Preparing for and Executing a Sale to an ESOP - The Douglas Company

This episode of the Owners at Work podcast is sponsored by 5th 3rd Bank. 5th 3rd Bank headquartered in Ohio, provides a full range of business banking services, as well as expertise and flexibility in constructing ESOP solutions, including leveraged and non-leveraged ESOPs, second stage transactions, seller note financing, and more. Welcome to another episode of the Owners at Work podcast. Once again, this is Chris Cooper, director of the Ohio Employee Ownership Center at Kent State University. We have a great episode in store for you as I talked to a brand new ESOP company about the transition process, the why, the how, and more. But before we get into that episode, I wanted to take a quick moment to give all our listeners an update about what's coming up at the center. Of course we're pretty excited here as we will be returning to in-person programming for the second half of 2021, including an Ohio employee owner retreat. The certificate program. Non-professional fiduciaries, CEO, CFO, roundtables, and much more. And of course we will be continuing on with our employee ownership webinars, virtual communications, check-ins, and more. Links to more information on these programs will of course be posted in the show notes for this episode. But you know, as they say, let's get on with the show. In this episode of the pod we interviewed Pete Douglas, president of the Douglas Company, a brand new 100%. ESOP right here in Ohio. Pete discusses his journey as an entrepreneur and how he came to choose an ESOP as his succession strategy. We also talked with his VP of finance and administration, David Brock Bader, on how he acted as the internal ESOP quarterback and finally with Franco Silva, an ESOP specialist from Prairie Capital Advisors. Really enjoyed the conversation and I hope you do too. So let's roll the tape. Today, we have joining us, uh, Pete Douglas, president of the Douglas Company, joining us as well as Dave Brock Bader, executive vice president of finance and Administration at the Douglas Company. And we're gonna be talking a little bit today about how one company went through the transition from an entrepreneurial-led company to an employee-owned company using an ESOP. In addition, we have one of their chief advisors, uh, Franco Silva, who's the director with Prairie Capital Advisors joining us today. So looking forward to the conversation. Welcome everybody. Pete, Dave, Franco, how are you doing? Thanks, Chris. I'm good. Doing well. I think uh we'll start out, uh, Pete with you. You are the selling owner, you're the entrepreneur that started the company and the selling owner. And so tell us a little bit about yourself and about the Douglas company and how you started the company and what you guys do. Well, thanks, Chris. Actually, the company was started by my father in 1976. After engineering school and MBA and worked for another company, I joined in 1982, became president in 192. Uh, completed an 11-year buyout of my father in 2000. Here we are, um, the company is a developer, general contractor. We work for developers, and our primary products are senior living projects and multi-family projects. It's a process that we go through that's high touch, high value add, controls costs, and controls risks. In the risky development business. So when you were thinking about what's gonna happen when it's time for you to retire and leave the business, what led you down the path of choosing the ESOP option and, and, and all of that kind of thinking and planning? There was a lot to it actually, Chris. Uh, I was going to do an internal sale to our 3 next generation leaders, including my son. Um, they were all lined up, ready to go. Uh, we had our documents written by the attorneys, then 2 people. One board member and another consultant suggested that we should consider an ESOP. Uh, we talked to one company from Kansas City that had become an ESOP 4 years earlier, and the president and CFO who we talked to, who both were minority shareholders trying to buy out the majority owner. Said, you know, we could spend the next 10 years saving every penny trying to buy out the majority shareholder, and then spend the next 10 years trying to figure out how to sell it. When somebody came to us with the ESOP concept, and it just made sense to us, even as minority shareholders. Uh, and, and they told an amazing story about the impact that it had on the company in terms of growth, profitability, retention of of their associates, customer satisfaction, and other factors. It was really impressive, but, you know, it's one example. Um, I'm an engineer, and engineers tend to be a little cynical, maybe, at least analytical. Um, so we formed this committee internally that included the three next-gen leaders, included Dave Bach, Brader, myself, and uh reached out to the YPO construction network, um, looking for dirt, really, we were looking for the problems. I mean, it just sounded too good to be true. Right. We probably talked to 15 different companies, and in every case, they said, if you have a good business, if you set up the ESOP, right, and you communicate effectively to your associates, it'll be a game changer. So, the interesting thing was, I didn't care which way I went, I cared mostly about the future success about the company. Right, so I left the decision up to the 3 next-gen leaders. I even went to the extent of showing them how they could make a lot more money. They bought the company from me than if they were part of an ESOP. They were unanimously in favor of the ESOP. Um, they wanted all 70 of our associates pulling together to build a great company, and between the stock value and the stock appreciation rights, they're gonna do well with no investment and very little financial risk. So it It, uh, that was our process. It was involved in making the decision, but everybody was in favor of it when they learned more about it. So, when we were setting up this interview, uh, you mentioned that you relied very heavily on your, uh, CFO, your executive vice president of financedministration, Dave Brock Bader, to help guide you and the company through this process. And I know we're gonna be talking to Dave here in just a couple of seconds, but can you describe a little bit from your perspective, uh, how important was he, what was that role? What made you kind of, uh, go in that direction with working closely with Dave on this? Well, Dave's always been my backstop. He's always been the guy who made sure when I was on the road, things were under control. Uh, and he was our quarterback in this standpoint, this, this project we did. He, uh, he helped us in every way. He was part of the committee. But he uh organized selection of our consultants, Prairie, and all the other consultants while keeping us informed and letting us make key decisions. There's an enormous amount of work that he had to put together in a short time because we're concerned capital gains are gonna double with the election, so we needed to get it done from my perspective, December 31st. And Dave and uh our CFO Dave Kelly. And their teams just Carried a heck of a load and. Got it done and we closed on December 31st uh with a lot of help from Franco. So Dave, uh, you're on the spot now, so you're fresh from the trenches. Do you feel like a quarterback? Uh, well, not, not particularly. I, I like to be in a supportive, yeah, I like to be in a supportive role, uh, more than anything, um. But you know, the, the process was quite interesting. We started really, like Pete said, with trying to research the good, bad, ugly, that process started out relatively in a normal pace. And it was in the probably the 2nd quarter of last year that we started working on on this and evaluating and everything was going on. There was a lot of stuff to learn and honestly being in my position at times I didn't know who I was representing because at the same time I'm trying to look out for the best interest of the company which would be in this case somewhat. Well, it's both the seller and the buyer. Uh, so that had awkward points of time, I guess, in dealing with that. But you know, you're really working with a lot of different concepts. A point of view is that none of the concepts when you start looking at them individually are super duper complex and need a lot of brainpower, but when you add all of those things together, an ESOP transaction is tough to get your arms around everything. So you went from selling price and the debt structure through the formation of this ESOT, uh, the trust, and how it relates to buying the stock and all of those things you really kind of think of, but then there are reward systems that get entered into with syn synthetic stocks with the SARS plans and and whatnot like that. And by the time you look at all of those things, your head starts spinning and because it's stuff that in a normal course of business, you really don't get into. And then things started picking up. You start looking at pro forma and Prairie did a fantastic job running different iterations and answering questions, but I think we got a Like probably around a 28 to 30 page document that had probably like 200 numbers per page um to digest all of that was really pretty incredible and you have to because you have to understand what you're doing and yes, you rely on your partners in this which was Prairie and your corporate attorneys Thompson Hein. But you gotta understand it yourself, and so it takes a lot of time to dig through all that detail, and then you make the decision we're moving forward, you, you, you make some pretty big upfront commitments to people, and then the due diligence starts and uh that was, that was really something. And no sooner that after you start the due diligence, all of a sudden attorneys start producing literally if if you printed it all out. Inches and feet of paper to start reviewing, and it all starts getting pulled together, and it's just a lot of things to keep track of all at one time, but, you know, at the end, what was the experience like? It was greatly rewarding. I learned a ton of stuff, got to meet a lot of some new people that I found great appreciation for what they do, and You know, it, it, it seems like it's, it, it is, it's a, it's a different environment for us right now, and it happened so quick. It was all pretty positive, but I'd have to say when we're in the midst of due diligence, Franco has had to talk me off the ledge a couple of times, so it, it doesn't go without some pain and suffering, but it's, it's a greatly rewarding when you get to the end. Yeah, you know, and the great thing is that you also have a, like your regular day job to do as well, right? Oh, I forgot about that. Yeah. Right. You know, again, when we had that initial conversation about and we're prepping for this interview, you made a specific comment that stuck with me. The, the company needs to be prepared. And can you explain a little bit about what you meant by that? Yeah, um, you know, in addition, I just outlined in terms of the different uh phases of the transaction. What I found was incredible was the, the due diligence process, and I don't, for some reason I did not expect the financial advisor. And the trustee's legal side to be as thorough and expansive of due diligence is what it turned into. Now there, there wasn't really information that they asked for that we didn't have. But what they they asked for all aspects of the organization from customer to risk management and they wanted information sliced and diced in ways which was not what we are normal in providing and so it took uh time to get through some of the information systems to gather the data in ways in which the uh advisers wanted it. And of course all the time Franco was calling and saying I need it now, I need it now. So you were not under a great privilege to have unlimited amounts of time to generate the information. And I would say for and I was in thinking back it was probably about a 4 to 6 week what I would say dedicated process where we spent time trying to organize and produce data to satisfy the information requests and you know it was one thing you do it one portion of the due diligence for the financial advisory. Uh, analysis and when you think you're through that, then all of a sudden the trustee's legal counsel comes through with its request and the next wave goes through. So that's what I meant about being prepared is if we, we, it would have been almost impossible if we didn't have some of the systems that we had in place to be able to generate this information. And thank goodness so much of it is electronic nowadays. Gosh, back in the good old days, I don't know how you could get through this in that length of time. Yeah, with the old paper ledgers, right, and all that kind of stuff. And so, you know, we, I think we talked about this previously as well, that, that selling to an ESOP has aspects of an internal transition or sale, but it also has, you know, components of an external sale where you have a buyer who's gonna run through your business with a fine tooth comb, right? Yeah, and that was the part that I probably didn't completely comprehend as much as what I should have early on was how the buyer side has equally as much. As if it was an independent sale, cause technically it really was an independent sale. Right. So, so, Franco, maybe this is a good time to bring you in here, so kind of build on what Dave was talking about. So from the advisors standpoint, how would you define a well-prepared business and one that's ready to go through this process? Yeah, no, great question, Chris. Really, I mean, our, from our experience, you know, well prepared business really kind of fits in what, you know, Pete and Davis kind of spoken here about. Really, it's, it's a company, it's a business owner, the management team that has done their due diligence and fundamentally understand their options, right? I mean, cause, you know, the reality is that each business owner. Has their own sets and goals and objectives from a transition perspective, right? Some may want to retire at the age of 50, while others may want to continue into their 70s, you know, you may have certain parties kind of pushed to maximize value from an exit strategy perspective and others that care a little bit more about the legacy and the wel for in the kind of local community and such, and, and really kind of understanding what's out there for them, right? I mean, understanding, OK, what happens if I Sell to a private equity, right? What are the pros and cons to that path? What are the pros and cons if I sell to a strategic firm? And if I consider an internal sale such as an ESOP, OK, what are the pros and cons, you know, to that path, and it's really kind of, you know, making sure that you've done your homework, you have the confidence of moving forward with a path. That you feel kind of meets your specific goals and objectives as a seller, as a company, you know, as, you know, for your employees. And so, so it's really not a cookie cutter approach. It's really, you know, somebody who's well prepared has done the due diligence of the time, kind of invested to make sure that, you know, they feel good about kind of moving forward in that exit strategy, which is key. And I think, um, you know, definitely kind of working with, you know, with Pete and Dave. I mean, it was evident, you know, kind of day one, even prior to our engagement, that they were well prepared and they've done their homework, certainly, and that definitely, certainly helps from our perspective, certainly, I mean, we're always happy, obviously, to make sure that we provide the education and kind of the visibility of what it means to be an ESOP company. But uh when you have a party that has, you know, done the preparation. In advance, you can dive into more deeper, right, kind of topics of, you know, within an ESOP structure. So more 200 and 300 level, and so, you know, off the gate, you know, we can definitely found, you know, Pete and and Dave definitely to be kind of up to speed on those topics and such. Um, and even kind of speaking further than that, you can definitely tell, you know, from Pete's perspective that he was planning this well in advance. You know, the fact that, you know, grooming, you know, his management team, essentially, which was definitely key for, for any transaction, right? You wanna make sure that you have a strong management team, you have bench there, you have a plan for the future as well. And, you know, one of the things that kind of stays with me, when we were making a presentation to, to the trustee team is that not only was there a sound organizational chart. But there was also a plan for the future. So we presented a future organizational chart that will take place in the next 5 years. And so, to me, again, it it makes certainly our lives much more easier, you know, as a financial advisor to work with someone. That's done their due diligence, done their homework here, and then we can say, OK, you know, let's sharpen the pencil here. Let's start drafting this blueprint, you know, at an earlier stage than we would normally than if you, you know, obviously someone will need a little bit more education, right? And having talked to enough business owners, uh thinking about uh transitioning to an ESOP, it's, uh, people always ask me, how long does it take? How, how long does this process take? And one of my first questions is, well, where is the, the business owner and the business at, right? And, and how ready are they uh to go through this process. And I imagine kind of building on what uh Dave said a few minutes ago about internal controls and processes and, and how prepared, you know, the business was, I'm assuming that has a huge impact as well on that time frame and the complexity or Conversely, the ease of going through this process. Oh, absolutely, and, um, you know, obviously I think, you know, PETA has definitely built a, you know, very kind of sound, you know, strong internal controls and processes internally that I felt kind of bold very well here, certainly transitioning into an ESA but also just the implementation of the transaction. That, you know, you're speaking with a team here that's definitely kind of ready. You understand that there's kind of stages here and it's committed, if you will, to kind of move things along and push forward. You know, Dave mentioned it was a challenge, but from our perspective, I'd, I'd give Dave an A plus here and In terms of working with him and his team, so I think, again, you know, from our perspective, if we're dealing with someone that is certainly has some strong sound kind of internal controls here in terms of executing something that is new and simply right, just create a much more kind of favorable situation here, um, in executing the transaction, but also I'd say kind of post these up as well, um, in the sense that, you know, there's expectations here that, you know, you'll be operating kind of like a mini public company. Right, and there'll be a little bit more corporate governance, right, that you probably are not accustomed to, you know, especially for these, you know, found their own privately held businesses that kind of pursue an EAP path. And so for a company that has kind of those controls in place, right, just, it, it, it provides something just a little more advantageous situation, I would say, to kind of step into that. Right, and it's not a surprise to me that you know, that an engineer developed these controls and processes, right, because that's what engineers do, right. So, Pete, having just gone through this process, looking back, how was it? You talked to other businesses when you were thinking about this, and if a business owner came to you and said, uh, what do you think? Should I do this or not? What advice would you give them? I certainly have no regrets, and there's been a lot of good that's happened. I guess I would caution them that it takes work and it's a distraction. When I raised my head early in the year, I thought, uh oh, there are a few things I haven't done in the last 3 months, so I had to get back into it. But Prairie was on a tight schedule, guided us through it, kept us calm, which wasn't easy. And they hit the goal. I would talk to people about the emotional aspects of selling the business. Yeah, I'd, I'd run it for 30 years, sole owner for 20 years. I'd grown it from You know, a small, much smaller company to what it is now. And so I can't tell you I didn't have seller's remorse. So I'd advise keeping your emotions in check, sorting through all that, and whether right or wrong, those kinds of thoughts will come at you. Sure. But you made the decision in advance and you just have to suppress that. Since the closing, it's been uh really interesting actually. We promoted it he heavily. We've been pushing people hard for the last 6 months to understand what it means to be an owner. They get it. Um, for me, it's been a relief. How many partners all pulling together to succeed. And, um, the other interesting thing is, since I'm only a minor partner now, I'm pushing them to do more, it's their future success on the line, and they're stepping up. It's for me, I've always worked 70+ hours a week to drive the business, but for the first time, I'm Looking around for stuff to do and uh I shouldn't admit that in front of Dave, but The great stuff is, you know, there, there are things that I could have and should have done in this business for this business, you know, for years, uh, that I've never gotten the time to do that I now am I'm working on. And so, the advice I'd give somebody is control your emotions, have a good team both internally and externally. Let's start with a good business. Yeah, and I really appreciate you talking, being willing to talk about that emotional side. I think a lot of times we underestimate uh the impact of that emotional kind of component of giving up the business and it's sort of letting your child go live their life. And start worrying about what's gonna happen to them after that. So I appreciate you talking about that. So Dave, kind of the same questions, uh, how has it been on the other side as a new employee owner and Pete, you can feel free to chime in on this too, but how have the employees reacted to the change you mentioned? A few things a couple seconds ago, but generally, how have employees greeted the transition? Yeah, I think it's been a very positive event that we went through all that being said, we closed on December 31st, but when we walked in on January 2nd. Mhm. It was the same people, the same things, the same business that we were running. And so it wasn't like you had a whole new group of leadership just stepping in and having to answer to different people do different way things a different way. The The challenge to that is what Pete alluded to, which is getting people motivated and thinking that now all of a sudden they can share in greater rewards than what they did. The year before, and so that that that has been somewhat the key of a lot of our education. Education of the folks we've been working on it quite a bit ever since the transaction, we wanted to start early and there's really two things that you do in education and yeah, you won, you, you got all the regulatory piece behind being a having a new qualified plan and you gotta go through the in, you know, the entry dates and the best things and all of that. That isn't what really drives what an ESOP is gonna be though. The other part of it is this, how do you increase or how do you maximize the potential that all of the new owners have and it's done through driving share value, and that is where our focus has been turned, is to try to get our people to understand how their job functions drive share value and uh that's a I, I, it probably is a never ending education process, but that's what we're really focused on now. That ties into Pete's getting them to think like an owner concept, and people are positive about this transaction. They see it one, it's a, it's a culmination now they know what's ahead for the company, um, you know, before the transaction, everybody was wondering. How is the financial transition from heat, uh Douglas going to go to the next phase of the business? This gave a sense of calm. It gave them a sense of understanding, and then to benefit by that by able to share in all of the value creation that that an owner can get out of it, um, it's a lot for an employee to absorb and they're doing a great job at it and they're excited about it, so I've seen nothing but positive come out of all this. We did a survey, I wanna say in March, is that right, Dave, to see how it was affecting people and 93% of our associates said that it positively impacted their desire to stay with the company long term, even though it had only been in place for, I want to say 2.5 months at the time, 70% said it impacted their desire to work harder to make the company better. So those numbers are just amazing to me that's soon after the transaction. Yeah, those are, those are really good numbers that soon after the transaction, having seen enough of them, uh, those are in fact, uh really good numbers. So, so, Franco, to kind of bring us a little bit full circles, we're seeing a lot of interest from business owners in perhaps selling their company to their employees through an ESOP. As an advisor, uh, you know, I'm sure you've seen a ton of ESOP transactions. What final lessons. Or words of wisdom do you have for a business owner thinking about doing exactly what uh what Pete did? I think, uh, I think what's critically important is to be a proactive planner. I mean, a time is such a valuable commodity when planning for an ownership transition event. So, you know, the more time you plan, the more due diligence that you conduct to fundamentally understand your options, what's available to you. Right, cause every business owner has different sets of goals and objectives and timelines, and again, there's not one pass is best for all. Now, you know, ESOPs are, you know, not best for everyone as well. So just making sure you, you kind of do your homework and understand. Kind of the pros and cons of each path and that way, again, it's best to make a sound informed decision with confidence kind of behind that, right? So I think definitely being proactive is, is key and also I'd say, as Pete mentioned earlier, um. Having a strong team, you know, certainly internally from the company's perspective we talked about the management team, how important that is certainly, um, but also I say externally making sure that you have a strong group of advisors kind of coaching you along the way, providing you the necessary education right? to make kind of decisions here that are very important in the inception of a transaction that can definitely. Impact kind of the, the overall, you know, sustainability of the ESOP, if you will, from a long-term basis. So having a good team, I think is definitely another key item, you know, that we, we certainly recommend. Sure. Well Franco, you were our leader, um, you know the process, you helped us through it, and you were calming presence when I needed it. No, it's been our pleasure working with you, Pete and And Dave and everyone at the Douglas Company and uh again, uh, just working with someone that's just, you know, again, well prepared and and and such, just just make our lives easier and if anything, thank you. for working with us. So, it was our pleasure. Perfect. Well, Pete, Dave, I really, uh, really do appreciate you coming out and talking with us here today, uh to get some of that perspective. Can't thank you enough. Thanks for having us, Chris. Well, thank you. You know, Franco, as always, it's good to talk to you and I'm sure we'll be uh talking to each other down the road as well. So thank you as well. Thanks, Chris. All right, thanks, everyone. Well, I hope you enjoyed the interview. As always, if you would like to tell your employee ownership story on the Owners at Work podcast, drop us a line at OEOC@kent.edu. Of course, we'll put that email address in the show notes as well. If you like what you are hearing on the Owners at Work podcast, we hope that you will like and subscribe to it in the podcast platform of your choice, and of course, tell your friends about the podcast. Until next time, take care. See you soon, and I hope everyone stays well.