What’s in It for the Owner? A Skeptical Conversation about ESOPs

[Music] hello everybody welcome to a 21 hats conversation thanks so much for joining us i'm lauren feldman your host and i am here today uh to talk about esops with uh jim cobb of triad components group in san diego and jeff taylor of crafts technology in chicago both of whom have implemented esops and with jay goltz of the golds group in chicago who isn't sure what he wants to do is kind of interested has a lot of questions and we're gonna go through his questions as well as yours if uh if you have a question feel free to start loading up the chat box with it we'll try to get to as many as we can but let's start jim i'd like to start with you tell us a little bit about triad what do you guys do uh how long have you been doing it and uh when and why did you go esa so we've been around about 30 years we manufacture fuses circuit breakers and switches mostly for the automotive industry uh as well as electronics and things like that so we've been doing that for like about about 30 years now and we have 20 people here out in san diego california and our revenues are somewhere in about the 10 million range and when did you go east up we went east up about two years ago excuse me and the real reason i went because i'm uh 60 years old this year and i wanted to find a way to i read uh beau burlingham's book uh finished big and uh was it was a really impressive to me and and put a lot of things in my mind some ideas but the real reason was i wanted to take all my chips off the table but still work as long as i want and remain and i keep absolute positive control of my company and not hand over control to anybody else so i get all my money out of the business and i can keep control with the business until i want to retire 90 years old if i want i can see from the way he's shaking his head that jay has questions already jay hold on to those questions controlling [Laughter] it's very easy to bait you jay i know jeff taylor tell us about crest technology oh first of all thanks for having me on here lauren i really appreciate it uh crafts technology 127 year old manufacturer of specialty diamond and tungsten carbide and ceramic tooling make all kinds of things for the medical industry a lot of aerospace can tooling cutting diapers whatever cutting tools and wear parts really high precision wear parts too so the company was bought and sold many times over that 127 year period by large conglomerates people like carpenter steel even once phoned crafts technology but it's still uh for that that whole time it's still been continuously operated as this specialty niche manufacturer so i came here about seven years ago day one for me was the first day of the esop i had actually worked with the principals that were running the business and they were in their 70s and 80s and they wanted to retire and then they also wanted to sell the business they had looked for a couple suitors or a couple of uh prospective uh buyers and then they had even approached me at one time of possibly buying it but uh i didn't have quite the capital i needed to buy it so uh we come up with a different plan and that was to do an employee buyout so i came in to lead an employee buyout and uh move into the ceo role in the succession plan from one of the principals i'm sorry i know you said it when was that that was seven in january of 2014. okay so you've been doing this uh for seven years now right got it all right jay what's your first question okay um i know very little about the whole thing so i just have two basic questions one is where's the money coming from to buy the company um and what's the upside to the owner for doing it well i guess three questions and then what's the upside for the employees necessarily but the first one i i'm trying to understand the math of this where's the money coming from jim why don't you take that first because you did it as an owner jeff uh did not do it as an owner um let's start with you it comes from two places jay the first time place it comes from is i was making a contribution of three percent to their 401k account um and instead of making the three percent let's just say for sake of argument i have a payroll of a million dollars a year that's 30 000 a year that i would be making into the owners or into the employees accounts on behalf of the company and so they would use that thirty thousand dollars to buy a percentage of the company the secondary where this comes from as they get percentages of the company a percentage of the profits now flow to the esop trust the and and the esop trust does not pay any taxes on it so we would normally as an s corporation be making tax distributions to uh the owners myself and and two other individuals and we would then um use that money to pay our taxes from from the s corporation well the esop doesn't pay taxes so they get to use that money to buy out more shares from the ownership so it then becomes a snowball effect so maybe the first year they have a couple percentage points and then we make more contributions every year and then they as they own more and more of the company they get tax distributions and they use those tax decision distributions to buy out more and more shares so it's going to take about 15 years for them to buy out all of 15 to 20 years and we're doing it in tranches as well and i'll get to the reason why we're doing it in tranches so what they did was they bought up 12 to start with for the first five years they're buying 12 percent of the company from my sister and they're using that three percent only uh to buy out my sister's uh uh interest in in this particular company and that that three percent covers almost exactly her payment for for five years and so that they'll end up with 12 percent of the company and then they'll buy another 18 percent of the company which gets to a magical number 30 and i'll get to that in a second when you ask another question here why 30 is really important but they'll buy another um 18 which will take another five years in order to to pay that back and then we'll go to a bank for the the remaining 70 percent and by that time the um the ownership will be in the trust and they'll basically take all the profits of the company and be able to pay off that note uh that we're going to borrow from the bank so i don't hope that answers your question i'm not sure so i didn't get the hope so there's not just your sister's in and there's a third partner no there's there's no more sister sister now what i'm saying when this all started there wasn't just you there were three of you there was my brother my sister myself i had 80 percent i have a brother who has 8 percent and a sister with 12 percent and so um but going into this thing it was always going to be structured as 12 18 and and and 70 and the reason why um i like that approach is because 10 years from now when i sell sell the remaining portion of my thing i get the valuation of 10 years worth of growth to the company so instead of selling it for for sake of argument 5 million dollars today i get to sell it for 15 million dollars uh hopefully in in 10 years from now so so from this just talking about the math of it all you're you're confident you're getting more money out of this doing it this way than if you were just to go ahead and sell it in 10 years or something so the answer to the question if i sold it as a strategic buy which i might get eight to 12 percent of ebitda or or x 12x or 8x the answer is no i'm not going to get that if i sell it to employees i'm going to get what would be like what a pe company would buy for which is that you know the 4 to 6x of ebitda so i'm not going to get anything greater than than that well it's not a strategic sale but you also don't have to pay tax on the money so that is an advantage we'll get to that in a second as well that's correct jim let me just just to be sure um your employees in doing this are not taking on any debt that this is all funded out of the profits and out of the contribution that you make is that correct well right now they have a small debt so we borrowed a quarter million dollars to buy out my sister and then each month they pay about 400 or 4 800 to pay back that loan uh and so but that 4 800 is about what our contribution is for the three percent so our contribution is about five thousand dollars in order to get the three percent three percent by the way is really important because um we also have a 401k that we don't make any we just allows us to save some money so we actually we have what's called a k-sop which allows us to have a continue to for the the people to put money away in a 401k as well as also have the esop as well as part of the retirement program so how many employees are there all together roughly 20. and how many of them are in on how many are involved in the esop 20 all of them all of them with the exception of i have one and she's not really an employee so that's the reason but i have one actually i have two employees or two people who work with me on contract they're international they want i have an office in spain i have an office in taiwan and both of those employees are not really my u.s employees they're really employees of a of a consulting agreement that i have with them jeff taylor how about you um you you you came at this from a slightly different perspective because you were brought in to to run it um can you talk about how your esop was funded and why the owners chose to do it that way uh what i first would say is the way that ours was funded is probably the way most of them are actually funded it's basically i'm going to use my own view of the matter i would call it it's like doing an ipo you basically are the only buyers are the the employees and it's a fully leveraged bio so what typically happens uh the notes get taken back usually by the principal some percentage let's just say the um the notes the principles are going to take back notes to the tune of 70 or 80 percent and typically get a pretty good interest rate and then uh the bank finances the down payment you know basically so you bought a 10 million dollar business i take a bank loan of 2 million dollars the principals get 2 million dollars of that 10 million dollars and the 8 million dollars is taken back by notes by the principals that's typical that's probably the most common way basically i i look at uh esops as uh it's kind of like imagine you open a 401k and the only company they buy is your company so it's an ipo 401k runs it we call it a trust you know uh handles the the shares but that's all an esop really is and it's it's okay so that opens up the when one buys a 401k they invest in lots of different stocks so they spread their risk out um businesses have ups and downs i mean i think most businesses do maybe yours doesn't maybe jim's doesn't but i've had plenty of times in my business where the world fell apart i'm in the home furnishing market and i had to dig in and buy a building that that i can't imagine my employees and i would call them civilians that aren't used to taking risk would have been in on so if if business is just steady and goes along i can understand that but what about when things get rough and one has to take a risk this you can't compare that to a 401k plan because that's spread out between 50 different companies so all in one company well can we put risk in perspective ah nobody ever put any money on the line there's no risk i mean your employees don't pay for anything nothing comes out of pocket it's funded best basically by the freed up cash flow instead of paying taxes you're paying the notes i mean no no employee ever has risk they they can't get sued they can't get anything they well let me stop you there for one second jeff and this plays off a question we got in in chat from sean bucy uh jim you shifted your contribution from a 401k to the esop so arguably that is money that they're putting up and shawn's question was uh along the lines of jay's question how do they deal with that risk and how did you think about that but i would say one thing if i could interject uh jim's situation is a little more unique i i think it's very fair to say that uh what i'm talking about is far more typical and these situations or these structures can get as complicated as you want it based on what you're trying to do as the principal selling it so i think jim's case and maybe jim could talk to that your situation being a little more unique so let me let me say so i had a simple question my employees on this and i'm not sure if it answers the sean and jay's question i said do you want to put your money into the stock market where you have no control or do you want to put it into our own business where we actually have control and you can work towards making this grow uh yourself and you've seen and they've seen a uh ten years now of double digit and 20 growth out of the company uh and if they work real hard it can grow faster and and such and they trust me to lead the company lead the company and themselves that they see the growth and they see the potential of our markets and and such so they could easily have put it into the stock market where they have they could have lost all their money in the stock market well that's that's not true you can't lose all of your money if you put money into 20 stocks you can't lose all of your money in the stock market that and this is where so you're telling me in 10 years you haven't had one bad year no 2009. it's okay that's that's commendable and i can see that they would be on board for that even last year you know where we had a horrible second quarter we still made we ended up about four and a half percent year on year up so that's that's last year and and something where we were shut down for two months and we still were able to to create a year-on-year profit or year-on-year sales increase of about four and a half percent well if one can do that and they're in that kind of business and they're that smart and all those good things to go with it sure no problem from what i can see most businesses have some rough patches along the way and that's a tougher cell to go hey trust me we're going to keep growing like we've been growing and i certainly have had uh i've been in business 43 years i certainly have i've lost money more than one year and i don't think my employees would uh that would go over great and two thought between the let's stop there let's pandemic jeff about that that's i think jay's asking a great question you know the example he gave was of him choosing strategically to buy an expensive warehouse in the middle of a very bad recession is that something that would be more difficult to do in an esop company i you know it's this whole this risk thing i i think we got to put risk into perspective i think before we go that jay you know if you buy any business and you're going to buy it at a multiple of ebitda right you want to buy it at six times ebitda well if you put up no money and you just run the business like it is in five to eight years depending on exactly what's going on just generally running okay you're gonna pay off the business so not one employee has put up one penny you basically should always buy a good a business that's already structurally sound and if you just operate it normally you're in the equity game all of a sudden like all of our almost 50 employees were in the equity game and it's a tremendous opportunity with i really i don't even understand where the downside is somebody would have to really convince me where the downside is for people who don't put in any money and and just as long as they run a business decent so are they not there's no 401k plan money being diverted towards this it's really costing them nothing so they it's costing them nothing they just are on the on the on the train ride for for the ride and if things go to just crap they're okay that's the de facto standard on how esops is set up correct what about the seller the seller what if the so you do the esop and china comes in and whatever that thing behind your head there on the wall that picture of that beautiful cutting tool or whatever that is they come out and they end up cutting your price by 50 and the business gets into trouble does the owner come out okay in that deal uh eight million dollar note they have no i mean well they usually retain the right to take the company back and by the way if they just sold a bum company to the employees they better take it back you know well no not a bump it was just fine one day i just just this morning paper source i just read today which was a you know chicago company they're in bankruptcy they were doing nothing but printing money for years and all of a sudden they're in bankruptcy this does happen so one day the company's good and i just want to be clear on this so the the owner could have sold it for let's just say whatever eight million dollars cash he goes to florida and he plays bridge all afternoon okay versus he does an esop and he's lending he's he's financing this and then something goes terribly wrong in the market doesn't he lose doesn't he lose his money he she well by holding a note they will get the company back substantially then the company might be worthless at that point well then nothing would be this different if he held it no no he could have sold it for real money and cashed the check and put it into a bank so if he wants to retire and move to florida and play bridge yeah but if he wants to stay involved with the business and you know like myself i'd want to be here for 15 or 20 more years and i still but i want my money today so i'm going to run it you know for as long as i want to be here to run it well for you that's no risk then you would have kept if in your choice it would have been own it yourself keep taking the risk or do the esop in this case though if somebody wanted to sell the company and could have gotten all their chips off the table they could have been done whereas in this case they're not really done but that's not you you're you don't want to sell your business and go to florida you want to keep running it and this sounds like an option for doing that yes i'm struggling to see where the upside of it is though for me at this point how would you do it in the future will you sell it to a pe company and then they kick you out in a year no i've got two options uh first of all as you know you're not that much younger than me maybe we'll be alive and well in 15 years and maybe not so we're going to keep running it hopefully everything stays good and one option is let's assume that the kids don't want it which if they did that would be the easiest thing let's assume not so one option would be to go ahead and sell it and the other option in my case because i carry a lot of inventory there's a lot of companies that make more money by having a going out of business sale than selling the company that you can just if you can get rid of your equipment in your your inventory that what that would be another option that at the end of the run if i can't find someone to buy it i could in fact go ahead and have it going out of business sale and again get my cash out of it and then your employees don't have jobs how big a concern is that um that certainly wouldn't be my first choice but if i needed the money that badly i you know you got to do what you got to do i i wouldn't want to gamble my my retirement and i'm not in that situation cause i own the real estate but there's many people need that money from the business to retire which is why i've got options i i i own the real estate and i'm okay if the whole thing just you know blows up one day but i'm i'm struggling to understand where the upside for someone like me would be because i'm coming to work every day i still want to flush that out a little bit so there's no you you said in the beginning jim there's no control you have total control correct so here's the way this works and i'll explain this so so remember um who so the all the stock if once once it's all gone so the employees aren't like electing a class president you know to run the company so what basically is you have a professional trustee who basically is in charge of voting all the shares of the trust so who hires the trustee well the board of directors hires the trustee and if you have a board of directors let's let's just say for sake of argument they're not but let's say my brother my sister myself are on the board of trustee or are on the board today even though she's not a part of this so we then hire a trustee and uh who then we have an election cycle on the border on the board one of every one of us is going to be has a one three-year term so the point is you know the trustee even if they were to have voted one of us off the board so there's still two against one and then all the two does is replace the trustee into someone who's a little bit more favorable towards us as the board and then the board then um signs another trustee and the trustee then votes the sister back onto the board again uh the way we want them to do that so in reality i mean it's it's it's not we control the board and the ford can then controls the trustee who then basically votes all the shares of the stock so it's and then who hires the president to run the company is the board so the board runs hires the president the um and such so it's a very uh incestuous arrangement uh for for this whole thing well uh but i would i would add to what jim just said though again i i liken it to a public company basically you have a board of directors you have banks you know trust and stuff so it's really it's like you're running a public company so jay you you lose the prospect that you're in control relative to if you're the singular owner and the principal you certainly lose it in relative terms to that but until what jim was saying you know you know you got a board of directors and but the board of directors can get rid of you yeah did you start jim did you start the company i did okay and it sounds like for what you're doing it sounds like a great thing and i'm not arguing with that this isn't a debate of i'm sure this is a great thing for many companies i also know that from what i read only one tenth of one percent of companies the united states are resoups which is i have no idea that is it it should be a lot more because again i i know personally 10 people have sold their companies to pe companies i only know two that it's actually worked out well for them um and as an alternative to selling it to a pe company there's or a financial type of sale this is the you keep all the control to be able to make sure that you get paid out i would say you don't have all the control because the markets control you and all those kind of other things i get that you know so yes the another pandemic can come and wipe everyone out and such but that there's a certain amount of risk and let me stop here for a second i i want to talk about what makes a company a good candidate to do this and whether jay's company even qualifies before i do that i just want to note that we're fortunate enough to have corey rosen uh following this conversation corey is the founder of the i'm going to get the name wrong i'm not going to say it but it's the preeminent uh employee ownership organization in the country and he's kind of keeping us honest he is he's been writing notes on the side and anybody following this discussion should uh should check that out he's also got contact information there so let me ask what what does it take do you need to be a certain size do you need to be profitable what are the key uh requirements to even consider doing this jeff do you want to take a shower before i answer that though uh jay and i'll bet corey would post this in the notes but i believe if he's with the nceo i think that they um they published that there's about 27 million employees in the united states that i i believe are part of esops i think that's the number right but it's 8 000 companies i read that number but it's 8 000 companies out of 8 million so um but i did it there's a lot of people like you know enjoying esops but um what makes a great esau but what makes a great candidate as an esop i think is generally i've heard and this is arguable but generally under about three million dollars in gross revenue i think a lot some people will say ah that's kind of too small based on the cost of setting it up that's generally true and one could argue that you could probably do it on any size but you know the cost of setting it up relative to what the company's worth might you know hinder somebody so generally over 3 million or so and also it should be uh you don't want to use an esop to buy a poor performing business you know that's that's not going to really work you know you as a principal as a buyer shopping for a business you could say oh i'll buy that business and you could try and turn it around with your money and all that but buying a poor performing businesses with the nissan is probably not a good idea you should have a high threshold for quality business what about an up and down business cyclical if you mean that yeah um i'm not sure well i don't know you need to be able to service the loan so if you're going to do an injection where they got a big loan to begin with you have to find a way to service that loan and if you if you don't have cash flow to come in to service that loan um and you're one year you have you know a tax loss and the next year you have a tax gain and um it's it's wouldn't really make sense you need it needs to be a steady profitable business and i would agree with jeff in in that regard you know they're interesting jay you say so what what other benefits uh if i'm circling back around unless lauren wants to uh go ahead but um this is something very important to consider and i often don't even see this published in any of the the esau writings and it's this in an esop there's no flight of capital all the money that is produced in the business stays in the business there's no vehicle really unless i guess you could pay dividends of sorts but generally that's that's not what esops do and again you could do it but so what happens is as you pay down the debt and you're not paying taxes man you get a debt-free business and no flight of capital is unbelievable how you can plow all the money back into the business so when you talk about risk and upside and all things like that it's an esop is an uncanny incredible way if it's run well no flight of capital then you reinvest it back in the business really well uh it's a very very big upside for that i will say this though before you say something today i i'll i'll there is somewhat of there is one there is one flight of capital he does know you jay yeah and that is you do have to buy out the people who do retire so they're going to have stock and so you do have to create a net stag to pay them out as they leave the company and so you know as people retire they're going to trade in their stock for money and you have to have some sort of money in and i won't call it an escrow but somewhere along the way that you have to be able to pay them for that obligation that the company has incurred on their behalf that's a great point i've heard jack stack of src who's written a book about all this uh with bo birlingham uh talk about this and he has said that that's the thing that has kept him up at night worrying about having that money available has that been tricky for for either of you um i'm the oldest person in the company so uh that's not going to be a problem well people leave for other reasons right right but that is it's funny that we we kind of turned it to this topic because and from what you said what jack stack said that is the thing that does keep people up when i read about it but again if you bought a quality business in general uh you know it's you get three years if you again if you bought it at five times ebitda and you're three years into it and you've paid down the debt substantially it's not it's it's not very complicated to get it right i think jay you bring up a good point though so what happens when you do buy a a business within us and then one year into it or something or like you said it's cyclical lauren or something something goes down something goes awry and then that that that can hamper things but um remember this is the only thing that's different about an esop different than any of us buying a business is you're just letting the employees do it they're they're in the equity game at that point and so part of the equity game is risk in that respect of ups and downs well let's be clear if i if you sell it to a company you get the cash so i can see you've convinced me from the employee standpoint great thing for you great thing for the rest of them out there all those people behind the wall they're all happy i can see that um jim from your perspective correct me if i'm wrong you believe why not believe it sounds like because of the tax implications and the magic thing of compound interest that you will end up with more money this way after 15 years than you would have if you probably just went to sell it there's nothing wrong with that right everybody well so i don't even talk about that so the one of the reasons about that 30 30 threshold is now i get to do what's called a 1042 exchange and so every dollar that i sell the company for and they pay me for along the way i get to put now into the stock market or the bond market as individual issues and i do not pay taxes on that exchange so for every dollar i pull out if i pull out a million dollars out of the business and i put it into individual stock issues or municipal bonds or whatever i decided to put it into i can't put it into a fund i have to actually put it into individual issues like like-ish or like stock for stock i don't have to pay taxes on it if i have a dividend paying stock or or a coupon that's paying on a bond i can live off that interest forever uh if i tell it enough i mean obviously you i can't touch the principal and if i need to i can always touch the principal but i just have to pay capital gains on that okay so this is a good thing for you for a lot of it's driven by this wait let's stop that i'm not sure i followed all of that and uh i want to make sure it's clear the money you're talking about pulling out that's the money your employees are paying you to buy the company step by step from you is that the money you're referring to only once it gets over the 30 percent threshold what's your best 30 percent but that that's could not do that she only sold 12 percent so she couldn't do a 1042 exchange she had to take the money so you get past 30 percent uh when as the employees buy you out you can take that principle and you get it without having to pay capital gains tax on it and if i heard you correctly you can then invest it in another investment and not have to pay taxes on your gains for that investment either is that what you're saying um actually so it's a little bit confusing there i'm saying you have to put it into stocks and bonds it's not you you don't get that option to invest in the stock so if you do an exchange basically your company stock for for ibm stock for instance or x on whatever i choose you know um uh i can then put that into stocks and then i can they'll pay a dividend or they if i bought a if i bought it a note on it but if you bought a note uh or not a note but if you bought a um a bond and it's a 10-year bond and it expires in 10 years you don't get a chance to redo that again that's a one-time shot you've got to pay the tax as that as that bond expires and you get back the par value of that bond so you want to have something that with a 50-year expiration date on on that on that bond uh or whatever it is that you do so or stock is never going to be called back you know preferred stock or any of that kind of stuff so you want to make sure that it's not callable in any way shape or form but when you do that you can then you can basically turn your investment if i sold the company for five million bucks i put it into the stock market stock market pays me three percent and i make a hundred fifty thousand dollars a year to try and live on forever um i never i only i do have to pay taxes on the dividends and the and the interest uh so that's taxable income to me but not the original sale there's i defer that pretty much forever it goes into my state so lauren i don't think we've convinced jay to be uh everybody's situation is different and and i can totally understand why it's working great for both of you but everybody's situation is different and when i start hearing things about trustees and voting my skin crawls i get up every day knowing i am fully if i do great it's because of me and if i screw up it's because of me and there's no politics and i can do whatever i want whenever i want and and i but you've given me food for a thought which is if i structure this and i was sure that my kids really didn't have any interest in running a long term could i get more money out of it this way because of the unbelievable tax advantages of this and certainly that's food for thought and i did never knew that um i do want to read a comment on the chat room here though that really i think is important jen briggs you're out there she jen says uh this it's an important aspect to strategic workforce management workforce planning hiring and retention are a factor in business planning in a way that is not a consideration for other firms eek eo esop firms really do regard channels as an asset really i don't regard talent as an asset i think that's a fallacy and i just want to flush that out that you know let's not say that oh if it's employee owned everyone's really more invested we're going to be a better nicer company and everyone's going to be valued more i mean i think that's a uh i just don't think that's accurate i absolutely believe my employees are assets and i do regard talent as an asset so i don't think this is a oh esops are wonderful everyone loves each other and works harder and if the owner's just running it it's all about the owner i i don't buy that concept jim you made the switch fairly recently uh do you think there's been a change in the way your employees viewed the company since going esop oh okay so uh jay like i told you uh previously i've listened to all the things so i i know that you guys don't really use open book management there and it's not it's not a big thing but we started our company almost with open book management and um from the very beginning so it was already a culture in what we do we don't share individual salaries but we share everything uh in there about once a quarter we go through the financials completely and i spend a lot of time and energy training them what a financial sheet looks like and such so they also know that if we don't do something or we do do something we spend some money on a party and it cost that party cost the company a thousand dollars well they got a 5x valuation on their on their own personal stock and so therefore you know there's a multiplier that they have in their own stock account based on our company so it's like five thousand dollars worth of bottom line to the value to the company and believe you me they know that so they understand that completely now do they second guess me because do they say hey why are we hiring this marketing guy uh adding to the to our team that's just overhead if we don't hire this and i do the extra bit of this job can we save this money and it doesn't really help us to grow that much so but i do get a little bit of that second guessing i get that jeff i would echo jim's comments and not that you're wrong on this jay because i think you're right on you value talent but uh unleashing some of that pent-up uh input or extra productivity uh let me just give you a number we went we doubled the size of our company with barely one or two more people i mean that's when we became an esop right so how where was all that productivity it was like wait were you working there at the time before that well i have all the uh financial records so i when i say no no no i'm just he joined it at the time of the esop right i'm saying maybe you did a really good job and maybe maybe the old owners were thinking back in the 1960s and didn't do anything modern and maybe you brought a new perspective to it and did a really good job that's what i'm going to talk about on the next podcast i'm just saying it wasn't necessarily it wasn't necessarily all due to being an esop the old owners got out of the way and you pro probably brought some new thinking to the company that you have been around a while you you know what you're talking about there's part of that that is true right but you know everything is you know it's a mosaic right so i i i don't think i would have had as much success let's say that unless i accept that absolutely i just don't want to pay asops as a magic bullet well jeff have you had uh talk about turnover among uh regular workers and leaders uh at the company do you think it's had an impact on that very low we're we're probably at like 11 or 12 years tenure uh but it's always been uh it's funny jay to jay's commentary the esop doesn't change everything the company has always been a good company it's been a you know just a high uh high uh precision uh great type of a high technology type of company but i want to say something else to jay and i think that we're missing the mark on something a lot of people don't want to just jump in the water so they want to just stick their toe in the water right you know jay have you considered that as a seller you could sell 40 of it right then you could run the company you would be the highest wage earner shares are distributed commensurate with the wages so if your highest you're the highest wage earner you earn the most shares so if you retain that business after you sell for 40 40 of it as an esop you run it because you own 60 percent of it you earn shares in the esop that you're running and those shares uh become you know once the esop is then sold uh to somebody else those shares are essentially in a uh like what would be a 401k or an ira so you could actually you know it's a little bit like double dipping as a seller where you get to earn back shares in the very company that you just sold it's just something to think about because maybe maybe that you should be somewhere you know you don't want to give up total control and by the way if you sell 40 of it and it does work out well well then you'll be queued up to sell the rest of the 60 winning or another 30 and then you know the reindeer 40 so just consider that you can set this up according to the way you feel comfortable with it's there's not a 100 one size fit all uh jim's story is different and yours could be different too and jim just uh you're right i do not do full-blown open book management but my managers certainly see the books and know where we're at on it and i also when someone says well we do open book management except they don't see the salaries to me then you're kind of doing open book management because given that in some companies the laborers 30 could be 30 of a company not knowing the salaries is kind of blind and then in some cases the owner's pulling out a tremendous amount of money and no one knows about that so i always you know it's either full-blown or it's not and you know it that's a whole nother discussion but let me clarify let me just clarify that though we break our we have departments and we so we say sales is costing us x amount of money in salaries marketing is costing us this much of money this you know um administration is costing us this much so they we blend these things so they see the total compensation and they see the department thinks but they don't know if it's steve or betty or mary who how much individually they they make for this and one thing about jeff also the thing about we've also decided i don't know because we're progressive out here in california so we um we actually limited the people who could we have some salesmen sales people that are highly compensated um you know well into six figures and um we like that and i'm not most i'm not i don't actually get the most amount of compensation of the company but because of that we said look it we want to flatten this out from the lowest worker to the highest worker so we cap the amount that they can contribute to 150 000 and then our lowest person probably makes 40 or 50 000 somewhere in that in that range so the the difference between the highest wage earner and the lowest earner wage owner if they're captain 150 is now about 3x wait you don't mean their salary kept you mean the amount that they can buy into the company right correct the amount of stock that will be allocated towards them okay so does every employee know how much money you're making uh probably yeah i'm not the only one that has an open open book because i i i give it away i tell people exactly how much because i'm i know when i'm under market so they know how much the sales people are making they just know a commission percentage they don't know the dollars because i'm sure that wouldn't go over great not because i'm i've got outside sales people it's never a great thing when they hear how much the outside sealed i don't want to go too far down the open book rabbit hole but when you're talking about their owners so i think it's all your honor i think that that's all open because it's fruit of the poison tree here it's an esop they own it they should know that the sales guy is pulling down 350 and maybe worth every penny i'm not saying they're not yeah go ahead jeff this is a good topic though a little bit in the sense that uh i would not draw a direct correlation with esop's being open book management and remember the way i i looked at it it's like a public company right so yeah maybe in some large public companies they do publish what the highest earners the ceos earn and stuff like that but uh in general you run it like you're a public company you you don't this everything we're talking about is up for debate on what you want to set it up like in your company when you when you buy incentives i think that's a surprise to a lot of people because if in my mind i hear employee stock owned company i assume they have access to the full books and now you're saying not necessarily that's that's eye-opening we do this just because we we want to do it but we were doing this before we were an esop company because we believe that that helped the productivity when they see where they're adding and they're taking it it's the jack stack approach to this whole thing with or without the esop you know we don't have a lot of time left uh this has been great there are a bunch of questions that we got some of them are in chat in the qa and i got some questions in advance i'd like to try to run through a couple really quick rapid fire uh number one how about firing an employee who's a part of the esop any issue with that is that any more difficult because it's in esop no different no different at all how about uh starting a business as nisop does anybody do that can you do it as a startup i can i wouldn't think so because it doesn't have any profitability really to pay you know unless they had profitability on day one how would you pay off you know the notes or anything yeah i'm not sure and who who would be the ownership they were just they're starting a business they're capitalizing the business with let's just say a hundred thousand dollars or whatever it happens to be then immediately they get their capital back it doesn't make sense okay how about this is there a concern once the employees reach a certain level of ownership that they could actually sell um to a private equity firm or something like that is there any impossible no no no it's not impossible i've actually heard i've heard somebody about this and in fact i was at a conference on this uh the guy from echo who had a big 2000 person so the trustee has to do what's right for the for the business so if all of a sudden the valuation team is doing a annual evaluation say you're 5x or 6x if somebody comes along and says okay we're willing to pay 20x for your company the trustee has to look at that and say look at i have i'm i have fiduciary responsibility to the shareholders who happens to be the employees to to sell the company for that kind of that type of a type of multiple or even you know maybe it was 12x or i'm just saying it's something outside the valuation so the trustee has fiduciary responsibility to the shareholders which is indeed the the employees so if someone were to come and offer a significant number uh for all those employees shares and turn those guys into what it used to be they had a million dollars now they have three million dollars worth of uh stuff that's that's that's something you have to look at how much does a trustee make about 10k a year by the way by the way i'm not uh we didn't talk about the cost of setting this up or anything like this but um i'm the trustee of because i'm not i haven't sold any shares yet so until the point where i'm actually selling my own selling my own shares i can be the trustee for the first five years or something like that so that's interesting it cost me by the way it cost me about forty thousand dollars to set it up and where does the trustees come from go ahead jeff well no i was gonna say something alarm but the trustees they're basically you know a lot of banks uh have you know services that they they do this for ease that's really reassuring for me because i've had nothing but positive experiences with employees that work at banks so that's a real exciting thing for me to think about that my entire life i've caught my own shots and now i get the assistant vice president of the bank that that is involved with my business the board hires the trustee and there are independent trustees all over the place just like there are third party administrators and just like there's valuation companies they are it's a it's a micro business that you can hire a trustee and what if you end up with a bad one you've got somebody that you are at loggerheads with you disagree on is there what happens the board the board dismisses the trustee i have to tell both of you you've done a really good job of of i've learned a lot about this whole thing i'm not dismissing it at all that is interesting um and i'm just surprised with all the years i've been going to seminars and reading articles that there's just not a whole lot about this out there and and i didn't just yesterday lauren says well you know you don't pay tax i go no lauren that's not possible you must pay tax and i am flabbergasted i would have bet him a thousand dollars that was wrong but i am flammable now you tell me yeah hey wait a minute the taxes are paid sooner or later okay right go to cash out there they employ when the employees cash out also you're not paying tax but you're setting money aside for when people pull get their money out so there is a trade-off there as well now the owner doesn't pay tax potentially if you set it up right you do it all the right things so the owner sells the company for 20 million dollars they could actually work it in so it goes into their estate and their state can be part of a trust and the trust can be perpetual and there's all kinds of other there's there's estate planning that can done so there's maybe never any taxes ever paid on that 20 million that the owner cashes out on i'd like to ask another quick question of both of you what was it like rolling this out how did your did you tell your employees right away or did you tell them after it was a feticon plea uh was there instant acceptance did they have to be convinced that this was a good thing what was that like for for either of you jeff you're smiling why did you go first well because this is one of the okay out of all the things we've talked about this is one of the stranger things in the nissan in my mind's eye and it's like one day you show up to the employees and you say guess what you bought a company you know you don't need their permission per se i i you know obviously the logic prevails that if everybody was didn't wanna they all gonna quit if you make them buy your company of course if it just doesn't work like that it's more of like you spring it on them in a sense and that don't take me literal but it's kind of like then they said to you and who are you yeah right okay so your situation's different than uh i mean jim's is far more similar to me and that i started it and uh that is interesting like i said and and to jen i just want to say i'm sure that this does help some engagement for sure i'm sure it does put a different angle on the business and people's heads and maybe they work a little bit i'm not arguing any of that i i just don't think it's going to take unmotivated employees and all of a sudden whoosh now they're all motivated no but but part of that's the education though so we believe it really strongly in education so i've i had to create a 20 dec you know 20 slide deck to go through and talk about what it is and what did they actually buy and how does it really work and you know they really thought as an employee-owned company they were going to be able to like elect like the president to to run once i left it doesn't happen that way and and i i needed to be really clear about that um uh who's that there's a board that actually runs the company and that you know um and they it's a it's a retirement benefit for them this is not a you know and the more the longer that they're here the more that they help to create profits in the company the more they will walk away with when they retire that's very interesting i got one last question for each of you jeff starting with you have there been any moments when you thought oh man this was a mistake i'm really he had nothing to lose though well but you might say right that's that's so you're right and i already understood and he saw basically there was no risk it was all upside for me and and i felt for all but you could theoretically have been running the company in a way and said you know what this is this is more difficult than it would be if i were running the business uh and it wasn't an esop that could theoretically have happened i think yeah i'm running the business with a bunch of co-presidents you know co-owners shareholders so you you can feel like that sometimes but then you settle into it i think you just put the last stake in the heart of j's [Music] because that's the elephant in the room you think you lose control i just want to be clear about something i can't think of one time in 43 years where my key people that we ever had to disagree with i go well it's my company so here's what we're going to do we always come to an agreement as to so i run a collaborative company as it is so that's why i i'm not saying i would never do this i'm you're bringing up some interesting stuff because i already run a company like that yeah we should all be co-president so to speak you know so i think that's the right way to do it anyway you got the best parking spot [Laughter] [Music] has there been a moment when you thought uh this was a mistake uh no because it's actually achieved everything i can possibly want um even okay so even if someone were to come to me in 10 years from now when i sell off the seventy percent again i'm crunching this thing so they come back and say you know a competitor comes back to me and says look at your valuation is 20 million dollars and my competitor comes back to me saying no it's 50 million dollars i have the option at that point to sell the whole company off to that for 50 million dollars i'm going to pay out the 30 that the employees own they'll make 30 out of 50 million bucks and and this whole thing so i'm not i can't i have plenty of time to unwind this anytime i really want to up until the point where i sell off the rest of it so and and i've arbitrarily set 10 years it could be 12 years you know whatever time i get ready to do this i i can go now with that said when i do make the the final sale on this thing i'd want to stick around for a few years after that to make sure that i'm uh because remember we're going to borrow the money from a bank and they're going to pay me this money and i'm going to invest in the stock market or wherever so i need to stick around a little bit longer to just to make sure that everything is running really smoothly for those first few years that we're paying back the bank so they don't come back to me and say hey we you're the bank loan defaulted we want our money back um and having to cash in all that stock that i that i got that's in the stock market now so i might stick around another two or three years so i'll work it out so i leave um you know a couple years after that uh and i might even stay on the board forever who knows all right last question jay i you're clearly not leaping at this uh to do it is is there something that could get you to do it is there something you've heard here i'll tell you he told this is very eye-opening i didn't understand the basics of how the whole thing worked and it's very interesting and i what i'd like to do is like why i don't watch shark tank any longer half the deals on there never happen so i'd like to talk to the people that did this that rue the day they made that decision that's what i we got two happy people here which is great i'd like to hear from the other two that did this that woke up and said oh my god what did i get myself into all right i lied that's one comment please is it yeah the department of labor actually the the biggest uh typical reason that they somebody gets in trouble with a bad esop it's because they overvalued it in the sale so it's interesting the people who you're going to find generally little rule of the day is you some owner might overvalue it and sell it to their employees overvalued okay you can't even sustain you'll find usually that's where the people are no i this has been very eye-opening and i can't tell you there's one particular reason that there's no way i would ever do this i would not say that at this point i'm gonna put this into my maybe pile because well not quite i still haven't given up on my kids uh uh taken over but um i am working on my eight-year-old grandson he seems interested he's got some questions but uh he seems like he's got the energy to do it well hopefully he's watching by the way if you guys have any more traditional questions you know lauren are you going to send something out so if you have additional questions and you i'll be happy to take anyone's you know offline and help anybody to tell give anyone a deeper story if you want my email is lauren l-o-r-e-n at 21hats.com anybody who wants to reach these gentlemen can do so through me uh this has been great thank you all jim cobb uh jeff taylor and jay gaults thank you for taking this time really enjoyed the conversation thank you lauren for always bringing things out that you never see anywhere thanks jeff yeah that's what he does that's what he does that's his brand all right we're gonna stop on that note thanks everybody we're out of here bye-bye