EP6 - ESOPs for Contractors discussion with Ben Wells - ESOP attorney Cincinnati, OH

Welcome back. Thank you for tuning in. I'm the ESOP guy. We are on a journey to an ESOP. For those that are tuning in, maybe for the first time, this is a podcast that goes through all of the, the attributes of an ESOP, an employee stock ownership plan, and the applicability of how do you use an ESOP for your, for your plan, primarily for your succession and exit plan. So before we get started, I wanted to mention as we continue to do this podcast, we've had some, some questions and different things like that come up over the, the last year or so. So we're gonna start a program called ESOP Guy Live. It's a webinar series, um, that will be on our website. So you'll be able to look for more information there and our website is at journey to an ESOP.com. So, I had recently produced and published an episode on this podcast for contractors and wanted to go through and explain the particulars of how a contractor's business um works within the realm of using an employee stock ownership plan. So the applicability of, of an ESOP for contractors. So today, I wanted to go in and, and do a uh an interview and, and get deeper into the, that side of things. So the title of this podcast today is ESOPs for Contractors. An ESOPs, an ESOP attorney's perspective. To do that, we have the opportunity to interview Ben Wells, who's with Dinsmore Law Firm out of Cincinnati, Ohio. Uh, Ben has been a partner at Dinsmore since 1995. Before that, he had worked at a national accounting firm in a, in a consulting practice. So with all that, I wanted to welcome uh Ben to the podcast. Thank you so much for joining us today. Thanks, Phil. Glad to be here. Great. Um, cool. So, so as we start, I just wanted to kind of, um, kind of get into a little bit of your background before we, we talk a little bit specifically more about contractors. So, can you give us a little overview of, of your work in ESOP transactions and just working with ESOP companies in general? Sure, I always enjoyed talking about ESOPs, so I appreciate the opportunity. Um, I've been working with ESOPs and ESOP companies almost my entire career. Um, back in the beginning, we mostly saw ESOPs with financial institutions, or at least that was, that was the nature of our practice. But as time went on, um, we saw more and more interest to business owners who were Looking to transition ownership or take some chips off the table and the benefits of an ESOP became more attractive to those folks and more well known as as time went on. So you've been, you've been working at ESOPs for your entire career as an attorney and you said, you mentioned like in your background working in a consulting practice with a national accounting firm. Were you working with ESOPs back then? Yes, actually, that's when I started. Uh, we, we, uh, that firm had a specialty in financial institutions and we worked on a number of thrift conversions which always involved an ESOP, and we took that ESOP practice and expanded it to privately owned businesses of all types and pretty soon after we started that we saw the benefits of ESOs to contractors and we've over the years I've been involved in in the transition of ownership to an ESOP and a large number of contractors. Nice. I see you, you're in your office is in Cincinnati. Um, and I know you guys have an office in, in DC. Where, how much, what's your geography? What do you cover in terms of the, the, the scope of the country in terms of working on ESOPs? Our ESOP practice is national, so I've been involved in ESOP transactions everywhere from California to Vermont and most of the places in between. So it really is a, it's not a state or locally oriented practice, I would say. The majority of my clients are within probably 300 miles or so of Cincinnati, but we really do ESOP transactions all over the country. And that's, and that was, and I kind of mentioned it kind of because there is, that is very typical for most people that do ESO work. You do work all over the place and Um, has it been difficult because of COVID for you guys to do, you know, the work that you have, or is that been kind of just more Zoom meetings and different things like that people are experienced with? Yeah, the transition to electronic communication has been actually pretty easy. We were doing ESOP transactions, mostly electronically anyway. I haven't been to a live closing in probably 15 years. They've always been done remotely. The one difference is that we don't get to. go to live conferences or other meetings to meet other ESOP professionals and potential clients. So a lot of that now needs to be done remotely, but we're adapting like everyone else. Yeah, everybody's everybody's adapting whether they like it or not sometimes, but um before we get into one other question I had just kind of your background and, and I know talking to other ESOP attorneys. Um, some work a lot more with trustees and represent the trustees on transactions and others work more on the, uh, the company side where they're actually doing the plan documents. Where do you say, where, where do you fall in more or is it kind of equally split? I tend to work mostly on the company side. Uh, I have represented ESO trustees and still do, um, but I would say 3/4 of my business is on the company side, um, with the remainder split between trustees and lenders. We also have a pretty significant practice representing banks who are lending into ESOP transactions. OK, great, great. So, So thank you good. I think that's a great overview of your background. Um, for, as we go into the discussion on the contractors, um, one of the things like for us as a CPA firm, we've been working with contractors, um, I really kind of since the beginning of our firm back in 1958 and um our practice has, I, I would say our largest industry niche is, is contractors and throughout the Central Florida area. So we're very experienced in working with them on the just the normal audit and CPA work, the tax work. Um, as we have obviously focused our practice on succession planning and a lot of succession and exit planning, um, obviously, ESOP is gonna come up a lot and, and I thought this would be a great topic because, um, the contracting business is very cyclical and there are definitely specific aspects to a contractor business that are unique, um. And so kind of with that, you know, from your perspective as we start thinking about just, just generally speaking, how well does an ESOP work as a solution for a contractor to help them accomplish their succession and their exit goals? And ESOP can be a great solution for contractors, um, obviously, you know, and particularly if you've got steady business and a strong backlog and, you know, pretty good history behind you, um, that helps, um, but we've seen all types of contractors, uh, uh, use an ESOP as a transition device. Obviously, as you point out, it's a different business than manufacturing or service business, and so there's complexities that need to be addressed. Most of those relate to, of course, financing, bonding, and indemnity issues, but all in all, we've, we've seen a lot of contractors use the ESOP route, and it's been successful. So, um, we, we kind of dig into, and I'm agree with you, I think it's just a great option as, as we start thinking about and that's, I mean, obviously I'm doing the podcast to direct towards that, but Um, when you start looking at some of the particular issues and talking through some things that I think are, are important, especially when you think about, um, going into a 100% ESOP purchase which for purposes of discussion, it's like you're, you're taking your, your whole balance sheet at that point. Now we've leveraged the entire purchase back into the balance sheet with, with ESOP debt and or either the seller is taking a note back and then there's this cash flow, you know, strain on this, on the company and So that's gonna create some, some issues, um, and then you have the whole idea behind the, the personal guarantee. Um, typically, the, the contractor has uh a bonding line and the bonding line usually has an indemnity or guarantee by the owner. And so some of those issues, um, can come up. Um, what would you say kind of from just your experience at, at dealing with, um, those kind of things, what would you say that a contractor needs to do to kind of get themselves ready for that process? Well, The, um, you need the, the stronger your balance sheet, of course, the the better you are. We, we find that a lot of contractors have, um, cash on the books because they've, you know, seen a lot of ups and downs and so they want to make sure that they, you know, have enough cash to operate if, if things get lean, um, but, um, you, you have to, um, I realize that there is, as you point out, there is going to be a lot of debt on the balance sheet after the transaction, and you may show a negative net worth at least in the initial years. So that's going to make your bonding company uncomfortable. Um, and the ESOP, uh, if you do a 100% transaction and you've got the ESOP as a 100% owner of the company. That ESO's not going to be able to provide an indemnity. They just won't do it. So, and, and in addition, if there's outside bank financing, the bank's going to insist on a first priority to all the other creditors. So the first step you have to do if you're looking at an ESOP transaction is to have a discussion with your surety bond company. And see whether they understand the concept of an ESOP, um. Some of the larger ones do and have experience with them. Um, many don't. Uh, and in that case, you're going to have to educate them, uh, which could be a difficult process. Um, so, ah, another thing is in terms of getting ready for an ESOP transaction is you're going to need to think about your transition plan. Most people are thinking of an ESOP because they're looking at the possibility of moving the business on to the next generation or to the management over time and so you want to make sure that you have a strong second generation in place that's able to run the company. That's going to be important to an ESO trustee. Uh, and it will be important to lenders as well. Um, so that's something that you're going to need to focus on if you haven't thought about it in the past. Yeah, absolutely. The, um, one of the things I think is important is, and this is because I do a lot of the upfront advisory is You know, create the transactions if it happened, work into your transaction or, you know, your planning documents, some kind of pro forma balance sheet to estimate what your balance sheet is gonna look like after the uh ESOP transactions happened. And putting together enough information for the bonding company to review at a, um, from a post ESOP level is very helpful because Then they can give you some feedback on their comfort levels with how that's changing things, especially on a 100% ESOP because 100% ESOP, it, it's going to be a lot more impactful to the company. And wherein if a contractors just doing a partial ESOP, um, that's gonna have some impact, but it's not gonna have, you know, the dramatic impact, you know, a full, fully leveraged trans transaction would have. Um, but I also agree with what Ben's saying too, the transition plan is very important. Um, and if you're planning to exit the business, um, there needs to be a very clear, um, uh, resume of some people that are, are available and are in the business that are working. That can operate the company the same, at the same level and really at the level of how you have created the forecast to look. So if that's, if that's not in place, then I think it's very difficult for the trustee to, to buy off on the risk there and it's gonna be a negotiation that might really be less than what you, maybe less than what you think is favorable. So absolutely and and as to the um the seller financing and the and the company's balance sheet, um, you know, it's, it's um Also, it's, it's important to keep in mind that there's a lot of flexibility in how the seller financing can be structured. And so what we see a lot is that the seller may take a, may only get uh current pay on interest for a while, uh, or may, may even defer some of. Interest to a later date, particularly if there is bank financing. Typically if you've got senior debt financing from a bank, they're going to want the seller only to get some amount of interest, usually, you know, 4% or so on an ongoing basis until the bank is paid off, and then the seller gets his his interest payments paid in a lump sum or in arrears. Um, and so, And the same process can be discussed with the bonding company. They have to understand that, you know, there's a lot of flexibility in the seller financing, and even though the balance sheet doesn't look very good, um, if the if the seller debt is subordinated to the surety bond company, they can feel a lot more secure. Yeah, and that's. And that's, you can't like, you can't go into this and thinking you're not, you, you, you're, you, you can do this without their input because they're really vital to a company um as you move forward and you want to create an ESOP that's sustainable, that has, that it doesn't have like a backlash, uh, you know, afterwards that's gonna affect you as a selling shareholder. Um, you kind of mentioned like some of, and some of the things we talked about using a holding company structure, um, in with, with an ESA. Can you, can you talk about that a little bit in terms of, of structuring that with um the subsidiary operating company to keep the balance sheet, um, you know, maybe no more normal? I is that. Yeah, we've, in fact, we've just been involved in a transaction where we are, um the, this company has a, has a building where they're headquartered um and also has an operating company. So what we're going to do is, is reorganize um with a holding company structure uh and the um The the real estate company and the operating company will both be subsidiaries of the holding company and we'll have the um the ESOP debt at the holding company level, which is going to keep the uh the operating company which will which will continue to exist as a as a corporation. Even though it'll be disregarded for tax purposes, um, and that, that company will have a clean balance sheet. Um, so obviously this all needs to be disclosed. You can, you can't hide the ball with respect to the um ah the surety bond company or anybody else, but it does enable you to to show you've got a company with a, you know, with a good balance sheet, and that can sometimes make the bonding company more comfortable. Sure. That's it, that's interesting. So in that structure, you had one company with real estate in the, in the operating company and then you split those those entities out as subsidiary entities. No, actually this, this real estate was owned separately. Oh, that was owned separately. Got it. OK. So, yeah, yeah, and so the, the owners decided to, it was the ownership was the same as the operating company, but it was in a separate entity. And so the owners decided to contribute that to the holding company as well, so they've got everything in one place. Oh, OK. And so for the, the holding company would show the debt, the operating company wouldn't, but obviously all the information is going to be. Up in the financial statement anyway, so the bonding company will see it, you know, as you go through. Well, there'll be the holding company will have a consolidated financial statement, but the operating company will have separate reviewed financial statements that they use for other purposes, right, for bonding and banking. OK. Very interesting, very interesting, Ben. Um, so, so some of the stuff that I get into is, you know, underwriting the, the, the work for a potential ESO for a contractor as you review the forecast. And the forecast is integral to the business valuation and it's gonna be integral to the feasibility cause it's gonna be really our, our way to estimate what the future cash flows are in terms of the payment of the notes and, and the effect of the tax treatment as an ESOP. And so all that's gonna be, you know, very important in the process of planning. Um, this is, this forecasting is like for contract can be really difficult because what we're talking about is, you know, sources of revenue that are subject to business cycles and, you know, as we, we, we've kind of been living in the last decade outside of the like 070809 period, um but it, that still wasn't that long ago and so coming back into a cycle is difficult to even predict at this point. Um, especially as you got it, uh, you know, you come through COVID year in 2020, and people thought that was gonna be a difficult year, and it turned out to be, you know, not so bad for a lot of companies. Um, when we're talking about that part of, of planning, how does that factor in, cause it is definitely difficult to predict. How does that factor into structuring the ESOP deal from your perspective? Sure, yeah, obviously, you know, forecasting revenues is difficult in any business, but particularly in an industry like construction. Um, when they're, when they're determining value for purposes of the transaction and, and Just every ESOP trustee hires a valuation firm to tell them how much they can pay for the company's stock. They're going to look at not just the the forecasted revenues, but they're also going to look at things like the customer base. So are these, you know, does the, does the company focus on governmental projects, healthcare? Um, that may, you know, those types of projects may have one level of predictability, whereas things like retail or industrial may have another level. So and that'll affect the discount factor that they apply in determining the value. They'll also look at the history of the business through prior business cycles and even, you know, to the strength of management and and some other factors. relating to the business to determine, you know, how solid is this business and what kind of history does it have and so how reliable are the are the forecasts that we're using to determine the value. Um, as to the structure of the deal, um, what we'll find is if there's a situation where, you know, there's, um, there's a lot of uncertainty, um. But things are, you know, you've got, you've got some good forecasts that, you know, things are looking good for the company, but they may be in a business that is in transition. Or you know the industry may be volatile. We'll sometimes see clawback provisions in a deal and obviously sellers don't necessarily like these because it means that the purchase price could be reduced retroactively based on the company's performance after the closing, but it can help make a trustee more comfortable with paying a higher price if they know that if things really go bad. Um, they'll be able to recover some of what was paid, and the way that's done typically is just by a reduction in the amount of the seller notes after the transaction. Um, we, that, that's a structure that Uh, used to be pretty unusual, but we're seeing more and more of it and particularly in businesses like construction that have a lot of volatility. Mhm. Yeah, I mean, I, I'm seeing it as well and I, I think the Other side of it is, is when, you know, we go back into the like the idea of the clawback, it does protect, you know, the trustee's decision is, is, is a difficult decision because they're, they don't wanna, they, they don't wanna overpay for the business itself and so they want to protect the employees from having that happen if, if the forecast isn't accomplished and. Um, on the other side though, the seller, if they're looking at a clawback, um, they would also want to, we would also want to kind of think about, is it possible for them to get, um, the upside advantage as well, so more like a And earn out with a purchase price adjustment if they, if they exceed the forecast. And so, what's your opinion on that structure, you know, in, in terms of, you know, trying to address the need the trustee has for the clawback and trying to come back with something more positive for the seller to absorb some of that risk? We've seen that as well, um, not as much, but it certainly stands to reason. If you're going to have a clawback on one side, you should have the right to, you know, get a little of the upside if the company does better than expected, um. So, uh, it's certainly not out of the question. That's, uh, sometimes that's a conversation or it makes sense to have that conversation with a trustee, even before the trustees hired, usually we'll interview um several trustees in advance of the transaction and uh. If it looks like an earn out or clawback is a possibility in this deal, we will have that discussion with the trustee ahead of time to find out whether they're agreeable to that kind of a structure. Yeah, I mean, and I agree totally. You want to have that conversation in the interview process so you can see where they lie on that issue and And if they don't, you know, clearly, you gotta make that that decision is, is, is to, is that trustee the right one for the transaction and look at what you think is right. But um if, you know, they, they can't see all, like, my point would be they can't see everything. So they're, they're gonna probably say something like, you know, it really kind of depends on what we're after, you know, as we go through due diligence, but you at least wanted to see if they're flexible towards that, you know, as you go through it. Um, yeah, and I, and I like the point on the, on the kind of the, the revenue, and I would just draw that out a little bit deeper that the stability behind the revenue of a contractor can be vastly different between different types of contractors because some Um, they, they can have all kinds of business in all different types of places with, with, uh, different types of, you know, brand new clients and customers, or they can specialize like in government and, you know, and, and so really kind of depends not only on the customer base, but, you know, the ability of them to win work in their, in this particular niches. Um, one thing I look for is You know, do they, do they have a a history of, of taking on jobs that are difficult for them? And they, you know, looking at that contract schedule, completed contract schedule and really looking at Um, if they're able to perform on what they've estimated or they have a couple of big, you know, losses every year, and those, even though they might be profitable, those could be difficult when you're actually estimating the forecasting can really hurt them. So they, you want to see a company that can estimate contracts really well, can be profitable on pretty much all their contracts. If they do have A bad one in the last couple of years, that's not so bad. You can talk through what happened, but if it's a, um, if it's like that's routinely the, the thing that happens, then I think there's, there's a deeper conversation about what does that translate to the, the valuation itself and the possibility of, of maybe more rigid deal structure. So. Exactly, everybody's going to have a bad job once in a while, but if you make a habit of it, that tends to hurt your value. Exactly. So, so kind of turning our, our focus a little bit now on the employees, which, um, you know, the first thing I would say is if you're doing an ESOP and you're, you know, you want your employees to be a benefit, beneficial owner and, and they're important, they're important to contractors business probably. You know, and I think every company that has employees, everybody's employees is important, but when you look at contractors, I mean, I think they're really important and some of these people have been there, you know, their whole careers, some of them really helped the owner to get to where they are. And so the owner really wants to reward them. Um, when you look at the applicability of an ESOP though, there, and you have a contractor that has, say, uh, you know, maybe a lot of turnover or a lot of union employees, um, does it make sense to still consider an ESOP? And I would say yes, absolutely. Um, in fact, we are working on a deal right now with a union shop and the union employees are going to be participating in the ESOP. Um, it, you have to have a discussion with the union ahead of time because it is a bargainable item. Uh, however, if you're adding the ESOP on top of the other benefits and not changing anything, then it's it's unlikely that the union's going to object. But, but it is something that needs to be disclosed ahead of time. Um, but talking about a business with high turnover, an ESOP can be a factor that helps reduce turnover. It is something that gives employees an incentive. Uh, to stick around because as time goes by, the value of their accounts gonna go up, uh, as long as the business stays healthy. And, uh, uh, in the initial, it takes a few years, uh, in the initial years, when a participant gets a statement, it's not going to look like very much, but as time goes by, the value of that thing can go up exponentially, and you know, an employee's been with you for a number of years can have a really significant benefit from the ESOP. And so employees start talking about that and you know it becomes a real factor in helping to hang on to people. So we find that You know, in a business that is, um, that has high turnover, there's always a number of factors at work, uh, and so an ESOP isn't going to solve every problem, but, uh, it's certainly something that can help. Yeah. And I, and I, I think want to state the obvious because sometimes people listen and they don't really, they, they don't understand actually the way it works, um, because I get this question a lot is, is the employees actually get this benefit. And they're not paying for it. They're just, they're there and it's, and it's that's why the unions are gonna be OK with it if, if they feel like it fits into, to what they're thinking is, is potentially, you know, the right thing for the employee, but um I think that's important. So that is why and you know, the employees because they get benefit without really paying for it. That is why it can be such a positive um attribute to the, the company's success of, of really helping to uh to retain key people or retain all the people that really see the, the big, big picture, especially if the company is growing in value. Exactly. So, so one of the magic questions we always get is, hey, how am I getting my money? I'm done, I've done all this, you know, I've listened to all your stuff. I knew, you know, I want to get my money now. So, um let's talk a little bit about financing an ESOP transaction for, uh, you know, a contractor. Sure, um, so there's different ways to finance it, but, uh, most of them, most transactions involve a combination of uh outside financing that is from a bank or other lender and and seller financing. Um, obviously, if you have bank financing, they're going to want to have priority. They're going to want to be paid first and uh. They're not going to permit much in the way of payments to any of the sellers until the bank is paid off, but the bank financing then can be used to provide, um, first of all, pay the expenses of the transaction, um, pay off any existing debt, and to provide some cash for the sellers of closing, um. And then, uh, if you're doing a 100% ESOP transaction, it's uh pretty certain that you're gonna have to have seller financing on top of that. As I mentioned earlier, that's going to be subordinate to the bank financing, and it may allow there may be some interest payments on the seller financing, but until the bank's paid off, the seller is not going to get very much from that from those seller notes. Once the bank is paid off, and this can happen fairly quickly if things go well. Uh, then usually what will happen is you can refinance the bank debt and pay off the seller financing, at least if not all or at least in part, um, and then go on from there. Yeah, I think that's, I think that the, some of the rule of thumb on what the bank's gonna be able to finance. And I've done a number of pod podcasts with, with lend ESOP lenders, but, you know, I think around 22 times cash flow is, is probably on average, you know, sometimes gonna be 3 times, maybe, maybe plus that, but um that means that, you know, depending on your multiple on the actual deal, there's gonna be definitely some seller financing left over and it just kind of prepare for that as part of the, part of what to expect when you're looking at how to get your money out of the, out, out of the transaction. Right, and the amount of bank debt is going to depend as, you know, as we talked about before in in valuation, it's going to depend on the nature of the business, how, how steady are the are the cash flows. The banks also going to look at assets. So if you're an asset rich company, um, you know, it's going to be easier to borrow from a bank than it will be if you're, if you're not. So it can vary, but yeah, it's um. I think what you mentioned is a is a good rule of thumb. So, you know, looking at some of the particular things that we just kind of identified, um, it might be what, what else this question is like, what should be, what should the contractor be thinking about down the road? How do they address, you know, the issues earlier on in the process that you think might be, you know, the concerns that they, they should have at this point? Well, I think, uh, as I mentioned earlier, you're gonna want to look at the transition plan for the business. Obviously, um, most sellers aren't gonna be looking at doing an ESOP or some other, uh, Similar device unless they're thinking about transitioning the business, but make sure that you've got good leadership in place that's able to take over the business once you're gone. Many people have just been so busy with their nose to the grindstone they haven't really been able to think about developing the next generation. Well, now's the time, if you haven't already done it, now's the time to start and make sure that you've got folks. Behind you, who are capable of, um, you know, stepping in over the long haul. And if you don't have those people, then, you know, you may have to start to look for them. Um, one question I asked Ben is like, I always ask the owner that's selling like how many hours a week do you work? You know, and if they say, they say I'm working 60 to 8 hours a week, I'm like, well, you know, you probably aren't there yet, right? But the other, the other side is like I'm, I don't have to really come in the office because everything is getting done. So you have these, these different spectrums and you kind of know at that point, hey, we, we need to work on that that plan a little bit deeper or, you know, we've got it nailed down and, and then you just have to talk about the resumes of the people that are, are really managing the company on a day to day basis. In most cases, we find that's exactly right. And in most cases, and I expect your experience is the same, Phil, this, this, this is a 10 year process and it's 5 years of planning and thinking about it prior to the transaction and then another 5 or more years after the transaction to fully uh transition it to the next generation. Um, and so, you know, if you're thinking about You know, if you're thinking about transitioning your business, um, you know, within the next 10 years, you know, you should probably, you know, start now. That's actually very good. I, I always say 5 because people 10 years is like, what? You know, um, but I definitely agree with you because the more time you have planned to plan it, the better it's gonna go because of the, especially this the idea of transition planning. I mean, as far as what your business is worth right now in, in 10 years, who knows, but, um, but actually planning who's coming up in the ranks. If, if you don't have a strategic person, you need, maybe you're hiring a strategic person in your company. Um, to build out your management group. If your forecast shows a lot of growth, you know, I always tell people, you know, try, if you're trying to get from say a $20 million dollar company in revenue to $40 million you know, you got to start acting like, you know, a $30 or $40 million dollar company before you get there. So you have to, you know, put in place people that can help, help you get there. Otherwise, your companies are always kind of tend to stay back in that same revenue level cause they just don't, don't think about the future as much. So I think those are Oh, good points to kind of think about in your preparation process. Um, we didn't mention it, but I know one of the concerns is repurchase obligation. Can you talk a little bit about that in terms of what they should be thinking about down the road and um what that will, will mean for them in terms of the actual ESOP? Sure. So, um, it's important to remember what an ESOP is, and that is it's a, it's a plan that, uh, allocates stock in the company to employees, ah, and it's uh it's part of the company's retirement program. Um, so when an employee retires, he can't take that stock to the grocery store and buy food with it. Um, so you have to be able to convert it to cash, uh, and The way it's converted to cash essentially is that the company buys the shares back over time. Um, and we call that the repurchase obligation. Uh. The law allows you to stretch that obligation out for a very long time, so it's generally not something you have to worry about in the initial years of the ESOP. But as time goes by and after the seller usually after the seller financing is paid off, then you're going to have to start buying those shares back from employees that retire. or leave the company. And so it's important that you have a source of funding for that. Now that can be you can do a sinking fund inside the company, you can do cash contributions to the ESOP. There's, there's several ways that you can structure. Paying the repurchase obligation, um, but it's something that once the ESOP is established, you have to start thinking about and usually the first step is to do a repurchase obligation study that looks at your employees census and figures out Roughly when these cash needs are going to arise based on the age of your employees and the value of the company and then plans for a way to accumulate the resources that you're going to need to meet that obligation. Yeah, so that's excellent because they're, it's sometimes people, people want to talk about that. And then I think, you know, the, the idea is like what should you be thinking about. Um, as Ben said, it's, it's definitely something you can plan early on for and you shouldn't have to worry about it too much, but you do need to know about it as part of the whole process. Um, the, the other thing you need to know and, and comes up quite frequently in conversations is the, you know, governance of the company, pre-ESOP, post ESOP. So I have a company as a contractor run by maybe a single owner. Sells the business out and now it's a controlling interest to uh an ESOP. Um, what should he expect, he or she expect in the process of, of going through that change when it comes to the, when I say governance, it comes really the, the, the structure of leadership and the organization of the company in terms of its, of how it's gonna be actually run in the future. Right, so if you've got a single, a company owned by a single individual and that person's done everything, chairman, sole member of the board of directors, um, you know, chief executive officer, etc. uh, that structure is going to have to change somewhat. Uh, typically, a trustee of an ESOP will want there to be An active board that is a board that actually has meetings or at least does written actions um at least once a year. It's going to want some documentation of the structure, so you know, actual corporate minutes and bylaws, etc. and so for some, some businesses. have this in place and you know most of our clients already follow good governance practices, but there's a lot of businesses out there that don't. Um, so for those businesses, it's going to be, it may be a challenge or it may take some getting used to, um. Uh, what it generally is going to mean is that you're gonna, you're going to need a board of directors, usually of 3 people, and, and if it's a 3 person board, uh, it can be 2 people appointed by the company, one of whom can be the selling shareholder, um. And and usually they're going to want to see one outside independent board member. Now that independent board member can be someone that the company chooses, but it needs to be, it can't be someone who's been a service provider or a family member or has any other connection to the company, um. The, um, we usually find that that once companies get used to that, there's a lot of, there tends to be some discomfort at the beginning uh among some companies and some sellers that they're going to lose control of the company and and the trustee is going to take it over. Um, in fact, that I would say almost never happens. The only time that the trustee really ever becomes active in the management of the business, if there is if there are really serious problems, then the trustee's obviously going to have to pay attention to what's going on. But for the most part, you know, other than appointing an independent director, we find that the management of the company and the operation of the company continues as it, as it did before. With perhaps a little bit more focus on bringing the next generation on because again that that's the goal of the seller is ultimately to be able to cash out of the business and move it on to the next generation. Yeah, that, that's really good. I think sometimes it's healthy and sometimes when we're, you're thinking about that, you're, you're not sure exactly what that looks like, but people stepping into new roles and new leadership and, and bringing up the next group is really a good part for everybody. Um, so I think like I would agree with what you said. It is, it's definitely not like you're having somebody take over your company and, and you're, you're like, you have to listen to somebody at that point, like the trustee's gonna tell you what to do. Um, it's more like you're still doing what you were doing before. If, if you're exiting the business, obviously, that's different. But if you're staying in the company, um, then likely you're obviously gonna be on the board and you're gonna have a lot of say so in what's happening, um, day to day just like you were before. So, but it is, it's a good point to make. I just wanted to make sure we, we addressed it, um, you know, in terms of the, of the, the process that goes, that happens when you actually finalize the completion of an ESOP. So, it is a great point and it's, you know, it's something that um Uh, almost every seller is concerned about, or understandably so, they've been in control of the business for a long time and so they're, they're concerned about giving up control. But at the end of the day, uh, For almost every in almost every situation, it's a non-sue. Yeah, yeah, I totally agree with you're saying. And, and it's, it's a little more formality, I think, to people that people are used to, but it's other than that, it's, I think it's just not going to be that much different than what you're used to. So, um, so all of that's been helpful. I mean, I know we covered a lot of ground. Um, I wanted to kind of make just some final comments and Um, I, I think what I, what I got out of the podcast was just this, this episode was, you know, the uniqueness of a of a, of a actual contractor type company and how they go forward, um, isn't, you know, definitely isn't a deal killer for an ESOP. I think there's, there's attributes that, that are really important. But the main thing for me. Is, is planning so incredibly important, um, and you, and basically connecting the dots with your bonding companies, with your bank, um, the people that are really involved in um helping the company do what it does, I think that's gonna be to me a critical area of, of, of importance when you think about this, this episode, this podcast. Yeah, it takes some groundwork and some preparation, um, but, uh, at the end of the day, it can be a great solution for a lot of companies. Right. Well, um, with, with all of that, I just wanted to kind of stop and say thank you for your time today, Ben. I know you're, Ben's very busy. He's always got stuff going on, so he made time for us today to do that. I just, I thank you so much for that. I really think it does help a lot of people when they Listen to this, it's, they get some information that they need and it's hard to, um, especially now with not having as many conferences, it's hard to get, you know, information from just objective people saying, hey, this is, this is out there. I always say, ask your advisor, you know, and people that you know, um, the people that you really trust, but use these podcasts, they're very helpful, I think. So with that, I just wanna say thank you for your time today, Ben. Thank you, fella. I've enjoyed it. Cool. So as we, as we close out, I wanted to remind everybody, um, if you like the podcast, please subscribe and share it with a friend. Look for the ESOP Guy live webinars coming up and have a great day. We look forward to our next step on this journey.