Family Business Succession Through Employee Stock Ownership Plans

[Music] let's get started thank you once again and good afternoon everyone welcome again my name is fernando parra and i have the great privilege of being an assistant professor of accountancy at the craig school of business where students prepared to be the next generation of bold ethical business professionals i also have the pleasure of serving as director of the institute for family business a comprehensive resource center for family businesses in our community as well as a nexus to connect with our students as part of our mission to serve as an educational center for our community we are offering this webinar on how family businesses can utilize employee stock ownership plans as a succession tool i'd like to thank our good friend and chair of the ifb advisory board some guile for his contribution towards developing today's workshop unfortunately sam will not be able to join us today we are also very grateful to the ifb advisory board and our dean julie olsen buchanan who have worked diligently to make our resources available to our community i would also like to recognize all of our community business partners our ifb members legacy supporters for their invaluable contributions that make webinars like these possible today i have the honor of introducing stephen dice is the director of esop advisory for ages acquisitions and a legacy member of our institute for family business advisory board steven is one of our own uh he is a proud bulldog and a graduate from the craig school of business go dogs steven has more than 25 years of experience working with family business in our community so let me yield the floor to our friend steve welcome steve uh fernando thank you so much uh it is a definite honor to be here today and um and off the top here i want to thank all of you for um taking your time to um listen to this uh overall workshop to kind of go through employee stock ownership plans and their application um within family businesses within our community um from a broader standpoint throughout california and the country and the goal today and to have you guys uh out of here by right around uh four o'clock is um my intent is to really provide awareness uh the most important thing as part of the institute for family business and the advisory board is that um our team of people on the board uh it's critical for us as a as a group to provide like i said awareness um uh information education to the community uh to the business community to whether you're a stakeholder or shareholder within an individual business you're a family member within that within that family business a an advisor a trusted advisor for those individuals or even more even as importantly uh people that are coming up in our community that are looking for mentorship and learning about the different things that are available out there in our community um you know not just here in fresno but uh more broadly from there so um what i'd like to say just kind of starting off at the beginning here is uh number one i obviously want to wish you and your families the best uh hopefully it's been a very difficult time for our community and the country and the world the past 13 14 months and uh but there have been a lot of developments a lot of things that are occurring on an annual basis on a daily basis and that have been evolving in the marketplace for employee stock ownership plans their application for privately held businesses uh in the local area and more broadly and what i'd like to kind of just start off with as a as a premise is uh our discussion today i will get into some history i think it's good to have a foundation of where you know that today's modern esop began um how it came into into existence and um uh the reason how it and the reasons why it is now being used very heavily throughout uh the us as a business succession tool for privately held business owners that are that that definitely need to be reviewing and understanding all of the options that they have available to them at the point in time that they are preparing or choosing to exit the business at some point either financially or operationally and so our intent for today is to provide you with some overview of of an esop how they work um it's not as well known in the community uh but you'll see just from some of the things that we go through today that it's uh it's genesis has been not just a 60-plus year process in the making but a hundred year process in the making to get to where we are today um an overriding premise also as well of the discussion will be the actual flexibility that's within an esop if you're looking to adopt one or looking to learn more about how they work and also the control of process and what i mean by that is is that at any time you're looking to transition your business um either selling the business or transitioning it to next generation family or next generation management or other parties it's critical that you want to be able to control a process and that things are occurring at a time of your choosing and in a manner in which you are uh you know your preference so uh we'll go ahead and go on to the first section here and like i mentioned uh kind of the uh a little bit of the what in the why of uh esops and and ironically if you really look at where esops began and here again esops are employees stock ownership plans um most people think that the modern esop today really had its foundation with the uh passing of erisa which is the employee retirement income security act back in 1974 but actually the genesis and the growth and the advocacy for providing employees within a given company with actual shares of stock or a beneficial interest in those shares of stock of the company that they're currently employed with actually began going on 100 years ago this year if you go back to 1921 companies like sears and roebuck procter and gamble jcpenney companies back in the early 20s actually it developed what and actually participated and provided to some of their to their employees what are called the original stock bonus plans and so that goes back literally a hundred years from now or a hundred years from today and the rationale behind that was that ownership was looking for a way to be able to provide benefits on to employees so that they are essentially on the same side of the table as the owners of the business and start thinking like owners and creating um efficiencies within the business and growing um the and growing the value of the company on a go forward basis for the legacy of the business and the continuity of the business into the future so let's fast forward in um and a gentleman by the name of lou kelso and luke kelso is critical when it comes to esops and how we've gotten to today simply by the fact that he is well known to have adopted and put in and he's an attorney by background in practice uh the very first esop in the united states and um that was peninsula um newspaper and that's even advance of you know any of the developments of 1974 and erisa which formalized the process for the advent of like i said the modern day esop but what the intent was for lou kelso was to develop a irs tax qualified plan that was a benefit program available for the employees but also provided a methodology and a process to allow privately held business owners to garner the liquidity or to monetize the equity value that they built up in their business while at the same time and over the future providing benefits onto their employees of that stock or equity that they would ultimately sell and so that goes back to clear back to 1956 so 65 years ago in 1974 another creep a critical person to the esop today um is a gentleman by the name of russell wong russell long was a senator matter of fact he was a the head of the senate finance committee uh in the u.s senate and was a a big advocate for formalizing the process of an esau again how to become more formalized how to make it toward become more prevalent with companies in the community with companies that wanted to have an effective transition that didn't involve them selling the business to a third party or maybe to a small group of employees in the company but another option of which they can control the process and continue forward and so that was extremely large in 1974 was here again the advent of erisa and the inclusion of the terminology and law that is still in place today for the modern esop then you need to fast forward to 1984 which goes to the law that was passed that that time during the reagan administration that essentially created an opportunity for owners of c corporations um if you're going to have an esop in your company you cannot be a sole proprietorship you cannot be a partnership or an llc you actually actually be a corporation either a c corporation or a sub chapter s corporation at the time that you sell but in 1980 84 with the advent of the law during that year during the budget it it allowed for there to be placement of the c corp option for an owner and this is unique to esops that an owner of a privately held business that chooses to adopt an esop can elect if they sell if they're a current c corporation at that time to elect what's called a 1042 internal revenue code tax-free exchange now that became as you can imagine very critical in the growth of esops in many communities and an incentive for owners of privately held businesses that the government was providing essentially through law an opportunity for them to either defer or eliminate the capital gains tax associated with the sale of their business and as we all know here in the state of california for those of you that are on the call the capital gains rates can easily be between between state and federal between 33 and 37 percent of the overall sale above your basis in the company when you ultimately sell the business obviously if you're selling a business to an outside third party most likely and in many cases majority of cases you will be owning uh you will be required to pay capital gains tax upon the receipt of your asset of your consideration for the sale so here again that was a big item in 1984 to provide c corporations with that opportunity and as you can imagine it provide a lot of incentive for private held business owners to elect the adoption of an esop as a succession planning tool exit planning tool for the company so let's fast forward in 1986. in 1986 during the clinton administration um at that time or previous to that time you could not actually put an esop into your company if you were a sub chapter s corporation so in 1986 the law was changed here again during a democratic um administration obviously the c-corp law being passed during a republican administration that allowed for s corporations to now also have the opportunity to sell the for the shareholders of an s corporation to sell their business to an esop in the esop trust and to be able to garner liquidity in that fashion and provide benefits onto their future you know to their loyal employees the unique benefit that occurred at that time and going forward was that excuse me under a sub s corporation whatever percentage of your business so let's say that you sold 100 of your company to an esop and you were a sub s corporation when you sold your company would become a virtually tax-free company as an example here in the state of california other than the franchise tax or uh did i jump off here no am i still on okay um or the franchise taxes which is one and a half percent here in the state of california so ultimately but the combination of those two laws that were passed provided owners if they were a c-corp at the time of sale to potentially eliminate a significant amount of of capital gains tax and to be able to finance the buyout of those shares if you were an s corporation or you converted to an s corporation after your sale that you would have the opportunity that your company instead of paying um income tax which would normally flow through to your k1 and ultimately to your 10 and 40 as part of your normal um receipt of monies through an s corporation um you would literally have the opportunity to have a company that is tax-free or virtually tax-free so you can imagine that if an esop is being used as a exit planning tool to buy out legacy shareholders of a private privately held business and you're utilizing an esop to be able to provide the buyout of those shareholders those legacy shareholders by having the ability of the company to virtually pay no state or federal income tax was a substantial jump again in the expansion and the processes through to what we call today the modern esop um so to get a little bit past that now toward um uh kind of off the history lesson but you can see that that esops just didn't start yesterday the premise behind an esop has grown and the and the components of the modern esop today have grown and developed over a significant period of time through legislation and as you can imagine with the benefits that i just illustrated um have increased dramatically the amount of esops that are in our communities in to this day uh to give you a little bit of statistics and people are always a little shocked by these numbers is that the last numbers i was able to look up is that there are about 6 500 esop companies or companies where a portion or all of the company is held of the shares of the prior owners are held within the esop for the benefit of the employees and in the state of california us being a very high tax state over 800 of those esops are just in the state of california alone um as you can imagine with the high tax rates as i mentioned in the state of california the thing that's that's as important of a benefit is that the amount of assets that are held in esop trust today now this is these are assets that is either cash or stock in the companies that have sold to an esau previously is now over 1.4 trillion dollars so basically what we're talking about there is that's a trillion for actually it's north of that now in assets that will ultimately be provided at retirement or in the at some point in the future um to the individual employees as a retirement benefit so as you can imagine you know think about that for a minute another you know big reason for esops in the past and how they've gotten to this point is is that owners within these businesses that have adopted an esop obviously the benefits that are associated with the shareholders and the company are exceedingly important the the as important benefit and in in lateral benefit complementing benefit to the esop of providing people that are employees in the company with benefits of this level over a broad standpoint is considerable and the other nice factor of an esop is that remember i mentioned that it was esops were adopted under erisa you know the formalization of esop and most people are familiar with erisa because of their 401k plans 401k plans that you may have in your company where you are deferring a portion of your pay and hopefully the company is making a match um associated with the amount of pay that you that you're receiving in an esop the difference here is that the employees are not making any contribution of their own money to the esop for their benefit the company is making contributions annually that allows for shares within the esop to be allocated to the employees over time that they have earned and can be grow as long as they're continuing to be loyal employees of the business so as you can see a lot of these benefits to get to where we are today came from you know processes and and thoughts and concepts that started literally a hundred years ago this year um and lastly in this section you know many of the companies that are esops the vast majority are businesses that may have 5 10 15 20 employees 100 employees whereas most people are familiar with companies like winco foods parsons which is a very large engineering um construction firm uh chobani uh if we all go to the grocery store and we buy our our yogurt um chobani is owned partially by an esau and so it you know people have familiarity with some of the large companies that have tens of thousands of employees but in our community here in the central valley even in california more broadly and especially throughout the u.s the preponderance of companies that are have adopted esops of that 6 500 that i mentioned are companies that are going to be you know smaller closely held businesses or what what are termed middle market businesses um that are going to be you know from an enterprise value 50 million dollars and lower so let's go ahead and go on to the next section so the next section is is basically you know why have company shareholders elected to establish an esop what's what's the rationale what's the motivation i've gone through a few of them just in the discussion thus far that you know obviously a selling shareholder of a privately held business may be enticed to sell their business and and to an esop and have the opportunity for their employees to benefit from that equity that was sold through to the to the trust um it's critical for people to understand at this point that it's a business accident succession tool which has become prevalent with a lot of the laws that have been passed over the years but it's been but it's also as important as an equity-based benefit for their loyal employees and to give you guys a couple of examples um you know if you go back 100 years in the past or even 65 years in the past before the advent of esops as a as an option what you ended up with is that you maybe had a couple of options available to you to sell to a third party your business this is if you're a shareholder or to sell your business to maybe a group of insiders or people within the company the esop allowed for there to be an additional option um no one option being better than the other but it provided another option to owners who said i'd like to see the integrity of the business continue on to the future i'd like to see it continue in our community in the form and fashion that it is today i'd like to see the business let's say it's a multi-generational business and there might not be a logical air that is working in the business or there may be even a logical air that's currently working in the business operation today um it's it's very clear um uh it's very clear through all of this that people need to have a a strong understanding that there's multiple options multiple strategies and um and that it's key for you know for each owner to make their own decision um another factor that's important is that um there's a lot of statistical information and i'm seeing this in the last 12 months through covid and through everything that's been occurring obviously to everyone i've noticed a lot of business owners that have said you know my employees whether they were an essential services business or not i've seen a lot of suffering occurring with these employees that have helped me get to the point of where i am as an owner today and the equity that i've built up in my business and in instead of possibly selling the business to a third party or some other option that i like the idea of having the ability to receive a fair market value and by the way when you sell your company to an esop you don't have to sell all of the company to the esop you can sell a portion to the esop it's not an all or nothing proposition but when you sell whatever portion that is to the esop and then we'll provide those shares on to the benefit of the employees it's it's important that many of them and i've seen this that they've looked at a lot of the studies that are out there through places like rutgers university um the business enterprise institute out of denver and in referencing rutgers university you know one of the things that they've seen is that and it's some statistics that i keep reading and they've really kind of blown me away is that 28 of senior citizens and i hate to use the term senior citizens because it's going to include my age in this example um you see in u.s that are retiring between age 51 and 61. this is 28 percent had zero financial assets when they passed away if they were at that point in life and then another 36 percent so a combined 54 of people that were polled or that were brought into this study had at most 50 000 of assets to their name at the time that they may have passed away or retired um another number i'm going to give you and this all goes toward the decision-making process of not just the benefits for the owner but the benefits to the employees is the number fourteen hundred and ninety six dollars and thirteen cents in the state of california today i just checked this the average social security check in the in california is 1496.13 now whether you're living in fresno or bakersfield or sacramento or or san francisco or la being able to retire with dignity is very difficult by especially if that is the predominant amount of your retirement benefits as an employee so what the esop has provided for those companies that have those participants and in just this last what last year was reviewed there were about 250 esops put in uh in that given year i believe it was 2019 there were 31 000 new esau participants that year that are receiving now benefits through the esop so a lot of statistical numbers that have been done by rutgers what they really point out is that there's an opportunity through employee ownership and and most people are familiar with employee ownership of you know i work for apple or i work for google or i work for whoever that company may be that's a public company the esa has provided opportunities for privately held businesses to stay privately held businesses and provide an equity component that the employees can participate in and benefit from as they go forward and into their retirement so you can imagine you know if you're setting it if you have monies that are coming through for social security hopefully you've paid your home off by by the time that you retire hopefully you've been putting away money diligently in a 401k plan that you've been participating in with your employer and but the third component or a big component and obviously other money you've saved is this pool of money that can accumulate as to the stock value and the stock that you've received and been allocated while you've been an employee of the business and what i've seen personally are many employees with these companies that have been around for many many years there's a saying at winco foods you know when you go through the checkout line at winco you know always be very polite to everybody but always be polite to your checkout person because literally the assets in the winco foods esau plant today on behalf of their employees is over a billion dollars so be careful the person you might be checking you know helping check out your groceries that day might be a millionaire that's there that's garnered that equity in their in the the stock of winco foods now that's that's a unique example there's no guarantees of you know million dollar payouts when somebody does an esop but but even having a a relatively small amount whether it's twenty thousand thirty thousand fifty thousand that you've built and accumulated and participated in that value creation through your company has been exceedingly important and you've been able to benefit from that as an employee so back to this point of there are tremendous benefits on the on behalf of the selling shareholders that are unique to esops the the exchange that you can participate in and possibly avoid capital gains taxes the ability of the company to essentially pay back any financing or the buyout of the legacy shareholders shares with not after tax dollars but with pre-tax dollars because we all think about it today if i make two million dollars in my company and i'm an s corporation shareholder in the state of california the high probability is half of my earnings have gone out for tax or the monies that i would receive if that money that would have gone out for tax to the irs or to the franchise tax board can be accumulated in the company and be used to pay for the shares that were required by the esop on behalf of the employees at a fair market value can be a significant win for the employees the company and obviously the selling shareholders that have built these wonderful businesses in our communities and would like to retire or maybe two feet in one foot in or maybe they can they can transition away at their choosing and so a big part of it i'll get to some questions here at the end a really big part of what i see with owners is i'd like to be able to stay involved in my company i'd like to stay involved as long as i choose i'd like to step away when it's at a point in time of my choosing and not because i'm it's dictated to by you know i sold my business and and i've got a year contract with a new acquirer and then they'd like you to step away and by the way nothing wrong with that solution at all there's every solution that's out there and there's many the esau provides just one option for people that are out there that's unique and we just want to make sure people are aware of that option fernando we'll go ahead and go into the next section so how can a properly structured esop become an integral part of the ongoing culture and sustainability of a company into the future um i thought it was important through this part of kind of the discussion and awareness that um that it's very important to understand okay we've we've gone through we've done our diligence we've gone we've worked with our trusted advisors which i heavily you know promote to people on a daily basis whether it's an esop or any other solution um about 80 percent of business owners out there this is through study as well believe that a written plan of their succession or transition both financially and operationally is critical to their business uh but the statistics actually if you go back and you ask companies and shareholders have they actually done that uh the number is actually about 17 so there's a dramatic difference between the two and so going to what you know so we've gone through the process of exploration we've gone through the process of looking at all the options they've worked the companies have worked with their trusted advisors we've just decided to adopt an esop on behalf of our company and for our employees and for the ultimate uh monetization or liquidity for the owners that are within the company and now what happens so now we're in e-stock today and the unique thing about an aesop is that uh a big part of it you know people always ask me this question so what does the company look like after i've sold to the esop and and the big the big big issue here and the big question is is that will my company keep the integrity of our mission of our business will it stay in place for the long haul in our community is it going to be able to maintain the culture that hopefully we've built up to this point i find that many companies that have successful esops for many many years in their businesses are those that already have a very solid culture uh within their business but there's also many companies that are trying to enhance their culture within their business and providing an opportunity to have a transition that may be less unsettling to obviously the company as a whole senior management um the broader base of employees within the company and the business in the community uh one thing i've i've noticed in many transitions that have occurred in the past is is that you know can we keep right here again i'm going to keep kind of harping on it but keeping that integrity of the business and and i'm going to give you another statistic which i apologize for but i thought this was one of the best i've seen and it's apropos to the day there was a recent study done by rutgers university that stated that through covid so literally through the last 12 to 14 months as we've all been fighting through our companies our families our loved ones everyone through everything associated with covid um that companies that have an equity component or an equity-based plan an esop or some other equity-based plan where the owners have some skin in the game they have some ability to see the company grow and prosper more than just the the pay and the benefits and and hopefully their love of working for the company they're currently employed with that companies that had that um ended up on a four to one basis four to one basis maintain the jobs within their companies better and to a much greater extent than companies that did not have that as part of their broader base of of kind of an equity-based program for their employees and i and i've always thought of what really what really brings that home is that your cr through that culture through the sustainability of the company going forward is that not just the owners of the business or the prior legacy owners of the business is this company critical to and important to them that it grow and prosper it be well beyond them into future generations and we all know how hard it is to be able to pass on a company generation to generation what's big and important to them is is that through that culture through that sustainability that everybody just works as a collective people look at efficiencies people look at ways that we can continue the business and make it through difficult times um if you look at the last the last great recession back in 0-1809 um there were also additional studies done back then with esop companies and non-esop companies and companies that were esop related businesses or had equity-based components to their compensation performed at about 25 better um than companies that did not and i think it's that collective that i think becomes very important for a lot of the employees it becomes important for everyone associated with the company and everybody is fighting forward moving the ball in the same direction instead of concentrating on the difficulty of the period that we might be confronting and this also gets to and it'll be a question that'll be in our section four here but i'll say it now is what happens if you have an esop in your company and there's a difficult transition a difficult time happening maybe there's a recession or a pandemic or a very difficult period that um uh it's a very cyclical business or maybe a company lost a key uh customer that they've had to now replace the fortunate thing within an esop is that here again kind of toward that process of culture and sustainability is that the existing former legacy shareholders let's say they're still being paid for their equity that was sold back at the original transaction is that they have the ability to be quite flexible if it's a quarter that you're going to have a difficult period or six months or a year that may that you may foresee there being difficulty within the business and so i've seen many companies where they've actually because of the flexibility this is back to the points i made at the beginning is flexibility is extremely important when you're looking at putting in an esop because an esop is not a black box it's not formed the same way for every company from one to the next they are very different from one business to another the benefit to that is there's a lot of options which can sometimes create complexity the other benefit is is that you can tailor the plan more specifically to the needs of the selling shareholders to the company going forward and to the employees and so that's from a flexibility standpoint and then on to one of my other points was control of process and this gets altered also to culture and sustainability is that the the controller process is important in that when you sell to an esop the process that is gone through to be you know to determine the price of the equity for the company and to negotiate with a independent trustee to determine the value of the company you as the selling shareholders control that process we don't have to go out and find an outside buyer we can control the process and the time associated with how quickly that the transaction may occur and and it doesn't matter whether you're doing a sale to a third party or sale to insiders or you're selling to an esop it's important that everybody crawl walk run in other words and it's kind of a saying i have for people is it's extremely important that in all options esop included that we not only become aware of options that are available like in estop but we also we take time to educate ourselves and understand what application if any each of those options may have for for the individual employees that are within the company and for the selling shareholders and we'll go on to the last section so basically where we're at now um so before we get to questions um which i'm looking forward to going through your questions um i thought i would kind of walk through a variety of questions that i typically get asked by individual owners that are endeavoring or looking at an esop for their business as a strategy the trusted advisors cpa legal counsel trusted financial advisors um key people they may know in the community uh that are confidants of theirs and also the employees when we ultimately may put in a plan the type of questions that they may come up with and one of the questions i always get is well if if the shareholders may not have to pay any capital gains tax and the company theoretic you know in this in this process of structure that way may not have to pay any income tax on a go forward basis so when is the tax paid you know how is that all handled and why is that being done why why is the government and the legislature provided laws through over multitude of of administrations um to the individual in other words why they forgot that tax and so this gets back to you know over 70 years ago if you look today today we have many people that are part of the baby boomer generation that those folks that are born between say 1946 and 1964 that are at that age where they're exploring their retirements from their businesses and i think a little bit of foresight back at that time um way back many years ago is that is that you can foresee in the future that there's going to be a lot of people that are one looking to exit their business and looking for options and two there's a lot of people that will be retiring and we only know that social security medicare and other benefits will only go so far so what's commonly happened and this is what is typical of any esa is that early on in the process obviously there are those tax benefits for the selling shareholders and for the business as a whole to help finance the buyout of the shares from the selling legacy shareholders but ultimately think about this i gave a statistic a little bit a little while ago that there are about a trillion for in assets that are in esops that are in employee accounts for the benefit of those employees so what typically happens is that an employee retires that employee can roll that money over to an ira account um they can continue in the company and roll roll over the benefits that they would have received via the esop to the 401k plan or if they went to another company and so as the employees and remember they paid zero for the benefit of these shares at the time of they were allocated to them that that 1.4 trillion and ever-growing share is going to be money over time that as employee participants end up pulling money from their ira accounts or their 401k accounts that they are ultimately then at that point going to pay income tax on those proceeds as they are paid to them from the value of their accounts of the esa and so what the legislature and a lot of the modernization of erisa and a lot of the changes to the to esti through to this day which there's a lot of bipartisanship when it comes to esops um i give the example there's a piece of legislation out today that um the some of the co-sponsors of the esop are ron johnson from wisconsin a republican and kristin gillibrand from the from new york and if and knowing our current politics in the world today and knowing the dynamics between both of those individuals they are both advocates for and benefits for not only owners but also employees but you find a lot of bipartisanship in a lot of the new laws that are being being put forward today and hopefully pass in the future to further evolve esops as you go forward so the unique benefit here is the employees do not pay tax as they're accumulating their value in that stock um the other part of it is is that um i went through a little bit if there's a dramatic downturn in the company there's flexibility associated with the business and any indebtedness that was involved with the sale of the equity originally from the legacy shareholders which is very important it also provides a lot of flexibility um you know i get questions from individual trusted advisors you know to walk through the different dynamics of the tax savings and benefits that are associated um the other question i ask is is well you know what's the what is the downside risk of putting an esop into my company the downside risk that i've seen in my experience is if the company was overvalued at the time of the sale if the company was you know in other words that the valuation that was um that was provided as sale to the the existing legacy shareholders was in excess of what should have been the value and now there's it's too difficult for the company to be able to cash flow the payment of the debt associated with buying out the shareholders that can create obviously significant trouble for a company the importance is is that the process that's involved having an independent trustee that is being negotiated with at the time of sale having an independent valuation done so that the trustee can have an independent value of the business and that legal counsel is associated with either both the sell side of the transaction which would represent the company and the selling shareholders and legal counsel for the trustee as as the fiduciary it's in the best interests as esops have evolved here that the price that's paid for the shares is fair it's a fair market value that's sold for and that it's not providing any detriment or negative um aspects to the company on a go forward basis so that's a really critical piece i get asked that on a on a regular basis is that's a that's a really big one and the other thing i get asked quite a bit by employee participants is is that you know i've literally been asked you know can i choose not to be in the plan um well and i always explain to them that there's there's no downside benefit for you to be a participant in the plan as long as you are employed by the company you continue with the company you're a loyal employee going forward you'll continue to receive allocations of shares and and you will ultimately be a beneficiary of those shares and and the employees also we drill down on and this is for the owners or shareholder legacy as well is that just like a 401k plan the individual participants are going to have vesting schedules so in other words it's not that shares go to an employee and it's their shares immediately but it's going to follow a vesting schedule that oftentimes mirrors what you have in your current 401k plan so here again the big difference between a 401k and an esop they're both under erisa they're both under those guidelines but an employee stock ownership plan is the primary asset that's held in the in the trust for their benefit are shares of the company that they work for and they are beneficial owners of those shares so that's a common question that i get as well so um to kind of let me get a drink of water here guys to kind of encapsulate things all the way to the end um i want to thank fernando and the the institute for family business for having the opportunity to provide some awareness on on a an exit or a succession strategy that is very prevalent throughout the us but you know it's typically about eight to ten percent of the divestiture transactions in the u.s each year are esops so it's an important one for everyone to know but back to my original point is that if you are a first generation owner of a privately held business if you're a second generation third fourth fifth sixth generation owner of a business um whether it was in your family whether you acquired the business at any point in the past please i implore everyone please work with your trusted advisors please work with them to make sure that you can have those written plans that states that if something happens adversarially to me something bad happens to the selling shareholders this is how things will be handled if the company goes through a process that they are selling either to a third party or to an esop or to internal managers it's at a time and place of their choosing i find that to be the most critical thing when i meet with people in the community whether it's here in fresno or throughout california or on the west coast or nationally people that i speak with it's that they desperately want to be able to have a transition that's at a time and place of their choosing and that they fully understand the the the benefits the downside any ramifications of the options they select so again to go back to my you know my beginning point most privately held businesses will be sold at the legacy level one time that's if you sell the whole company or maybe you break it up into individual pieces and sell it in multiple pieces but it's extremely important that you plan it's extremely important that you utilize your um your key advisors that are in the community because they are there for you and again i'm hoping that this information was helpful i tried to keep it where we're we're out of here by around four o'clock i don't know if i i'm not gonna know if we're close on that oh it's almost four so um um you know definitely would love to open up to questions and um at the very last part of this um slide um there is obviously if there's information that was of all of interest or you'd like to find areas to explore things further on esops as a succession tool um the institute for family business is here as a place of education advocacy but not it not for sales it's not here to sell you an option or sell you a a an alternative or anything of that nature the institute for family business is here to provide service to the community and as you can see there's some emails that are here at the end myself as well as fernando and the nceo.org is the national center of employee ownership uh which is actually located here in california and they have a multitude of information on not just esops but equity-based plans that are prevalent out there in the community for the benefit of the owners the legacy owners key management transition management and the broader base of employees so anyway fernando thank you so much for the opportunity and thank you everyone for uh taking the time today look forward to your questions thank you stephen we actually do have some questions and i open up the floor i open up a google document for people to actually share those questions with us or you can simply use a chat or raise your hand and i'll uh yield the floor for you guys the first question we have is is there a union no sorry if there is a union in a company are there cons considerations for the part of the company that may prevent it from becoming an esop um very good question and um there's a couple of ways when it comes to companies let me let me make sure you can hear me okay all right so now i'm unmuted so relevant to unions um what typically happens when you when you put in esop so to answer the question initially there are no um any major issues with placing esops within a company that um that currently has a union as part of the components of the workforce for the company um but we've worked with numerous i mean if you look at it there's a lot of construction firms that are esops on a national basis and even here in our community that have unions typically the choice by the ownership and the company is they can do one of two things they can exclude the union employees and the participants in the plan would typically be the administrative and you know as an example in a construction company administrative folks um estimators foremen other people that may not be part of the union but are employees of the parent company or the existing business they will they will be able to be in the esop and be participants but they will but frequently the union employees are excluded from being participants in the plan one thing i will add to that is that i've seen in cases at times that um the individual companies will sometimes and here again the relationship between companies and unions is extremely critical but i have seen situations where uh there are people that are within the union that upon awareness of the esop may elect to become a an employee of the company versus being part of the union i do see that happening it's less frequent but there is nothing at all stopping a company that has union employees or even a preponderance of union employees uh adopting an esau great as a follow-up steve can a union employee become an owner under the esop so um thank you for the question so what that goes to is it would be a situation where a a person that's part of the union now here again it's a very delicate process we have seen people that are part of the union being involved within an esop um you know there are multiple options there as to what can occur traditionally those parties are excluded um but i have seen people that are part of a union also be part of the esop in the company it all gets down to a very um very cautious negotiation between the parties and the union to make sure that there's you're not creating any ill will or otherwise by being part of the you know part of the union as well as being part of the the esop as well do we have any other questions can you see me safari yes i can hear you okay i have a question uh for small companies how doable it is to have a profit sharing plan versus having a full-fledged uh e-stop and in the downside to creating a profit sharing plan for key employees uh thank you for your question um uh basically what we've run into is that you can have a 401k 401k profit sharing and an esop at the same time um they do have different components to them obviously one is going to be employer-based securities or employer-based stock the other is going to be obviously monies that may be allocated to the participants but what we've traditionally done is is that companies will continue with some sort of profit sharing associated with the with the company with the plan you know there's always a very delicate balance and we do a lot of that review is is what benefits are you providing today prior to the adoption of an esop and you do not want to create a negative connotation of the esop by removing benefits that might be existing today currently through the 401k as a match as an example or through a profit sharing so it gets down to some discussions on the math that's associated and the benefit being provided i have seen companies that in lieu of the profit sharing contribution um they will basically be providing that allocation on to the esop instead of the traditional profit sharing that they've been doing previously um i would just say that it's a choice um i've seen it you know in both directions uh it also goes to to expand on your question it also goes to bonuses a lot of companies pay year in bonuses as an example to their employees either for safety or other work that they've done within the business you don't want to curtail existing cash bonuses things that are customary in your company that are expected items if they're earned by your employees that are that are there within the business so i'm not sure if that answer your question but it's it's a choice as to how you handle the combination of a profit-sharing 401k plan and an esop but you can have both thank you so much thank you you're welcome uh any other questions anybody asked no i think we're all good and then then thank you uh very much stephen for uh this wonderful presentation again as mr diaza mentioned it's all about making sure you find the right information through your advisors so feel free to reach out to us or stephen in this case if you're interested in esops stay connected with us i hope that you found this information useful and don't forget to become a member your contributions are what makes these seminars possible so thank you once again for attending today steve thank you and thank you all you