ESOPs Are Great. But Not for Me

[Music] hello everyone welcome to the 21 hats podcast I'm your host Lauren Feldman last week jolz continued his exploration of employee ownership flying to Portland to meet up with Sean busy and Jim calb a friend of 21 hats who has already sold a portion of his business to his employees the three owners planned to attend a conference promoting Employee Stock ownership but things went somewhat arai Jay and Shawn 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 2 days later we taped this podcast which quickly turned into one of the more rockus 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 the 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 in magazine named the best newsletter for business owners and which you can subscribe to for free at 21h house.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 busy CEO of Kinesis which is based in Portland Oregon and works with small businesses on marketing culture and strategy Jay go CEO of the gos group whose companies in Chicago include a picture frame business artist frame service and a home furnishing store Jason home and Jim calb who is founder and president of Triad components group whose companies in San Diego include optifuse which manufactures fuses circuit breakers and switches mostly for the automotive industry the episode is titled esops are great but not for me welcome Jay Sean and Jim 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 Oi 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 Shi Ed 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 sea 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 see it through four or five 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' 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'm just curious this is this was a a conference designed to encourage people to do esops tell me about the conference it's just like everything else I've seen everyone 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 that 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 interest 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 wait the title was is an ESOP right for you that was the title right and and so I think Jay went 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 a 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 happened 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 abely so I I want to do a little different T these guys went to a seminar from I believe it's called nceo the national Center for uh 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 and 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 have anybody there it'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 they're 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 and I'm not seeing 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 charts with circles and squares and well you got to 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 head 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 invest M 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 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 oneman shop and you know he basically does exclusively ESOP work and Inter you know everything from like feasibility studies and so forth and you know he said to me he's likees are big companies in this room and they're looking to sell to big companies and they're 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 the 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 Stay 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 it was well 30% were somewhat happy and I had to go yeah not real interested in somewhat happy that's not my goal to be somewhat happy so good 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 cuz before you thought you were going to make more money absolutely your business was going to be stronger it was going to keep your employees 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 glue to keep people together working together I realize that the problem is I've got four out of the five 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 do for the business and I don't need all my cash out so four out of five I'm right there the fifth one is where it falls apart I'm not going anywhere I plan on being around my kids are going to 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 going to have to explain this to me like I'm a 5-year-old J you're wrong though go Jim you're wrong tell us tell us tell us why Jim it's your own money taxfree so is the money that I get from earning the money I I'm giving away think about it how it's not first of all the interest on that is not taxfree that's what I learned that's really not true wait wait wait we 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 but 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% 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 sing they're they're going to pay you with profits that the company makes over time called 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 going to have to sell some stock or get you know or you're going to 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 okay 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 going to happen I have four different businesses and the one guy that I talked to he goes you're going to have a real hard time getting a good appraise a lot of that I've got a weird business with four different businesses is it possible in 20 years one of them is going to 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 Jim does that apply to you I think you have multiple businesses I believe I have multip I have three businesses and so but but here's then you're going to 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 okay 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 any any by anyone anytime you know that whole that whole line so yes you can get sued but 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 infuriating who's who's who's they the the trustees the stockholders that you've given stock stocks have no no say in your business whatsoever the only person who has a say is the trustee all right okay I got it are you telling me though that one day my kids wake up and go you know what somebody offered us X zillions of dollars for the building which they don't own and we're going to sell the building and close the business are you telling me none of those people could go and Su us for some reason when you said they don't own you're saying the employees don't own the building 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 well Jay you've already told you in PR previous podcast you've already said that you have what $4 million of inventory or $10 million problem 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 for5 1020 million somewhere down the road the the employees will just share in that proceeds from that um that sale here's the problem I've been through four 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 esup for his own business 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 I fully agree with Jim not as much I can 80% cover this by simply doing a bonus plan through a 401k 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 real 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 the 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 okay 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 four modules that the different steps along the way about $5,000 a module so I ended up with two out of the four modules otherwise I didn't need it I had an attorney who walked me through all the other types of 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 going to 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 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 okay we all aborted it 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 remember my staff is 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 makes them you know I want them to be financially literate and and not necessarily open book management we do open book management but I want to financially literate what what makes us money and what adds value to their stock what are the lower paid employees make uh my lowest paid employee makes about $19 an hour as a warehouse guy okay all right that's pretty reasonable I mean I mean in terms of a parallel my understanding is that 20 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 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 oh cool okay all right so what I did was in order to stop that a couple things happen I use a formulation based on how much they how much salary they make so when I'm attributing stock so if someone makes $400,000 with my company I'm only going to attribute the first $150,000 or three 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 three times the lowest person okay but that's what their allocation is so no one's going to ever get really super topheavy in in this um in this situation U 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 mhm I want to be clear I'm sure for you you figured it out and it's going to 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 selling 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 them which I think is a great thing but you are planning on completely being out of it has that changed for you Jay cuz I I I feel like you've kind of ebbed and flowed on whether you're children whether you want your children to run the business no absolutely not I PL my kids are probably going to be here and and I no I've I do not see down the road that we're going to wake up one day and say G just 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 ESOP and he built an incredible company he went from three employees to $250 million and he didn't Esa and now he's in Florida and he tells me well listen 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 tolds me he's got two boats in Florida like I have no interest in having two 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 five years and then I also like I said don't want to sadle 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 have 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 point they all understand this we're all in this boat together so if if it goes down it goes down and with the understanding as 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 the openbook management you don't think you're going to 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 the the ESOP pays off in the long term in 10 years my I I'm GNA 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 going to 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 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 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 and there's no need to dispose of it any longer okay that has absolutely never been the case I never said my kids don't want it and I would need to just AB J maybe 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 going to wake up one day and say yikes what I get myself into and again I'm not like that I don't see that that way at all I I look at this as kind of a god sense 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 going to take over my business and you're going to retire eventually and your kids are gonna take over so again it won't be you won't call it retirement not 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 five years you want to retire it started at eight years and so now I'm I'm three years into it and then my my wife is going to retire um in about six years and so I'll retire with her okay okay I have no plan on doing that that's the difference but again though I don't I'm not going to 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 bank is that the bank is lending the company you just kind of summed it all up you're still on the hook for if I was to sell I did not want to be on any hooks I want it 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 absolutely 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 four 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 three times this is really hard work that's what they keep pounding away on it that's right how many those guys are talking to you actually have an ESOP I do telling you it's not that hard yeah and 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 is 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 esops that 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 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 and you were convincing which is why I was continuing this and I I I I got this all from but I just realized 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 looking at the problem though just being I want to give money to the employees for doing a good job and you're right yes 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 and 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 absolutely I you know I think about my business I don't have any children and I know my brother well my brother's only five years younger than me so he's not going to want it and I also think about like how do I do right by the people who help me build this thing and the ESOP 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 do you remember what it was Jay was it like 35 Grand was that their price whatever 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 organization 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 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 paid the right yeah tot 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 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 we're 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 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 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 to whether 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 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 to PE company I would lose control of the way for sure for sure no argument there okay tell talk about that truste piece because I think that was a trigger for Jay we have three 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 a 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 three-year term only one of which comes up every year so there's still two out of three people on the board in any given point in time so even if the trustee comes in and says I'm going to hire my own board member the two other board members could easily just fire the trustee uh I see okay so that's how you maintain control Sean I just want to say two things to you one is everything triggered me it's a and b you hit it 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 and if I had to do it yeah 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 going to 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 it figur it out 401K incentive plan I agree J Jay you're absolutely right I knew we would get to this end for your situation you've convince 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 we have a different situation Jade since we we seem to have agreed to agree tell us a little bit more uh about your your plan B okay 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 going to 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 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 employe salary divided by how much you know they've got you know compared to the risk 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 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 okay good has anybody paid any attention to their 401K balances no one ever told me that when do a 401k plan in 20 years half your employees aren't going to be in it it never occurred to me that was going to 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 10 20 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 going to do 20 it yeah it's easy totally in control everybody's happy you're giving that money away absolutely okay let me play devil's advocate for this Jay sure you have a health event in five 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 going to do this how does it wait wait what does that mean hung out to dry what what does that mean they stop doing they they sto doing it they cancel the plan um they take the profits themselves um you know they just have a really different value you've talked about this a little bit youve talked about how your children have a slightly different take on profitability than you you have an answer to that 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 okay 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 going to go set up a system to screw my kids over long term that oh they'll have to be control controlled by the priorities like no I'm not going to set up a system because I don't trust my kids are going to do the right thing so that well that way they can't screw over my employ I'm not doing it I just well I mean you just you never know okay let's just I'm not saying they would I don't think they would do it I'm conf but but you're right they could do that but things happen right you know a divor 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 why would I possibly want 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 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 explain to my wife and to my children I do not want to I've been in lots of vistage 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 to run the business run the business you want it blow up I 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 going to be the old man going I built this for you I'm not I don't want to 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 going to sell it to a PE company or whoever wants to buy it from them and they're going to 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 soap box 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 the stress 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 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 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 taking care of your employees you're also unsaddling your kids from a ton of responsibility that's just not true and they're also getting a ton of wealth in the process said unsaddling I leave a business with my kids and they've got an EA that's unsaddling that's hardly the case but they don't have to run it everybody that I've talked to the experts that that do this for a living when I explain I only want to do 30 and I've no they so far three out of three go yeah this doesn't make sense for you well no I'm advocating that you eventually get to 100% because 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 okay my kids will be 60 years old at 55 years old it's like I don't know that I'm to be able to get this going to the third generation and like that's okay I I I I'm not going to burden myself with the with the I've had enough burden for 45 years I am not GNA 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 going to get the money that you sell for Jay I think their question in whether it's actually burdening them by doing an ESOP and I think sea looks at it as unburdening them oh I don't if you talk to any one of these people all you hear the words hard work complicated well talk to the esa that's not 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 right you know along along the way but right now we've sold a grand total of 12% I like 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 he could do that though the whole way and additionally your key managers are going to be 6 years old but then you'll have key managers replacing them it's it's a Continuum it's not a snapshot of today it's going to 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 going to 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 them and myself no let me say that Sean really hit it on the head cuz 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 this who's going to 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 all you're doing is saddling your kids to sell the company once you no longer there and at that point they're the 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 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 if 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's throws it down and then and 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 that if you want to buy that go ahead but I'm not taking that responsibility I am not taking the responsibility for 130p 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 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 night 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 jobed 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 because 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 signed 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 be get screwed over as 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 EMP 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 help 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 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 has is showing is there's a path forward to where the employees win in the shortterm 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 heirs 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 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 draw the line no you know we can we can take that out of the convers I I think that's a a waste of energy because it's just going to 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 erors if they do sell it to a PE company at the end and or that they liquidate they will pay the full taxes oh my God so many taxes 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 which time they actually sell the the Investments there's no question but that gets back to I'm in a weird business with four different businesses and the one guy that knows it says Jay you're going to 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 them and if they're listening reach out to me Lauren 21h hats.com and I'll put you in touch with Jay in any case my thanks to Shan Buffy Jay gz and Jim calb 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 listen to this episode you can learn more at Great game.com thanks everyone wait wait don't leave yet if you have a question or a comment that you'd like the 21 hats owners to address send it to me by replying to your Morning Report or by email at Lauren 21h hats.com that's L RN at21 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 podcast follow us on Twitter subscribe to the morning report at 21h hats.com this episode was produced by just Theron founder of blank word Productions okay now you can leave thanks for listening everyone [Music]