Man, I’m Glad We Didn’t Do an ESOP

[Music] hello everyone welcome to the 21 hats podcast I'm your host Lauren Feldman this week Matt hoing who is president of an engineering firm in Ohio explains to Shan busy and Jay gz how he created a do-it-yourself employee ownership plan for his business some 10 years ago Matt's predecessor as president tasked him with selecting an ownership structure that would engage employees and help the firm be as successful as possible that sent Matt on a mission of Discovery in which researched the pluses and minuses of every structure he could find including Employee Stock ownership plans before ultimately creating his own structure Met's plan doesn't enjoy the tax advantages of an ESOP but it opens ownership even to part- Tim and it requires employees who want to be owners to make a financial investment in the business in other words they aren't given ownership they have to buy it Sean and Jay quiz matat on the choices he made and how the plan is worked out 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 hats.com where you can also find transcripts of our podcast episodes and lots of other articles and interviews joining me this week on the podcast are regulars Shan busy CEO of Kinesis which is based in Portland Oregon and works with small businesses on marketing culture and strategy Jay goz 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 Matt hoing president of Choice One engineering a civil engineering firm that is based in Sydney Ohio the episode is titled man I'm glad we didn't do an ESA [Music] welcome Sean Jay and our special guest Matt hoing it's great to have you here Matt great to be here Lauren thank you maybe you could start by telling us what choice one engineering does and then giving us a quick overview of how employee ownership works at Choice One Choice One engineering is a Professional Services Company um specifically civil engineering surveying landscape architecture Services we work uh with public municipalities as well as private developers in Ohio Kentucky Indiana primarily we have at Choice One an open employee ownership structure where generally if you've been here for three full calendar years you have the opportunity to buy into the ownership we have an internal board of directors that approves that and and sets the amount of shares that can be sold but if you've been here for 3 years our hope is that you exhibit those characteristics that we're looking for as fellow owners and we have share levels and share structures that we can get into that each employee can buy up to that amount um of ownership and we currently have 40 of our 79 employees are owners and it's 100% employee owned correct you must be an employee of choice one if you want to be an owner wait go backwards tell us how it all I where did the founders go how did that whole thing happen great question J there were five Founders originally of choice one and they all were original owners they had a philosophy in place of they didn't want any one owner to own more than 50% of the company so at the time the president of the company owned 45% and their structure was also an open ownership structure I would say it more closely would resemble a key employee retention structure where new owners were invited to become owners they they also had to buy into the company but they were invited to be owners there's no real Clarity or structure around who got invited or when they got invited and we currently have three of those five Founders still as members of choice one so they're still part owners two of them work daily in the business one of them the original president of choice one is in the process of selling out as he's reducing his involvement in the company so when you say selling out the question is how does that work he's got a check for the let's just say he still owns 45% does he get a check for 45% of the appraised value of the business or how's that work yeah we do a yearly valuation and anyone that would sell or buy shares we sell them by um that transactions at that yearly valuation and we created a step down sellout plan with him that he's is selling so many every year and we'll write him a check for those number of shares every year and he obviously has to pay tax on that money right correct and do you know if this is different than and I have no idea is this what happens at accounting firms law firms medical practi is it isn't this similar or is this what happens in those kinds of places my loose understanding is yes it's similar to that I have not found one of those places yet that been quite as fully inclusive in the ownership that there may be certain principles that are asked you know we'll sell our shares to a certain group of people but not every employee has the option whether they're part-time or full-time to buy in which is what our current structure set up as yeah and we have a number of unissued shares currently there's of our a thousand available shares that choice one can sell we've issued 612 so Tony the the original president of choice one doesn't have to sell a share for a new owner to buy a share if that makes sense so you can issue new shares or are you buying them back through the company when you said we buy them that yeah can you clarify that a little bit Yeah the the company buys them back and we essentially just retire that share so for example we just went through this process here at the beginning of the year Tony sold eight shares back we now have we've retired those eight but we that allows us to sell eight additional shares we're currently Limited at that 1,000 number that was set up in the original code of regulations of the of the company when they founded Choice one so every share that he sells back or anyone sells back gets retired and we've now have that many more that we can sell to new owners you know when I met you Matt I don't know exactly the size of the firm but I want to say it was 40 or 50 people and now you're twice that size over take so I assume one share is worth considerably more now than it was back then so a is that true and then B does that create any tension in terms of the cost of buying in yes it's true our Share value has continued to increase um we do a composite over five years Share value so we try to smooth out the the Peaks and valleys um we tried to set a lot of things up in the structure so that it wouldn't encourage someone to try to gain the system so to speak hey you know this year looks really like a really great year I'm going to sell out and then next year with the econom is looking down or whatever I may buy in kind of thing so the Share value has continued to increase gradually um when I say gradually 12 to 15% a year uh year-over-year and then we also you asked if that causes tension on on people buying in yes it has and does we've done one share split already back at the end of 2019 when that price to buy in just seemed unattainable you know there's kind of a fine line there of what's that number what can someone afford what makes sense to ask them to buy to pay to buy in and not we're financially transparent we have a bonus structure set up through that and we've kind of loosely said that it takes three years once you've been here three years to buy in if all you did is saved your bonuses over those three years we want that to be enough to be able to buy a share there's no exact science to that but that's just kind of loosely what we've held internally as our board of directors as what's that number that's going to tell us you know it's time to split these shares again so they become attainable for people are you comfortable telling us what what that number is in dollars yeah um the last time we split them it was when they went the share price went above 30,000 so we split it our philosophy is we want there to be skin in the game right we want you to have to buy in we want there to be some pain so to speak of buying in part of our hope with the structure is it's going to encourage Behavior change so if you know that was one of the things when I looked at the structure in changing the structure I didn't like about an ESOP and I'm by no means an ESOP expert but the thing that I didn't resonate with the ESOP plan was you just kind of earned ownership you know for being an employee there um I didn't feel like that was going to really encourage Behavior change where that relates to this conversation is we want to split it at a number that's not going to make the new price you know 30,000 now is 15 we still want to make that new price something that is enough skin in the game that it's going to encourage you know still encourage that behavior change Matt let me uh stop you there I'd love to you you just referred to the changes that you made your system has evolved through the years it's not the same as it was when you first joined the business can you take us through that process a little bit I know you're president of the company now you worked your way up what was the system like when you started at the business and then how did you come to make those changes yeah so I started full-time in 2007 and was asked to become an owner in 2009 I had no idea why they were asking me I mean I I was I was very appreciative of the fact that they were but there was nothing in writing anywhere that said this is what you need to do as an employee to become an owner and and when I was asked to become an owner there was actually employees that had been here longer than I had that weren't owners and I can specifically remember the former president I went for lunch when he made the offer and I I remember asking him you know what's this employee going to think about me being an owner and they're not an owner and you know at that time I was what 24 wow I think I'm still pretty naive today but I was especially naive then let's just be clear he's also not your father-in-law right correct that's correct yeah okay I just want to get that out of the way cuz frequently that's what they don't tell you until you figure it out later okay good yeah completely unrelated is this like one of those movies where there's the chosen one I mean Sean you kind of joke about that but that's that was how the structure was set up as hey there's certain key employees that we don't want to lose and this is a way to you know encourage them to remain committed to Choice One and that was something I didn't understand at the time and as it got explained to me that model makes sense and then it made sense of what their plan for my future at Choice one was so it it was it was very much a tap you on the shoulder invite kind of open ownership structure you still had to be an employee there's a lot of the concepts today that I took from that structure because I really liked the way they set it up but in in two I'm going to fast forward now to 2014 Choice one went through a pretty transformational year in 2014 where we we really sat down and looked at what kind of things are keeping us from being the company we want to be we have a purpose of providing fulfilling lives for a lifetime and a lot of what we do runs through that filter I mean everything that we do runs through that filter but we we looked at it and said what's what's not allowing that and two of the things we honed in on is you we we had talked about wanting a company of people who think act and feel like owners well we weren't fully financially transparent you know we were transparent from the standpoint of if I asked a question or if anybody asked a question the president or anyone else would have happily explained it to them but there's no education around it there was no I don't know what to ask so we went through in 2014 and created our financial transparency model and with that we had myself and the former president Tony had the conversation of well what else is there and I said if we want people to think act and feel like owners my opinion is I think they actually need to be able to be owners um you know we can't just expect that opening the books is going to be everything that we need to change that behavior and and get them engaged at that level at the time him understanding the financial is much better than I did he took on the financial transparency model and said I'm going to I'm going to set this up he gave gave me the um the Reign to create a an ownership structure to modify the ownership structure in a way that resonated more with what we wanted to be as a company who we wanted to be as a company but also you know that was a Time 2014 was really when we announced it to the company Matt would take over for for Tony's president the plan was that was going to happen in 2021 that actually all moved up but um Tony looked at it and said you know this ownership structure is going to be something that affects the future Choice one for a long time why don't you focus on this cuz you know I won't be around for as long as you will to realize the the benefits or the Pains of this ownership structure so I you know 2014 I'm I'm 29 and just I have an engineering degree I didn't I didn't go to didn't take a single business class in college um you didn't miss much trust me but I have to ask you this question so what happened when you're 24 were there not 10 other people that were there for 10 years that said what's going on here that they took the kid they made him a partner did you not have any push back you were 24 years old weren't there 30 some year olds that were there for 10 years doing the work that were pissed off about it so when I got off an ownership I was the ninth owner and we had 20 employees at the time so there at the time there were only two other people um that had been there significantly longer than I had but because of the previous structure where it was kind of for anyone that was aware had some observation skills which I don't think I I had at that time you could see the people that were owners were key people in key positions in the organization either key departments that we wanted to grow and become key people or currently were key people so there was really only about one or two people at the time that probably looked at that in my mind could have looked at that and said wait why why Matt not me and to this day I mean that that was something that really really stuck with me and why in 2014 when I was creating this plan that was one of the first things that had to happen was Clarity around who and how and why you became an owner and what that process was it certainly worked out for me but I didn't like that I didn't like that there wasn't a lot of clarity for myself or anyone else you were given the assign of figuring out an ownership structure with very little background in business how did you approach it what did you do to prepare yourself and then how did you proceed yeah so a lot of my story here at Choice one I'm very fortunate from the founders and the leaders of the company here that provided me the support and encouragement to to go out and do things that I probably wasn't really ready for in my mind yet anyway but one of the things is we had a board of advisors an outside Board of advisers and the president time Tony invited me into those meetings and said Matt these are three highly intelligent experienced people ask them you know ask them any questions you have and I just started through them and through other contacts that I knew that our business had I started asking people what your ownership structure look like what how would you go out and approach it if you were me I started getting books thrown at me names of books and I started getting references like why don't you go talk to these people and the nceo there's they had a book that kind of highlighted a lot of different types of ownership structures I remember reading that one and getting through it and my head just spinning and saying okay I don't understand any of this uh I I don't think so I really need to find somebody that has each one of these types of structures some of them I read and just said this doesn't I don't like this this doesn't make sense but the esoft one kept coming back as a prevalent either through the books or people other businesses that I knew and so I started talking to more and more people in those companies I was a part of a vistage group a key executive vistage group at the time so I had a network there as well of of people I could say hey what's your ownership structure look like so I had a lot of outside resources that I leaned on um I probably read more in that year than I've read in any other year in my life not that I'm overly proud about about my uh reading but that's where it started Lauren there was just a lot of hey I don't know anything about this topic let's let's go find people who do and whether that was authors or individuals and every conversation or every book I read I would take notes and there'd be something I like this or I don't like that and I had a notebook full of just different pages you model this in our structure don't model that this is a great idea this is a terrible idea and I kept coming back to to the president of choice ju and saying what do you think cuz he obviously helped create a structure I kept going back to the board of advisors and saying this is what I'm thinking today and it went from you should be a soul owner company to you should be an ESOP and about anything and everything in between and I I can still remember you one of the things about the esap that I UND I think I understood at the time was the tax advantage to the owner selling out the the owner looking to transition I don't believe that tax advantage was going to be either there at all or as significant given that there wasn't a owner that owned a majority of the company but I was still trying to I felt a responsibility to those owners that had been there longer than me that either were going to be selling out or selling out sooner than I plan to to make sure that I wasn't creating a system that was going to be unfair to them and I kept trying to solve that tax piece like how do I do this with a tax advantage for these guys and one of my lunch meetings with a network friend through the vistage group looked at me and said Matt how many decisions do you guys make at Choice One that are solely based on taxes and I said I I don't think any he said so then why are you making taxes such a big deal here and that was that was one of the things that that was one of the light bulbs that I remembered saying okay I can have some freedom to move Beyond this piece now I it's still had to get appr the plan still had to be approved by all of the current owners so they were also going to have to be okay with it but that was that light bulb that said okay I really can just look at Choice one look at what we want to do where I want to go with Choice One and set a structure up that satisfies that purpose of choice one okay so as someone who spent a lot of time looking into esops it seems to me that the issue is there's no question I don't think there is a tax advantage to E STS but just correct me if I'm wrong the reason why you gave up the tax advantage is because a you like the fact that they have to pay money to get into it which in ESOP isn't that you like the fact that every that that not everybody's going to be invited into it I assume you like the fact that you don't have the government in your place every day telling you what to do CU there's tons of regulations with esops because it's a government sponsored tax plan so you don't have any at now I assume right is that true that's correct Jay and that I mean you hit the big topics there but that last one is one of the ones that I look back on and say man I'm glad we didn't do an ESOP because we've changed our plan a couple times since 2014 you know not having the control to be able to internally within our own ownership group decide what's best for our structure was something I just couldn't get past like I'm going to have the government telling me what I can and cannot do with our business that just never resonated with me right and to to be fair to the government I understand why they do it they don't it's just like 401K plant they don't want somebody to be able to take this and manipulate it for the benefit of a few people so I totally respect that the government's got their hands in it your plan is far more running the business in the most efficient and effective way and by doing an ESOP you lose some of the tools to do that so I totally understand why it was worth giving up the tax advantages for that yeah and I looked at it as a you know there's pros and cons and ours isn't a perfect system by any means right but there's what was the way that we could best ensure the the future of choice one and when I say the future of choice one I mean Choice One in the way we want Choice One to be could Choice One exist as an ESOP yes absolutely but there's lots of things we do that an ESOP wouldn't necessarily encourage or support the whole idea of an ESOP you can't discriminate which means if you got someone who works for you that turns out to be mediocre you got to treat them like everyone else whereas in another way you structure you can take care of the people that are taking care of the business I mean it's not discrimination it's a matter of I'm going to reward the people that deserve to be rewarded and the other people I'm not going to worry about and that's not what you can do with and ESOP is very much regulated that everyone has to be treated the same and that's that does tie your hands I mean I I think kind of in defense of ESOP you know I think we're using a lot of terms like the government's in your business from what I've heard from people who run esops that's not the case that the government is up in your business it's just like my experience has been with managing a 401k which is it's just very compliance heavy and so you're spending a lot of energy meeting compliance and then also I think the more important part is you don't have the ability to be creative in terms of how you shape and structure things as you learn things down the road which is what I'm hearing from you Matt is like you did something you thought would be right and then you realized oh gosh we got to change it a little bit and we got to change it a little more and we got to change it more and that's where I think the ESOP is frustrating potentially is the lack of creativity that you can have with it well you just said it's it's a lot of um compliance many people would Define that as having the government in your business so I do think that that's yeah I mean there's a difference between like filling out forms and submitting things which is how the 401K is for me and like literally the government like looking over your shoulder which is true in some Industries and some regulated places so right it's not like they're reviewing your plans it's just their rules and regulations that you have to follow Matt I I think I heard when you were talking about what this would mean for the future of the business I think you may have been uh referring to another aspect of esops which is that you can't really control what a future generation of owners will do they would have the option and maybe even the fiduciary responsibility to the business at some point was that a concern yeah that that was probably the last piece of it that really turned me off of theop was that we wanted to be able to say we want to operate Choice one as we feel best for Choice one and if that means continue on forever um or if that means you know someday do we sell I don't ever see that in the future that I'm involved in Choice one but my concern was that if if a very enticing offer financially was on the table and we were in ESOP that we would have to consider that and we like the ability to take those emails or phone calls that come in way too often and just say thanks but no thanks you know or just hang up right well he's from Ohio he's from Ohio Jay they're a lot nicer there than you Matt if you did get an offer you wanted to take tomorrow could you take it that there is a way to sell the business yeah so in our structure the president has full Authority for every business decision the internal board of directors which is made up of a group of the owners their responsibilities are to approve new ownership then you approve the buy sell transactions of shares and to elect the president of the company if we did want to sell you know I I as president could entertain that I would have to bring that offer to the board and the board of directors and say hey we have this offer here's the reason I think it's the right thing to pursue and they as the board could approve the sale of choice one so you're not 24 anymore you're what 39 now Y and I have to ask I hope you must have been gifted at something at 24 that you must have been really that maybe at the time you didn't recognize looking back there must have been a reason why he took you to lunch and made you this offer and had this plan for you so looking back what was your skill set that made you stand out so much that the guy saw you as the air parent because that's pretty much what happened not not a 29 not a 32 but a 24 which is pretty remarkable so tell us what is your gift Jay I I I'm G to say what I think it may have been um you know and it goes back to when I was in high school I realized that I wanted to help people so I have a personal Vision um statement of creating a positive impact on others so we can enjoy life together and I have everything I've done whether that's been in high school sports or tutoring or whatever has been around wanting to enjoy life with people and helping them be successful sometimes at the expense of my own success and fortunately I had a high school math teacher that that guided me to not go get a business degree and be kind of one of many trying to make it in the business world and he recommended I do engineering because he thought I could handle Math and Science into project management and which is really people management and be able to do them what I really love doing so I think it starts with a realization early on in my life that that's that's where I really got my own personal fulfillment from but I've had people along the way that have guided me my parents um you know this math teacher uh College professors and then even the the the people here at Choice one that encourage me to continue asking those questions I was always that person that I'm going to put my head down I'm going to do my job as well as I can and I'm always going to ask what else can I do what can I do to help you know hey I enjoyed being an engineer but there I always had higher aspirations of getting out of engineering and becoming managing people and helping helping the employees be successful so just kind of in inherently by that it requires me to ask questions hey how can I help you right for me to feel fulfilled I need to know how I can help other people and so I was asking those kind of questions and I think I think that that's what what led so if we had Tony on the show and we asked him you think he would give that a similar answer I think so yeah I think he okay listen I buy it I think that makes perfect sense Matt I think you said it was 2014 when you and the founder Tony the president at the time decided to kind of reassess things was the business profitable at that point yeah yeah we've um even through like the 0809 um time frame we've we've always been profitable there wasn't anything like that it was just that continuous strive to want and get better to learn and improve continuous Improvement what what can we get better how can we make Choice One better this year than we were last year is is really what triggered his thinking of hey we want to get into this financial transparency model I like you know he um got turned on to the great game of business ownership Thinking by Brad HMS was a book that we that we read and it just we've always had that mindset and that comes from Tony but you know continuous learning continuous Improvement continuous absorbing of information running it through Choice one's filter to see what would make sense or not make sense and then developing developing the plan for us and so yeah we were we were profitable then and have been ever since how do those time periods compare Matt you know cuz I talked to a lot of owners who think that if I incentivize people with money they'll work harder and we will be more profitable and they'll behave in a different way so I'm curious what's been your experience experience you know in terms of changing I mean it did sound like half the company was a quote unquote owner when you took over so it already had that in its DNA but how is the profitability compared between those two eras almost exact same from a percentage standpoint our our percentage profitability was in the high 20s low 30s then and you we're we're still in that same range today how about um from an equity standpoint you know cuz like a lot of times you'll have companies where the people who make who are the owners you know realize a lot more benefit than like kind of the worker bees do you feel like that's changed or you feel like that's that's always been in the DNA as well that's kind of always been consistent in the DNA one of the things that did change in 2014 is we we did put more clarity around it it's you we used to be a very subjective bonus mindset of hey this person's puts a lot hours in they should get a bigger bonus not necessarily are they being more productive right so we put some parameters around here's numbers you know we we set a a 15% return on investment was was our goal for ownership if we achieve that then then that's when our bonus structure kicks in and then there'll be some additional return but we really set it up as you know hey we know there's going to be employees that choose not to not to buy in that's their choice you know people want to spend their invest their money in other places or spend it in other places that's that's their prerogative they can be an employee of choice one and not be an owner so we didn't want that to get out of balance to where hey if I really want to financially be successful I've got to be an owner but we also needed to make sure that that ownership return on investment would make sense to invest you know if you're getting a 5% return on invest for at Choice one but I can put in the stock market and get eight then financially that doesn't make sense right so yeah so it sounds like what I'm hearing is profits are pretty consistent after the change and going to transparent open book management seems like satisfaction in the company is very similar in your mind like what's changed that for the good in making these moves so it's the things that are hard to measure right it's it's the things that are to say hey would would all of these employees be just as engaged if we didn't have this structure we have from an employee age we have a very young company so I mentioned that 40 of our 79 employees are owners well there's only eight of them that could be owners so we have that many that just haven't been here for three years yet so it's it's an enticing plan this plan of knowing that hey in three years I can become an owner it's helped from a recruiting standpoint it helps retention standpoint and it it helps it helps people see because we do a lot of Education around it too of here's how my individual impact returns some actual investment you know to me as an IND so you know the whole what's in it for me mindset we've got an ability to draw a direct line there for them and so now if we do a good job of hiring and we're hiring humble hungry smart people that want to be motivated and become better employees for themselves and for the company there's encouragement for them to do that because there's there's either a return today or a future return when they get to that point Matt were you affected by the great resignation and the labor shortage we were affected only in the sense of it was hard to hire people um we we did not we did not lose anybody we didn't have any turnover we didn't have anyone retiring at that at that point but we had some key hires that we were hoping to find much sooner than what we did that we in that mid to upper level experience range it just took took a while to find those people because either you know the companies that had them were really holding on to them because they understood that or there just weren't that many of them remaining in the workforce did you have to raise your pay as a result we did not uh we have our we have a philosophy um the one thing in our financial transparency model we don't share as individual salaries but we share the philosophy of we are going to pay national average as a base wage and then our hope you know our goal with our bonus structure is is that you're going to be total comp and the 75 to 90% on those same National surveys from a total comp standpoint so it's a in it together uh collaborative setup there oh okay so your salaries then are lower than well they're they're you said 50% but then once you add in the profit share it's it's 75 to 90 right am I hearing that right okay so so you are asking people to some degree take a little bit of a Buy in even from the very get-go right right yeah so from the very get-go we're saying hey we know you could go get pick a number $55,000 more at a competitor maybe you know we need to be we need to be competitive or we wouldn't get anybody right yeah but we can then lay out to say here's what that 5,000 will look for you at this competitor they're going to give you 2,000 in bonus and we're going to give you 15 you know assuming you help us be successful help me with this here's my hypothesis as to why they put you in charge correct me if I'm wrong no I I I think this makes just tell me if this is possible they were all hardcore Engineers that were working there and you even though you didn't get a business degree you think like a business person you're asking questions you're looking for best ways of doing things you're trying to work collaboratively those are all not the same words that go with being a hardcore engineer so they recognized that you were bringing a more modern thinking to the business and you were thinking like a business person and up until then they were really just operating like engineers is it possible that's the reason why you Rose to the position you're in yeah Jay I think that's very possible I mean that to me that's that asking questions showing that interest and wanting to learn people that do that you have some confidence that they're always going to want to keep doing that and keep improving things and so that's called a business person right that's not an engineer do you know of any other companies who have adopted a plan similar or the same as what you guys are doing I don't I know of some companies that I've met with that have wanted to talk to me about our structure that have put in place some aspects of it I don't know of any other company that does Full O you know open ownership to any employee like a part-time employees at Choice one can buy in and become owners what about the receptionist that's been there for 10 years yeah um so we're a professional engineering surve surveying company by the licensing board in the state of Ohio more than 50% of our shares need to be owned by licensed Engineers or surveyors so we have share level amounts where a full-time licensed surveyor Engineers um landscape architect can own 20 shares a full-time non-licensed employee can own 10 and then a part-time employee can own six um so anybody that fits any of those categories so the receptionist the administrative assistant that's been here for 13 years can own 10 shares as a full-time non-licensed employee do you think that's the defining difference between your plan and a typical engineering firm I think I think that that's one I think that's one of the the pieces is that everybody across the board no matter what role they play can have that Pride that sense of pride in ownership so we've got owners across the board in every in every position in the company wanting to do the best that they can do because they understand what that means for the success of the company I know most accounting firms and law firms for sure there's partners and most people become Partners over there a while in engineering firms is that the case or is it frequently owned by one person and they all work there I I would say there's there's a good mix of both and more of them that I personally know are more in that hey we've got a a a handful of Partners a small percentage of Partners the ones that are sole owned tend to be the uh the 20 and less employee size firms yeah so what's interesting Matt is like you're what I or at least what I have seen historically with Professional Services is that it's sort of like the Hales and the have knots right you know it's like there's a small group that's the partner group and they really get a lot of benefit and then then there's everybody else and then those organizations seem to have higher turnover um and sort of greater sense of like two different tribes within the company um that seems to be changing I've noticed I mean I'm see I'm starting to see like marketers being promoted to partner for example in engineering firms which would have never happened 10 years ago seems like you're you're way ahead of the curve and pushing way harder on it than everybody else is Matt is there anything looking back that didn't work out the way you hoped it would or that you wish you had done differently there's several things that we've changed in our plan that 2014 we created this plan rolled it out some of the things that were part of the plan at that time were the president and the CPO could own a percentage of shares and every other employee was on a maximum number of share level so as new owners bought in they're value diluted but as president mine wouldn't because I could then also buy more shares we've since got rid of that and said hey if it's right for everyone else to be on a maximum number of shares it's right for the president and and our chief production officer to be on a maximum number of shares as well so those share levels when the plan was created was set that the president could own 20% of the company the CPO could own 15% of the company and between the two of us we don't we' both only own 35% so they would be you know if we weren't leading the company in the right direction you know it's not an unbelievable ass to think that they could remove us from our positions but it did become apparent to me that that's not going to sit right that didn't sit right that I that I could remain at 20% while someone who owned 20 shares and was 5% now owns 45% and in 5 years we only own four and three you know their percentage keeps going down that was something that we changed we also had some allowance for additional shares for what what at the time we called vice presidents of our other offices we had at the time we had three offices and fortunately none of the people that we had labeled in those positions had owned those additional shares when we made when we corrected this but we ended up Closing one of our offices not because that person wasn't putting a ton of effort in and doing their best it just the market wasn't what we thought it was maybe going to be and that that kind of made us realize that hey we shouldn't use this ownership structure to compensate you for your role that you're doing every day in the business we should do that through salary and bonuses right we should do that through your compensation so we were able to take that out of the plan and now you know those people don't have the ability to own additional shares because they happen to have a skill set that allows them to communicate better and relate better you know those people in those titles were our business development people U more or less they were the ones going out meeting clients um knocking on doors doing cult calling that kind of thing and when we close that office not because of anything Ryan was doing wrong that was the wakeup call that said hey yeah you know we would had to have taken those shares back we would had have bought those shares back from him and we he couldn't have done anything differently to be successful you know he did everything we asked him to do and so that was one thing that we said you know we really shouldn't use the structure to compensate people for their role their daily role in the company we need to do that through compensation wages and bonuses do you have your own parking space I do not excellent hear your own bathroom you got your own bathroom nope I all right you're just a regular guy good for you Matt I'm kind of curious about the compensation piece you know especially with the two factors of bonus and dividends for share ownership and one of the things this is a tension I've observed with companies where there becomes more and more owners is the willingness to to to pay and invest in things that are not related to driving immediate Revenue goes down so what I mean by that is things like Innovation marketing culture new product creation Etc um I'm curious how you manage that you know how you keep the company focused on not just the near-term which is being profitable but also how do you plan for the future and changing things and creating Innovation and focusing on non-billable activities excellent question uh Sean honestly for me person I'm a very financially conservative a lot of people will call me Frugal um in my own personal finances so in an interesting way I I actually feel like I owe it to the ownership group and to Choice One to not be that financially conservative with the company because I you know I don't want to hold their returns back right I don't want to hold the success of choice one back because we're not investing in Innovation and those things however I work for an engineering company right we have a lot of analytically minded people that like to see a straight line between cost and return on investment and so it takes it takes a lot more you know I spend a lot more time convincing myself how am I going to sell this to the group whereas personally I could just make a gut decision and say this just right let's just do it right but I spend a lot more time trying to get that story clarified so that when I let the company know that hey we're going to make this investment I've got the reason that I can lay out for them this is why I think it's the right investment fortunately I haven't made any extremely wrong choices yet so I've I've built some trust and some some leniency from them a little bit you have some Equity yeah and like I said I've it is my nature to be more financially conservative um so I think that that gives them some ease as well CU again I'm going to go back to I'm I'm working with a bunch of analytical people who also tend to be pretty financially conservative do you worry that that cultivates a culture of you need a 100% win rate like any risk taking has got to be successful you know you know cuz like no there's no good risk-taking that's 100% successful right so I'm curious how you manage that right like yeah that that certainly builds in i' I'm fortunate right now I have a great outside board advisor group that I've intentionally built with people that I know are going to push me in that there's there's several times that they'll just look at me and say mant stop thinking about it so much you just got to do it you've got the finances to afford to lose you're actually holding yourself back by not investing You by not making that decision quicker and every you know so I've got that kind of in my in my ear as well of them saying just take the risk and no doubt Sean there are things that probably we could invest in we could take some um Innovation and creativity with and take that leap that we haven't May that may have paid off but I'm also fortunate to be in a space where industrywide we're pretty from a civil engineering standpoint we're pretty low Innovation Innovative group so e even a slight risk Keeps Us ahead of the competition okay I loved your answer there like how you you get pushed yourself how do you create that within your company knowing that you know someday I know you're still young but someday you're going to leave you know how do you Foster at least some risk-taking in a in a very conservative industry we've got kind of identified the people in our team here that are those brainstormers those people that just dreamers if you will mini meths yeah mini I mean it in a way we really like a lot of what Patrick lenion does and we we really latched on to his working genius assessment I'm kind of known at Choice one as the weirdo because I'm a w I'm a wonderer and an inventor and so I uh I'm that dreamer I know who else and the rest of the company knows who else is in that group and so we get those groups together on a regular basis and say okay guys what do we missing what what can we what can we do you know AI is a big topic everywhere right now right so we we put a group of those people together to say we need you to stay on top of this for us you know found people that had that interest that aren't as driven by the details and so they don't immediately stop something because they can't see the return on return on investment they they keep pushing through and saying yeah let let's let's test this out Matt we're going to have to wrap up but um I I I want to ask you based on your own experience and also on your conversations with other owners who've expressed an interest in what you're doing have you come to any conclusions about what types of businesses this your kind of DIY employee ownership model would work and what types of businesses it would not work for I don't know if it's types of businesses as much Lauren as the cultures within those businesses cuz I know manufacturing companies that have cultures that I think this could work really well it's those cultures of continuous Improvement continuous growth continuous development when they focus on people development and help wanting the the employees to be better and the employees themselves buy into that which to me is a sign that that's truly part of their culture then and not just something on the wall is when the employees want to continue to develop and make the company better because of Pride you know satisfaction fulfillment whatever that may be that's where I think a model like this works when whenever you can have an open ownership and you don't have one owner questioning why is this other person an owner you know you you know that they're in it to make the company you know they're going to do their part in their own role to make the company as successful as possible that's where this works if you've got an environment where there's a lot of disparity and the culture is let's say a hierarchy type culture where I don't trust that that person on the front line cares as much about the company as I do I don't think this ownership structure is right in that environment Jay what are you taking away from this yeah well a I think if you wrote a book it would be called running an engineering firm like a business because I think that's what you've done I think it's worked well for you because you have a bunch of professionals that you know Engineers I don't know that would work in a typical Manufacturing Company where you've got some people making $20 an hour and I mean I don't know I I for me personally I it doesn't really apply to my kind of company but I I totally can see where it's worked well for you why is that Jay because I've got 130 employees some of which are you know $20 an hour employees and I it's just different and it's just for lots of reasons and um I mean you've got a bunch of college educated Professional Engineers that are have a different mindset than somebody who makes $20 an hour it's not I'm not saying it wouldn't work I'm just going it's not necessarily G as Matt just said it's it's it's different do you have any problem with like say non-engineers understanding this or you know administrative folks no not we've got feel we have field surveyors that have high school high school education level and one of my favorite stories of this employee ownership taking effect actually comes from one of those guys you're going above and beyond because they were an owner wait how much is what's that person's salary um well now they're above 20 at the time they were below $20 an hour that's a position that starts around $17 an hour for us and does some of those Buy in yeah all of them that are eligible have I'm surprised that they had the money I mean if they're making $20 an hour they're putting food on the table I'm surprised that they had the income to be able to come up with the 1020 $330,000 to buy in cost of living is a lot lower in rural Ohio too is that fair that a fair statement I think it comes a lot to you the education we do on here's what this means and and here's you know it's an investment right do people borrow money to uh to to pay for the entry not from the company but there are people that I do know that have have loans from Banks or from family wow I got the family I'm surprised the bank I mean the returns are amazing you know I mean that's and you've got like what 20 years of those kinds of returns or more you know so just to be clear when you say the bank lent the money I have to believe they had some collateral to to back up the loan yes the bank that that um Choice One banks with has offered zero collateral loans to them oh wow that is incredible all right no that makes sense they know your company yeah that you know you should always mention that that's that's uh that's valuable and interesting yeah that's that's one of the reasons we we bank with them is they're a they're a local bank and and do things like that that's so cool all right my thanks to Matt hoing Sean busy and Jay GS and to our sponsor the great game of business which helps businesses use an open book management system to build healthier companies you can learn more at Great game.com thanks everybody 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 ren21 hats.com do it now before you forget and don't be afraid to tell Jay what you really think you can take it and if you got something out of this conversation help us reach more business owners tell a friend subscribe and review us wherever you get your podcasts follow us on Twitter subscribe to the morning report at 21h hats.com this episode was produced by Jess Theron founder of blank word Productions okay now you can leave thanks for listening everyone [Music]