EP8 - Flexibility of structuring an ESOP for your succession plan. Interview with Pete Profumo at Braden Kitchens, Inc 100% ESOP

Welcome back. Thanks for tuning in. I'm the ESOP guy. We are on this journey to an ESOP. So for those that have not tuned into this podcast before, we are, we've created this podcast to be a resource for those that are thinking they might want to use an employee stock ownership plan as a succession or an exit strategy. Today's episode we're titling Flexibility of an ESOP Structuring the Right Succession Plan for you. And to do that, I'm very excited to have the opportunity to interview Pete Profumo with Braden Kitchens Inc. Pete was one of, uh, one of my original clients back in the early or mid mid 1990s, um, in banking. Um, he, before that had headed up part of the leadership team that took Harley Davidson through a leveraged buyout and eventually went public. At some point in his career he got kind of tired of corporate America. He came down to Florida, bought a business called Braden Kitchens, and he's been the owner of that ever since until we went 100% ESOP almost 2 years ago. One of the reasons he chose an ESOP is its flexibility in terms of what he wanted to do with the business, which we're gonna explore in the interview today. He is currently the chairman of the board of Braden Kitchens, 100% ESOP company, still the president of the company and works on, on a day to day basis, works probably more hours than I do. So, um, Pete's an old friend of mine and I, I appreciate him taking the time to do this. Um, before we started the interview, I wanted just to kind of quickly remind everyone that, um, you can find all the episodes on the podcast through our website at journey to an ESOP.com. Also be looking for the ESOP Guy live webinar coming up in March 2021. So with that, I wanted to say, Pete, thank you so much for joining our podcast today. Good morning, Mr. Hayes. A pleasure to be with you. Excellent. Pete, before we start the, the, I wanted to kind of just a little bit about you, you know, personally, in terms of your, your work ethic. What time do you get to the office in the morning? Um, my normal arrival time is at 2:45 a.m. and my quitting time is 2 p.m. 2 p.m. So for an old man, it's a long day. So in your mind, what's an old man? An old man is anybody my age or older, OK, and you are. I am 7474. That's a lot of hours for a 74 year old, and I'm not judging, I'm just saying that's a lot of work, but you like it, it's what you do, right? Correct. Correct. So it's kind of like, as I, as I say that, I wanted to kind of say that because I'm, I'm, I'm moving into the, the planning of the ESOP when we went back, um, was it 3 years ago? Uh, we started in mid 2019. 2019. So, so in mid 2019 questions that we we were talking about in terms of it wasn't that you wanted to work less hours, and I, and I think for some people, they get to that place if, if they're in their 70s, maybe they want to work less hours. Um, for you, what was, what were your motivations back in the, in 2019 in terms of thinking about the possibility of using an ESOP? Well, to be frank, when the possibility of an ESOP first came up, I really only had a conceptual knowledge of what an ESOP was. I really had no understanding of the process required and how to get there. I think having a financial background and accounting degree helped as we went through the process, but Uh, some of the analysis that, uh, that were run by a valuator to, to get us to the ESOP were, uh, quite a bit over my head. Uh. You know, my, my financial education is over 50 years ago and back then, uh, I don't think there was any such thing as an ESOP. So I learned quite a bit as, as we went along, but in the beginning, I, I really knew very little. I relied on you to bring me along. Yeah, I know definitely was like as I go through that experience in my head, that was definitely a, a tag team effort, you know, and, and I think it always kind of tends to be that process of working. Um, your background in accounting and your background, you know, kind of spoke about the Harley Davidson years, um, and leadership, all of that obviously connects to what we need to put together to make sure that the ESOP actually is gonna work. Um, what in the whole process, you know, if I just said over the whole process that you went through, what, what stood out the most to you in terms of your ESOP transaction? What stood out the most to me. Um Probably it was a tedious process to go through. There was a lot of information gathering that That was required by by our evaluator of. And I just think it was, uh, in hindsight, I think it went very quickly, but while we were going through the process, I think everybody was impatient to try to get it done as soon as possible and see what kind of result we came up with. You know, you asked me when this process started. Uh, what I thought the business was worth, and I don't know if you remember my reply, but it was that I had no idea. I do remember that. You know, we're a very small business that that essentially provides a service to a number of builders and that services to install cabinets. As a result, we are closely tied to the ups and downs of the housing market. So when the market is up, we're up, and when the market is down, we're down. And I think back to 2007, 2008 when the bubble burst and the market crashed. And so did we, you know, I, I look back at our volume falling 80% in 2008, our headcount going from 60 down to 19, and, and we proceeded to record substantial losses for the next 5 years. When the market recovered, we started recovering, and since 2013 we've followed a growing market. In fact, the recovery has been so strong that our sales have tripled since 2013 over the last six years. So with those kinds of ups and downs over the last decade or so, I had no idea how to value this business. If you had come to me in 2010 and said, let's, let's do an ESOP, I would have said the value is 0. Because we were, we were, we were substantially in the red and we had, we really at that time didn't know when things would start up again. But for 7 years now, we've been in a very strong market. Uh, our builders continue to be optimistic and uh. And I guess that's a long answer to what I thought might be worth. I think that's I think that whole idea of that question gets I ask that question to everybody when I when we do look at ESOP because some people, they think it's worth much more than it's probably worth, or some people they think it's worth much less, but I think it's important to establish early on like what is it, what are they really shooting for, what do they think they really want to get out of it from a financial perspective. Um, and that's only one of the goals and objectives. I think there's many, um, when, when you and I first started talking about the ESOP, what would you say your, you know, your individual goals and objectives were in terms of, of what you wanted to try to get out of the ESOP? Other than the the evaluation. Well, I mean, the, the main objective of, of the ESOP was, was to maximize the value of the business and enable me to have an exit strategy over over a number of years. And, and that's exactly what happened and what the ESOP provided. Yeah, and so like, as you said, as we talked about before, you're you're a 74 year old loves working, you work 12 hour days, which again, I, I think is, is a pretty strong testament of, of your work ethic. Um, when we, when we work through the idea of an ESOP, um, I know one of the things that we talked about was, you know, what's gonna change in the process of now I don't own the company anymore, um, did you have any, um, I guess, you know, apprehension towards like how the changes are gonna affect what you were doing in the business and for the business? I really didn't have any concerns because I had no thoughts in advance that there was going to be any changes in the way we ran the business. I mean, the only concern I might have had was now that I'm an employee versus an owner, I could be fired by the board of directors. Fortunately, we put together a board of directors that I think would not do that to me. Yeah, well, and I think that's, that's a big part of the planning side, you know, is planning what the board of directors is gonna look like, um, making sure that you know you have a clear idea of what you want to get out of it at the end and being able to do what you're, you know, what you're doing right now, which I think is really nice is, you know, be able to continue to work in the business, enjoy what you really did before. And then you don't have to worry about what's gonna happen to the ownership because it's all taken care of at this stage of the game, it's really just to keep, you know, doing what you're doing, but continually thinking about, you know, the position that you're in and transitioning your role as time goes on. Um, how many, how many more years do you think you, you would like to work in the business? It, it's kind of like a, a loaded question. Well, it is a loaded question because right now I really don't have an answer. As long as my health remains good. I really don't have any any thoughts of retiring at least in the next 5 or 6 years. Now if circumstances were to change, uh, you know, I'd have to consider that, but. You know, we structured the ESOP. I say this facetiously to people, but I took a 10 year note when we established the ESOP. And I tell people I certainly have to hang around for those 10 years. Now whether that'll happen or not, time will tell. Time will tell. Nobody knows. But the nice thing is is that I think as we go to the the next thought process on the ESOP for you guys is, is if, if you didn't want to work, you really wouldn't have to because there's, there's a, there's um parts and pieces in place. That kind of move you towards like, hey, I have, I have the option. I think that's one of the nicest things about putting together an ESOP is you can create options. Um, if you wait so long and you don't have these options, then you're in this planning chaos, which can create other issues and other problems. Um, 11 thing I was gonna throw out is this, I, you, technically, your business is a family business because your son works with you in the business. Um, like, let's talk about that for a second. How did this whole thing go over with, with your son and, and by the way, your son's name is Pete Junior? Right. Uh, I, it went over quite well. Uh, I think Pete Junior, he's fine with the ESOP, uh. Unlike his father, I don't think he plans to work into his 70s or 80s, so he will be the individual to run the business when, you know, when I do retire, he will obviously be the largest shareholder in the ESOP and. I think at this point he's very happy about how things turned out. That's great. So I will, I will point out that if you think I work a lot of hours, I work nothing compared with Pete Junior, so. Yeah. Well, it's, I guess it's in the family, the work ethic, and it, it's interesting cause family businesses are diff are different and sometimes it's difficult to do an ESOP in a family business because the, the, the You know, the, the, the children want to take over and have the ownership and, and for, for all obvious reasons. Um, in this case, he didn't want to own the business directly. I mean, and being an an ESOP beneficial owner was, was really what he was looking for as well. So that was an interesting, an interesting dynamic for, for you guys. Um, so if, as we go through that, um, let's talk a little bit about, we'll break it down a little bit into pieces, but, um, you know, as you start, we started talking about the beginning, not really knowing and, and understanding the ESOP. We went through the first phase of the ESOP process, which I would say is really documenting your evaluation and um and then planning out like the feasibility of how this ESOP is gonna work. Um, as we went through those first two steps, um, what would you say your understanding and, and of really what you're getting into? It's like, you know, I, and I kind of know like as I went through this with you because I think you kind of grasp things pretty quickly, um, but what would you say your understanding of the ESOP was in going through those first couple steps? Well, the first couple of steps were really to gather a lot of data. Uh, I, I remember we went back, we went back 5 years, we went forward 5 years. Uh, getting the historical data was a little bit of work, but it was not a problem. Forecasting the future was a little bit of a problem. Um, as I've already said, we've, we've grown at a rate of about 20% a year since the market recovered, and we, we had to decide what kind of growth, if any, we wanted to put in the forecast. Ah, you and I discussed it quite a bit and we agreed to be conservative and we submitted an original forecast for the ESOP that that showed only modest growth in the business. And I think, uh, I think that worked out quite well. Yeah, I mean, we were, we were fairly conservative, and I think part of it is knowing that you, you had mentioned earlier, the cyclicality of your business. We nobody knows when the correction might come. Um, fortunately we live in a, in a state where Florida, you know, is growing and, and there's seems to be right now a good, um, at least in the next couple of years, a good number of, you know, houses being built every year and, and people moving down and, and the economy is, is, is stronger down here but it's really hard to know. So being conservative was important and I, and I, and I know from my perspective, I, I didn't want to like put something out there that your valuation was gonna be. You know, some huge number and then you, you, you, you have to work in those parameters. Um, one of the things I think going into the process that I try to like help people with is. You know, the, the dynamics of an ESOP company of, of being a part of an ESOP company as you as the owner selling your shares and now still being their president, now you're the chairman of the board, um. There's a lot that goes up, goes along with it, and I, and I think just kind of just say what, what I, what seems to happen with most people is there's so many different unknowns and it, and it takes a good couple of years towards like dealing with all of those things that kind of start to, to pop up in, in terms of now what do I have? To do what, what are my compliance responsibilities in running an ESOP company? What's my fiduciary responsibilities? So for you, do you feel like, like how, how has that worked for you if I took it from, we went through that whole process, we closed the deal, now you're running the company, do you feel like you're, you're starting to really get like the responsibilities of, of an ESOP? I really do feel that way. Uh, one of the things that's come up just within the last couple of months, which I've discussed with you is capital spending for the business. When I, if I was still the owner, there were things I would go ahead and do and spend capital funds for, whereas now that we're in ESOP, I have to think of the impact that some of those expenditures would have on our profitability and therefore affect the share price for the employees. So there are things to consider that I consider now differently than I would have considered when I was the sole owner of the business. When I was the sole owner, the bottom line wasn't that important to me, whereas now the bottom line is important to our employees. So I have to give it more consideration than I would have in the past as an owner. Yeah, and I think that's um. Those are kind of things. I think you, you've always run your business very, you know, well with, with respect to all those variables, but it does make it different when you're thinking about everything matters to them in terms of being, them being beneficial shareholders. So moving, moving into like one of the, one of the parts of the, of the planning or, or actually the parts of the process that I think is, it's for me, it's a little, it's exciting because you don't know exactly what's happening. I know for, for you it might be like, oh this is a lot of work is we get into the due diligence phase, we've hired the trustee, they've got their evaluation firm, and we then go through that whole process of giving them what they want. Um, and then we get into the negotiation of, of the sales, sale price and all the other aspects of the negotiation. Um, and going through that process, um, You know, it, it's a lot, you know, and, uh, yeah, when you went into, when you got into that process as we went through it, do you recall kind of the, uh, you, what you were experiencing in that or did you feel like, did you, did you feel like it was like, uh, an overwhelming process or did you feel like, hey, I think we're, we're kind of working through exactly what we had planned. It's kind of again kind of slanted towards towards that loaded question, but. I did not feel that it was an overwhelming process. As I said earlier, I mean, there was a lot of, a lot of information to pull together for our for our evaluation firm, and that took some time and at times, like I said, it was tedious and boring, but once we got that pulled together, Ah, I think it went very smoothly with the valuator. The, the fact that we had the information, the questions that they asked, we were able to answer timely. Uh, they seemed like good people to work with, and the result, the result was good. And, and I think the result specifically was, and this is the part that's always difficult because at the very beginning you're like, I think it's gonna look like this, but then when you pull all that together, this is actually what the deal is gonna look like so you have all this time and and energy spent to try to get to some some level of number and in, in this case I mean I think we were within what your expectation was in terms of what you wanted to sell the company for. That that I agree with 100%. Uh, I was, I was pleased with the result of the of the valuation and uh. I continue to be pleased a year and a half later. I, I know we had discussed, uh, taking a note versus any cash upfront and the, the fact that I had planned to stay in the business indefinitely, uh. And the fact that we put a note together with a good interest rate was an easy decision for me to make. Yeah, I mean, that, and you took, you took a 100% seller note. Um, the, the advantage of that for you was obviously, you got paid the interest, you're getting paid interest on the note. Um. The disadvantage was you, you just don't have the, the cash, the liquidity up front to say, hey, I wanna go put money somewhere else or, or do that, take it out of the business. So, um, you know, for you going through that, what, what was, what were the major things that you were thinking about when we were deciding on whether, whether you're gonna use all seller financing or, or trying to do a bank, bank note? I really didn't have to think about it very much. As I said, the fact that I planned to work for many more years, uh, There was, and I had no need for any upfront cash at that time. I wasn't planning to retire and go off and buy an island somewhere. Uh, taking the note with a good interest rate, as I said, that was an easy decision for me. That's great. Um, kind of moving in, let's move into the employees for a second. I'm curious like what have you seen, you know, and I know when I went to the, the meeting when we first announced it. Um, what have you seen within questions the employees have when this first thing started and, and how does that, how's that going at this point when, when you now they are, you know, you're, you're 100% ESOP and that really benefits them in general. Well I think it's going very well with the employees. It really went well from the start. I mean, the question that came up in the beginning is, you know, when do we find out? When do we get our statement, and That ended up happening about 6 months after we executed the deal. I think, I think the employees were surprised when they saw their statement. I think providing this program, uh, in addition to some of the other 401k programs and things we offer, it really made the employees, I think, very, very happy. It, it, it was kind of a win-win for them. And I know very shortly I'll probably start getting the questions. When will we know about 2020, right, yeah, but that process again, we're just starting now that we have our year-end information and we'll be pulling together the data for the valuation company again. And then we start our cycle all over again, but, but I think that's great. I think having that like the difference when you're pre-ESOP before ESOP, and now it's like their employees have something. That they didn't have before and and over time, you know, they're not gonna understand it right immediately, but over time they're gonna start to to understand it and hopefully make it more of a difference in terms of what they can do to improve the valuation of the business because that's where they're gonna really benefit as the business continues to to grow and hopefully become more profitable and um more more valuable as the years go by. Um, so let, let me ask you this big question. It's like just thinking about the whole thing from beginning to end. Um, what would you have done differently, knowing what you know now about the ESOP process? I really can't think of anything that I would have done differently. Uh, you know, we're running the business the same way we ran it before, uh, I mean, technically, I'm no longer an owner. I'm an employee and technically the employees are now owners and uh other than that, I can't think of anything that we're doing differently as, as I said a few minutes ago, we are being a little more. Cautious about spending money on some of the capital things we'd like to do with our business. I mean, when our when our buildings need painting, when our parking lot needs repaving, some of those things as an owner, I would have done whenever, whenever they arose now. I don't think our employees are concerned with whether the buildings get painted or not. I, I think they might be concerned that that might lower their share values. So, that's the only thing I can think of that might be a little bit different in the way we're running the business now as an ESOP versus the way we were running it prior to the ESOP. Cool. Well, one thought I had, and this is just kind of one of the things I was, I was gonna finish with is when you look at, you know, Braden Kitchens going on into the next 50 years or 25 years or long past year there, right? Can you see that the, the possibility of, of this company continuing to do what it's doing with the structure of the ESOP and what, what has been put in place? The answer to that would be yes. I mean, I'm sure that there will be more ups and downs in in the market that we service, and there'll be, you know, when you look long term, there will be probably some bad years, but right now we don't foresee that and. I'm, I'm just very satisfied with the way things have come out. I, I think the employees are very happy with the thing, the way we, we did the ESOP. And I really don't see anything different down the road. I hope Brighton Kitchens is here for another 50 years, you know, we are in our 50th year right now. Oh, well, perfect. A matter of fact, next month will be our 50th birthday. So for a small company, we've been around for a long, long time. Yeah, yeah, and and to maybe celebrate at some point, whoever it is, a 100 year anniversary would be great, so. Um, so we're we're expecting our accounting firm to do something special for our 50th birthday, but we'll have to wait what that is. We'll have to wait and make sure we plan that accordingly. So now that's a big deal that we will do something for you guys. But with all of that, I think it's very helpful. I, I guess I, I want to stop and say thank you so much for your time, but especially because I think there's so many people that are thinking about an ESOP and As we do these interviews, we talk to a lot of different types of people, attorneys and trustees, and but it's better to talk in some cases to the actual owner who goes through the whole process because you've been there, you've done that and I think I from that standpoint and just for you to put you put this time, you know, aside from me today, I just wanted to say thank you so much, Pete and I I definitely enjoyed the process in doing that and doing this with you and just the. Um, doing the ESOP from the beginning to end and, and just kind of the, the way things work, um, it just worked out great. So again, I just wanna say thank you so much. Well, you're very welcome. I enjoyed talking to you about it. Right. So as we close out, I just want to remind you, if you like the podcast, please subscribe and share it with a friend. Um, be looking for ESO Guy Live. Have a great day and we look forward to you on this next step on this journey to an.