Straight Talk About ESOPs and Co-Ops and EOTs, Oh My!

[Music] Hello everyone. Welcome to the 21 Hats podcast. I'm your host Lauren Feldman. This week, Jay Goltz, Mel Gravely, and special guest John Abrams have a frank conversation about what business owners can do to avoid what John calls the fat wallets and broken hearts syndrome. That's his term for what can happen when an owner sells to private equity and the company ends up getting stripped. JL and John all agree they want no part of that. They all would like to see their businesses continue on without them. And yet in thinking about succession, they've chosen very different paths. In a conversation sparked by the recent publication of John's book, From Founder to Future, we discussed those choices along with such issues as why there are so few employeeowned businesses, whether they outperform other businesses, how you can finance the sale of a business to employees, whether the employee owners of an ESOP are truly owners, and whether a worker co-op model just might work for a hard-bitten old school owner like Jay Gouls. Even in good times, owning and running a business can be a lonely pursuit. Our hope is that these weekly conversations will let owners know they are not alone in facing challenges. In fact, that's the whole idea behind the 21 Hats community, engaging with other owners to get the kinds of insights only another owner can offer. If you're interested in learning more, step one is to sign up for a free trial of the Morning Report newsletter, which helps you navigate this interesting world in which we live. Every day it highlights the most important news for business owners and shows how other owners are coping and finding opportunities. Step two is to get on our Slack channel where you can ask questions, get vendor recommendations, and tap the wisdom of a very impressive crowd. Just search the 21 Hats Morning Report to subscribe. Joining me this week on the podcast are John Abrams who founded South Mountain Company, a design and build construction business in Massachusetts, Mel Gravely, who is chairman of Tiversity Construction, a construction firm based in Cincinnati, and Jay Goltz who is CEO of the Golds Group whose companies in Chicago include a picture frame business, artist frame service, and a home furnishing store, Jason Home. The episode is titled Straight Talk About Esops and Co-ops and EOTS. Oh my. Welcome Jay Mel and our special guest John Abrams has a succession plan consulting business and who recently published a book from founder to future. It's about the various flavors of employee ownership. Those flavors include ESOPs, which are probably the best known form of employee ownership, but also worker co-ops and employee ownership trusts. John, when you decided you wanted to convert South Mountain to a form of employee ownership, you chose the version that I think sounds the scariest to many business owners. You made it a worker co-op. Uh, why was that your choice? So in 1973, Lauren, in my early 20s, I inadvertently, by the seat of my pants, founded a business that would be my primary work for the next half century. And in 1987, some longtime employees said they wanted to stay at South Mountain for their careers. They didn't want to take the usual route and make their own businesses, but they needed a greater stake. And at that time I could have made them partners but somehow I stumbled on the notion of the worker co-op and I thought hey if we do our job well over time we're going to want to welcome more and more people in here's a structure that does that and at the time almost 40 years ago there were about a dozen in the US today there are roughly 1300 numbers growing rapidly but many of The originals like Equal Exchange and the Rainbow Grocery Cooperative still thrive today and they've grown significantly. I love that longevity. And so that just appealed to my particular nature, not to everybody else's necessarily, but certainly to mine. And ultimately um South Mountain became a 40 person integrated architecture building and solar company that is always among the highest scoring BC Corps in the world. And at the end of 2022, I retired. I passed it on to next generation leadership. They are killing it with tools and resources unthinkable 25 years ago. And I think ultimately they will take it to places where my intuitive and casual style of leadership may have been unable to. So, you know, I have no way of measuring, but I feel like whatever modest successes we have had go back to that hinge point, that moment when I decided to convert it to a worker co-op. Well, well, here's one way of measuring. Can you tell us what the revenues were at the time you made the decision and what they are now? At the time I made that decision, they were probably 1.5 million a year and now they're well above 20 million. The thing that I think scares people about worker co-op is there's an implied sense that this is becoming something of a democracy and and you do use that word uh in the book. Tell us about that. Do you vote on everything uh at the company now? Oh my god, no. So there's a great misconception and this idea that the worker co-op throws out the notion of leadership. the worker co-op needs even better leadership than any other kind of company. So that's um quite a fallacy. And one of the keys to successfully operating a worker co-op is to have a very clear decision-making matrix that says these are the decisions that management makes and these are the decision that the owners make and the decisions that the owners make are definitely limited. When you made it a worker co-op, did you create a board? Did you report to to somebody? Uh, yes. So, for all my years at South Mountain, I was the CEO. I was the president of the board, but I was entirely responsible to that board. Yes. And who was on the board? Did you control it? Interestingly, all of the owners were on that board. We decided at the beginning that we would just do that until it became unwieldy because there were too many and it never actually did. So no, I did not control it, but I was the leader and I had a leadership team that was um tremendously well aligned. And when I retired after three intensive years of building internal leadership capacity with this leadership team, there were six of us on that leadership team. And you know when I retired actually about 6 months before my retirement date we looked around at each other and we went oh my god we have done this job and we have 6 months to just polish the mirror and ultimately it was almost like I just slipped out in the night because it was seamless. You know I hear co-op I think Birkenstocks and tofu and you got to be a vegetarian. I I just I don't have a clue what that means. What does it mean to be a co-op? Who owns it? What does that mean? How does what's the structure of it? So, first of all, let me give a little context about that. The worker co-op is by far the most widespread form of employee ownership in the world. and worker co-ops range from the Mandreon cooperatives in in the Basque region of Spain where there are roughly 80,000 employees most of them owners the largest worker co-op in the US is a driver's co-op in New York City with 10,000 members they are not wearing Birkenstocks they are driving vehicles day and night and they're eating hot dogs I just want to hear that they're eating hot dogs hot dogs man Okay, guard. They're probably all at Yankee Stadium. So that that's just it's it's an it's not an uncommon misconception, but it definitely is a misconception. So who actually owns? I mean, one minute you own it, and then when you become a co-op, what's the legal structure? You sell it to your employees and yourself if you're planning to stay like I did for 35 years. And um each member has one share which means they have one vote on matters of policy. So they are determining the future of the company. They are not in any way managing the company. Well, John, if all the employee owners were on the board and you reported to the board, that is potentially a form of democracy, isn't it? Could they have fired you if they wanted to? Absolutely. Yes, they could have fired me. Um, it is democratic, but it's only in particular matters, matters of policy and that distinction between what is a management decision and what is a policy decision. And I I'll actually tell you because we did not have many models to follow. And I can remember times when I came to a board meeting and reported about a decision that I'd made and somebody said, "Wait a minute. You made that decision without even asking us about it?" And I said, "Yeah, that felt like a management decision to me. Let's talk about that." Because we had to craft where the appropriate decision-making responsibility led. These days, it's way more codified and simpler. And actually, one of the things that people love about worker co-ops is that they're relatively simple to convert to and relatively simple to operate. What about you mostly were doing consulting or whatever. I I got millions of dollars of inventory. I mean, what if a company is got millions of dollars of inventory, equipment, maybe bank loans? Doesn't that get comp who's taking responsibility for the money that has to be put into the company and signing on the bank note and all that good stuff? I mean, it doesn't sound like you maybe had to do that. What about a company with like mine? Why wouldn't John have had to do that? He had a construction business. Oh, I thought it was a consulting construction business. You actually No, not at all. Oh, no. Cuz you were Okay, so you did own a bunch of equipment. So, you go buy a tractor for 300 grand. Who's signing the lease? So, for example, right now I'm working with a company that is a construction company converting to a worker co-op. They have 60 employees, revenues um $15 million a year. They own real estate. They own a building that's worth about $4 million. They have $2.1 million in banknotes. And all of this is part of the valuation and part of the purchase price that the founder is selling the company for. The founder is making what the business is worth and the employees who are buying it are taking on the responsibilities that the founder has had so that in 5 years the founder will be able to fully retire. And let me just say something. I make it clear in the book that my own inclination um I love the structure of the worker co-op, but you got to remember that I lived it for 40 years. There are other forms of employee ownership that are equally important. Certainly the ESOP is far more widespread in the US. The employee ownership trust is um very new to the US and there are very few employee ownership trusts but is gaining traction quickly and in the UK it is the form of employee ownership and it has um a very successful and lengthy history. So there are lots of ways to think about it, ways to choose and certain types. No company's the same, no owner's the same, and different types appeal to different people. And it depends on your orientation and your aspiration. And my job as a consultant is not to tell people what they should do, but to figure out what is this company and and what what do you want to be and how do we get there? I just got the book yesterday. I glanced through it. I didn't read it thoroughly, but I got to tell you, it really is an honest, insightful, and most importantly, you weren't trying to sell anybody on anything, and I appreciate that. You weren't preaching. It's not a socialist book about everybody should own them. It really was a pleasure to read through that. You're just giving some honest and and showing the pitfalls of some of these things because especially ESOPS, I I spent two years looking into it and like I want nothing to do with it for various reasons. and you you kind of cover some of that in there. So, I appreciate that you're giving an honest appraisal of the thing. Well, I really appreciate that, Jay. Um I mean, I think if if we're going to talk about the book, probably should give a little context for it. Um will you bear with me? Sure. So, there are two things about the book. First, as context, from the 1930s to the 1970s, US labor unions helped to create a prosperous middle class by negotiating higher wages, a host of other benefits for working Americans. And during that time, wealth inequality declined significantly. But at the end of that era, the typical corporate CEO made roughly 20 times the typical worker. Today, that's climbed to 250 to 300 times. And if workers wages had climbed at the same rate as corporate CEOs, the minimum wage today would be more than $100 an hour. Now, we know that nothing like that has happened. And in the 50 years that I spent at South Mountain, both political parties left workers far behind. I think what I see around me, I don't know about you guys, I'm sure you see the same thing. American workers are desperate for those who will fight for them and level the playing field. And my feeling is that maybe they can find that right inside the companies they work for and the companies in which they've invested their future. So there's that. But second, meanwhile, today there are about 3 million American small businesses with employees with founders who are over 55 years old. And during the next 15 to 20 years, those businesses will transition in some way and trillions of dollars will change hands in the process. Now, some of those companies, as we know, will be passed down in families. Many will unceremoniously close their doors when they can find no buyer, leaving holes on Main Street. Jobs will be lost, but many will be targeted by strategic buyers and um what I call rapacious private equity. They may be absorbed and bundled and relocated and carved up, sold for parts, their mission and culture undone. So while many founders wish to preserve the values with which they began their businesses that they put heart and soul in for 30 years or more, their adviserss, financial planners, succession consultants, business brokers, accountants, attorneys, they know little of the employee ownership options available that can accomplish that. nor do the founders, nor do the 32 million employees who work in those companies. So my feeling is that employee ownership can reward founders for their time and investment and simultaneously reward the working people who have helped to build these companies. Amen. The book intends to inspire a different way of doing business that preserves mission and promises impact and longevity. That's the purpose in the message. So, let me let me jump in here for a second. You just spoke with a lot of passion, John. It I've spoken with a lot of owners who've gone down this road and are similarly passionate about the choices they made. Many people, as we all know, see this as potentially the future of business. Arie, who wrote the introduction to your book and who was on this podcast very recently, happens to share that view. uh people see it as an antidote to private equity, as a solution, as you were suggesting, to the silver tsunami, a cure for wealth inequality. But then there are just so few companies that have chosen this. And I'm I'm curious about why you think that is, but I want to start by getting Mel into this conversation. Uh Mel, we've spoken a good bit here about your succession plan, and I I think your thinking has had a lot in common with John's. You both wanted your business to continue in a recognizable form beyond you. You both chose to separate the ownership transition from the leadership transition. Did you consider any form of employee ownership? Yes, we did. Um, a number of forms. Um, although not the co-op. Listen, to me, this conversation is at the heart of the entrepreneurs's vision, the entrepreneurs's um manifestation of what they really want. this is the ultimate decision and I like all the options, you know, uh there's a lot of things I like about an ESOP that I don't know the co-op model as well. Um but there's things I like about even just sharing the ownership privately. There's, you know, the trust route. There's advantages to that. But what I like the most is the options. So for for me today, and I always say that for me today, it is going to remain a family asset. Um it is very important for me today for us to create a um a multigenerational organization that creates multi-generational wealth in the single black family that I lead. That's just important to what I believe in based on the history of the people that that uh raised me and the position I sit in today. For me, this is the right way. Um, and for my kids later, they may decide to do something else, but uh, everything we're doing is trying to keep this as a family asset for now. And, um, and we'll always consider other options as we go forward. You said you really like the ESOP option. What kept you from doing it? I like a lot of things about the ESOP option. Um, what kept me from doing it is it doesn't stay as a family-owned enterprise for us. Mel, I have to say to you that during the course of writing this book, I spoke to many, many business owners and some of them were familyowned businesses. Like one that just stands out to me is a company with 300 employees in North Berwick, Maine that has gone through six generations. So there are some of these companies that have lasted 100, 200, 300 years. And my hope for you is that that's exactly what happens to your company. But it's also important and I and and you obviously are thinking this way. The family doesn't necessarily want to keep going with them. So it's great to have options for keeping the company going beyond the family if necessary. And if not, that's fantastic. Yeah. You know, John, we met uh back in the fall, I think for the first time. Um so, you may not know exactly what we're planning here, but I agree with you. And um it's part of the reason I separated ownership from leadership. Um because we have a we're going to be privately owned, but we're going to be professionally managed in creating a incentive plan for the employees that work there so that they get a chance to participate in both the profit and the equity growth. um in this business is important to the longevity of having good strong leaders that are not owners are not necessarily owners. So I don't have any kids or family members working in our business at all today and I never have and I don't even anticipate that we will have but I am trying to make sure that they understand at the governance level at the board level their fiduciary responsibility to continue to um provide the governance that is necessary to have a thriving um multigenerational um business. You sound just like me. I love what you're saying. Yeah. So, you know, I don't think I I I don't think there's much daylight between what we aspire to have. Um, I think that's what I say. I love all of these options because I think they fit personality types. I think they fit your uh tolerance for oversight. Like, you know, the ESOP is a very very complicated model that has oversight involved with it and because it's, you know, it's got the tax advantages that it has. And so, there's a lot of different approaches here. And I like that option. To me, that's what I'm living for and that's why I want to start wanted to start my own business in the first place. Can I throw out I spent two years looking at ESOPS. I went to two out of town seminars and they did an excellent job of turning me off to it. They could have done a better job. It it was all about the people that were taking him over. There was nothing available for the business owner who was thinking of doing it. And let me just tell you my conclusion and tell me if you think I'm off on this. Number one, the tax advantages. I realized, wait a second, if I want to give some money to my employees and participate, I could bonus them out. That's deductible to me. I could put in their 401k plan, that means they don't have to pay tax on it. And as far as my own portion of what the business is worth, the fees are so tremendous that I figured whatever tax advantage I'd have is probably going to get chewed up in the 20, 30, $50,000 year to run the whole thing. And number two, after watching a couple of these webinars, these guys wear foxes and sheep clothing. They're saying, "Oh, I'm an investment banker. We frequently sell them after we do the deal." It's like a bait and switch. They sell you on the ESOP. You feel good about taking care of your employees and the neighbor and everything else. And a year later, they go and sell the whole thing out and everything you you you've designed to happen, poof, it's all gone. So, I couldn't I'm sure they work well for some companies. I've heard of some that have worked extremely well, but for me personally, that is the and I also don't need to answer to the government every I mean that that's not a goal of mine that I've got oversight of trustees and bankers and a bunch of stuff. I I I couldn't have been more turned off from it. I am with you all the way. It's the last thing I would ever do with my company. way too complex, unsafe in terms of being susceptible to a sale that you don't want to do. And um it's my last choice, John. It's unsafe, you're saying, because the next generation of leaders might even have a fiduciary responsibility to sell if they get a big offer. That's exactly right. But the flip side of that is that there are ESOPs that take many of the the attributes of co-ops and in fact some of them even call themselves esoperatives that to me are exemplary companies and these are incredibly successful companies like Revision Energy in the Northeast with uh roughly 500 employees that are just doing a terrific job. And the thing that worries me about what you're saying, Jay, is do you have a plan for what happens if things don't go just the way you wish that they were? I mean, one of my favorite quotes in my book is from Eric Rager. He's the founder of a great company in Chicago called Webbit Services, and he talks about various friends who have ended up selling to private equity because that was the only option they could find. And he says they took their sevenf figureure paychecks and to a person they're all miserable. They sold their souls and their employees got the shaft. And I call this the fat wallets and broken heart syndrome. And that's what you're talking about Jay when you when when you said these companies that just sell out. But we don't have to do that. Well, so I want to I want to I just want to go on the record here because you you guys I don't Jay you you a little bit more than John, but uh I have seen wonderful outcomes from ESOPs. So I just want to go on the record and say that. Absolutely. No, I know some people do. I sit on the board of a of a company that just went e completely ESOP. A small piece of my company is owned by another company. They happen to be an ESOP. I've seen wonderful stories of people retiring with millions of dollars of assets that they wouldn't have had in virtually any other business model you guys can mention because they've been in an ESOP that's been in a company that is growing and and their value is increasing. the situation you describe, Mel. I think we we've all seen examples of that and it's it's an amazing thing when you know somebody who's a frontline employee retires with that kind of nest egg, but I think it gets a bit of a misconception or even something that's oversold about employee ownership sometimes, which is the idea that it really is employee ownership. That's right. That's right. I don't know that ESOPs create employee owners. I would agree. I think you can treat your employees like their owners, but let's face it, it is a a glorified, you know, um compensation plan. Yeah, absolutely. But but hold on a second. But it is tied to the value appreciation of the organization. Right. Here's the bottom line, guys. I don't care what company you run. I don't care how it's structured. I don't care how it's owned. If you don't have a value appreciating organization, your employees are screwed. So, Mel, I I want to say that um it seems to me that we and I think we may be getting hung up a little bit with ESOPS. It seems to me that we all agree that there are terrific examples of ESOPs and there are times when ESOPs don't achieve what we wish to achieve with our businesses. And I want to throw out that, you know, we're talking about ownership, but ownership is not everything. And in fact, it's only a part of things. What we're all talking about is making great businesses that um are good for the communities that they work in, that are a force for good, that are good for the employees, that are good for us. And there are many other elements to that. It's not just about the ownership. There's another issue that I stumbled on in my company. Think about it. We keep talking about retirement and retirement and retirement. Well, first of all, 20% of people I I just went to my 50th high school reunion. 20% of my class is dead by now. And that's pretty much standard. 20% of people are never going to get to retirement. So my question is, you got the guy, the woman that works for you making $65,000 a year. Great. We're funding their retirement fund. They need money now. Whereas if I did my own bonus thing, I could say to them, "How much would you like to put in your 401k plan?" Oh, you'd like to take $10,000 of that and go fix your car, put braces on your kids' teeth, uh, fix your home. It It's all on retirement. And some of these people, everybody's not making $150,000 a year. Some of these people could use a little money as they go along as a bonus. And if you do an ESOP, I don't think that's an option. It all goes into their retirement. You just said, Jay, the one of the great arguments for a worker co-op and an employee ownership trust is that the employees are sharing those profits every year. Not when they retire, but every year. Great. How how does that work, John? So, it works different in employee ownership trusts. They they are completely flexible. Basically, they're set up as a trust to benefit the employees. And what that means can vary. In a worker co-op, um, at the end of the day, the profits are split between. So, a worker co-op can deduct a certain amount in dividends and those go to the employees and the IRS the IRS demands that you make at least 20% of that in cash. Most worker co-ops do a lot more, anywhere from 50 to 100% depending on their cash position. So, I agree that that that sharing those profits year after year is one of the great advantages. How much oversight is there with a a co-op versus like the 401k thing? It's like the government's all over you. I mean, it's like it's it's regulated and you got to have like I'm not exaggerating when I say this. I think what six different people you have to have an appraiser, I mean lawyer, an accountant. What's the story with a co-op? How much oversight is there? None of that. There is none of that. There are some basic regulations, IRS regulations that you have to comply with, but it doesn't cost anything. It doesn't require somebody saying yes, you can do this. So, it's a completely different animal. John, you were right that there is a danger we get too hung up on ESOPS, but I want to ask a question that starts with ESOPS, but I'm curious how it applies to the other forms as well. We talked about I think Mel kind of agreed with me uh and maybe you do too that ESOPs are really more of a retirement plan than shared ownership. Um and my question is well are they a good retirement plan? Because you know any business can fail. What happens if an ESOP fails? That guy who's got thinks he's got a million dollars waiting for him that million dollars can just disappear. If if it's in a 401k that can't happen. I mean you can make bad investment decisions of course but it's your money it's not segregated if it's you know waiting for you at the ESOP. Do you see that as a problem as well and how do the other forms deal with that? I do see that as a problem. Of course it's a problem. It's a problem for the employees when any business goes belly up. You know, just two weeks ago, a terrific company in Vermont called Gardener Supply, which um was an ESOP and for many years very successfully, and it went into chapter 11. And those people are just like you're saying, Lauren, those people um who thought they had all that money don't have it now. So that can definitely happen. But you want to, you know, you want to hitch your future to a company that you think is going to succeed. And if any company goes under, you lost your job. But if all your retirement savings is in a 401k, you haven't lost that. Absolutely. Yeah. And that's I think that's really important. In a trust that money is protected in a worker co-op and and in an ESOP properly run there should be money going into a 401k and let's just be clear it's not can on 20 years I don't know what the number is a good percentage of companies are going to go out of business I I just look at Chicago with the retail almost everyone when I grew up all the retailers I know in Chicago there's like one or two left out of I could list 30 companies that just went away one day. So, that is a real situation. And Jay, re remember what I said about the dozen co-ops in the US in 1987 that most of them still exist, have thrived, and have grown. Um, it's a much more stable form of business. If Jay were to do a co-op, how is that financed? If he's selling the business to the employees, what has to happen? So, there are several ways. So in my work and I heard you say this I think Jay I advocate for disentangling ownership and leadership do the ownership at an early you know in mid-career get that done that's the part that's transactional it's less emotional and it takes less work do the ownership stay in your company with a long runway to a leadership change and build that leadership capability. So, if you get the ownership work done, you've got the time and you can finance it yourself. So, most worker co-ops are owner financed over 10 or 15 years. Many also use financing from, you know, sometimes bank financing, but it's tricky that way. When we became a co-op, there was no co-op infrastructure in this country. There was one organization, the A group, that was helping people become co-ops, but there was nobody to finance them. Now, there are roughly a dozen financing companies that just do co-ops. They're nonprofits, and their goal is to help those co-ops succeed. So, you can do a you can do a mix of owner financing and fund financing. I have to tell you, I first of all, it was Mel that said he separated leadership from management. It wasn't me. Oh, okay. Yeah. I have to think about what that means. I have to tell you, never even crossed my mind to co-op. Isn't even on the radar screen. I'm very excited to talk to you further about it because I do need to do something and I'm still the family thing. I it my kids are not taking over the business. So, now I'm left with and I still want to go to work every day and I feel perfectly fine, but I I know I got to do something. So, I absolutely want to follow up on that and uh see what the details are because I'm not selling the private equity. I'm not I'm not doing it. I I'd rather, you know, I never realized this. When you're a retailer, believe it or not, you can make more money with a going out of business sale than you can selling the company. If you if you do the math with IB times X, whatever that X is, and you do what your inventory turnover is, a company my size, my business is probably worth about what my inventory is worth. So, I I can make more money having a going on out of business sale. and I don't want to have a going out of business sale and I want to keep my employees working. So, I do want to look into the co-op thing. I find it interesting that I've never heard about it. That is why I wrote this book. You are like so many other people. And my aspiration is that one or more of the methods in the book or one or more of the stories will inspire each reader to say, "Hey, that sounds like me. That sounds like that sounds like the business that we want to be. That sounds like our future. I'll take it. So, that's what it's for. Jay, one of the things that turned you off uh to ESOPS, you were thinking that maybe it would make sense to do start at 30%, something like that, and you could possibly do an owner financed version of it. But you thought about it and you concluded, wait a second, if I do that, my employees are buying that 30% with money that I would have had anyway. I'm in effect just giving them that 30%. Right? I'm giving them money to get back to me. But there's a bigger problem which I'm embarrassed to say it took me two years to think of this part. The cost of this are substantial. Like everybody says first year it's maybe 75 grand and then after that maybe it's 30. But if you're only doing 30% it's literally 3.3 times more expense. It's like you're not even leveraging it over the whole sale. So the math is horrible. 75,000 is really low to start an ESOP, right? And if you're only doing 30%, you're whatever you're saving, you're going to spend more on the fees than you saved in the So that was out the window. Just like I'm just giving them my own money to give back to me. Would that be the same case with a co-op? Um, similar in a way, Lauren. So, the diff the difference is that it doesn't cost a lot of money and it costs almost no money to maintain. The ESOP also has annual fees because of the the regulations that are extensive. So with a co-op, if you finance it and you take your money out, whatever the valuation is, you take it out over a period of time out of company profits. You get paid, but meanwhile, you have something that you never had before. And that is a fully engaged workforce who are working for themselves as well as working for you. So the chances for that company to succeed in in a greater way are large. So at some level, let's think this out. So if I if Joe Schmo, who isn't private equity, who's actually a normal business person that I think would take care of the business, he comes to me, he she comes to me and says, "All right, I'll give you four times earnings, okay?" And I get a check. All right, that would be one way out. This way you sell to your employees and you let them pay you out over time. Like, okay, I don't need the cash. This is really eye opening. And like I said, the part that's so interesting to me is the only co-op I've ever heard of is REI, but the REI is not a worker co-op. Really? So, REI is a consumer cooperative. It's owned by the people that buy stuff from there. There are a lot of kinds of cooperatives. There are credit unions or cooperatives. They serve 135 million people in this country. The utility cooperatives, those are different. They're producer cooperatives or consumer cooperatives. Well, worker co-op is a different animal because the workers are the ones that own the company. And you know, people ask too, are there marketing advantages to this? Well, that's a really complicated question. We know what customers and clients want. They want great service and performance. They want their expectations to be met and exceeded. Some have the perception that employee owned firms will do a better job of that in that and in that sense there's sometimes a marketing advantage. But the big advantage is in in terms of attracting talent. People want meaning in their work. They want a voice. They want to share the wealth. They find that in employee owned companies. Mel, you spoke highly of some forms of employee ownership. You thought about it. Did you form an opinion as to whether employeeowned companies perform better than other companies as well as other companies? Yeah, I'm not qualified to answer that question. Uh Lauren, to be honest with you, what I will say is that employee first companies uh perform better than others and I know employees feel when they are treated comp both through compensation and through development and through engagement in community, they feel different. They feel more engaged in the work. And so I will say an engaged employee clearly outperforms one that's not engaged. I just think there's a lot of ways to get there. Employee ownership would likely be one, but um I think there's some other ways to get there as well. Yeah, I I agree, Mel. When I sold my company, it was very familial. People were were great friends. People had fun. It was um there was the kind of engagement that you're talking about, Mel. And I thought that by becoming a worker co-op, we were formalizing something that already existed. I was so wrong about that. Nothing could have been further from the truth. People becoming owners, it means something. It means something to be able to walk in out into the community and say, "I own that company." So, there's an added level there. And employee owned companies do on average outperform on measures of productivity, stability, resilience, and what you're talking about employee engagement. Do you add all of the types of employee ownership models to to that statement or just the co-op model? No, all of them when they're done well. That's the key. And I think Mel, you're really talking about what the heart of the issue is is making great companies that um treat people well, engage people, and have open book management so that people can help to make the business a success. I would just add though as a business owner when you say engaged versus non-engaged, personally I would say make them more engaged. I believe my employees are engaged. And frankly, when I hear that stuff, it's insulting to me. It's insulting to employees, I would think, saying, "Oh, since I'm not an owner, I'm not engaged." So, I I fully agree. I I think they're more engaged. I can't argue with that. That makes perfect sense that they would be more engaged if they were owners. And I do believe on the marketing side, I got people working in my framing showroom that have literally been here for 25 years. I'm sure the customers would be thrilled. They have relationship with them. would be thrilled to hear that they're now part owner of the company. I do think that would be worth something, which was another appeal to the ESOP. What you've just told me is every single one of the things that turned me off with the ESOP doesn't exist with this. So, I'm extremely excited about this that this has all the good stuff and none of the bad stuff. It sounds like, well, I mean, that's extreme, but yeah. Tell me what I'm What could be bad? Give me the bad. What's the bad stuff? Um, you have to have that orientation. Um, you have to have a sense of trust in your employees. My biggest fear about becoming a worker co-op was that because the employees had certain um kinds of power that decisions would get made that would make this thing that I love become something that I didn't love anymore. Boy oh boy did that not happen. I have no cons. I have lovely wonderful employees that have been with me for years. It took me many many years to figure out how to do that. But I feel great about my people. My turnover is very very low. My key people have been here for 20 30 years. So like that's not a concern of mine. So so far so good. You are the kind of person that would make a great owner of a worker co-op that becomes instead of the owner becomes an owner. And um you just sound like the right kind of person. Jay, do you have Birkenstocks? I I could get some. I I but I'm not giving up hot dogs. I My first one I I swear my connotation the second I hear co-op is is you know the hippie thing. That's what I'm thinking. So So Jay Jay, you can eat hot dogs when you're wearing Birkenstocks, you know. I guess. All right. Good to know. It just shows you the tremendous potential out there. As someone who has been involved, you know, I've been reading stuff for year. I had absolutely, like I said, I thought REI was a co. I've had zero exposure to this. Jay, when you get a chance, read the read the story in there about Snow River, which is a small manufacturing company in a rural town in Wisconsin. And the owner um it had been there a long time, union employees, and the owner um said, "You know what? To hell with this. I'm out of here. I don't care about this company anymore. I want to go to Florida, play golf." And um the union actually told the employees that, you know, you could buy this company and become a co-op. And there was a lot of feeling, a lot of support for this because if that company had left this town, had closed down, it would have been tough for the town itself. And I can tell you those guys were not wearing Birkenstocks. Jay, you know, I hate to correct you, but I feel the need to point out that John actually isn't the first owner of a worker co-op to appear on this podcast. Uh, a couple years ago, uh, we had someone else on and I'm pretty sure you listened to it. Uh, we at least talked about it, but I think you dismissed the idea at the time. Do you remember who you had, Lauren? Um, I was afraid you were going to ask me that. Uh, I could look it up, but off the top of my head, I don't. It was a very small, very small firm in Oregon. I vaguely remember now that you mentioned it. And I think that was the problem. It was a very small company with just professionals working there. And I just I it didn't resonate with me. That's fair. Yeah. Yeah. Yeah. That I do remember it was very small and there was there was a handful of professionals which is extremely different than what I have. I got 125 employees. Everything from you know $18 an hour up to six figure people and it it just didn't resonate. Jay, there are worker co-ops that don't resonate with me at all. So, I mean, there are all kinds of variations and in any business type, I think you probably heard from one that just didn't hit home with you. And like I said, you hope that one one story will will make will make you say, "Hey, this sounds right to me." The the punchline here for me at least is father time is undefeated and if you want it to continue, what is the answer to the continuity of the business? And um again, as an entrepreneur, I think having an understanding the options is the point. And John, I'm just excited that you helped frame not just the the worker co-op, but other forms and and juxtapose the them against each other. I think it just adds a lot of clarity because the point is what are you going to do? And as an entrepreneur, I think we owe it to our employees to have an answer to what's next and cuz it's not going to be you. You're not going to be here the next year. No, I've been in limbo. I've been trying to figure out what am I going to do. You're the poster boy for the silver tsunami. No, absolutely. I'm not doing private equity. I'm not planning on going out of business. My kids are not taking over. I've been just trying to figure this out. So, today was perfect timing cuz uh never too soon to start working on this. You know, Mel, what's really interesting to me is that there we're in this period of time when you talk about the different methods where there's a tremendous amount of experimentation going on that is so exciting and there's a chapter of my book where I talk about companies like Apis and Heritage and Obron and Teamshare and these are cooperatives of cooperatives or in the case of uh Apis and Heritage they're using private equity to they're buying companies and making them employee owned. And I don't know, you know, which ones of these are going to be successful and which ones are going to take off and which ones are actually going to do what they say they want to do, but it's exciting to see this kind of experimentation. like one of them is buying companies like laundromats and tire shops, companies that never thought they would find a buyer at all. So, there's a there's a tremendous amount going on in this country today to help small businesses find different ways and new ways to elevate. Yeah. And I again, to me, that's the exciting part. And one day, you're going to collect and chronicle those as well. and they'll serve as new inspiration for another generation of people who are trying to find the answer to how do I grow, scale, add value for myself and for my employees. And as long as we're pursuing that question, I think that's the right question to be. But we'll only tell about the ones that actually work, Mel. Right. Absolutely. Unfortunately, we are out of time, but this is exactly the conversation I was hoping to have. My thanks to Jay Goulz, Mel Gravely, and especially John Abrams. John's book is from Founder to Future. Thank you all for taking the time and for sharing your experiences and thoughts. Thanks so much. And Mel and Jay, great to talk to you both. 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