we got into the middle of it, we were really trying to get past just the numbers. We had a lot of discussions examining what the entire succession team wanted for the company to look like after the transaction. Our sellers were the 2nd generation of owners. They had bought the firm from our founder about 18 years earlier. And you know we talked a lot about what their goals were for the firm back when they were the buyers and what they had envisioned for for what the firm was going to become, and I think this visioning of both the past and the future really helped us to decide to choose the ESOP over the management buyout alternative. Once we got into finalizing the process and we made the decision to go as a 100% ESOP transaction, then we started assembling the team for the transaction, and I think things went very smoothly. On the due diligence was performed and the valuation was decided on and negotiated between the sellers and the trustee. You know, the transaction was really almost anticlimactic for us on the purchasing side of the transaction. Since the transaction negotiations were taking place between the trustee and the sellers, those of us who were soon to be employee owners really weren't in the loop. And, you know, personally I felt a little bit left out. We were kind of waiting in anticipation to see what would happen. It was sort of like, you know, I was, I was a father in a 1950s era hospital, you know, in in a waiting room waiting for a baby to be born, and the doctor comes out after the process and says, Hey, congratulations, you've got a healthy baby girl Aesop, and here's how much she's going to cost you in monthly payments for the next number of years. Yeah, you kind of didn't know what you were getting into or didn't know what you were going to get until it was all done. Um, that was, that process as you go through it, and I know there's a lot that, you know, a US corporate management are not necessarily on the front, on the front lines with. Um, what I know kind of going from the very beginning of discussing in the MBO and going into, you know, the ESOP, um, you, you, and I kind of remember how a lot of the early meetings that we had, your um understanding and opinion of, of either of those two different strategies. How did that How did that change over that period of time where we were working through, I know we did a lot of modeling and we talked a lot about business valuation, we talked a lot about cash flow. Um, did it, did you find that you just kind of learned a lot or just kind of knew or kind of reinforced things? What the process itself, how did that affect you when you went through it? Well, I think it was very educational for me because we spent a lot of time on the nuts and bolts and numbers, but really the decision came down to more of the emotional concepts, you know, one of the reasons why we ended up preferring the ESOP over an MBO was was first and foremost cultural. About half of our employees work out in the field each day, so they're not in the office. And so really the professionals who are in the office have to rely on the measurements, the observations, and the decisions that are made remotely by our field staff. I grew up in the land surveying industry. One of our perennial laments in the industry is how do we get the remote field staff to care about the projects and clients as deeply as those of us in the office who are running the company. you know, this is really kind of a cultural thing, but I feel like employee ownership helps to build that mindset. It wasn't really about creating a sense of ownership, but providing actual ownership, and I really believe that the concept of employee ownership and the ability to give all of the employees a stake in the outcome makes a difference, and it allows the employees to share in the benefits of capitalism, and it's a great opportunity. The second thing that kind of swayed it for me was that the ESOP really offered a continued mechanism for corporate succession, and what I mean by that is our corporate succession team, we met on and off for about a 3 year period discussing this concept of a management buyout and running various seller buyer transaction scenarios before we started learning about an ESOP. And you know one of the things culturally with a management buyout. You're really selling the business to the next generation of owners, so that involves kind of grooming key staff members to make sure that they've got the skills to successfully operate the company when the seller retires, but it's also convincing that next generation of buyers to purchase the business at, you know, what would be a fair price for both the buyer and the seller. One of the really cool things I think about an ESOP concept is that, you know, if you move to a 100% ESOP, it greatly simplifies this process for the next generation of succession. Um, because the mechanism for the transition of ownership is already in place, it allows the leadership team to focus really exclusively on that mentorship part of the, uh, the work to continue the successful operation of the business. And the actual ownership part takes care of itself. It frees up the leadership team to really focus on the mentorship, and I think that was important for those of us who were investigating the management buyout because it simplifies things when we're ready to pass the business on to the next generation. Now we were founded in 1972. We're starting to plan our 50 year anniversary for 2022. Um, we really want our firm to become a 100 year company. And I think this ownership succession mechanisms that are built into the ESOP are really going to help us to get there. The third thing really was was the tax incentives. SSMC is a subchapter S corporation, and as a 100% employee owned ESOP, we're essentially exempt now from federal income taxes. This incentive for employee ownership, I think, really gave us a competitive edge in the marketplace, especially since we operate a real capital intensive business. Where the annual tax obligation is always a major consideration when there are a lot of equipment purchases. I think that's, that's a very good overview. One of the things that you said kind of initially that I just would comment on real quick is just this idea of the emotional side of, of the decision making process, which can't be put on a spreadsheet and, you know, numbers and, you know, numbers you always need to make sense for an ESOP. But that's an, that's always a very interesting aspect of when people are making decisions, when you are deciding. To go with the ESOP over the MBO. And I, and I'd have to say, you know, my comment to you is, is I think that you guys um put the company first. And I think sometimes the MBO gets done. Um, because the, the, the new business owner wants to, you know, he wants to own the business, and there's nothing wrong with that. It's just, you know, culturally speaking, um, you, you basically wanted the company to be more successful and, and the reasons you just stated are really are very good reasons in terms of why somebody should choose an ESOP over an MBO and, and I, I, I get in that conversation like almost every week with, with, you know, new perspective um companies that want to think about becoming an ESOP. So as I, as I remember, one of the issues that we dealt with, that I wanted to talk about a little bit was this idea that, you know, when we were going through, I'd say more of the management succession discussions, like who is taking over what job from the selling shareholders. You know, out of the three key people, including yourself, there was Darryl and Tom. Um, you each already had specific roles in the company that you were doing, but then you also had roles that you were taking over from the, the two existing selling shareholders. Can you discuss how you guys went through that transition process? And then also kind of how is it going now after almost 2, now we're on 3 years of the ESOP transaction. Did the management transition plan really work the way you thought it would? Well, before the buyout, each of the three of us who were on the the buying end of running the company, we ran 3 different operating divisions within the company. So our primary focus was really on operations, and the plan was that each of us were going to set up a successor in each one of our respective operating divisions, which would cover things on the production side. And then we were really going to divide up the leadership and administrative roles between the three of us covering marketing, finance, human resources, technology, and administration. So really that, that's kind of the, the plan that we implemented on day one. But you know, I'd like to, to say that my favorite quote from Mike Tyson, the boxer is, Everybody has a plan until they get punched in the face. And that was kind of the way it worked out for us as we tried to start executing this and presenting these concepts. And what we really quickly found out was that if we were going to talk the talk about employee engagement, we really needed. Walk the walk and not run the business like it was run before. What I mean by that is we really needed to engage all of our managers to build a new culture. This involved delegating a lot of the additional responsibilities to the other managers in the firm. And really forming a more distributed form of leadership, I think that's really critical in an ESOP, and it's really still a work in progress even after two years. I'd say it's a learning process for all of us because primarily the model that we as senior leaders came up with. You know, it came up under as we progressed through our careers is really no longer appropriate for this new environment. So I'd say we're all kind of figuring it out as we go along, but the key thing is being able to share the responsibilities and involve everybody in the process. Yeah, I think a couple small comments there would be just this new environment includes COVID, so everybody's wrestling through the next stage of of of life and how we do business that way with keeping our employees safe. And then the other comment I would make is, you know, more of a question, like a small question is like, how, when you guys were going through those um steps, how did it work with the selling shareholders as far as them, um, you know, stepping down in their roles and, and you guys stepping into them? Was it, was it a smooth transition between, you know, you, the, the old owners and now you guys are taking over the transition plan? I would say it was fairly smooth. The the older of the two sellers left after about a year after the transaction, and then the second left about 18 months afterwards. So we had had, you know, a long process to go through, as I said, we'd been planning the succession for several years before the actual transaction. I think partly where we ended up having to spend a lot of energy was just on managing the relationship of our clients. Obviously whenever there's a transition, you're transitioning in how you're running the company, but you're also transitioning. In those relationships between the company and all of your clients or customers, you want to make sure that everybody is comfortable with the continued operation of the company and the continued relationship. So we spent a lot of time on relationship building with our clients as we were going through this transition. And you guys did a great job because you haven't missed a beat since you took over. Um, I remember when, when the whole thing was completed and we were, you guys were ready to announce the ESOP to the employees. And you, Brian took a lead role in that presentation. How was that for you? And then also, what do you think it was like for the employees to kind of get the news? Well, we've got, we've got multiple offices around the entire southeast and so we really decided news of this magnitude needed to be delivered in person and so what we wanted to do was really make presentations in each of the major offices. And so for the larger offices we actually rented offsite locations. When we first really announced that these presentations were going to be made at an off-site location, the rumor mill really started cranking up and there was a great deal of speculation. So one of the things that we wanted to do was was really decide to have some fun with it. We started an online message board where employees could post their ideas and speculations on what the announcement was going to be, and, and, and we had a lot of fun with the the speculations and the rumors. We really wanted this announcement and presentation to be something different. And you know we felt from the beginning like food should be involved. We're trying to promote this concept of family ownership of the business and all the employees coming together as a family, and we really wanted to gather around a meal. Our original concept was we were going to have a steak dinner so that all of the employees now had a stake in the outcome, but that's great. We decided that it really wasn't probably the most appropriate action to spend that much money while introducing the sale and our new debt obligation to our former owners, so we backed away from the steak concept. But what we settled on was this concept of a pie social and really it was kind of cool as a leadership team. We all served slices of pie to all of the employees and told them that they'd all been just given a piece of the pie. I think that the presentation was really well received from the employee's point of view. Uh, what we really wanted to do is present the concept to them of, of why we were doing the sale and you know why the the the two previous owners were retiring. We explained that we investigated lots of different alternatives from the management buyout to an outside sale, and we introduced the concept of the ESOP and why we made that decision and we spent a lot of time really explaining to the employees then what an ESOP was. We had some. Videos that we played from various other ESOP companies to really start to introduce the culture and I think it went very well. I think the pie helped. I'm sure the pie. I've just got to tell you that that is such a cool idea and honestly, I didn't even know that I knew that you guys did the really great presentation, but I didn't know what what you had done there. Um, yeah, so if you guys are listening out there, you're like, hey, how should I do the presentation? Maybe you can borrow Brian's idea. I think that's really clever. Um, so as you've gone through a complete, you know, this complete cycle with the ESOP, you know, from beginning to where you are now, what would you say were some lessons that you've learned through this whole process? I think education is key, you know, from early on, I think anyone who's going to be involved in this really needs to prepare themselves and learn as much as they can. And as you learn about the ESOP and the transaction and how it works, I think it's important really to educate all of the employees early on in the process by sharing what you've learned with them. You know, after the transactions completed, you know, you may be running the company, but your employees are now your business partners, and I think they really need to be treated as such to the maximum extent possible. I really believe in involving them in running the business. After all, it's their company too. Um, on the, the, the process side, I think one of the key things that I'm very grateful for is the fact that we really assembled an experienced team of advisors, you know, you want to pull in an accountant that's got expertise on ESOPs. I was very happy with the fact that we brought in an external trustee to, to give us advice and support the firm. Um, I think having a solid valuation firm that that's done a lot of ESO valuations. Somebody who knows the right questions to ask and will dig deep into the firm's finances and ask questions about operations to prepare an accurate valuation, I think that's critical and You know, I don't want to leave out the third party administrator. You know, this is somebody who can take that annual evaluation and prepare informative statements for each of the employees so that when they get a statement, it's, you know, it's really very informative for them. So, you know, I think the the team can make all the difference in the world. That's true. It's it's like my experience too is you don't know what you don't know until you get through it and having to ask those questions. Um, you really do have to rely on, on experts, the people that you surround yourself with. So I think those, that's a good overview of the people that you definitely want to have, um, experience. The only one I would add to that list would be an experienced ESOP attorney. Um, and you probably weren't as involved in that part of it because that's more of the selling shareholder, but they will help create a solid plan document that will help the sustainability of the ESOP as you go through different types of challenges, but, but, uh, complete a great list of, of people that you should definitely have as your and your team. When you guys um got this out, we go to the, we shift over the employee side, as you mentioned, kind of you treating them as your, as if they're your business partners, um. In fact, they are, and they, you know, they have this, they have a stake in the business as well in their retirement accounts for the ESOP. But um how, how, like, what's the actual reaction from the employees since the ESOP was created? Um, what, what have you seen there from the employee side? I think initially, um, you know, there, there was a great deal of surprise in the, in the concept, um, and I'd say really employee engagement is still our biggest challenge. You know, one of the problems with our current economic system is it teaches people how to be employees and not business owners. So, you know, culturally everyone has just been used to the idea of, of, you know, not necessarily being active in the leadership of the company, you know, we're in our 3rd year now of operating as an ESOP. Our employees had received their 1st year valuation and stock statement last year. And in a couple of months they'll be receiving their second statement this year. So they're really only beginning to see some of the economic benefits of ownership, and I think it's going to take a few more years of kind of watching their vested balance increase before everyone starts to really internalize what ownership means over time financially. You know, financially, the ESOP really acts like a retirement plan along with our 401k. And we've really spent a lot of years educating our staff on the benefits of the 401k plan, and we're proud to say that we've got over 80% of our employees participating in the plan. It's really tough sometimes, you know, looking at our demographics to get a 20-something year old single male to start seriously thinking about their savings for their retirements, and I think a lot of people still don't get the idea that there's a financial benefit to spending your entire career as an employee owner where you receive company shares of stock each year rather than just working as an employee somewhere else. Um, I think it'll take time, but each year I see more and more of our staff understanding the process and getting involved. We started up an ESOP communications Committee. We've got a leadership council where we're doing mentoring with our younger managers and things like that. There's a lot more questions that are being asked, so they're they're starting to get it. Those are great. Those are great comments. What I like about your attitude though is you guys are patient with your people and you know, I think you have to know. Uh, you guys have a, a wide spectrum of employees that some of them are gonna get it probably earlier on. Maybe they have a little more experience with something like this, and others are, it's just gonna take time. So I think that makes a lot of sense to try to be just as patient as you can to try to help them. Um, so I know that for you, you've read a lot, and you've learned a lot about ESOPs. What resource would you recommend to folks that are considering an ESOP and, and want to learn more? You know, I, I really can't say enough about the ESOP industry organizations like the National Center for Employee Ownership. The resources that they put out and their publications have really been invaluable for me as I went through this process. I'd say really if anyone out there is considering becoming an ESOP, they're a really great place to start, to start that learning process. Um, and you know, their annual convention that they've got is really an incredible learning experience, um. I got to go our first year after we became an ESOP, and we've sent key employees each year since then. It's really kind of a cultural transformation to be able to be part of, you know, a group of 1000 or 2000 people that are all essentially working. their business rather than in their business. It's a great cultural environment and they've got a lot of great educational materials that have helped me. That's great. I'll mention to you that's coming to Florida and we're starting another podcast on it is the Florida Center of Employee Ownership. And so, a lot of states have chosen to create their own um statewide um nonprofit organizations. So this is just getting started as we speak, um, myself and John Burgess are um gonna have our first podcast coming up in the next month, so be looking for that. But um I think those, the NCEO are the stuff that John Brian's talking about, their, their resources on their website are really good. They have so many articles that you can read. Um, so I think there's a, there's a lot of information and I think my advice too would be just read as much as you can, ask as many questions as you can so you can really try to understand how these types of things work because they're, they're complex because there's a lot of components to it. But when you take each one by itself, it makes it much more easier to digest. So kind of shifting over from the management of an ESOP company for you, Brian, what, what's the most and maybe your, your, the other guys that you're managing the company, what's the most difficult aspect of keeping up with the compliance of an ESOP company? Well, I really wouldn't say that there's been any great compliance difficulties. I think it's probably because of the fact that we've got a good team of professionals that are working with us that are keeping us informed on what we need to do. So on the compliance side, I wouldn't say that anything has been burdensome, but you know one interesting concept that I'm beginning to realize. Uh is this process of getting our annual evaluation for the firm. Essentially you're on an annual cycle. You've got to get the firm valued each year so that you can prepare employee share statements for all the individual employees. So I've been in our company for about 20 years now and in the past we really Never focused on the value of the firm. We were focusing on servicing our clients and this sort of thing and so we didn't do a lot of long term visioning or planning about the firm itself, but really as an ESOP, this annual process has us focusing a lot more regularly on our financial forecasting and the decisions that we want to make regarding the company and where we want to take it. So that we can prepare these materials for this annual valuation. So because it's an annual process, it requires essentially a more formal business planning process to be implemented in the company. But I think the process in this structure is really making us become better business leaders, and I think the company is stronger because of it. I and that's something I talk about with that ESOPs or they're thinking about ESOP. It's an intangible. Benefit. I actually had this conversation with a company just yesterday and it was this idea that your company does change over this um process of becoming an ESOP because you're, you're, you're kind of not, I guess, for, you're forced to do a business plan to create a financial forecast that makes sense. But I find that is probably one of the most healthy things any company can actually do. Um, especially as we go into the next like wave of, of uncertainty. So I'm, I'm, um, really, really proud of you guys for pulling that off. It's hard to do because you actually have to um put some effort and time there when you have so many other things that will kind of pull your attention in, in the day to day business. Environment. So, so I think overall, my, my final comments would be, you know, this was, this to me was a very successful, um, ESOP company that we, we started with and, and to talk to Brian today and look at where they are, um, I'm absolutely pleased with how that has all gone and with the, you know, just the experience that they've had, I think that Um, for a lot of people listening, I think there's a lot of discussion about ESOPs, are they right for you or not. Um, you know, as we go through this whole interview, I just, my, my final comments were just, it's just a, it's nice to kind of go back and look in hindsight at at what things that um Brian's company did and how they went through that whole process because I think it's helpful for others to look at that. So for, for you, Brian, do you have any final comments for us? Yeah, I, I, I agree with everything that you've said. Thank you for having me on your program and giving me the opportunity to share our experience and, and our story with your, your listeners. Really, a message I'd say for the sellers that are out there who are considering an ESOP, um, put together a solid team of, of folks who are very experienced in putting together ESOP transactions and giving you good advice on the process both before and afterwards. For the folks out there who are going to be running the ESOPs, I think education is really key. Educate yourselves and educate all of your employees. I'm a big believer in practicing open book management, sharing the financials of the firm with with all the employees. I think that it's amazing the benefit that you and everybody gets when everybody in the firm starts to internalize how the company makes money and generates profit. You know, I'm just always amazed when You know, we go through these educational processes and I see the light bulbs come on for all of our staff, and I hear discussions out in the field about, you know, the types of work that we do and what generates more income and this sort of thing. I think education basically makes the company a lot stronger and you know, I, I personally, you know, to brag from it and I'm, I'm very proud of our firm and our employee owners as we've been on this ESOP journey. I think we've still got a long way to go, but we're making tremendous progress, and I think we've got a good solid group of people, and I'm excited about it, you know, I think employee ownership is a wonderful concept, you know, for, for all of us, we're only starting to learn how to use it to our advantage in the marketplace, but you know, from the point of view of our customers and clients, they receive higher quality products and services. The employees get to share in the benefits of capitalism, and I think the company runs more efficiently. So overall, it's it's a win win win scenario. That's awesome. Well, so I just want to say thank you again for your time, Brian, today, the insight that you've had from a management perspective and your experience, it's really valuable to better understand the ESOP process. As we close out, I just want to remind you, if you like the podcast, please subscribe and share, share it with a friend. Have a great day. We'll look forward to our next time on this journey to an East.