Through The Eyes of a Business Owner

good morning everyone thank you for finding time to listen to our session which is through the eyes of a business owner why i chose an esop my name is keith apton and my background i'm a managing director i run a 10 person team in national practice based out of washington dc within ubs the name of our team is the capital esop group and in particular we work with entrepreneurs owners and operators have probably held businesses with enterprise value 10 million to 500 million in size helping them with pre-liquidity management and post-liquidity pre-liquidity planning trying to figure out the best options to go about selling a company whether it be selling to an esop or an outright third party and post-liquidity holistic wealth management to include tax estate and cash flow planning with us today is brian allen who is a business owner president and ceo of precision walls we'll introduce him in a moment and let him tell you a little bit more about what precision walls does and where they're located and who their clients are customers are and then i'm going to introduce ed renninger right now who is the ceo and president of ses esop strategies and one of the foremost top esop attorneys in the country ed uh thank you keith for the introduction uh so just a little bit about scs this is not intended to be an advertisement but but i feel like at least though a little bit of duty here to tell you what we do so we're an esop consulting firm that deals with small to medium-sized businesses to help them think through a whether an esop makes sense to accomplish their goals and objectives and if so to help them structure a transaction in a way that's most likely to accomplish those goals and objectives so we're really looking at the whole gamut of esop structures on from you know partial to 100 um from from being c corporations and taking advantage of 1042 in which case we often work very closely with keith and his team from ubs who we believe are some of the best in the business out there to also look into s-corporation esop structures um as well as publicly traded estops on occasion as well we have a team of eight lawyers and and three investment bankers that's all we do 100 of our time is help people with that um kind of before we did dig into the substance of the session i have to do the continuing education slide here which is that you are eligible to receive ce credit for the session but you have to be logged in under your own name you have to be signed in and you have to collect it through the nceo's google form and there will be apparently throughout this session at periodic times and i have no control over this so apologies ahead of time but there will be some polling questions that they ask you at various points and you do have to answer those questions in order to get ce credit so that's that's the intro great brian why don't you take the time to tell us a little bit about precision walls and where you're located what you guys do and what really makes you guys unique versus your competition okay uh we are a wall and ceiling contractor in the construction industry so we're a specialty subcontractor our customers predominantly are general contractors we have 11 locations throughout the southeast our home office is in raleigh north carolina so predominantly we work in north carolina south carolina virginia and tennessee lots of products and services we've grown those over the years but predominantly exterior interior metal framing drywall acoustical sealants exterior claddings especially wall systems uh movable walls mountable walls uh projection screens uh operable walls so anything around division nine and exteriors is is what we do we roughly have 1200 employees or so uh and that's us great um i know a lot of the companies we work with are intergenerational what does your dad think about the east top by the way he loved the esop and uh when i first after i got all my stuff together and went to him and asked him his thoughts on that he he loved it he loved the fact that we could actually uh over time help workers with a better retirement and put them in a better place when they go to retire so he was all for it and and how long ago am i correct your transaction was done last year tell me how how long prior to the actual sale did you as a family or you as a management leadership team you know plan on actually selling the company what was the process like you know when did you guys begin having conversations about selling the company tell us a little bit about that i'm thinking it's probably three years ago so we we got approached um i guess three years ago now from a private equity group and it was a good offer and so as as the person leading the company and and for the shareholders which um the shareholders were me my brother i got three i got two siblings there's three of us so we were the controlling shareholders my my parents were controlling the company with a small amount of shares so we had done some estate planning back in 2012 so there's really five shareholders and so i listened to the offer and it sounded really good and went down the road with them and the more i got involved with that situation and got down within a couple months of of actually finalizing the deal and decided that it just wasn't the right fit for us and through that process um we were looking out in the country to see if there was a strategic buyer as well instead of a private equity so i went out and found an investment banker and said if we're going to have an exit i want to see what's out there not just the pe group's offer and we were looking for strategic buyers and we found out that our industry a lot of the strategic buyers the people that we thought that were large enough to be able to purchase us a lot of them were esops you know i would say if in enr if we're in the top 10 and i would i would say five or six of the top ten in our industry were already esop so that got me you know pretty intrigued about esop so i started studying esops at the same time that we were looking for a strategic buyer sounds like you hired an investment banker can you tell us a little bit about that process how did you find the banker how many did you interview and you know would you advocate to to other prospective business owners that are in a similar process today to have somebody representing you to negotiate these these purchases from private equity or strategic buyers definitely you know it's expensive but it'll be worth it in the end to have someone that really knows the market and also you know understands how the deals go and it's it's new to you so you don't really understand all the different things that can happen to put the deal together and they've seen 100 deals so they can come up with solutions that other people have have put in place that you haven't heard of and so it can get you out of a bad spot so you know at first when i when i was looking at the investment banker i thought wow they're going to take a huge percentage of of this at least i thought it was a big percentage uh but at the end it's well worth it you want someone that does this every day if if you're going this is a big deal it's a once in a lifetime opportunity and you need to get it right yeah ed and i oftentimes like to tell clients you can't get out an eraser you know once you sell the business and you've agreed on purchase price and reps and warranties now you don't want to find yourself looking back two years later saying i wish i would have done this and so i i would echo that sentiment i know ed you feel the same way it's really important to have professionals in their respective lanes helping a business owner through this process and brian i want to go back to something you said earlier it sounds like you received an unsolicited sale an unsolicited offer to sell your company to private equity and that led you to entertain the offer and then you went out and interviewed and hired investment banker what led to your decision to hiring the banker that you chose and did you interview multiple bankers we interviewed three um and really i had i had heard a presentation from this company uh i'm in a vistage group and this company had come and spoke i don't know three or four years earlier in one of our meetings so i was introduced to them and and i i was really torn of whether to go with an investment banker that was from our industry that knew construction and subcontracting or someone from the outside and so i'm not sure that i made the right decision i chose to go with an investment banker that that did more than construction because i thought maybe the the net would be broader of of the type of buyers they could bring to the table uh again we weren't thinking the selling but once we started in this process i felt like that we should probably look at every option and so we went with an investment banker that wasn't necessarily devoted only to construction i don't know if that was the right move or not it's just the one we goes it worked out for us in the end uh that's that was the reason we chose them and brian just a quick question so you said that you you got the unsolicited offer was it it was the idea of getting liquidity at that moment in time is that kind of what drove the the thinking that this is worthy of exploring were there other dynamics at play there um you know i've got you know i'm the one that's running the business and i've got other siblings and you know we we've we've been very blessed and fortunate i mean you know we had really had a good run since i've taken over the business as far as in size and growth and everything and you know when you've got you know all of your family kind of jewels on your on your back every day after a while your stress starts to get you that you know every decision you're gonna make you're gonna you're gonna lose something for your family and i just kind of want to get out from under that and i was fine working for someone else i like my job i like to work and so i i didn't see an issue that i had to have you know i didn't mind working for someone else so and we had gotten to a point that i really thought we had an opportunity to really grow uh even more and i just didn't know if i wanted to put my uh family's assets at that much risk so i was looking for someone that would want to use this as a platform to kind of go more nationwide with what we were doing so i had big dreams on that from an employee's standpoint but i didn't really i was fine with risking my percentage but i wasn't i wasn't comfortable risking my brother and sister's you know future um plan was never to transition it may be to the third generation you know you know that's kind of what pushed me to an esop was exactly what you just said so um there's so many benefits of an esau but one of the things that happened is i'm in some benchmark groups and i've got some friends around the country that are in similar businesses and so i was really excited that we had a lot of owners and people that run these businesses that are similar size and a regional and and they're all about retirement age and i was in this group and i was one of the one of the i was obviously the youngest guy at the time in the group and so i wasn't at retirement age i'm only 46 years old and they're all you know a lot of my friends were in their mid late 60s and they're looking to to pass the business to the the next generation and i watched some of those happen and i thought i don't really want to be in that position or be that guy so for example you know my my parents got pretty lucky with us and i didn't know how lucky i was going to get with my kids my son's 15 my daughter's 13 i think they will do a great job but i did not want to do that to my team to put all my marbles on that my daughter or my son are going to be the right fit to run this business and so i did not i was really more the esop i chose the esop for our team of employees more than anything else and i thought that hey if my kids want to work here one day they can earn it just like everyone else and um in an esop situation that works perfect so i didn't really want to put i just wasn't i saw that happen and i saw owners making decisions and duress that maybe their son or daughter wasn't the right fit but they wanted out and wanted to retire so bad that they would envision it would fit and i just didn't want to be that person you know 20 years from the day so that was another um that what motivated me to to move toward a nissan it's interesting i see a lot of um i mean a lot of our clients are our family owned businesses right and and they they generally struggle with what's the right transition mechanism they could give it away or sell it for a deep discount to their next generation but but it has a lot of the negatives that you mentioned the other is to go out to the market which you ended up looking at and exploring to see what would have happened and you know honestly after that there's not a lot of options other than an esop so it's interesting to hear you talk about that context and and that thought process that went through you i've seen the same thing with with that fan intergenerational transfer um some sometimes it's it's forced yeah well the wonderful thing about my situation is i'm young enough i can work my retirement plan and uh you know i can work the next 15 years and i feel like you know i can help the esop hopefully get where we need to be and and whoever is the person to take my spot would have earned it you know through the employees and it won't be a birth necessarily it could be a birthright but i just don't feel like employees want to go to a company to where they feel like they've got a glass ceiling because of a number of family members in this business we've not operated that way in the last 15 or 20 years anyway uh and i didn't want to go forward afterwards ed going back to something you said earlier um you and i both run practices that are very objective by nature we're really agnostic to whether our clients sell to a third party or choose an esop but what we really focus on is empowering these clients with the information to make the right decision for them their company their employees and families what i really like about brian's story and i'm going to go back to this this sale to private equity that he ultimately walked away from is that brian really ran a dual track he looked at both options i wish more people did that so frequently find that people will hire a banker that will only take them to market to find a third-party sale because they don't understand esops or they'll just simply go to an esop professional that doesn't understand how to go to market and find a buyer and they're limited in scope to the options in front of them you know brian you did both and and we called it a dual track in our industry and i i think you benefited from that let's go back to the sale to private equity you know you had a pro you had an investment banker representing you you're negotiating a purchase price and an loi why did you walk from the pe offer before we go down the path of why you chose these tell us why at the end of the day it wasn't the right thing for you you know it was uh just so the one thing everybody worries about with a pe group is that you know they're going to they're going to sell you quickly you know they're going to keep you three or four years that's their reputation you know they might keep you three to five years and they're just trying to make some money on the company and flip it to someone else and so you know i had that fear and um you know if the money's enough then you as an owner you start thinking okay well i'm not worried about that as much but the more you get into it and you start to engage with them and learn their tactics and and the things that they were doing it just it became less and less of a fit for me uh it was like for example i wanted to increase margin in the year that i was working with them and and i've never and i'm kind of jumping around here but i've never in my life thought short term you know i've been very fortunate to wear every decision i could make it was long term i mean it's simple decisions like you know we need a new you know we need 10 new company trucks and you know so we're not thinking about profitability for this quarter or spending the cash for this quarter if that's what we need i don't want to end up with with 40 trucks that all need repair at one time i better buy eight to ten twelve trucks a year so i keep my fleet new well they don't think that way they they think that hey if you don't spit don't spend the money they're kind of more quarter to quarter thinking and that was tough for me during this time and and one of the biggest issues was that i decided i actually called and told them i said listen um i want to increase our margins you know i i we've got a we've got to improve the job quality of work that we're getting and um and and to do that i'm going to slow sales will slow revenues to increase margin and that's kind of my plan for this year and we're kind of through this process and they you know they kind of said okay and look these guys are super smart really good with spreadsheets they i learned a lot from them i don't want to take anything away from what they do because i was really impressed with a lot of the data they're very data driven so i actually have incorporated a lot of things i learned from them into our business now to be better so i learned a lot from and one of the things was is that we actually dropped revenues from year to year in a growth i know we're in a growth cycle the economy's been going well but we cut revenues about 20 which is a lot but the bottom line and went up 35 what i'm saying is we went we dropped revenues from one year to the next but our profitability was up 35 40 big number and so i thought they were going to be super happy with me and i started talking to them and they i said wait a minute you know we've added you know two or three million dollars in net income to the bottom line and all they wanted to talk about is their bank in california was not going to like the fact that the graph didn't show a growth curve like that it went like that and i was like wait a minute we don't none of us get paid on revenue we all get paid on profitability my our employees are getting bigger bonuses because of this i can take care of their families better it's not about revenue all the time i mean you can have a lot of revenue if you're not making any money we're all going to go broke if you want cash you're out of business and so that was the first kind of and it was like it was like a month and a half before closing where we had this big conversation well they took this conversation i felt like to leverage me so they came back to me and said listen by the way um we think we can still do the deal with the bank we can get them through this drop in revenue and i'm like wait a minute you keep talking about a drop in revenue we were more profitable and uh so i think it was a good move and they said well here's what we want you to do we want you personally to leave 10 of more of your money in so not the whole family the whole deal but me personally they wanted me to leave 10 of my portion in the business and i said you know for this and and you know real quickly i didn't like it but i didn't say no i just wanted to listen more i said well what do you mean by that are you talking about for a year because i put together a growth strategy for them um and it was conservative and um they said no until we exit and i was like i'm not doing that you know i i don't mind telling you that we're going to hit this revenue money number next year and this profitability number and if i don't hit that until i hit that you could keep the extra percentage uh until i hit that and so they wanted me and so that didn't feel good so all these things right at the very end started rackaging you know the right word for it but they started just collaring me down and i was just too short-term thinking and then i didn't feel good that they automatically have talked about we want you to be a platform we want you to grow the company we're gonna we're gonna put money behind you to grow this company and then in the last couple months they started talking about their exit you know they hadn't talked about an exit much before that so all those signs long story short i just decided it wasn't a good fit not only for for me running the company but for our employees going forward i wanted to be able to keep everything the same and that's a great thing i love about esop is that i continue to run the business we can keep our culture the same our mission the same our values the same no one's come in and said only thing that people have said the trustee anything else banks is we like what you're doing keep doing it they haven't come in hey we want you to change and and so that's a wonderful thing about esop is you can keep a lot of your your values missions and cultures and strategies the same which has been great for us so the level said at this point you've got into the trenches you've got to know private equity you've got to know what would be your new partner and it didn't feel right and that's ultimately why you pivoted to then move towards the esop strategy let's let's go down that path how did you go about getting educated on esops and all the options in front of you before you actually decided to do an esop walk us through the education process so i obviously read a lot of stuff on the internet just like just like a lot of people would and um so then i started went to find companies that were in our industry in our business that were already esops and so fortunately i found two companies that were similar businesses to i or to us throughout the country that allowed me to talk to them i interviewed the uh in one particular company uh they were great to me they i interviewed the owners the current president two of their general managers uh a superintendent a project manager and a foreman and really they've been a they had been an esop for 16 years so i got a really good perspective of um and also i was able to ask questions like okay what would you do differently looking back you know what would you do differently and so that was awesome what they loved about it what they want to do differently so i really learned uh from a from a company that was actually an esop and then i called around uh two i think i had three other companies i talked to that were outside of our industry that were esops so i got some information from them and then i found uh a couple of um other investment bankers from my current investment banker because once i called off this deal i didn't really have to hire the same investment banker again to do the esop so i went out and interviewed other investment bankers that had some experience in esops and so i got two presentations on esots from outside investment bankers now i ended up going back to my same investment banker for several reasons but that's part of it i'm trying to think of some other research i did but that was most of the research i found keith keith was an incredible expert he was awesome through the whole process i'm trying to remember how i was introduced to keith but keith was one of the smartest guys i'd met on esau and then after that it's real so the next most important person maybe more important than investment banker is the attorneys and so then i wanted to know who were the best attorneys so i called around keith gave me three names uh of who he thought were experts in the esop game and i called um a couple of it was one other investment banker who had just done some transaction with two companies and they gave me those two attorneys so i interviewed three attorney firms and ended up with ed and uh can't say enough i think ed's been incredible his company you know they've been awesome so uh i got really lucky with some awesome advisors is what happened it made the process really easy and side note we need to do more of these panel conversations with brian for sure yes thank you brian it's too kind it's very thoughtful brian but it's easy to tell so it's been awesome so so let's let's stay on that that education process so you did two different things there that i i think were highlighted a you you called existing esops both in your industry and outside of your industry do some diligence on what worked what didn't work what they would have done differently to understand it going back to our title through the eyes of an actual business owner and not just the professionals and then it sounds like you surrounded yourself with a really good deal team to get knowledge whether it was your investment banker myself and ed and others to help you along that learning curve let's dig a little deeper so now you you've got a lot of information on it um i just know from the benefit of ed and i working with you you really put pen to paper on all the options let's talk about that what options did you explore and what led you to make the decision of the way that you wanted to go about structuring your old series up for your company give me give me more on what you're looking for there as far as i know i know at one point you you were you know challenging everybody saying i i want to make sure i get this right and do i want to do a partial sale do i want to do a 100 sale how long do i want to work as a company do i want the company to have the immediate tax benefits of the s corp and you looked at the tax savings that 1042 provides and every scenario is different for every owner but what ed and i always appreciated is you know you weren't going to make a decision until you had turned over every stone to look at what it meant for you what it meant for your family what it meant for the company and it always came back to the employees at the end of the day i can't tell you how many times you said during the process i'm not going to put my own self-interest ahead of what's right for this company and what's right for the employees moving forward so what i'm going with my question is you know what what led you to your decision in the process of the evaluation of different options that the esop provided well um i know exactly where you're going now so what i will tell you is that starts with having a good deal team because i had all these questions and i wasn't very knowledgeable about the ins and outs of all the decisions you can make on the esop so i can't stress the importance that you've got to get someone um with a lot of experience with esops and every attorney firm is going to tell you investment bankers going to tell you they know about them but you know it's like it's like it's like if you were going to have surgery on your arm right you everybody wants to tell you it's top surgeon well the question i want to ask them is how many surgeries are they performing on that every week right i want the guy that's done 100 i don't want the guy that has read all about it and supposed to be the expert does all the presentations i i want to know and practice how many he's done and and so that really helped but there was a lot of decisions and and you could take an esop lots of different ways and my thoughts on it were is that what got us here was the company and the company is the team is the people without the people we don't have a company we can rent all the buildings we want but the company is the people it's like you have someone that's that's that's uh if you have someone on the team that's stealing from from the company they're not stealing from the company they're stealing from us you know it is hurting us as a team and so the thing is is that you know there were a lot of ways 1042 that is an incredible opportunity and i'm i chose not to do it but it was a really hard decision because it is an awesome opportunity to save a lot of taxes for the shareholders it's it's a it's a great thing however my concern was is that i felt like it was better for me and my family but not long term is good for our employees now that effect is it might be okay and end up equal equal but i was really concerned that um we we were gonna we were gonna pass out too many shares too fast and ride of shares for future employees and i just thought that the the deal was was a little too sweet for the shareholders and and not equal enough for the employees so i chose not to do it because i thought it was it was you've got to keep the generator going and so you need to make decisions that keeps your company uh afloat for the next 10 or 12 years and i was trying to make sure that we were putting them in the best situation going forward to be successful and i didn't want anything to do to hamper that so um not that 1042 did i just thought that it was uh i just i just chose to to to take the route of making sure that the employees would have a touch better deal in that situation than the shareholders yeah and let me let me see that out a little bit keith if you don't mind um just to to give a little technical background on what the differences are and why that why what what brian decided matters there at the end of the day if you're if you're effectively an s corporation and you're 100 owned by the esop what you've created is a structure where the company doesn't have to pay tax because it's an s-corporation but you also don't have to pay tax at the shareholder level because you're owned by a tax-exempt trust on the other hand if you're a c-corporation which is what you have to be in order to do 1042 then you have a structure where the company itself has to pay tax on its profits and there's some tools and techniques you can use to try to drive down taxable income but those tools and techniques have some negatives that come with them the benefit though from being a c corporation is the selling shareholder can take advantage of that code section 1042 provision which which which permits the selling shareholders to avoid or defer paying capital gain on the sale to the esop and ultimately if structure properly even eliminate that that capital gain event so there's a there's a there's always a tension there between the c and the s from a shareholder company perspective and and um trying to make an informed decision in light of all the facts and circumstances is one of the goals of trying to structure a good esop transaction and it was easier for us to make that decision to stay an escort because i had so much basis in the company so the tax benefit to us on the entire cell was not as strong as it would be for most companies so it was a little easier decision for me to say no let's um let's get all the tax spending i mean that's the greatest thing what you just said is one of the greatest things about an escort is the fact that if you're an escort and we decided to go 100 employee owned my thoughts on that were why have two of these it's very expensive to do this deal if you're if you're going to eventually be 100 employee-owned it's a lot cheaper to do it once than three or four times so we decided to go uh a hundred percent employee owned out of the gate and so what that means for the company is that the company stops paying federal taxes and in most places in most states state taxes so you can end up paying the shareholders off faster and getting shares to the to the employees because basically the employees end up with an incredible retirement plan for free because the government is basically going to pay for that retirement plan for them the way i look at it over the next 10 years so the company is bought by us not paying the government taxes we're taking that money basically every year and paying off the shareholders for their shares and as that happens the employees get more and more of the company they actually get all the company up front but they get the debt paid down so they get more and more equity in the company over 10 years and basically the government ends up paying for the company for the employees and it's an it's really a retirement plan and that's you'll have to work really hard to make sure spend a lot of time with our employees since we've done this to make sure they understand it is a retirement plan and it is to make their retirement more comfortable uh going forward and i'm really excited about that brian how has the esop been received by both your employees with your employee communication that i know you did a bunch of different breakouts as well as how has the esop been received by your clients um you know fortunately or unfortunately and i would say unfortunately a lot of people don't know a lot about an esop so it's been received really well so the answer is so far with our employees and even our customers it's been really good however you've got to educate them you know what you're going to find out is a lot of your employees don't even really know how this thing works and even you know they just don't know anything about it so it's really important that you take them very very basic and in a simple form through exactly how it works and how they get shares and so we did a lot of that i think i've done 22 presentations since october myself and i traveled to all the locations and met with every every employee in groups and and you say well that's a lot of time but hey you know this is our future i need these people working every day like employee owners to make us the best in the industry and the only way i can get them to do that is to educate them and i didn't want to leave that up to someone else and i wanted to hear it from me and it's going really really well uh at least at least i'm hearing that it's gone really really well and i've already decided that we're going to do that every year to a smaller scale but i think that i've got you got new employees coming in we've we've put in new employee so i'm bringing all new employees to our home office in raleigh and i'm going to do that same education every quarter uh for new employees how many employees you have brain we've got roughly about 1200 employees and so i think that i need to do it once a year at every location just as a reminder because the more i can get people to understand how this works the more they're going to help our team be successful because from here on out we're working for our retirement and if you think about it you know i've really spent a lot of time with our field employees because field employees you know they want to teach someone but you know it's kind of you know i don't know if i want to teach them all my make them as good as me because maybe they'll make more money with me and so i'm trying to cut through all that guys listen your job is to educate everybody on this team to be as good as you at what you do why because you want two people working for your retirement not just yourself everybody you see is working for your retirement we want your retirement the best it possibly can be the only way we can do that is to work together as a team to get smarter better faster more efficient and treat our customers like kings and queens and so i'm trying to spend a lot as much time educating i think the more people you can get in the game that understand the game the easier the game is to play and the better you get at the game so i have taken it upon myself and our team's done a good job as well i just i just feel like we need to do a really good job making sure that everybody on our team understands what an incredible opportunity this is for us but it's only going to be as good as we make it and we've got to get out of the shoot and get it done well so we've been really focused on the education brian if you looking back at it there's a lot of things that have worked in this up to date you had a process you hired a banker you explored your options to sell to a third party or do an esop before committing to the esop you did a tremendous amount of diligence uh with a team of advisors as well as talking to people that were actually in the community with existing maturity stops to become educated as to why this made sense for the company and appreciate you sharing all that you know one one thing i always like to ask business owners that have actually had some time now to look back at the deal is what would you have done differently you know there's a lot of positive things you have done but is there any advice you'd share other people that are currently listening to this that were in your seat a year ago is there anything you would have done differently both on the esop transaction but more importantly on the process of pre-liquidity planning going to market and setting yourself up at the personal level for a sale to to a third party or an nissan um you know again i was pretty fortunate to have some great advisors so they didn't let me make too many dumb mistakes uh you know the only thing i might do differently is i might have i might have negotiated or or done some things differently with the sars that would be the only thing that i feel like that if i knew what i knew now i would have done things some differently with the sars program for our key staff let's pull a little bit of that change that but i would have done it differently out of the gate i think so let's pull a bit more out of that comment what did you do and what would you have done differently with the stars so um well i tried really hard to do everything i could to get it where we needed to be but i really didn't know enough that i could push some levers differently um but basically you know just like with any cell you know they want to see a forecast and and the thing with me and it's just for our company and probably my personality is that i like to surprise people with good things not bad things so i'm very conservative when it comes to forecasts and uh that's why i've got good bankrupt i feel like our team has great banking relationships because you know we usually under promise and over deliver on what we put out there and so that isn't always great for a cell your investment banker is not going to like the fact because what it is is they're they're they're coming up with this price based upon a forecast and so um you know i wasn't very good at the forecast because i have a forecast to make sure that we can hit it versus stretch right and um so we put the forecast together and i did a forecast and you know if we didn't have a downturn and then i did a forecast if we did and and so i grew up in the construction business you know downturns happen it's not it's not if it is when and you need to be preparing for and i will tell you that if you do a good job preparing and always ready for a downturn you'll stay pretty successful in this business because downturns give you huge opportunities to win but you got to be in a position to use them to your advantage so you can't spend all your money in good times you need to have cash to be prepared for a downturn so i put together you know a downtown scenario a downturn scenario and also an upturn scenario and with that um the the people that evaluate the company and come up with the the value of the company through the esop transaction and then your trustee they want to put together something to incentivize your key people and that's usually a sars program and um i just thought the sars program that we put together originally was a little bit aggressive because it wasn't kind of based off my conservative downturn upturn plan it was based on no downturn and i just didn't you know that's tougher to make in the construction industry now so far we're hitting the numbers but if we you know with this coved 19 situation it could be a little tougher next year to hit those numbers and i was just trying to get the best deal for my my leaders and what they were doing and you know you know we'll be able to renegotiate that some but that's the only thing that i wish i would have it's really not that big a deal i'm making a bigger deal than it is because it's working for us but i just wish i had to spend some more time on the sars program but outside of that you know again having the best advisors um get people that's done this a hundred times and you're you're going to be in a good spot right so let's let's tease out the tsar thing a little bit and kind of talk about its theory on on incentive compensation because it all has to work together right you mentioned several times brian at a retirement that the esop is a retirement program that's a long-term incentive plan for all of your employees um that doesn't theoretically do anything to deal with short-term incentives what you need to do on an annual or maybe a medium-term basis to incentivize not just your key employee your rank and final employees but also your key employees to perform and then there's also this theory out there that the esop itself um because it's so long-term and because it's so based on on broad-based participation which is a good thing that that it it may not be the best tool to incentivize your key management employees because they're they're in it the same as everyone else and so the theory behind a soros plan or some other form of you know equity compensation plan synthetic equity compensation plan for management is that you can create an additional tool beyond just the esop that can drive performance and it's always a challenge in coming up with a structure because you're making decisions today trying to think about what impact that's going to have on performance over the short medium and long term to come up with a structure that drives that performance and alliance interest in the right way but but sometimes you don't have perfect information right and that's always the challenge and structure but that's the theory behind it try to come up with a program in a package that is going to incentivize your key management employees and give you something to hire key management employees to come in that's right that's right and we had a synthetic structure already and we still have that in place for that short-term incentive package for our leaders and this was just an add-on and uh i'm making a bigger deal out of it it's actually fine it's working we're hitting our numbers it was just uh when it when you when you're in the construction business and we're all in it and i've got my team together they understand the ups and downs of construction industry when you look at the sars program that we ended up ended up with that looks like this and doesn't think about a downturn you know i just felt like that it could have been a little more motivating to my leaders to look out five years and say you know what we're gonna anticipate a downturn next year and then we're gonna we're gonna drop in revenue we're gonna buckle down and get our stuff together and then we're gonna start growing again and i'm used to being able to get with our team and say okay here are the goals right this is if we don't have a downturn this is what i expect if we do have a downturn here's our plan and i wasn't able to do that you know out of the gate with the sars program now i've got a great trustee so we're working on that now and we're putting together that exact plan that i wanted to show a downturn and then up so small thing i didn't want to make it a big deal but that would be one of the things that i'd look at doing differently brian you you mentioned earlier that you thought about um a partial esop a little bit and and dismissed it for for a couple reasons i think the big driver was you know the cost and expense of going through another transaction were there any other drivers there and why you might not have done a minority esop or sell a minority amount of the stock yes um so it was taxes right so if it's an escort we're an escort so whatever you sell to the esop that's 40 100 that is what taxes you don't have to pay and so the concern and this came from uh the company that i spent a lot of time interviewing about esops they started off with like a 30 e-stop then they went to a 50 then they went to a 70 and now they're at a 95 and when i talk to the founders and the owners the one regret they had you know uh was the fact that they wish they'd have done that sooner because they always had a tax issue at the end of the year they had to figure out how to get the money out of the company to pay their taxes because as we own as an s corp we have the company basically we earn income and the company gives us the distribution to pay the taxes well that gets a little more complicated with an esop and i didn't want to go through that and then the other thing they told me was that every time that step they sold more they had to get a team together it cost them more money to put that together and looking back on it they just would have went you know 100 east off out of the gate now the other thing that you're going to hear because i heard this from other people and what i will tell you the the three or four cfo owners that i talked to that said what i'm about to say what i learned is they never really got in to an esop and really studied it because what they said didn't make a lot of sense but they really believed it and you know it's hard to challenge someone when they well i just was learning so i was listening but i had i had two cfos both tell me that they decided to only do a 30 uh um esau because they were worried and the owners and the presence of the companies were worried about a lack of control if they went 100 and that makes no sense by the way um there's not really a control issue it could be 100 and the reason i say that is that you know the only thing that goes to a vote outside of your board and outside of you running the company as the ceo of president is if you were going to sell the company pretty much you as the president of the company you as the board make all decisions you don't just do an esop and then you know 1200 employees get to tell you what to do every every year and in my presentation to them i said listen guys you all are now employee owners right but i don't want you going to job sites tomorrow threatening to fire everybody the management staff is the same the leadership staff is the same the decision making is the same so i think that the people i talked about worried about control and i'll say something else about control you're your trustee if you pick a really good trustee they're there to help you and they're there to make sure that you're in compliance and that you've got a good plan and you're doing things correctly they do not want to run your business they want you to run your business so actually in an esop situation if you're doing a fairly decent job as a leader they don't want to get rid of you they want you to keep doing what you're doing so i don't think there's any difference in control from a 30 esop to 100 esop and in the six months that i've been a esop or eight months however long it's been now i haven't seen any difference in control my job is to do the best interest in my team to make them successful that has not changed before nisop or after nissan that's that's a great point um one last thing i'd like to add on the conversation ned that you teased out on the sars is warrants you know brian was there focus consideration and what was your perspective on the warrants and how are you using them so the way we ended up with the warrants um and uh is that you know the warrants are the warrants are to make sure that you do a really good job over the next 10 years hopefully putting the team in the right spot as the previous owner so to speak so the warrants my job is to do everything i can to make our company successful over the next 10 years so that i can make those warrants more valuable and in our situation as i said i had a brother and a sister and my parents and and my dad who started the business so they wanted the warrants uh to come to me and so that's kind of my incentive to stay and make sure that the company is stays successful and that's a wonderful thing because what it does is especially for my siblings who aren't involved in the business as much is that my job you know the way we did ours is we had for ourselves we got 40 right and then we've got 60 on the back side so we will get 60 of our money over the next 10 years and so the warrants kind of incentivize me to make sure that the shareholders get the rest of their money and also that i put the team in the best position we possibly can 10 years from today to keep growing the company continuing the success as best i can and so it's pretty motivating because you end up earning a certain percentage of the shares back um and and they're as valuable as you make them you know 10 years from the day so you almost feel like you've got some ownership that you're chasing back again after you sell and so that's that's an exciting thing it could be worth zero or it could be worth a lot and it's up to our team to make that make that happen i know we spent some time talking about this prime but there's some neat strategies that we've actually kicked around to the two of us that a lot of owners are able to take those warrants and use it as an estate planning vehicle to get it out of their estate while they have nominal value and you have all that appreciation from the hard work that you and your management team and the employees do so the future appreciation and value of those warrants can be set up in a trust outside of your taxable state and that's something again that that was of interest with you from prior conversations we we've we've certainly covered a lot um you know the topic of this conversation this this session was through the eyes of a business owner why i chose an esop and you you really hit on some great points before we wrap up in summary just going back to that topic uh is there anything else that maybe ed or i have not asked that led to your decision of why you chose an esop or any other closing comments that you'd like to add so if you're considering an esop you know the first thing you need to have i think is you you need to have um enough payroll enough employees to make it work and the first thing i would do is i would hire someone like an ed uh to do um just a feasibility study you know does it work for your company do you have enough payroll to make this work um and i think that i don't know what the minimum value would be but i would think if you think your company is worth at least five million or something you know then it might work if you've got enough payroll but the payroll is a big deal because that's how you figure out how to get out of the federal taxes to end up to pay for it and if that works uh there's really not a lot of negatives because so i will tell you some negative so one of the negatives with esau is you do need you probably will have to wait a certain amount of time for all of your proceeds right so that's different than a sell or strategic sale might not be much different than a private equity cell if they've got some call back or they've got some earn out or whatever but you're going to have to wait so you might get 40 of your money up front and you'll get the the as the owner 60 over you know eight ten years or however long it takes now the the the cool thing about that is that you do get interest payments on that weight and you get warrants so it is if as long as you continue to run things well and the company do well you actually will make probably as much money as you put it into a pretty safe investment so if you look at it holistically is not much of a negative and if you get to continue to run the company the same way you've run it in the past and nothing changes about your mission your values your culture your strategies i mean that typically doesn't happen when you exit a company so those are the big positives and the other positive is you get to create an incredible retirement plan for your team your employees your people that the federal government basically over 10 years will pay for you because esops are non-tax when it's an escort now you think okay how how is the government doing this and i think probably the one of the reasons they're doing it is because you know they're trying to get more people to plan for their retirement without having to rely on social security so they've been fairly positive on esop since whenever they were i think they were in came out in and the other great thing about it is it doesn't matter which side of the political spectrum you're on you could be a republican or a democrat or whatever they all love it right so republicans love you know not paying taxes and the government not taxing us more well what's better than an esop where the company stops paying taxes right and and and the employees get to buy the company with the government money so the republicans love that the democrats love it why because it's a transfer of wealth it's a transfer of wealth from my family which there's five of us three kids and two parents to 1200 employees so they love that we're actually going to basically take the the money we're paying taxes and let them pay us over 10 or 12 years to buy this company and then the employees end up with a retirement plan so i don't think it's going away i think it's in the right situation i think it's the best way to exit but you just need to see if it's the right situation for you so if you're interested i'd start with a feasibility study does it work and then go from there yeah that raises an interesting comment brian so so i have a slide up here that kind of talks about the process you know from a to b and how long it takes and we generally use as a rule of thumb you know 180 days from the time you're thinking about it when you do the feasibility analysis the transaction studies um until you kind of close the transaction does that fit with you was that a bet seem about right to you yeah i think i think we were a little quicker than that but i think you need to think six months um but i think ours was faster than that only because i had already put a lot of this stuff together you know for a a private equity group or strategic sale so i was probably all the due diligence stuff was pretty much done for me i can't remember but i don't think ours took more than about four months i think yeah that's about right three to four months so it's pretty fast but i think six months you can get it done in six months yeah and so the big hurdles right is that the feasibility then you need to find money because it needs to be financed which means you need to find a lender you need to hire a trustee and each one of those is its own little process talk a little bit about how you went through the kind of the financing and the trustee process yeah so um you know you could do it without an investment banker so you could uh so what where the investment bankers should earn you the money is going and finding the financing right that they're they're negotiating that financing if you feel like you're really good at negotiating financing with you and your attorney you could probably do it without an investment banker but i would probably use one if they're really good at negotiating the financing with banks they're going to be well worth it and then the second thing you need to do is interview trustees right i've got getting a good attorney on first that'd be the first thing i would do and then they could help you find these other people uh and then when you get to you're gonna interview trustees i would interview at least three trustees um and then you need to you know that's gonna be a gut call they're all good there's a lot of good trustees out there just going to have to feel you know figure out who you feel most comfortable with um and then after that the attorney kind of takes over from there and investment banker goes out and it it kind of moves pretty quickly after that right interview processes were you surprised by how much paperwork there was in this process i mean you would gone partially through a sales process before so you knew how much you needed to generate from a diligence perspective um a lot of people haven't done that so my guess is they may be surprised by that but in addition to that there's there's documenting the whole transaction putting all the paper together yeah that's why you need a good deal team there is a ton of paper because you're trying to document everything that you did everything correctly and there is a lot of um you you're going to need you know either a good accounting firm to help you or if you've got a good controller or a good cfo fortunately i had a great cfo and we it could really get this information together but it's no different than selling to the outside i mean you know you're going to get um you know someone to come in and value the company an outside firm and it's really the numbers are very similar you know what you're going to get for a total sale value enterprise value from an esop to a strategic or private equity group it's really a private private equity group it's very similar um i i wouldn't think oh i'm going to do an esop so i'm going to have to take less for my company i would there there is a thought out there like that and it's wrong that is not the case um it could it's it's at least equal in my opinion or at least in my experience it it was equal to what the other office were if not you know definitely on the uh private equity group right fair points so i listen i have no other questions i i know technically there's still more time left in the the session but i think if we leave it open at the end you know maybe if people when we do the live session next week maybe people have some follow-up questions um so so keith did you have anything else you wanted to get out there i did mess up in the beginning i was supposed to talk about how we get um ce credit maybe maybe i should go back to that slide real quick and hit on that yeah we can always and i don't think we need brian for that we can reintroduce ourselves and talk about the ce and kind of splurge it together but no i i think the content was great um brian thank you for having a candy conversation which is what this really was and you told your story everything from your parents starting the business to stepping in and running it what i really appreciated hearing is part of your rationale of selling was not not putting your employees in in the situation of having the pressures of you as a parent having your two kids come into the business which is very different than how a lot of our clients view things a lot of our clients do two things they're thinking about how to save money and taxes themselves i.e 1042 and they're thinking about how to preserve their own legacy by having their kids come in and run and own and control the company and they're very very motivated from their own interest and what i've always appreciated from you is your vision you are very much forward thinking your leadership but you truly are putting others interest ahead of yours and i thought that was very clear in your story of thinking about what was right for the company versus yourself i.e you're willing to pay some taxes at the personal level to put the business i.e your words the generator in the best position possible and you also thought it was best for the company to not have them pigeonholed to having to work with your two kids coming into the business but you still have the option in 10 years when you're still there i'll bring your kids into it so i i just want to say thank you it was a candid conversation as we knew it would be it was informative it was objective and you went through all the processes of selling to a third party private equity and walking away from that why you did it surrounding yourself with a great deal team to get educated doing your own diligence and and i'm very confident that those that are listening to this will get a lot out of so i just want to say thank you thank you yeah as well uh sounds like i did a lot i didn't do very much if you again if you just hire the right people that are experts they'll make you look really good so that's how i feel i feel like you guys made it really easy for me through this transaction so it's been awesome to work with you thank you brian okay all right i'm gonna pause the recording and thank you all for your time one second here