Martin Staubus - Stocks, Owners, and Employees (C2518)

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You know, we, we have interviewed so many wonderful guests, uh, advisors, authors, thought leaders, over 750 of them in total, and you can find all of the content at the audio library, which is located at the exit coachradio.com. There's a button there that you can click on while you're driving, while you're exercising. and listen to 20 minute interviews and 1 minute highlights categorized into 12 different categories. So I hope you'll go go look there. It's a great place to go learn about and listen to this concept of preparing for the future of your business and your life. Exitcoachradio.com, the audio library. My next guest is Martin Staubus, and Martin is joining us from the Byer Institute. Uh, in, uh, University of California at San Diego, he's the executive director there, and they specialize in um helping business owners understand the use of ESOPs, employee stock ownership plans as a means of achieving an ownership transition while keeping the company intact. Creating equity incentives for companies, ESOPs are a uniquely attractive exit route, uh, from business ownership. They offer a ton of great features and tax benefits. They're not for everybody, but that's what we're gonna learn from Martin today is who they are for, who's who's attracted to them, why they're attractive. So let's get right into it. Martin, welcome to the show. Thanks for joining us today. Thanks very much, Bill pleasure to be with you. Martin, uh, you've been involved with the Ber Institute for quite a while. Tell our listeners about your background and what the Byer Institute is all about. Sure, yeah, uh, I'll tell you just real briefly my personal background. I, yeah, I've been working in this field for ESOPs for close to 30 years now. I was originally trained as an attorney, had a legal background. I also picked up an MBA along the way, so I have the financial side of it, and, uh, uh, and actually put in a little bit of time with the with the Labor Department that sort of regulates all of these ESOPs and ERISA plans, so I've got their perspective, so. Pretty strong background for this field. Um, the organization itself, uh, unique stories. It was started originally by a fellow named Bob Beyer, uh, hence the name the Beyer Institute. Uh, he was the, uh, uh, an entrepreneur, the founder of a company that became very successful, known as SAIC or Science Applications International, started here in San Diego in 1969. And within 30 years it was a Fortune 500 company, uh, over 44,000 employees globally and 7 to $8 billion in annual revenue. Quite a success story. Um, he did that by, um, uh, basically awarding stock to, uh, people who are making major contributions to the growth in the value of the company, you know, you, you help the company increase its value, you've got some stock in the company. Uh, and it was, uh, obviously a very, very successful model, and, uh, people were so interested in how that was working and what he was doing that he said he decided to set up a little institute to sort of respond to all the inquiries he was getting about uh how that worked. So that was back in the mid 80s. Uh, I wasn't part of it at that time, but that's how I understand it. And uh and it was an independent group in 2004, it moved into the, the business school here at UC San Diego where we've been based uh since then. It's an interesting collaboration, uh, a university, um, and, uh, and, and an organization that councils how I'm trying to get my head around how that works and and what's the benefit of that? Right, everyone's trying to get their head around how that works. It's part of uh the uh the the brave new world of, of higher education where, you know, budgets are tight at the universities and all that sort of thing, uh, so it's not a traditional thing. We essentially are a consulting firm. A that that operates out of the university, part of the terms of the arrangement when we made this move to bring the group into the business school was the school said, you know, we don't have any budget for you, so you're going to have to be what we call a self-supporting entity. So we charge a fee for our consulting help that we provide, but we are still different in the sense that at the end of the day we're part of the university, which makes us a nonprofit organization. Uh, so we just, uh, charge enough to break even. Uh, if we make a profit here, it sort of disappears into the bowels of the university budget somewhere. I don't get to take it home, so no point in charging more than we need to to keep our doors open. Uh, and we do get a lot of, uh, indirect, uh, kind of support from the university, uh, beginning with free space, which is pretty nice, so our costs are low, so as a result, our, our fees are low, so we, we have a what I think is a very high level of expertise here at the university, a lot of very smart people with really strong backgrounds in this stuff, as I say, I've been doing this for 30 years and we're able to offer that at a really a fraction of what it would really be going for in the in the full private sector. That's great to know, but the other, the other question I had that I guess, uh, uh, everyone probably wonders is does the Ber Institute benefit from research by is it, is it a class? Is there a class on ESOPs and are people researching from the university standpoint feeding that back to you as well? Exactly, uh, there's a lot of interest in this. I think a lot of, uh, business school academics get interested in, in the idea of an ESOP, uh, both in terms of, uh, of an exit strategy and also how, uh, how effective does it actually motivate employees when you sell stock to an ESOP and stock goes into goes to goes to employees. Do they, uh, in fact actually respond? Do they take their work more seriously? Do they start paying more attention. Uh, and so there's lots of research gets done. People do lots of collecting of data and interviewing and all that kind of stuff and come back with research studies. And in fact that research does bear out the fact that employees do respond to that. Companies that have have ESOPs are actually higher performing, uh, greater productivity, greater profits, faster growth, because all those employees are taking their work a lot more seriously than they. to when they were just employees, so that really helps us in our work, and I actually do a little bit of teaching. I spend about 75% of my time working with companies who are interested in exploring an ESOP and maybe setting one up, but the other 25%, I'm in the classroom with MBA students and and teaching them about about this stuff. Well, you can't, you can't help but get smarter hanging out with MBA students and listening to, you know, their thoughts and ideas, but it's, uh, what, what I'm interested in is what's the trend uh with ESOPs? I mean, uh it's it's been, it gets talked about a lot in my world it gets talked about a lot and then a lot of times business owners go, it's a little bit too complicated so we're gonna talk about that but what is the trend? Are are more and more companies gravitating to it? And if so, why do you think that is? Absolutely, uh, I, I heard one so that you saw. Expert recently say he feels he feels like a lumberjack in the middle of a Siberian forest. It's so many opportunities to do this, so many companies that are candidates to do this, and it's really a matter of the word getting out. ESOPs have been around for almost 40 years now, really, but it was really been sort of a well kept secret for a long time. And as you say that they're just complicated enough that you can't, most people can't really explain them real short and quickly, so it gets hard to sort of communicate and get the word out there. But I'll tell you, every time I have a conversation with the business owner and I lay it out, this is actually what's involved and how it works. Their eyes get wide and they say, I can't believe this. I can't believe I never knew about this before. Some of them say, they say, Are you sure this is legal? This sounds too good. Uh, so it's an amazing deal, but the word is getting out increasingly, and, and so we see a real upswing. It's like an acceleration, almost like a snowball effect of the growth in the ESOP activity. That's interesting and uh let's start off by talking about what's a a good size company that you need to be and how do you measure the size of company before you even start putting an ESOP plan on your radar screen. Right, uh, well, first of all, the company needs to be uh a profitable, you know, successful company. ESOP is not a route to to to dump a failing company. Uh, part of the process with an ESOP is that the, uh, the, the sale price, what the ESOP's going to pay to buy stock from an owner is is established by by by by law. The rules require that you bring in an independent professional business appraisal firm, you know, a valuation firm, and they will study the company and assess what it's worth and basically what anybody else would pay for it. What's the market value if we put this company on the market, put it up for sale, notify the investing world that this company's available to buy. What price do you think it would fetch? And that's the pricing process. And of course if the company's failing and struggling, and these are smart valuation firms, that's all they do all day long with steady companies and what they're worth. They're going to see but there's no value in this company. It's heading down the tubes. So it's not a way to dump a failing company, but assuming it's profitable and it's doing well, it's going to have value, um, it's going to be pretty successful, uh, candidate. Size wise, a quick rule of thumb, I would say is probably a minimum of about $5 million in revenue. Some practitioners would tell you a higher number, and that's really, it's really a function of the tax benefits that ESOP provides, which are really prodigious impressive tax benefits. But of course those tax benefits scale with the size of the company. A versus the transactional cost of doing this. Now an ESOP actually is a considerably cheaper way to sell a company than conventional sort of an M&A type of transaction where they want 1 or 2% or something of the of the value, and ESOP's generally going to be less than that. But at some point, even with an ESOP, the transactional costs may be enough that they're that they're kind of wiping out all the tax benefits from it, so. Uh, I'd say for at at our pricing, which is, I say low, uh, we can probably go down as low as about a 5 million revenue company. Uh, others might say 10 or even 20 million, but I think for us 5 works. Yeah, and 55 in a like a manufacturing company is very different from 5 in a service company depending on your margins and you know what what type of industry and company you're in. So because they ultimately they like you said it has to be well run and managed and profitable because there's gonna be a payback. Exactly. And really what they're, you know, the evaluation firms will protest and say it's really complex and you need 3 PhDs and all the stuff, but essentially primarily the value of your company is tracking your EBAA as they call it, you know, your, your cash-based profits, uh, so another maybe a better rule of thumb than revenue since it's variable would be a million dollars IBEA. So if you've got that, you're probably gonna be a good candidate for any so. That's, that's great. OK, that's a that's a number we can all get our head around and then uh one of the things you said is it's the sale prices established by appraisal and of course we we preached to a lot of our business owners we want you to get a a better than um you know market rate for your business by creating your. Business as a strategic purchase by a much bigger company in your industry, you know, we, we wanna blow the doors off of that 3 to 5 times EBI do formula or whatever it happens to be at that time in that industry. Does, does the ESOP, do you find that ESOP valuations are typically, um, pretty standardized by, by, you know, if you take, uh, all service companies or all, all architecture companies are gonna come into a pretty standardized type of a thing or do some does that. That specialization that they've developed and that efficiency that they've developed stand out um like it would if they were purchased by a uh a buyer that's you know really. Yeah, yeah, right, it's, it's certainly true. Evaluation is not a cookie cutter process. Uh, it's not just a simple formula they're gonna factor in a lot of those things, and it's certainly true and ESOP is no different from any other sales situation in the sense that, uh, you're going to get a better price if you're really prepare the company for sale. So somebody may have been running a company for 20 years, whatever, and they're comfortable and it's part of a nice lifestyle and they said this is great, but. They, they their their financial statements are just thrown together on QuickBooks or something, and uh, they, uh, their management team is really, uh, you know, not very impressive. There's a lot of things where a buyer's going to come around and say, I'm not, I can't really tell what you got here. So, and ESO's going to be no different. The evaluation firm is essentially in the shoes of a potential buyer. So as with any other company, you want to prepare it for sale, you want to get nicely at least reviewed financial statements. You want to have uh good records to show your profitability. All these things you do to dress up the value of the company are going to be the same in the ESOP context. Now one factor that is going to impact valuation in the ESOP situation is that with an ESOP we're by definition talking about the company continuing on as an independent company. You're going to sell stock to an ESOP and it'll keep going. So what you won't get with an ESOP is what they call the synergistic premium. There are some buyers out there who say, yeah, your company's generating about a million dollars in EIA, but if we buy it, we'll be able to cross sell some of our current products to your new customers and some of your stuff to our new people, and we can strip out a bunch of your costs and, you know, fire several of your most of your administration. And at the end of the day we can justify it'll be worth it to us to pay a higher price because of what it's going to yield for us when we combine it. Now an ESOP won't match that scenario because as we said, it's going to the company's going to continue forward on an independent basis and the price has to be justified based on the kind of earnings that it's going to continue to earn on its own. So you would, you would lose out on this special synergistic premium. However, there's a different benefit you get from the ESOP, and this is money in the bank benefit that you can count on for sure, and that is that with an ESOP you have the opportunity to sell your company tax free. Which is a pretty amazing benefit because today at the current rates if you're in California, you add the state and the federal together, the, the, uh, capital gains rates are 37% so you sell to some other company's going to offer you a synergist to premium, whatever it is, you're going to lose over a third of your proceeds when it disappear to taxes and you sell it to an ESOP, you can avoid that loss and keep every penny of it. What that means is you actually have a built in premium of almost 60%. In other words, if you have a company. And uh it was valued at $10 million for ESOP purposes. Some other outfit out there would have to offer you $16 million for your company in order for you to net $10 million after taxes, whereas at the ESOP would offer you $10 million you get the whole $10 million you're just as well off. So it's, it's rare to see premiums that big. So and probably the majority of the cases you're actually amazingly enough going to end up on an after-tax basis doing better by selling to an ESOP. So there's a reputation out there that ESOPs somehow don't pay as much. Well, on an after-tax basis they pay at least as much and often more. Mhm, OK, and that's, that's a good point, um, the, the only. Uh, concern that I've heard from that is that when you do any stop and you do the you do the exchange your C corp you exchange and you buy a group of marketable securities, right? And that's how you avoid the taxes at that point. Someday you're gonna sell those securities pro possibly and at that time it's kind of like an IRA account. I've got. a million dollars in my IRA account. Well, not so fast because someday you're gonna have to take that money out and someday you're gonna have to pay the taxes. It's more of a tax deferral, isn't it? Uh, actually this is the strategy that's used pretty widely these days that really makes it a what I call a permanent deferral where it really isn't just a temporary deferral, it really does eliminate the taxes completely and the strategy for that the the main the key piece of it is the fact that Um, a state tax law has always provided, you know, when, when, when all of us eventually die, uh, any investment assets we have go to our heirs with what they call a stepped up basis. In other words, any gain that took place during our lifetime is just sort of forgiven. It's just wiped out and it just goes to your kids or your heirs, whatever, and they start fresh and and nobody pays any taxes and it's just literally it's just forgiven and not paid, so. If you, uh, it certainly is true the conditions for avoiding the taxes when you sell to an ESOP is you take your money and you're supposed to reinvest it and you can pick any, uh, securities you want to divest it in. You can get a diversified portfolio. You can buy some stocks and bonds, whatever, and, uh, you roll your money over, as they say, into these new investments you pick. It's true that if you then sold those investments, you would trigger the taxes. So the object of the game here is let's not sell those things. Uh, but then people say, well, my kids are going to love me for that, but if I have to take all my money and roll over other investments, what about me? I don't get to spend the money that, that's not that's not so great. So the solution to that is what people are investing in now is there are there are these particular long term floating rate bonds that are issued specifically for this market, and what they're designed to do is that they're, they're issued by blue chip companies. They make the best possible collateral that a lender would ever see. So you sell your company for say $10 million you take your $10 million. You go to a brokerage and say I want to buy 10 million of these long term floating rate bonds, and then I want to open up a margin account and I can borrow out of that. The brokerages will lend you up to 90% of that money. So you can put your $10 million into these bonds, borrow out $9 million of cash, and that money is now yours to do whatever you want. Uh, the interest you're earning on the $10 million bonds is just about enough to pay it the the the interest on the you owe the brokerage on your $9 million loan, and this loan is just basically a permanent loan. It just stays forever. And so you really did pull out 90% of that money, uh, tax free. Uh, eventually when you die, your those bonds get a stepped up basis and your heirs will unwind all that stuff, and, uh, so you would have really literally never paid the taxes and had 90% of that money coming up, do whatever you want with the extra 10% went to your family. So it's a pretty good deal. And of course whenever whenever we bring up taxes we wanna tell you, you know, engage qualified tax professionals. It sounds great and uh there there are always caveats because sometimes that stepped up basis turns into an estate tax just depending on your particular situation but get good tax counsel advice and these are creative ideas, Martin. I like them a lot. Um, so what, what holds most people back when they look at this and they go, yeah, it all sounds great, but I thought about it and I don't want to do an ESOP. What do you think holds them back the most? Well, I would say the only, the only real uh bit of a downside potentially would be the fact that. Uh, you're probably not going to get all your money as quickly sort of up front. I mean, I would say that business owners who have not really explored or been through sort of a business exit, they're often fairly naively hoping that, you know, when they want to sell the company, they'll sort of advertise it and somebody will name a good price and write them a check. Here's your money and and you go home. Well, it's never as simple as that ESOP, non-ESOP. Every, uh, kind of a deal these days is going to include earn out provisions, those kind of things, and yeah, we said 10 million, but what actually means is we're going to give you $5 million up front and then the other 5 you'll get 3 years from now if in fact the company grows at 35% a year or whatever. So you never really necessarily get all your money right up front. Having said that, with a sale to a big, you know, a big company or a private equity firm, whatever, you're probably going to get paid more quickly with an ESOP, um. It's going to take a little bit longer. You're going to get paid in installments, uh, so you may get maybe half the money up front, and then the other half would be paid, paid off to you in in annual installments. So if you had a company that was valued at 10 million, maybe you'll get $5 million up front and then you'll get like a million dollars a year for the next 5 years, that sort of thing. So if somebody really wants everything right away as soon as possible and go off and ESOP won't work as well for them. But if they could say, hey, you know, I can afford to, I get a big chunk up front and I can afford to wait for the rest, and it's all tax free, then that's not going to be a problem for you. But that if it is a problem for you, that's one downside of the ESO route. OK, how about situations where I hear like people saying, you know, I went through 2008 and it was really tough, and if I would have had an eStop then, I don't know if I would have the cash flow to make debt service. What happens in a scenario like that? Well, it's interesting you talked, we talked earlier about research that's that's been done, and, uh, there was research done recently into, you know, how companies with ESOPs, uh, managed during that last pretty, pretty, pretty awful recession, and it turns out that companies with ESOPs have a substantially better survival rate than in fact the, the bankruptcy rate of companies with ESOPs during that period was only 25% of the overall bankruptcy rate. These companies were 4 times more likely to survive. A, because mainly the explanation is that the employees are going to do whatever it takes to keep their company going because it's their company now. They own a big stake in this thing. If they have to take a pay cut for a while, they'll do that. If they have to go out there and hustle and sell more business, they're going to do whatever it takes, so they actually improve their odds of surviving. That's great. So now, uh on the on the counter side of that business owners are saying and now since 2008, I finally got it back to even keel and I see a big growth curve ahead of me. So maybe I should wait, wait to do my ESOP until it's worth a lot more. I don't want to leave chips on the table. Are there strategies to to help them overcome that fear? Right, uh, there are. Um, one of the things, of course, is that, as I mentioned before with the ESO scenarios, the valuation firm is putting themselves in the shoes of a buyer. So if the, if you can make a convincing case, maybe you've got contracts in the book and you can show the valuation firm, look, we've brought in these contracts, we're going to be bringing in tons of revenue and earnings over the next, you know, 35 years, and the evaluation firms say, yeah, well, that's what we're basing our valuation on is what we're anticipating in terms of future performance of the company. If you can't convince the evaluation firm, you probably couldn't convince another buyer anyway, uh, so that's one consideration. But in terms of another strategy for that, uh, it's certainly true that if you actually rather than, you know, trying to convince the valuation firm that we're going to have a big year over the next 2 or 3 years, it's going to be great. If you get a really good year under your belt, it's a lot easier to convince the people. So I do work with the owners who say, let me, let me put this off for a year and really get that real an actual real year of real performance on the books, uh. Another one of the great things about an ESOP, one of the one of the really most compelling things though about it, is the fact that it's one of the few ways that you can sell a company in pieces. I mean, anybody else who wants to buy your company, they say sell me your company or don't sell me your company. I don't want to buy 25% of your company or 50% or whatever. With an ESOP you can do that. So I've had a lot of owners who say, yeah, I really think that we're going to be going through some great years coming up ahead. Uh, but on the other hand, I'm, you know, I'm 60 something, and, uh, you know, I don't know how much longer I personally want to really be working this hard and maybe what I'll do is I'll take some of that off the table, uh, and that'll do a few things. One is I'll take some of this money, I'll turn it over to my wealth manager, and I'll invest it nice diversified investments and uh I have a lot more economic security to worry quite so much because currently, like a lot of business owners, what 75% of my net worth is this, this company. And I'm optimistic about it, but what if something happens? So let me take some chips off the table and, and then the other thing that does is by by selling the stock, the stock goes into this ESOP for the employees and we explain this all to the employees and say you guys are now shareholders in the company and it's your company and uh if we can help this work together to make this thing grow, that every dollar we grow by it's money in your pocket. And so what we see is all that motivation translates into really driving the value of the company. So we say my original plan was today I'm thinking, hey, we could go from 10 to 15 over the next 3 or 4 years. Well, we put in the ESO and we go not from 10 to 15, we go from 10 to 18 or 10 to 20 because the employers are just doing that much better of a job and so yeah, I'll sell 25%, 30% so I take some money off the table now. Uh, just to get that incentive effect and, and just to, you know, reduce my risk, and then I'll sell the rest of it, uh, when we get those bigger numbers down the road in another 3 years. So I see a lot of owners do that too. OK, and is a company that has has uh triggered an ESOP or partial ESOP in your experience, are they an attractive target for purchase by another company down the road? Is is is that complicated or does it make it more? Mhm. No, that's a very good question. A lot of owners will ask that to say if I do this, if I, you know, maybe I'll, you know, my initial plan, I'll sell 25-30% similar to the ESO, but what if, you know, a couple of years down the road I get some incredible offer that's triple what they ever said the company is worth and it's just too good to refuse. Am I gonna regret setting up the ESOP? Does that ESOP complicate things terribly? And the answer is no, not really. The ESOP is basically going to sell its stock along with you. So if we had our, our stock, the, the, uh, valuation firm said your stock is worth $10 a share. Somebody's offering you $25 a share. Well, the ESOP is, you know, owns whatever 30% of the company. Well, the ESOP will sell its shares for $25 a share. It's a great offer. And they just, uh, prosper along with you. I, I call it declaring victory on the for the ESOP, the basically the employees just instantly, you know, got this giant boost in, uh, you know, what their share was worth so so it really doesn't, uh, substantially come but you know, you're gonna, there's a simple you know stuff the lawyers will take care of. They're going to unwind the ESO or, uh, change it amended to change into a 401k plan. There's, there's some details to to take care of, but it's not at all a major impediment by any means. Uh, a couple more questions for you, and, uh, one of them, you're doing great by the way. I'm really, uh, you're explaining things clearly, and that's what our listeners need to hear is good solid clear advice on this. So thank you. Um, how about when someone's saying, uh, I wanna, I really wanna lock in and retain a few key employees? should I put in some kind of a plan to do that before I were to do an ESOP because does my relationship change as a fiduciary after I start an ESOP, you know, or, or my own compensation. Uh, will I have a problem giving myself a bonus or a raise after I've set up an ESOP if I'm the trustee of the ESOP. Uh, right, yeah, it's certainly true that in general, uh, when you set up, once you set up an ESOP, you're going to be operating the company a little bit more by the book maybe than you used to. You're probably not going to be, uh, you know, paying for the family vehicles any longer through the company like you used to. You're going to do things a little more, a little more straight arrow with with the ESOP involved and so you might want to clean it up. You might have said in the past, you know, I didn't really worry too much about my compensation. I took whatever I decided I needed to take. And now you're going to have to, you know, be a little bit more, as I say, by the book, a little more salary, so you want to think about that and plan that and line those things up. Um, if you're selling, uh, you know, 25% or something to these up, then you still got the 75%, so you clearly have an equity interest in how well it's doing, but it's possible there are owners who sometimes sell 100% sell the entire thing but don't really necessarily want to exit right away. They'll stick around for a couple of years and so at that point they may, you know, want to negotiate a A compensation package like, you know, other executives might have that might include some stock options and that sort of thing, um, so we often set up those kinds of programs as we're working out an ESOP and doing the planning for an ESOP, we'll say, OK, we're going to have some um some some some supplemental equity programs usually stock options or it could be uh. We are for various reasons we'll use a a phantom stock program instead for some cases, but either way there'll be a sort of a separate, you know, uh, equity, uh, equity compensation sort of program going on for people so that can be lined up in conjunction with the ESOP. So the bottom line there is there's some preplanning that should be done to think through some of these issues and another one that I hear a lot about because a lot of companies that are set up these days aren't uh either have uh. Uh, they, they've transformed from a C corporation to an S corporation in contemplation of future sale or for pass through, um, uh tax treatment or they're an LLC or something like that. But let's just deal with C Corps and S corps. If someone is converted to an S corp, they can still be an ESOP, right? An ESOP can be set up in either S Corp or the regular C Corp. They they work in either way. There's a few little differences, but they can both have an ESOP. And with the, with the S, you don't get the the tax deferral, but for that reason, do you see a lot of people convert from S back to C before they become an ESOP? Yeah, absolutely. So a common pattern we'll see, for example, is somebody comes to a business owner and wants to explore the CSOP, and they've been operating for an S corporation for a long time, and I explained that this ability to be able to sell and avoid the capital gains tax, where we talked about that earlier, how you do that. One catch of that is you have to be a C corporation at the time of the sale. So converting from an S to a C is generally a very, very simple thing. Once again, it's never something you do without consulting with good, you know, advisors, uh, CPAs, whatever on that type of thing. But generally speaking, you just send a little notification to the IRS. Dear IRS, you know, from now on we're going to be a C corporation. So as soon as you've done that, you're now eligible to sell stock and qualify for that, avoiding the, avoiding the capital gains tax. Now eventually there's no waiting period there as well. No waiting. You can do it the very next day. Now once you convert to C, you can't switch back to S for 5 years. There's a 5 year wait before you go back. So but you're probably going to want to end up going back to S, so you'll have this 5 years. So what I see therefore is one of the things I always really emphasize is that ESOPs are remarkably flexible. It really allows the first of all, the owner's completely in charge of it. They decide when they want to do it. It's so incredible that there's really no adversarial sort of party across the table from you as there is in a conventional sale and nobody telling you do it this month or I'm walking away or sell me all or nothing or what, you know, the owners in the ESOP situation says, I'll decide when I want to do it. I'll decide how much I want to sell, and the ESO just says, OK, as long as the price is the, uh, appraised price, the ESOP will go along with whatever you want to do. So a a pattern I see that's very popular with owners I've done with a number of them. That they'll choose to is they'll say, OK, I'm an S corporation now. OK, here we're going to go with what I call the 5 year plan. So the 5 year plan is, uh, step one, we're going to convert to a C corporation and then right away I'm going to sell 50% of my company and why 50% if I sell less than that, the appraiser says, oh, that's a minority interest. Anybody out there in the world is going to be less enthusiastic about being in a minority position where they have no control, so they'll they'll only pay a lower price and therefore the ESOP will match that. So if you want to get, uh, avoid that what they call a minority interest discount, sell a full 50%, which is not a minority. So they say, OK, great, I'm going to sell 50% and I'll be, and because we just converted to a C corporation, I'll be able to avoid the taxes. Over the next 5 years we'll stay a Corporation and during that 5 years we're going to do two things we're really focusing on. One is we're paying down this acquisition debt, so if they're making payments the company's making payments to me for my stock, we're getting, making sure we're getting me paid off. The other thing we're doing. My job as the head of this company is I'm mentoring a successor generation of leadership. So I got young guys in the company, you know, if I got hit by a bus today on the way home, this company would be in big trouble tomorrow. But these guys with 5 years of training, if, if, uh, if I sort of mentor them and coach them over each year I'm started handing more and more things off on my plate and delegating to those guys. Maybe by year 4 I'm just going to be chairman of the board, not even come to the office every day. At the at the end of the 5th year. I'm in, well, we're still a C corporation. I'm going to sell the other half of my stock and once again avoid the taxes and then literally the next day after that sale we're now eligible to convert back to S and it'll be an S corporation. These guys got the things under control. I slip out the back door. They didn't notice I'm gone. And the final piece of this story, which is going to blow people's mind is that at this point the company is an S corporation once again, so of course it doesn't pay taxes at the corporate level because it's a pass through entity. Taxes on its profits are normally paid by its owner. When you're back to this guy was the owner, he paid all his taxes on the earnings. Well, who owns the company now? The ESOP owns the company now, and ESOP is a tax exempt qualified plan, so it doesn't pay taxes. So the company doesn't pay taxes on its profits. The owner doesn't pay taxes. Well, who, who pays the taxes on the company profits? And the answer is nobody. So what you have, you have is a you have a tax exempt business. People can say, how could this be legal? How is this possible? It's completely like it's completely possible there are thousands of companies doing this now. These companies operate and at the end of the year they made a million dollars, and any other company in the world is going to be in California at rates is going to lose about $400,000 to state and federal taxes and be left with $600,000. This company, ESO owned this corporation, makes a million dollars and keeps the whole million. So that's the final piece of that 5 year plan, so it's a pretty nice way for the company to end up. So there is a Santa Claus. It is, it's just the magic yeah and part of the reason I think why these companies can, uh, you know, survive downturns and all that kind of stuff and these companies are now they're making acquisitions, they're growing, they use some of this extra money to acquire the companies. These are very healthy, robust companies, as you can imagine with all that extra cash. Now, obviously, if someone was an existing S Corp and they sold 50%. Uh, they would get to the same place except they would have not been able to defer those taxes on the initial sale, correct? Right, that's the only difference is you don't qualify to defer those taxes if you stay as corporation. You do get a little offsetting little benefit, and that is amazingly enough. Uh, if you, if you don't claim that tax deferral, then you can sell your stock, whether it's 50% or 100%, whatever you're selling, you sell to it and you get fully paid for every last share. But as soon as the sale is done, you take off your owner hat, you put on your employee hat and say, Hey, I work here too, and I get a W-2 like everybody else, and the stock is now going to be divvied up to every employee who receives a W-2, including you, the owner. So stock that you were paid for, you get a batch of it back. And in fact, the stock is generally allocated to employees in proportion to their pay level, so the more you're paid, the more shares you get. And so you're Mr. Owner, you're probably the highest paid guy in the company. You get more shares than anybody else back. Uh, now you can't get that if you're claiming that that deferral arrangement. So that's one of the trade-offs. And so, uh, you get to sort of pick do I want the tax deferral or do I want to stay and be able to get a bunch of bunch of my shares back in my own ESOP account. Got it. OK, OK, so there's there's obviously some important considerations a lot of preplanning uh the first step is to become educated and talk to someone who specializes in these types of plans so uh and and that's what you do, right? Exactly. That's where we will take somebody through the whole process from just beginning to understand and explore the thing. All the way through the actual implementation and of course being based at the university we really excel at educating and explaining and and uh surely helping people to understand this, uh, so that we I think we are the place to come to learn more about this and if what you're learning seems like this makes sense, we can take it through a continuing exploration process, really get down and nitty gritty, start looking at specific numbers of your company, and we can map out, uh, uh, we actually use a modeling process to show you exactly. How a particular ESOP transaction would play out in your company and how it would impact your income statement, how it impact your cash flow, an estimate of the price you'd get, how what the employees would see from it and enable you to see a whole picture of what it would look like, and that helps, you know, owners to be able to make a really well informed final decision do I actually want to do this or not? OK, so you're the first, it sounds like you're, you know, there's at some point you probably have an attorney involved. You're gonna have a evaluation person involved. You're gonna have investment advisers and all that involved, uh, and your tax adviser, of course it's a team approach, um, exactly. Are you the first call? Yes, we're the first call as I say, we would help you fully understand this, and then if it makes sense we would then lead the process of putting the team together so we could recommend. You know, appropriate attorneys that are good for this and recommend valuation firms and the other players involved in the process and really as I say lead you through the whole process. So much great information. Martin Staubas from the Beyer Institute at UC San Diego. How do people get in touch with you best and learn more about what you do? The easiest way is just simply to Google Byer Institute. So Ber is B E Y S T E R B E Y S T E R Institute. You Google that and we'll come up. Byer Institute. You'll see it there at the Rady School of Management at UC San Diego, and that'll get you to our website. You can also find me on LinkedIn through my name. And you can always reach me at msabas at UCSD.edu is the email. OK, and uh I know that you're also a member of a group called Provisors that's a well networked group of professionals so you have access to to top advisers in all areas like you can recommend evaluation people I would imagine and attorneys that would be familiar with this if people don't have those types of resources. Exactly. That's great, really great information. I'm glad that we extended our interview a little bit today. It's a little bit longer than our usual format, but I think it was necessary because this is a this is a a concept, a strategy that a lot of people are thinking about, but they're they don't know where to go to get good advice about it simple questions like I was asking and and the great explanations that Martin provided. Martin, thanks so much for joining us today. It's been a real pleasure. My pleasure as well thanks Bill. Thanks a lot appreciate it uh I'll talk to you again real soon. All right, take care. 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