ESOPs Are Great. But Not for Me

Hello, everyone. Welcome to the 21 Hats podcast. I'm your host, Lauren Feldman. Last week, Jay Goltz continued his exploration of employee ownership, flying to Portland to meet up with Sean Bussey and Jim Kalb, a friend of 21 Hats, who has already sold a portion of his business to his employees. The 3 owners planned to attend a conference promoting employee stock ownership, but things went somewhat awry. Jay and Sean left the conference early. Jim canceled his flight, and has happened before in his brushes with ESOP professionals, Jay walked away feeling convinced, convinced that is, that an ESOP probably isn't right for him. Two days later, we taped this podcast, which quickly turned into one of the more raucous conversations you are likely to hear about a somewhat technical business topic. Although we did manage to find some clarity in the end. In Jay's words, we agreed to agree. Along the way, we confronted quite a few relevant questions such as do ESOPs have to be so confusing? Are there professionals who pitch ESOPs trying to make them seem complicated? If Jay wants to sell 30% of his business to his employees but continue running it, how much control would he have to give up? Will an ESOP make life easier or harder for Jay's two sons in the business? Instead of an ESOP, could Jay accomplish most of what he wants to accomplish by setting up a profit sharing bonus plan through his 401k? Hanging over the conversation was a larger, more philosophical issue. What exactly do business owners owe their employees? And whatever those obligations are, do they extend beyond the sale of the business? Do they extend beyond the grave? Even in good times, owning and running a business can be a lonely pursuit. Our hope is that these weekly conversations brought to you by our principal sponsor, the Great Game of Business, will let owners know they are not alone in facing challenges. Same thing with our daily newsletter, the 21 Hats Morning Report, which magazine named the best newsletter for business owners and which you can subscribe to for free at 21 hats.com, where you can also find transcripts of our podcast episodes and lots of other articles and interviews. Joining me this week on the podcast are Sean Bussey, CEO of Kinesis, which is based in Portland, Oregon, and works with small businesses on marketing, culture, and strategy. Jay Goltz, CEO of the Goltz Group, whose companies in Chicago include a picture frame business, artist frame service, and a home furnishing store, Jason Hole, and Jim Kalb, who is founder and president of Triad Components Group, whose companies in San Diego include Opta Fuse, which manufactures fuses, circuit breakers, and switches, mostly for the automotive industry. The episode is titled, ESOs are great, but not for me. Welcome, Jay, Sean, and Jim. It's great to have you all here. Jay, the last time we spoke about ESOPs, uh, you told us that you were initially really excited about what an ESOP might mean for your businesses. But that your joy quickly turned to oil when you started talking to people in the ESOP industrial complex, and they kind of unsold you on it. But you, you kept digging, and you wound up kind of rediscovering the joy. And even convincing yourself that you could actually make more money owning 70% of the business than you do owning 100%. And in fact, when we last spoke with Corey Rosen, a couple months ago, you told us that in your mind, the question had shifted from, why would you do an ESOP to, why wouldn't you do an ESOP? So, as we get started here, you just flew to Portland to hang out with Sean at an ESOP conference. Where's your head at now? Well, I discovered why you wouldn't want to do an ESOP, just for me. I think ESOPs are great things for many companies, but I have to tell you, I've now sat through 4 or 5 presentations from, as you call it, the industrial complex, which is a good phrase for it. Not people that have done them, but the people that are administering them, the people that are helping with them, and employees. I've, I don't think I've seen one business owner other than Jim who's on this with us today, actually talk about it. And I had to figure out why this doesn't work for me, just for me. So, it's ideal for people, first of all, you have to have a team in place, check. Wait, before you go through the, you're about to list why it makes sense. Let's come back to that. First, I, I'm just curious, this is, this was a. is designed to encourage people to do ESOPs. Tell me about the conference. It's just like everything else I've seen every one I've gone to. I start with joy, and then it quickly goes to Oi, listening to the people, the complications, the questions. Here's some Oi from Monday. They did a study to people that have done ESOPs, and they found that 60% of them were very happy, 30% were somewhat happy, and 10% weren't happy. And I said, why are the 30% somewhat happy? And the answer turned into the two people at the front that were with the company. Well, I don't think our clients are like that, are they? Like, no one will tell you the truth. The someone that does an ESOP is not happy. I'd like to just understand why this could go wrong, and I have yet to get anybody give me a straight answer on that. So it started me back to where I started with. It took me a while to figure out why for me personally, this doesn't make any sense. All right, well, let me stop you there for a second. Sean, did you have the same reaction? to the conference in Portland? Yeah, I mean, I had a I had a struggle with it because I think it was structured in a way that doesn't necessarily serve the best interests of people who are curious about becoming an ESOP. That's the whole point of this conference, right? Well, I, I think it should be. What the title was, is an ESOP right for you? That was the title, right? And, and so I think Jay, Jay and I went there with the goal of becoming educated and learning. And we quickly found out that it was far too much in the realm of being a sales seminar than actually an educational seminar. And the fact that there weren't other uh ESOPs in the room, like folks who had become ESOPs that we could like connect to and say, hey, what are the pros and cons? What should we believe? What shouldn't we believe, you know. Instead, it was a room full of people who wanted to become ESOPs and who, who did, who needed information like us. And then a lot of vendors, and the vendors had paid, I think, a lot of money to be there. So there's a flaw in that model, right? Because, you know, the incentive is to fill a room full of potential prospects and to sell to them. We happen to have an ESOP in this room. Jim, I'm curious. It's been a while now since you made the decision and you did it, and I know you're happy with it. Did you kind of have to fight through this as well? Did you have a tough time figuring out whether it made sense for your business? Um, no, actually, so I, I want to do a different tack. These guys went to a seminar from, I believe it's called NCEO. The National Center for Employee Ownership. There we go. And again, I, I used to be a member of this, so I went the route of, I went to the University of California in San Diego, I'm here in San Diego. And so they were very, very positive. About all this, it was actually a seminar I heard about 20 years ago from the same group. So I went through a different route, and they don't have any vendors. They don't have anybody there's just a bunch of information on the campus of UCSD. And so um I've never been to an NCEO event. I want to make something clear. The problem in my mind is not that there are vendors. You just highlighted it. You went to a university where they teach. They're professional teachers. They know how to teach. We go to these things. I'm not saying any of them are dishonest. I'm not saying anybody's pulling the wall. They don't know how to teach. It's not that they're, they're bad at, at selling and explaining. They're horrendous at it. They go to these complicated shops. Circles and squares and well, you gotta get warrants. And I'm thinking to myself, how many people in this room know what a warrant is? And they go on and on and on and on and on, and you can just see people's heads spinning, including mine. They could start with, let's tell you why people do ESOPs, why they work out. Great, and why sometimes it's not appropriate. Just like if you went to school. They're not teachers, they're investment bankers, lawyers and accountants putting on seminars. They do, they talk shop to each other and, you know, and they lose the audience, and they don't even realize they've lost the audience. Yeah, that's true. Yeah, I finally got some clarity. I spoke to a guy in the room who's who I actually think was probably my best connection of the day. And he's a one man shop and, you know, he basically does exclusively ESOP work and, you know, everything from like feasibility studies and so forth. And you know, he said to me, he's like, these are big companies in this room, and they're looking to sell to big companies. And they're My mission is to make it complex and hard, and uh that way they can generate more fees. And I was like, yeah, that kind of feels like what's going on here. All right, so, but here's a question. You don't want to reject doing this, Jay, just because they're bad at marketing. Correct. Correct. And you warned me about that because you're good at Calming me down, and you were right, and I, I stayed calm for a few minutes. I finally lost it when I asked the question about only 60% were really happy, and the guy at the back who was running goes, Well, 30% were somewhat happy, and I had to go, yeah, not real interested in some up happy. That's not my goal, to be somewhat happy. So, I think I calmed you down. Yeah, right. Tell us, just to make clear that it's not just the bad marketing that's turning you off. Why are you cooling on this now? What have you learned that doesn't make sense to you anymore? Because before you thought you were going to make more money and your business was going to be stronger, it was going to keep your employees and it starts with this. What, why was I looking at this? I'm concerned about my 401k balances for my employees. Half of them don't have anything in there. That was the first thing. And two, I wanted to do something that could be a little more glued to keep people together, working together. I realized that the problem is, I've got 4 out of the 5 criteria for, is this a good thing? I've got the team in place, I care about my employees. I don't need to get the top dollar for the business, and I don't need all my cash out. So, 4 out of 5, I'm right there. The 5th 1 is where it falls apart. I'm not going anywhere. I plan on being around. My kids are gonna take over the business, which means the money that I'm getting for quote unquote, selling the business is my own money. All I'm doing is taking my own money out. It's, it's not like I left and I'm, I'm, I'm fishing every day. So the, the whole idea. Wait, wait, wait, let's stop right there, because this gets complicated and somebody's gonna have to explain this to me like I'm a 5 year old. Yeah, you're wrong though. Go. OK you're wrong. Tell us, tell us, tell us why, Jim. It's your own money tax-free. So is the money that I get from earning the money. I, I'm giving away. Think about it. It's not, first of all, the interest on that is not tax-free. That's what I learned. It's really not true. Wait, wait, wait, wait, wait, we're, we're we're covering too much ground too quickly here, I think. Let me set this up. The traditional way for doing an ESOP, and maybe this is the way Jim did it, you'll tell me, is Most of the time, I think, the employees get shares in the company by borrowing money that is paid to the owner. Yes, you're interested in doing it in a slightly different way, which other people do, but it's less common, I think, where you don't need the money out of it, so you're going to lend the money to the employees, correct? Yeah, but here's the fallacy. I don't need to sell anything. I gave away a revenue stream for no reason. That's the point. I'm not you're not giving it away. You're selling it. I'm, I'm. Giving away the revenue stream from it. So it's the same, it's my own money. I'm giving away a 30% but they're paying you, you're giving them 30% of the company, but they're paying you for that. They're paying me with my own money. I'm, I'm not, I haven't left. I'm going to work every single day. They're they're gonna pay you with profits that the company makes over time. All my profits. But what's Jay saying is like if he just kept ownership, he would get that money anyway. Right? So think about all the other things that, that, uh, Jay wants to do. He wants to engage his employees, he wants to use it as a recruiting tool. He wants to show that he's an employee owned company to help gather new customers and as a marketing tool. And yes, eventually you're gonna have to sell some stock or get, or you're gonna give it away to your kids. So one or the other, it's going. To, you're not going to have it when you die. OK, everything you said is true. The problem is, I get to a non-negotiable, which is, I do not want to hang my kids with responsibility to a bunch of stockholders, trustees for, I don't know what's gonna happen. I have 4 different businesses, and the one guy that I talked to, he goes, you're gonna have a real hard time getting a good appraisal out of that. I've got a weird business with 4 different businesses. Is it possible in 20 years? One of them is gonna like peter out. I mean, you're talking to a kid that watched his father's dime store slowly but surely become irrelevant. I mean, is, is, I don't know what's coming down the road. I don't want to have to hang my kids with some responsibilities to a bunch of people that, so those upsides aren't worth it, is the point. Gym, does that apply to you? I think you have multiple businesses, I believe. I have multiple, I have 3 businesses. And so, but, but here's it, then you can just saddle them with having to sell the business eventually, which I don't want to do. And then, by the way, that control issue has not, there's, that is, that is a complete fallacy. So, as long as you control the board, you can control the ESOP. OK, here's your fallacy with that, which they made very clear in this room, and you can get sued. You can get sued for anything, any, for anything, any by anyone, anytime, you know, that whole, that whole line. So, Yes, you can get sued, but uh is the practical, the practical, um, application of that is you will not get sued because again, if you don't do anything wrong, no, they can say, wait, what do you mean you're closing this one division that you shouldn't be doing that. We have and here's the problem, which is what's so in. Who's who's who's they, the trustee the stockholders that you've given stock to stockholders have no say in your business whatsoever. The only person who has a say is the trustee, right? OK, I got it. Are you telling me though that one day my kids wake up and go. You know what? Somebody offered us 10 zillions of dollars for the building, which they don't own, and we're gonna sell the building and close the business. Are you telling me none of those people could go and sue us for some reason? When you say they don't own, and you're saying the employees don't own the building, your, your kids do. So you're imagining a situation, you're gone, and the kids get an offer for the Real estate, which is suddenly much more valuable. Right, which happens every day, and they want to sell and close the business, you're worried about the ramifications of that. Jim, what do you think of that? Well, Jay, you've already told, you know, in previous podcasts, you've already said that you have what, $4 million of inventory or $10 million it'd be cheaper for me to just close. When you sell the business, you're going to liquidate and your, and then your company will have some money, some cash at that particular point in time. And then the employees will take whatever cash at that point, just like selling it to somebody else. By the way, if your kids decide to sell the business for 5 $10.20 million dollars somewhere down the road, the employees will just share in that proceeds from that, um, that sale. Here's the problem. I've been through 4 webinars with this, and every time I try to get any of this out of these quote unquote professionals, Monday, when I ask, what are the reasons why that 10% are really unhappy, these guys looked at each other in front of 50 people and go, Well, I don't think that's true with our customers. Do you? No, I don't think so. One of the fact that I have to ask you, a guy who did an ESOP for his own business, and, and I, it seems like it's a great thing for you, the fact that I can't go to a webinar and talk to a quote unquote professional to find out what are the downside potential things, and no one will give me a peep, is extremely disturbing. And infuriating for paying for airfare, for paying for membership, for going to webinars. They just won't tell you the truth. This clearly is not right for everyone. But again, you don't want to walk away from this because they're bad at marketing it. No, no, I agree. I figured it out. This isn't right for me because I can accomplish the same most of it. I'm not, I fully agree with you, not as much. I can 80% cover this by simply doing a bonus plan through a 4. 1K plan, I can take care of my 401k concerns with my employees. I can give them an incentive by doing a profit sharing thing, and I can accomplish that goal, and I can pay less taxes because I'm obviously, when I give them money in the 401k, it's deductible. I can, I can get 80% there without going through what is continually said in the books, and the webinars. This is a lot of hard work. They keep pounding that away. This is a lot of hard work. Not really appealing to me. I'm thinking, this is like getting a, a cow because you want a glass of milk. No, I think I'll just go to the grocery store and buy a quart of milk. I don't need to own the cow. I don't need all of the ramifications. Jimmy, what was your experience in terms of the level of difficulty, and, and I think it's important to recognize you're a DIY guy. OK, so here's the issue here. It wasn't hard at all. I engaged the the UCSD people, they were my consultants on this. The cost on them, they had 4 modules that the, the different steps along the way, about $5000 a module. So I ended up with 2 out of the 4 modules. Otherwise, I didn't need it. I had an attorney who walked me through all the other types of and in fact, I have, I had this for you for, for Tuesday, uh, Jay. I had, I have this whole checklist. of things. We should say, Jim, you were gonna go to Portland and join Sean and Jay at this conference, but when Jay aborted it, the, uh, the plans fell through. Well, keep in mind, I didn't abort it. I called him to see whether he was really hot. I would have waited around if he was coming up, but he had his own things going on and he was thrilled to get off the hook, so I didn't just abort it. We all aborted it. The, the, the point is, it wasn't hard at all. The hardest part was just educating my staff on what it was. And so I have these one on one meetings with them. I remember, my staff is a much smaller than yours. My, I only have 21 people. So it's much easier for me to, to, to meet with my staff, go through their, their statements, show them how much stock they have, show them how much it's worth, show them what their vesting is. And it's really, really simple for, for me to be able to do that. And it makes them. You know, I want them to be financially literate, and, and not necessarily open book. We do open book management, but I want to financially literate what what makes us money and what adds value to their stock. What do the lower paid employees make? Um, my lowest paid employee makes about $19 an hour as a warehouse guy. OK, all right. That's pretty reasonable. I mean, I mean in terms of a parallel. My understanding is that 2 is about the kind of minimum threshold number of employees and that if you have a company that starts to shrink, you can run in, I mean, it was referred to as kind of the nuclear uh situation where the percentage of stock owned by a number of people gets too low. Um, or too high, I guess. Can you address that at all? Do, do you know what I'm talking about? Yeah, I, I do. And so, by the way, Sean, I'm at 21 now, but when I started this, I was about 14. 0, cool. OK. All right. So what I did was, in order to stop that, a couple of things happened. I use a formulation based on how much they, how much salary they make. So when I'm attributing stocks, so if someone makes $400,000 with my company, I'm only going to attribute the 1st $150,000. Or 3 times what the lowest person makes in the company. So if I have someone who only makes, you know, $40,000 a year, then the maximum amount of their salary can be $120,000. It's 3 times the lowest person. OK. But that's what their allocation is, so no one's gonna ever get really super top heavy in, in this, um, in this situation. Um, but that, that's one of the decisions you can make going on. Again, there's a little template you can use to just take you through all these decisions, what the vesting schedule looks like. If someone were to leave, what happens then? I want to be clear, I'm sure for you, you figured it out and it's gonna work out great. It's just, in my case, the fact that I'm not planning on selling the company down the road, it just doesn't make any sense. That's all. I'm not showing the company. Well, I'm. Selling the company to them, you know, to the employees. I'm not selling it to anybody else. Oh no, that's fine, but I have, but you are going to sell the company then, which I think is a great thing, but you are planning on completely being out of it. Has that changed for you, Jay? Because I, I, I feel like you've kind of ebbed and flowed on whether your children, whether you want your children to run the business. I, my kids are probably going to be here and, and I know, I, I do not see down the road. that we're going to wake up one day and say, geez, you sell the business. And I think if I was, I fully support the ESOP philosophy, the model. I think it makes perfect sense. In my case, though, I talked to a guy that sold his ESO, and he built an incredible company. He went from 3 employees to $250 million and he did an ESOP, and now he's in Florida and he tells me, Well, listen, uh, you don't want to die at your desk. And I go, Wait, wait, wait. Maybe I do. That's an assumption you're making. He tells me he's got 2 boats in Florida. Like, I have no interest in having 2 boats in Florida. So, for me, I plan on working for another 20 years or something. I'm in a very different place than someone who says, I want to be out of here in 5 years. And then I also, like I said, don't want to saddle my kids with all of the potential problems with, for instance, what if business goes down, the stock goes down, and all of a sudden people are pissed about it, and I don't want to worry about any of that. Jim, is that a concern? It could be, but again, if they understand what the dynamics are, then, you know, my, they all understand this, we're all in this boat together. So if, if it goes down, it goes down. And with the understanding is we work hard, it won't go down. But back to, back to Jay's point though, so if you're bonusing them out each year and all of a sudden your profits go down, you don't bonus them that year. Right. I do. management. You don't think you're gonna have some angry employees? No, I, I, I show them that we, we do more, more open book management. We explain to them where we're at. No, I think they'll understand that, listen, we had a bad year, here it is, but here's the other issue. I got lots of people that in the next 10 years will be retiring. I'm confident doing the math, they'll have more money doing it this way. So the ESOP pays. Of in the long term, in 10 years, my, I, I'm gonna, I'm gonna do this in a way, they'll have more money in 10 years just getting their bonuses on their 401k than they would have gotten doing an ESOP, because a lot of the money in the beginning, apparently, and this is what no one will give me the exact number, some of that money you're putting towards the trust is paying me back. Well, they're not paying me back now. So, It's gonna go right to them right in their 401k plan. It's just cleaner and I, I like to call it, it's an elegant solution that didn't occur to me until now. Jim, one of the points I'd like to go back to that Jay has made is the issue of whether he's giving the company to employees or a percentage of the company to employees or whether he's selling it to them. Jay's uh expressed the concern that if he didn't do that, he would just get the, that profit stream that's now going to go to the employees. So essentially he's giving it away. Is he right about that? Is that the way you look at it? Uh, it is. So, so Jay has now changed, as far as I'm concerned, has changed the dynamics or changed the, the, the, the, the ideas going in and and the the idea going in was I don't. My kids don't want it. I need to find a way to dispose of it. Now it's my kids want it, and there's no need to dispose of it any longer. OK, that has absolutely never been the case. I never said my kids don't want it, and I would need to just ask Jay. You heard that, but that's certainly not been the case. You expressed more doubt about where things might end up. You, I don't think you ever were convinced one way or the other, but you wanted, you wanted options, right? And I still have options. That's the beauty of this. Using my plan now, if that turns into a Situation, there's still options. They can go and sell the business, they can do an ESOP, they can do whatever they want after I'm gone or while I'm here, but I, I am expecting that they're going to be here. The point is, options. I like the options. I have no reason to lock myself into something that I'm gonna wake up one day and say, Yikes, what did I get myself into. And again, I'm, I'm not like that. I don't see that that way at all. I, I look as as kind of a godsend of what I've built can now go on forever. You want to retire. That's the difference between you and me. You want to retire. I want to semi-retire. I've got a succession plan. I, I know who the young kids are gonna take over my business, and you're gonna retire eventually, and your kids are gonna take over. So, again, it won't be, you won't call it retirement. Now he wants to die at the desk, Jim. No, it might be called dying, right? No, but it's not, and your number is how long is your, your plan? 5 years you want to retire. It started at 8 years and so now I'm, I'm 3 years into it, and then my, my wife's gonna retire um in about 6 years and so I'll retire with her. OK, I have no plan on doing that. That's the difference. But again, though, I don't, I'm not gonna retire completely. I'll still be on the board. I'll still be, because they'll still owe me money. So I can't necessarily just walk away. Yeah, the bank will give me the money at the end, but, you know, the company still has to be around to pay the bank, so I can, I'm, I'm still on the hook for that note, uh, that the, the bank is the bank is lending the company. You just kind of summed it all up. You're still on the hook. If I was to sell, I did not want to be in any hooks. I want to just be done. Either I want to be running it. Or not running it. I don't want to not be running it and be on the hook. I, those two things together are not an appealing combination. So I think this is super simple. I just don't think Jay wants other people telling him what to do. And this I think it's no, there's no question. But, but the question is whether you'd really be in that situation or not. And I think you're very concerned about the role that the employees would play in managing the company after you do an ESOP, and Jim's telling you that they play no role. No, you're really missing it. This is what's changed. One thing, it now occurs to me, I can solve my quote unquote problem by simply Doing an incentive bonus plan through the 401k. I get the deduction, they get money done, solve the problem. The rest of this, there's so many moving parts, and all when you go to these seminars, all you hear from everyone is, this is complicated, and this is a lot of hard work, and every time I go to these things, I think to myself, why would I want to do this to myself when I can Simply do my new solution of simply doing a, a bonus plan through the problem solved. Why is the ESOP so hard in your opinion? Well, after sitting through 4 webinars, they've convinced me that it's so hard because they keep telling me this is really hard. Every single one of them. The book says it 3 times. This is really hard work. That's what they Keep pounding away on it. That's talking to you actually have an EO. I do, and I'm telling you, it's not that hard. Yeah, and I also think one of the things that was a trigger for Jay in that event was you had lawyers in the room talking about fiduciary liability and risk and and lawsuits and blah, blah blah blah blah blah. And this is why I didn't like the event. It's because essentially they're trying to create fear, uncertainty and doubt. So that in their minds, you hire them. But for people like Jay, that kind of message is terrible. No, you missed the other bigger trigger. The guy they had speak that was representing ESOP said he did an ESOP, and he went through the whole story of how he did the ESOP. And at the end of the day, he was an employee. He didn't own the company. He started the speech by saying I want to just contradict what someone just said that, well, the employees are getting this and they're not paying anything for it. You know, what do you have in a company when without employees, nothing. He's basically saying the, the employees have earned the right to take over this company because they're employees. And like, I, I said at the end, I said, so you've never owned anything at, no. I want to hear from somebody who borrowed against their house, who spent 40 years with the stress and the risk, not from this guy, and I've yet to see one person in any of these webinars stand there and say, I used to own the Now, Jim, you're that guy, which is why I was listening to it. Yeah, and you were convincing, which is why I was continuing this. And I, I, I, I got this all from you, but I just realize for me personally, I solved my problem with the 401k plan and, and the, I don't, it's just not worth the exposure to the potential problems. Again, you're looking at the problem though, just being, I want to give money to the employees for doing a good job. And you're right, if that's, if that's your situation, you, you feel better about yourself so they can retire a little bit more comfortably because you're doing that, then that's fine. That's, if that was your problem, you're absolutely 100% right. This will fix your problem. I knew we'd agree at the end of this. We can agree to agree. No, I mean it. That's the case. That is the case. Like I think Jimmy's perspective is really important because I, you know, I think about my business. I don't have any children, and I know my brother, well, my brother's only 5 years younger than me, so he's not gonna want it. And I also think about like, how do I do right by the people who helped me build this thing. And the ESO industrial complex, they're motivated to create a sense of, of confusion and necessity. So one example, right, there was a group in the room that was, you know, this group that pissed off Jay so much that was saying, well, all of our customers are happy. Their feasibility study for doing, uh, uh, an analysis, uh, do you remember what it was, Jay? Was it like $35,000? Was that their price he admitted that it doesn't work for some, but he never told us why. He admitted that, that sometimes the feasibility study comes back that it's not worth it. And then that's fine. But anyway, my point being that Their cost structure for doing that thing, just to assess was, you know, tens of thousands of dollars in that range. The, the solo guy in the room was like, that's ridiculous, and they're, and they're that way because they're big organizations. I mean, JP Morgan was in the room, right? So just to give you an idea of the organizations that are there. And he's like, you know, my feasibility study is like 7K, and I think Jim was saying, what, 5K at the, at the, through the college system. And so what I'm starting to see here is that there's a way to get this done, but, but the, but unfortunately, the national organization is structured towards the high end of the cost. Structure and towards the larger corporations. Wait, wait, let's let's talk about why, because those are the people that paid the money to sponsor this. Unfortunately, it's designed for the bigger companies to be doing these speeches and like, I think you're giving them too much credit. I don't think they're trying to make this confusing. I think they just don't know how to explain things. Uh, it might be both. Right, right, for sure. Sean, where does this leave you? Are you still thinking of this as an option for your business? I think it's a great option. My business, I've got to prove the model further, like where, like where Jimmy was when he started his journey, size-wise. Um, our model is probably more volatile than his, um, so I need to get Before the pandemic, I was like, yeah, we're on this train. I've proven consistent marketing, consistent delivery of customers, consistent growth, good profitability, and I was like, full steam ahead. And then the pandemic really undercut us. And so, I've got to I got to regain that confidence and growth trajectory, so that, yeah, I get to 20 people and I can make that happen. But I, I think it's a great way to go. Uh, one thing I want to ask Jimmy though, that is really, it's never been addressed in the in in these, in these conversations is, and, and I'll just use an example. So there was a company here in town that provided like winery supplies. And they converted to an ESOP, and it was like such a cool thing, such a community good. The employees all got this tremendous benefit. Private equity comes along and says, Hey, we'll buy you an ESOP. And then the employees look at that offer, and it sounds like they voted yes. And so then it becomes owned by private equity, and they like eviscerate the company, you know, move it out of the community, do what private equity does. I'm curious, Jimmy, uh, if you've thought about that. So the answer is yes. So this was actually brought up at a seminar I was at. And so the guy was talking about how he had, they had done an ESOP, private equity came to them. But remember, it goes to the board. The board is the one that entertains any type of offers for well not the company's for sale or not. And who's the board made up of? The board is made up of, you know, directors that are. It's so here's a symbiotic relationship. So back to Jay's thought about control, you never lose control as a selling owner. Unlike if I were to sell the PE company, I would lose control of the moment. For sure, for sure, no argument there. OK, talk about that trustee piece because I think that was a trigger for Jay. We have 3 directors on the board, including myself, one of our employees who doesn't necessarily have to be an employee and an Outside director, who's a, who's a friend of mine. He's a long-term friend of mine, who's a retired CFO for a public company. So we sit on the board, and then the board basically hires a trustee. And in this particular case, the board hired me to be the trustee because I'm not selling any stock right now, and not for another couple more years. So at that point, we'll have to hire an outside trustee, but the board hires that trustee. But the way we've done the election on The board is every board member has a 3-year term, only one of which comes up every year. So there's still 2 out of 3 people on the board at any given point in time. So even if the trustee comes in and says, I'm going to hire my own board member, the 2 other board members could easily just fire the trustee. Uh, I see. OK. So that's how you maintain control. Sean, I just want to say two things to you. One is, everything triggered me. A and B. On the head. I don't need to answer. You know what, I've put everything I have into this company for 45 years. I'm the one that took all the risk. I just don't need to have to, this whole thing with I just have no interest in it. And if I had to do it. Yeah, I know, totally. If I had to do it to, to solve my problem, maybe I would. But I figured out how to do it without any of this. So, I, like I said, I'm sure this is gonna work out great for you, Jim. I'm sure that there are lots of companies that should be doing this. Given my exact circumstances, it just, uh, the cure is worse than the disease. There is no disease. I got to figure it out, 401k incentive plan. I agree with you, Jay, you're absolutely right. I knew we would get to this end. For your situation, you've now convinced me that in your situation, that's the right thing. For sure. I think those for Sean and I though, it's, it's, it's a different situation. So we have a, we have a different situation. Jake, since we, we seem to have agreed to agree, tell us a little bit more uh about your, your plan B. OK, here's what changed. From day one, you called me a year ago and you said, have you looked into this ESOP thing? Not really, and you explained to me that you can sell part of it to your employees and then there's no federal income tax. And I Said, oh my God, think about it. You're gonna use the tax savings from the 30% to basically buy this portion. It's like free money from the government. What didn't occur to me till I finally figured it out is by giving money as an incentive plant, I'm saving the taxes that way. Wait, wait, wait, you spell that out. What's the plan? Yeah, I go ahead and do an incentive plan through the 401k plan and I put, and I Just, I, I mimic the ESOP theory. I take the employee's salary divided by how much, you know, they've got, uh, you know, compared to the rest of payroll, or I just do a straight percentage, or whatever, and I go ahead and do an incentive plan and put everybody into it because this is That's the part that no one ever said to me. This is how they should do these seminars. They should start it out by saying, do you care about your employees? Yes. OK, good. Has anybody paid any attention to their 401k balances? No one ever told me that when you do a 401k plan, In 20 years, half your employees aren't gonna be in it. It never occurred to me that was gonna be an issue, and that would get people paying more attention to this whole thing. So, so, so how does this plan actually work? You're, you're bonusing them based on the performance of the company, right? And you do that for 1020, 30 years, they're gonna have some money. So you set up a percentage of profits that every year go into the 401k. Yeah, and if I really get and if I want to make it more one year, I can go, you know what, instead of doing 15%, I'm gonna do 20%. It's, yeah, it's an easy, totally in control. Everybody's happy. You're giving that money away. Absolutely. OK, let me play devil's advocate for this, Jay. Sure. You have a health event in 5 years, your kids take over the business, and they look at this plan you've built, and they're like, you know, I, you know, dad was real generous, but I want the money now. And they leave the employees hung out to dry. Now, now I, I'm not, you know, saying your kids are gonna do this. How does it, wait, wait, what does that mean hung out to dry? What, what does that mean? They stopped, they stopped doing it, they canceled the plan, um, they take the profits themselves, um. They just have a really different value. You've talked about this a little bit. You talked about how your children have a slightly different take on profitability. And, and, and so, so then, really, you know, your goal of like caring for your employees, uh, is just basically wiped out, you know, in that one moment, whereas an ESOP, it actually is a lot harder for That to happen. OK, I have an answer. Here it is. A, I don't think my kids would do that, and B, and if they did, I'm gonna go set up a system to screw my kids over long term. I'll have to be controlled by the priorities. Like, no, I'm not gonna set up a system because I don't trust my kids are gonna do the right thing so that, well, that way they can't screw over my employer. I'm not doing it. I, I just I mean you just. You never know. OK, let's just, I, I don't think they would do it. I'm confident, but, but you're right, they could do that. But things happen, right? You know, a divorce, a divorce happens. That's a great example, right? It comes down to who do you trust more, your kids or your employees? Well, that's an interesting question. You trust your employees greatly. I, I do, and I trust my kids too, but like at the end of the day. Do I want to set up a system that my kids end up with this, this, this, this harness around their neck that they ended up with this business and now they've got stockholders that are getting, I, I, why would I possibly but you also just just so I mean just so you know, Jay, you're giving them a different version of a harness, right? Yeah, exactly. You're you're giving them the responsibility of the company, which I've heard tension there on the last podcast, like I've heard you say. Uh, I'm not sure they want this. You know, it is a big responsibility you're handing over to them. Yeah, yeah. So my, my, and I encourage everyone to do this. I typed up a, if I die sheet, I change it every year, and I explained to my wife and to my children, I do not want to, I've been in lots of business groups and I see some of these family members that got roped into being in the business. I do not want hostage kids that got stuck with the family business and all of the nightmares that go along with that. I made it clear, do not ever use the phrase, oh, dad's turning in his grave, or he wouldn't want us to do that. Do whatever you need to do to be happy. That's my message. Do whatever you have to do. You want to sell the business, sell the business. You want to run the business, run the business. You want to blow up. I am not hanging this on my kids. I'm just not. And I've seen too many repercussions from it, and I'm not gonna be the old man going, I built this for you. I'm not, I don't wanna do it. I'm not gonna do it. So then you're gonna screw over, then you're gonna screw over your, uh, your employees because then the kids are gonna sell it to a PE company or whoever wants to buy it from them, and they're gonna walk away with the money and then they're gonna, first of all, let's go through that for a moment. You just kind of explain the whole thing. That is hardly screwing over my employees. The employees, this is where they cross the line in every one of these seminars. I don't believe any business owner owes it to their employees to give them Shares of their company. Do I think it's a nice, good thing? Absolutely. But I am not getting on a soapbox to say, we all owe it to our employees to make sure that they end up with a piece of the business. That's why I was so offended by the guy who they chose to do the speech about it. Show me somebody who started the business, who had 40 years of distress and risk, blah, blah, blah. I don't owe anybody anything. And I, I certainly want to do something for my Employees, but if I'm not hanging out on my kids, I'm just not. And if you gave me those two choices of, one is my kids end up with this legal nightmare of dealing with this monster I created, or they decide to sell and take all the cash. I mean, uh, you're, you're making a lot of assumptions about the legal nightmare, and I would encourage you to talk to some more mature ESOPs that have been around for a while and see what their experience has been, because I look at it and go, this could be a win-win here, right? You're You're taking care of your employees, you're also unsettling your kids from a ton of responsibility. It's not true. And they're also getting a ton of wealth in the process. Unsettling, I leave a business with my kids and they've got an that's unsettling. That's hardly the case. But they don't have to run it. Everybody that I talked to, the experts that, that do this for a living, when I explain, I only want to do 30 and I know they, they so far 3 out of 3 go, yeah, this doesn't make sense for you. Well, no, I'm advocating that you eventually get to 100% because, uh, you know, unless you, unless these kids are really passionate about running the business, I mean, if they're saying you, Dad, yeah, I love this business, I can't wait to do it the rest of my life. And I haven't heard you say that at any point. No, no. Here's the myth. I hope to be going to work for 20 years. OK, my kids will be 60 years old at 55 years old. It's like, I don't know that I'm gonna be able to get this going to the 3rd generation, and like, that's OK. I, I, I, I'm not gonna burden myself with the, with the, I've had enough burden for 45 years. I am not gonna burden generations of mine with having to keep this thing going. If it doesn't work at some point, it doesn't work at some point. So unburden them like, dude. They don't have any burden now. They can do whatever they choose to do. That's, that's no burden. Well, they're gonna get them, they're gonna get the money that you sell for. Jay, I think they're questioning whether it's actually burdening them by doing an ESOP, and I think Sean looks at it as unburdening them. Oh, I don't, if you talk to any one of these people. You hear the words hard work, complicated. We'll talk to the ESO that's what Jim says. That's not what I say at all. Here's a problem. I can't find anybody who sold 30% of their ESOP and had no plan. I haven't been able to find that person. I've sold 12% so far. I know, but you've made it clear you plan on retiring and being done and getting all your money out. Great. But I have a plan to sell 100% someday, you know, along the way, but right now, we've sold a grand total of 12%. As I said, for you, it makes perfect sense. And in a couple more years, we'll sell 18 more to get it to 30. Jay, he's saying that it's not that different from your situation. And I think, Jay, you're underestimating. What it takes to run a business in terms of the burden of running a business. I mean, even yourself, like you're like, hey, some of these businesses I have, they might not be valid in 10 years, you know. Like, these are big things to carry. Right? Which means that the best thing possibly in 20 years. Keep in mind, my key managers will all be retired in 20 years. They're all in their 40s. The best thing might be in 20 years to just shut the business, sell the real estate, and move on. That might be the best alternative for all parties. Jim, is there any reason he couldn't do that if it were owned 30% by an ESOP? Um, no, you could do that the, the whole way. And additionally, your key managers are gonna be 6 years old, but then you'll have key managers replacing them. It's, it's, it's a continuum. It's not a snapshot today. It's gonna be what happens. I mean, we've got young kids that are coming into the business that I see them taking over the management of the company someday. Um, it's gonna be theirs. But back to this whole thing. So, Jay, what you're saying is I don't want to burden my kids, but what happens is you're burning and myself. No, let me say that Sean really hit it on the head because Sean's very smart. I don't need to be told what to do. I just don't. After 45 years of me putting everything I got into the Who's gonna tell you what to do, Jay? You got the whole, every time I start hearing board of directors, trustees, I don't need to deal. With any of that. What you're doing is saddling your kids to sell the company once you're no longer there. And at that point, whoever's going to buy it from them are going to look at that and say, hey, look at Jay's not here to run this business anymore, so we're going to pay you a lot less money for this. Yeah. No, you left the part out that you brought up before that you forgot about. I got so much inventory. I used to wonder why businesses just closed and they didn't sell. And now I realize people make enough money on going out of business sales to make just as much money as they sold the business. I have a ton of inventory, so my business is simply just not worth much more than. The inventory, so this would not be a nightmare. This would not be a burden. At the end of the day, sell off the inventory and, and move on. I don't think that's what you close it down and then and then and just throw the the employees out on the street. Um, I did not adopt them. I care about them. I want to do everything, and I can tell you in my letter, I put in there, give bonuses of blah, blah, blah. I'm not, I'm not buying it. If you want to buy that, go ahead, but I'm not taking that responsibility. I am not taking the responsibility for 130 people. They're hardly thrown out on the street. They could go get other jobs. I would hope that doesn't happen, but I am not buying that. Um, I'm not taking that responsibility. But again, I, I look at it a completely different way. I know Sean does too, and The fact is, I didn't, you, you talk about how much sweat and equity and how much sleepless nights you have. I've had those too, but so have my employees. A lot of them have been with me long term, just like yours have, and they, they have put up with the the lean years. They have forsaken, uh, raises when, you know, they could have gotten jobs somewhere else for a lot more money, and they stayed with us the whole, the whole way. Um, and so yes, they have put themselves out there. In a sense, I want to reward them. Um, and, and they're, they're, they made the company what it is today. I'm not out there doing every job. I'm paying them, I'm paying myself. Um, let me cut to the chase. Did they sign a personal guarantee for $2 million to the bank? No, but they allowed me to pay off that guarantee. No, they didn't. So don't tell me it's the same thing cause it's just not. It's just not. I'm not saying they're not dedicated. I'm not saying I wouldn't want to make sure that I take care of them as much as possible. But don't tell me they've got as much skin in the game as the owner who has had to sign the personal guarantees for years and years and years. I'm not buying that, and I, I don't think they're getting screwed over, and I will make sure I put in the document, here's what my wishes are, blah, blah, blah. No one would get screwed over is the point. I look at the alternative to this. There are so many moving parts to it and so it's simply not worth it. And what's changed is, like I said, I figured out, I can accomplish my goal by doing a good bonus plan through the 401k plan. Let's just set aside the morality of whether employers are obligated to take care of their employees for their entire lives. You know, I, I just, I think that's a, an issue that raises raises the emotional level, and it distracts from kind of the core issues here. And the argument I'm making is that I think Jay cares about his people. I think Jimmy cares about his people. I think I care about my people. We all recognize they have helped build the business. I think it's a waste of time to start to say, well, I put in more energy than they did, or I signed my house, or I was up sleepless nights. Let's just set all that shit aside and say, Hey, how can we do best for the people we care about and love? That includes our family, that includes our employees. And I think what Jimmy is showing is there's a path forward to where the employees win in the short term and the long term. And the employer wins. Like, yes, maybe there's a little bit of of control you give up, but you're going to give up that control regardless when you die. And I think there's a really cool way in which this thing can last a long time. And, and Jay, I think your airs would make out really well. And I would encourage you to consider. That this business you have built, which is clearly in your heart, like clearly you're speaking so passionately for it because you have made it so much of who you are. You care about these people and you don't want them to become homeless. You said it yourself. And, and I think there's an opportunity, and then maybe it's not today, maybe it's 10 years from now. You know, to say, my kids actually, they don't really want it. They're not passionate about it. My employees, they do want it. And here's a way for everybody to win. I'm already there. There's nothing you said that's not true. I've already got that in place. And if the kids want out and they want to do an ESOP, they can go do an ESOP at that point, and they could be the ones to set the ESOP up. My only line in the sand is, I don't want to be preached to by anybody about that. I have some moral responsibility to make sure that all of my employees work at this company for the rest of their lives. That's where I draw the line. No, you know, we can, we can take that out of the conversation. I, I, I think that's a, a waste of energy, uh, because it's just gonna fire owners up and get them all upset. I think what I'm looking at this is, is how do we create a win for everybody here? And I think that's an interesting idea, you know, to say to your children, like, hey, if you guys don't want to run this and I'm not around anymore, here's the path. Please set up an ESOP. I would appreciate that. Yeah, I did that. That's exactly what I did. I typed out a whole sheet with, here's the bonuses that I want all the people to get, you can afford it. I've laid all that out, and it's all there in black and white, and they will follow my, they will, they will do it. Well. We are just out of time. One last thing, Jay, is that your, your errors, if they do sell it to a PE company at the end, and or that they even liquidate, they will pay the full taxes. Oh my God, so many, so many taxes on that, whereas they would avoid paying those, those taxes on the sale, it would be deferred until into your trust. Um, till, till at which time they actually sell the, the investments. There's no question, but that gets back to, I'm in a weird business with 4 different businesses, and the one guy that knows it says, Jay, you're gonna have a real hard time getting a good valuation. Is it possible there's someone in my situation that could walk me through this and go, oh no, this is, maybe, maybe that person exists. I haven't met him. And if they're listening, Reach out to me, Lauren at 21 hats.com, and I'll put you in touch with Jay. In any case, my thanks to Sean Buffy, Jay Goltz, and Jim Kalb, and of course, to our sponsor, the Great Game of Business, which helps businesses implement open book management and employee ownership. Hopefully, no one there will listen to this episode. You can learn more at greatgame.com. Thanks, everyone. Wait, wait, don't leave yet. If you have a question or a comment that you'd like the 21 hat's owners to address, send it to me by replying to your morning report or by email at lauren@21hats.com. That's L O R E N at 21 hats.com. Do it now before you forget and don't be afraid to tell Jay what you really think. You can take it. And if you got something out of this conversation, help us reach more business owners. Tell a friend, subscribe and review us wherever you get your podcasts. Follow us on Twitter. Subscribe to the Morning Report at 21 hats.com. This episode was produced by Jess Thuberon, founder of Blank Word Productions. OK, now you can leave. Thanks for listening, everyone.