Creating a Destination Workplace with Betsy-Allen Manning
Watch/Listen here or on Apple Podcast, Spotify, or wherever you listen to your podcasts“I believe as the leadership team goes, so goes the rest of the company. So if you don't have that consistent and significant sustainable growth, you've got some work to do.” — Mike Goldman
“We all can't be in charge and we all have to work really hard. And it means that, that as a leader, you're going to be spending the long time, the long hours, doing what needs to be done, cause you know that overall as a team, you're going to rise and fall.”
–Jeremy Huish
ESOPs
- An ESOP is an employer-sponsored retirement plan where investments are made in the employer's company stock, unlike 401ks which invest in the public market.
- Significant tax benefits are available for the seller, the company, and the employees through ESOPs.
- Companies make annual contributions in the form of cash or stock to the ESOP for employees' retirement benefits.
Employee Perspective
- Retirement Benefits: Employees accumulate stock value in their retirement accounts over time, which they can redeem upon retirement.
Ownership Perspective
Employees typically receive payouts upon retirement. However, if the company is bought out, they may receive a significant payout based on the company's valuation within the established time frame.
- Owners can sell partial ownership to an ESOP, providing flexibility compared to selling to outside buyers.
Tax and Financial Implications
- Tax Savings: Owners can defer or avoid capital gains tax through a 1042 tax election, significantly increasing their net after-tax cash.
- Financing the ESOP: Funding for ESOP transactions can come from business cash reserves, bank loans, or seller notes.
Control and Management
- Post-ESOP, companies typically form a proper board with internal and independent members to ensure good governance.
- Owners can choose to stay involved for as long as they desire, ensuring a smooth transition and maintaining control over their business.
Impact on Employees and Culture
- Cultural Shift: Employees take 2-10 years to fully embrace ownership mentality, with internal promotion and cultural initiatives playing a crucial role.
- Motivation and Productivity: Ownership can lead to increased motivation, productivity, and cost-conscious behavior among employees.
Setting Up and Managing an ESOP
- Business owners should start with an ESOP 101 call with a consultant to understand feasibility and valuation.
- Implementation: Involves engaging a trustee, attorneys, and valuation firms to negotiate and finalize the ESOP deal.
- After closing, companies typically celebrate the new ownership structure with employees, promoting a sense of shared ownership.
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Mike Goldman: Jeremy Hewish started his career as a tax attorney. After years of being an attorney and consulting, Jeremy realized that the largest transaction his clients will ever do is to sell their business. And the largest tax bill that these clients face is the tax bill on that business sale. He then fell in love with employee stock ownership plans, also known as ESOPs because that transaction benefits the owner, the company, and all the rest of the employees who never had a chance to own a business. He is also a VP at corporate transition consulting, Jeremy, welcome to the show.
Jeremy Huish: Glad to be here, Mike. Thanks for joining me.
Mike Goldman: other cause we're working on a client together.
Now before we get into it, I've got to ask you, I looked at your bio on the website and if it's accurate, you've got. Two accounting degrees and two law degrees. Is that right? Are you a glutton for punishment? What's that all about?
Jeremy Huish: Yeah, the mountains were there and I decided to climb them, but they just, it's,it, I wanted to become a tax attorney, usually a tax attorney, you need an additional degree, like an accounting degree. And then when I was working out in Washington, D.C. the company I was with as with 1 of the big 4 accounting firms, they said, oh, by the way.
If you want to go get your LLM in tax at Georgetown Law School, that's a master's in law. we'll help pay for that. As long as you keep working for us and we'll even let you off work early to go to class. And so I said, sold. I will put in the extra effort since you're going to help support me on that, but I'm grateful for what they've done and it's been a good career.
Mike Goldman: so we're going to focus with Jeremy today on employee stock ownership plans. I keep hearing that more and more. My selfish reason for doing this is I want to learn more about this stuff and hopefully you'll benefit as well. But the first question I always like to ask is a bigger one than just the ESOP.
Question and that's Jeremy from all of your experience working with organizations over the years, what do you believe is the most important characteristic of a great leadership team?
Jeremy Huish: Well, if you're thinking about a team and I've observed and seen and been part of many different ones, And for company to succeed, you don't always have to have a great team, but it sure, sure does help to have one. I would put two traits there. One is trust. And the second is to be unselfish. And let me clarify both of those points.
Why I think those traits are important. One is trust is that the team trusts each other. You have responsibilities. You're going to do it. You know that, for example, let's say the president is a good friend of yours and that person may make more money than you, but you trust that everything's going to be taken care of, or you trust what role that you're going to play is important and everyone does that.
The second is unselfish is that we all can't be in charge and we all have to work really hard. And it means that as a leader, you're going to be spending the long time, the long hours, what needs to be done, and you're not going to be upset if someone else gets some benefits. And from that, cause you know that overall you're as a team, you're going to rise and fall.
I remember I was talking to one CFO and this is a great functioning team. And I said, where do you think they're going to go? And they said, well, our CEO. We all trust him and we know usually he makes great decisions. So whichever way he recommends, usually we all follow. And this has been a high performing company because they have great trust in each other and the leadership team.
So if someone recommends that they will do that. But so trust and unselfishness, I think are two traits that make a great team.
Mike Goldman: So going to start off with a big overall question on ESOPs.
What is an ESOP and how does it work?
yeah,
Jeremy Huish: that is, those are two big questions.
I'm sure I'm sure
Mike Goldman: that like a 10 second answer, but what is it ESOP and how does it work?
Jeremy Huish: Yeah, so I will start with short answers and then you tell me how to expand. An ESOP is an employer sponsored retirement plan. A 401k is an employer sponsored retirement plan. The difference is a 401k invest in the public market, Amazon, Google, Apple, those types of companies. Whereas an ESOP invest just in your own company, just stock in your own company.
So that's what an ESOP is, employer sponsored retirement plan. Like, a 401k Congress has provided some significant tax benefits for these retirement plans and tax benefits can benefit both the, or all three groups, the seller can get some benefits by sponsoring the plan. The company gets some benefits and the employees are get huge benefits from these things called ESOPs.
And so that's at a high level what they are now, how they work is another subject, but let's just on high level, get into it every year. the company will make a contribution to this retirement plan of either cash or stock. Now think about a 401k. I like to do some comparison there. Every year the company that sponsors 401k will either do a match or some sort of contribution into that for the employee's retirement account.
Whereas with an ESOP, the employer will contribute some stock or some cash for this retirement account that invested in that company stock. And that account is held for the retirement benefits of those employees. So that when that employee retires, whether that's going to be in two years or 10 years, that all those shares, that value that's been built up over time can, will be redeemed when that employee leaves.
I'll tell you a quick story. I was speaking at a local Mesa, events sponsored by this group in Arizona. and we had joining with us, one of the, Executives from one of the largest ESOPs in the country. They're a big construction firm. I won't say the name, but, they were talking about what they have done.
And the ESOPs been around for decades. And they said they just had one of their largest shareholders retired from the company. And this shareholder was. a warehouse manager. And then he paused and said to the audience, how much do you think was in this warehouse manager's retirement account when he retired?
So again, this is blue collar worker, not some executive. How much? And the amount that this person had was over 4 million. I thought, wow, what profession am I in? I mean, that's great that I can create those, but just to think of the value creation that can happen if we allow the common employees to all be participants in this wealth creation, and I'll share some of the upside
So that's some of the power of that is that we're creating a huge retirement accounts. now I'm cherry picking, obviously a good example that's out there, but there's many times and many companies that have been able to create huge amounts of wealth for the average employee out there that sticks around longterm for these things called an ESOP.
Mike Goldman: to simplify how you think about it.
Instead of in investing in the market, it's investing in the company and having shared ownership of the company is from an employee standpoint. I want to understand the ownership standpoint where the original owner standpoint as well.
But from an employee standpoint, is it only upon retirement that they get paid or what if. Five years down the road, the company is sold at a, you know, at a five X, it still only upon retirement or when a company gets sold? when does the employee actually have a chance to get a payout?
Jeremy Huish: Yeah. Yeah. So, that's two points here. One is what normally happens and what happens if you have a buyout. So normally, again, think about an ESOP is a retirement plan, much like a 401k. So normally in a 401k, you can't pull the money out early. Now there are some rules where you can take loans and such, but just think about generally 401ks, you get a retirement, the same thing with an ESOP.
Most of the time you're not designed, they're not designed. For you to get money out annually or to get profits or dividends. Now is a retirement account for their benefit. And so, when you turn age, whatever retirement age is age 65 or etcetera, that is your retirement. Much like a pension that happens if you go work for the government or some other company for 20, 30, 40 years, this is your pension that's being built up.
So that's what happens. Now, if you were to leave that employer. What happens? Well, usually what happens is the company will buy back your stock and sometimes it's either the next year or up to five years later. They will then fund a self directed IRA or 401k for you, and you can take those funds with you to the next employer or just rent yourself, but it will be qualified retirement plan funds.
And you think, well, what are those rules? Just think about standard 401k How those rules work. Same thing happens here once you leave a company. So that is the standard ESOP. Now you asked a question. What happens if you get a buyout? So I was working with a company and small company about 30 40 employees and they sold to an ESOP and a few years later, a knock on the door comes from a strategic buyer and that strategic buyer says, we want to buy you and for a premium.
And we talked about it with the management team, with some employees and with the ESOP trustee and said, should we sell? And they did the valuation and said, you know, we should, because here's what's going to happen. The company was now owned by the ESOP. and the amount of money that's going to waterfall to all the employees.
we figured it was about five years worth of salary. So for only working there a few years, they made more money. in their ESOP retirement account over those few years of working that they did in their normal salary. And they kept their jobs, which is great. And, that is a much, much higher return than a normal 3 percent or 4 percent or 5 percent employer match in a 401k.
And so, fun fact about ESOPs is there's about 200 or 250 ESOPs created per year and around the same number of those ESOPs that go away. And you may think, why, if these things are so great, why do they go away? Well, the vast majority of those are acquired because ESOPs become very much prime acquisition targets because they already have a good management team in place.
They already have happy employees and they're loyal. We've already dealt with the transition of the owner, founder or whoever is the selling shareholders and got that done. And then there's this big incentive. For the, all the employees in the management team is do we want to cash out our retirement accounts?
And now it's not easy to buy them. There's some steps that need to be involved when you buy an ESOP owned company, but certainly there's been buyers out there that realize that these are nice gems. to acquire and hundreds of them will be acquired every year.
Mike Goldman: and if you are, if your company is acquired those folks, they're still not able to take that money out. a penalty until retirement age, or if it's acquired, does it liquidate right there?
Jeremy Huish: It's still under the retirement account rules. Much like if I had a big juicy 401k and I got acquired by some public company named the company and I'm part of their new retirement account, I can carry over my retirement account, but I can't, if I pull them out early, then I'm subject to a 10 percent penalty.
Plus, I have to pay ordinary income tax on that.
Mike Goldman: now from a, from an ownership standpoint, what, in what situation should the owner of a company be thinking, Hey, an ESOP would be a great, you know, a great strategy here. when does it make sense to form an ESOP and when maybe does it not make sense?
Jeremy Huish: Oh, sure.I,I have this response. I would say, what's the strike zone? If you're saying, where does an ESOP make sense and where does it not? And so it gets into size, industry, and your relationship with your employers and your employees. And so let me hit those things. I would think for a size, You want to be a company with 20 plus employees and 2 million or more of net cash or EBITDA, however you want to define that.
Can you do smaller? I've done ones at a million dollars, even less, it's possible. And you can do lower than 20 employees, but that's usually the nice size where things can work and you can satisfy some of those tests. And then you can go up from there. Company is making 50 or a hundred million dollars and you can be larger.
Even public companies sponsor ESOPs and even private equity is now getting into ESOPs and using ESOPs as part of their acquisitions. That's a, that's another topic of how that's done more of advanced level. so you want to have a size. The second thing is that you want to be in the right type of industry.
the number one industry for ESOPs is manufacturing. Other popular industries will be engineering, architecture, construction. and then. It windows on down from there. Who is not a good candidate would be, for example, a, a small doctor office, a small dentist office, a small CPA firm, or now CPA firms.
Keep in mind, this is public. You can go find it, but BDL, one of the largest accounting firms in the country. they just sold a portion of their company off to an ESOP for well over a billion dollars. And so you have a big accounting firm realizing that's a smart way to move versus the alternatives that they would have.
Mike Goldman:
Jeremy Huish: So you
Sorry
Mike Goldman: when you go back to, you said manufacturing sounded like more of the, some of the blue collar were, you know, made sense, but then you went to, you know, accounting and doctor's office, why is it that a manufacturing type environment is more ripe for an ESOP?
Jeremy Huish: Oh, sure. Well, it's, yeah. Great question. So why manufacturers? I think it's because those are very stable businesses. That's number one. Number two is, an ESOP cannot pay more than fair market value. Now, most private equity deals are. Within the range of fair market value. But in the world of business valuation, there's fair market value in this strategic value is you've got certain patents, you've got certain locations that no one has.
We're going to pay you a premium. And maybe that's in the world of 10, multiple of your earnings or 15 X or 20 X or a hundred X for some of these dot com companies that are pre revenue, whereas most manufacturing companies don't trade for that level. And they are more of a six X or seven or eight, or even a five or four X.
And that's where the fair market value is. And that's where the ESOPs can pay. there's just some rules that we have to follow with that. And so you won't find a lot of ESOPs in, let's say Silicon Valley, those. coms. Cause, cause of that reason you can't get the huge valuation, but for most of those companies in construction and manufacturing and engineering architecture.
This is a fair market value play, whether they go to an outside buyer or the ESOP, it's on par with each other on what they could get. So I think valuation is a big part of it.
Mike Goldman: Andwhat are the benefits to a business owner? Of doing this, I imagine, you know, that from a standpoint of, you know, impact on the company that does, is it a morale impact from the standpoint of, you know, one strategy to for them to, you know, pull some of their money out of the company and how does that work?
But what are the real benefits? Why? Why would a business owner do this?
Jeremy Huish: Sure. One of the first conversations I have with any new prospective client is I go through, here are some of the facets that an ESOP can do. And we spend a few minutes talking about it. And I try to understand what is their important, facets that they want. And I talk about fair market value price.
I talk about tax savings that can happen. I talk about being able to preserve the legacy of your name on the business or your business culture, being able to benefit the employees, being able to dictate or have influence on the future leadership choices of the company. Cause if you're bringing in an outside, Let's say private equity or outside, you know, large public company that they're going to have a lot of say
And, and but you just have a lot more control as a business owner if we go through the ESOP route and I then boil it down and say what's most important for some. It's going to be they like the tax for some. It's like they really love to benefit the employees because these employees are family members.
All of these things apply within ESOP. Now let me talk about what doesn't apply.if the Owner, business owner says that's all well and good, but I'd like to get the biggest check possible and retire tomorrow. That's not an ESOP candidate. That's where you're looking for an outside buyer that has deep pockets.
They're going to come in and they're going to do what they do, good or bad. They're going to do what they do. Come in, give you a check. you, maybe you stay on for two or three years for an earn out, but you were essentially on your way out the door. You've been cashed out and you're at risk and everything else that kind of gets laid on the, the buyer.
So I, I try to split out because if they just want the most money, and move on. They're not a good ESOP candidate, and I don't judge them. That's not a bad thing, and that's a lot of deals are done for business owners that's what they do. that's okay. But if their priorities are, I want to take care of my employees, I want to do something for them, and I can share other stories where the employees are very well taken care of ESOP.
And then they say, I get it. I'm going to go through the effort. of bringing in this ESOP team, Jeremy and his company and the trustees and the risk attorneys will go through this whole transaction because it is worth it for me to leave my employees in this great position and to give them a chance to have success.
Like I have had success. And so I'm trying to that that's my big filter at the very beginning of my discussion with them and figure out who are you as a person business owner. What are your goals here?
Mike Goldman: unselfish characteristic early in our conversation, potentially. And just
Jeremy Huish: Right.
Mike Goldman: basic in terms of the mechanics, because I really want to understand the mechanics. If I'm selling to a strategic buyer or I'm selling to a private equity firm. They're writing me a check. I know, you know, my business is worth X.
They have the PE firm has bought Y percent. And here's the check that I'm getting and I'm giving up, you know, X percent ownership of my company for an ESOP. How does that work? If I've got a company that is fair market value, you know, valued at 10 million to take a small, but round number it's valued at 10 million as an owner. How is the ESOP allowing me to pull money out of private equity firm, isn't writing me a check. So where's that money actually coming from?
Jeremy Huish: Sure.
there's two points there. Let me, first off, let's talk about the tax and economics of an ESOP versus an outside buyer. And the second is a sourcing of the funds. And those are two very important subjects that I go over with clients. So they understand the first off is the tax economics of it.
If my business is worth you and you're using your numbers, 10 million, And I was just talking to a client yesterday in California, and I was showing him, if you have a 10 million value business, and let's ignore basis. You would have to pay capital gains tax on that when you sold both federal and state and their blended tax rates somewhere around 37 percent for capital gain for a C Corp.
So that owner would end up with somewhere around 6.3 million net of tax in their pocket. If you were to sell that same company to an ESOP, You have what's called a 1042 tax selection, which allows you to defer, potentially avoid long term the capital gains tax on that sale. So if you sold for 10 million, you can do this rollover election and potentially end up with 10 million in your pocket, in your estate long term.
So you have significantly almost 50 percent more net after tax cash in your pocket of yourself to an ESOP because of that. And you may. A follow on is what is this 1042 election? The best way to describe it is think about a 1031 real estate exchange and a 1031 if you sell a piece of real estate. And within a certain number of days, roll over the proceeds from that to another piece of like kind real estate, like from one commercial building to another commercial building.
What happens is the gain is deferred. And if you hold that second piece of real estate until death, you get a step up in basis under current tax rules. And that gain goes away permanently. So you've never had to pay that capital gains tax. So that's a long term play. A lot of my business owner clients are familiar with that because they love to play with real estate.
1042 is a cousin. And the tax code to 1031, 1042 says, if you sell stock in your company to an ESOP and within 12 months post transaction roll over the proceeds. to other stocks or bonds of U.S. trades or businesses, then you can defer the gain. And if you hold that second buy that you things that you bought stocks or bonds until death to get a step up in basis.
And that's just normal tax rules there. And so that's a very popular strategy for business owners as they look to see, okay, what are my options and why that's beneficial is sometimes Outside buyers off 10 million, but the ESOP is only offering 9 million, but you're still 9 million net of tax.
You're ahead of 10 million and then having to pay tax. So that's now a 1031 is complicated. You get to get professionals to deal with that. That's a longer discussion of how 1031 rollover works. Similarly, a 1042, There's some complications. We have to get into the weeds of how that works, but they're both very powerful strategies and very popular in their industries.
So that is the economics from a tax perspective. Any questions on that before I get into financing?
Mike Goldman: but we'd wind up having a three hour episode. So let's keep it at that level and let's
Jeremy Huish: yeah,
Mike Goldman: the second part of it.
Jeremy Huish: sure. So, different from a private equity is that the ESOP, when you form this new trust and this trust wants to buy stock from the owner, whether they want to buy 10 percent or 50 or a hundred percent, the trust has no money in it. So how do we get financing? How do we get money in there? to buy the stock from the owner.
Well, there's a few sources. One source is maybe there's some excess cash in the business and the business will loan the cash to the ESOP can buy the stock from the owner. Another source is there's many banks out there that love to loan on ESOP transactions. And they'll loan one times earnings or two times earnings or loan up to the asset net asset value that they have inside of it.
It'll be an asset based loan. sometimes you get into mezzanine debt, maybe you're a three or four times earnings. So there's different underwriting and credit scores that companies have for that. But there are banks if you wish to go there that would loan money to the company and the company can loan it to the ESOP.
And then you've got cash for this transaction. But most of the time there's not sufficient cash in the business. Or in a bank lending to pay for the full transaction. So usually the seller is having to do a seller note to take back the rest. And so what will happen is they will get probably interest payments on their seller note until the bank's paid off or the company's paid off, and then they'll get principle and interest after that.
So if we're selling a $10 million business, maybe we get three, $4 million from a bank. And the, so the day of close, the seller gets $4 million of cash. And a 6,000,000 installment note, and they'll, the company will pay off the 4,000,000 to the bank, and then they'll start to pay off the sellers, the remaining 6,000,000.
That is a big hurdle in ESOPs, whereas private equity would come in and say, well, we give you more cash. In the ESOP, you only get 4,000,000, but with us, we'll give you 7,000,000. And the remaining 3,000,000 may be in earn out. So you don't get all 10 million even with private equity, but you may get seven million up front.
that's typically how they're structured. But that's something you have to weigh in and say, I really want to do the ESOP on a bit benefit my employees. Am I willing to take less money up front so that all these wonderful other things can happen? And that's an evaluation they have to do.
Mike Goldman: as you said, between that and maybe a private equity that may give them more, you know, regardless of tax benefits is I still regain, I still have control of my business.
Jeremy Huish: That's right. That's right. And let me touch on that control. What does that mean? Well, often a business owner, they are the sole person on their board, and they're the CEO president. They just run everything. When you have an ESOP that owns it, you actually have now a proper board where you have probably three or five board members.
Maybe that owner stays on as chairman of the board and they will have maybe an internal person be on the board and they likely need to have one or two outside independent board members. And these are people that they will nominate and the ESOP trustee will vote on them, but you'll have a board that runs it.
And so that's an important distinction. Now, some owners think, Oh, I've lost control. And I said, well, in some ways you have, in some ways you haven't, but keep in mind,these are, this is a board made up of your peers, of people that you know and trust and respect. And if they have ideas and suggestions and recommendations, you should take them seriously, both your internal as well as your independent one.
And so I, you know, hopefully the board is unanimous in everything that they do, but that's one distance that's different from,
Mike Goldman: private
What have you seen from an employee standpoint, when a company successfully completes that transaction, then they now have employee owners. Their owners, they're not seeing that money until retirement. So it's kind of, you know, it's longterm, but what have you
Jeremy Huish: right.
Mike Goldman: in the morale, the psyche, the motivation, the productivity, does it have a big impact on culture and motivation or like what have you seen there?
Jeremy Huish: Yeah. So the average amount of time that it takes for the employee base to really wake up to the ESOP is around two years. And you think, why so long? Well, there's several factors that go. I've talked to some businesses that take up to 10 years before they fully get it. Some it's immediate.and where on the curve is your business going to be?
Number one is you have to have a cheerleader there. As you know, anything that you're trying to do to promote culture, if it's just a one time message and then you go on with your day, that will not stick. Yeah. And so you need to have a cheerleader inside the company to help promote employee ownership.
Because once you understand this employee ownership, then you start doing things that owners do. You start picking up waste. You start turning off the lights on Friday, so we don't waste electricity. You start to avoid unnecessary costs, those types of things. Now, why is it two years is usually the mark?
Well, at that point, the employees probably have two years worth of statements that they get on their ESOP account, and they can see that, oh, this account is growing over time. And then they start to realize that this thing can be worth significant money. Okay. Hundreds of thousands and for some people, millions over time, but it takes two years to get those two statements in and then it makes a big difference.
But again, I think it's not just the two statements. It's the amount of effort that the company does to promote the culture will speed up or slow down that conversion. of employee owned.
Mike Goldman: W
hat do you see as some of the common challenges, pitfalls in setting up and managing an ESOP?
Jeremy Huish: So like setting up a new health insurance plan or setting up a new retirement plan, which is what this is, it takes some time. And I have asked many different ESOP owned companies how much time does it take? And for large ones that have thousands of employees, they'll probably have a full time person.
That just does. And usually that's half their time is on an ESOP and half their time is on health insurance employee benefits. But for most smaller companies, I ask him, how long does it take per year? what's your compliance time? And they say, probably around 5 to 10 percent of my time of somebody's time, whether that's the CFOs or HR person.
And I think that's where you could get tripped up is that if you think, oh, it's the one thing and done, I've done the transaction, this will just run itself. Well, yeah. Your annual health insurance renewals don't run themselves. Your annual getting your CPA to do their financials don't just run yourselves.
You have to set up a system where you have monthly and quarterly things that need to get done. so that you can properly administer and manage this thing called an ESOP. And we have some training and some helps that we do. And the industry wants to help you out in the, there's conferences that do that.
And so it's hard if you're trying to learn and do it, it's hard not to succeed. but if you just say, Oh, it's going to happen. Well, all these other things don't happen. Health insurance doesn't happen. And you have to, Put it, be proactive and have someone to sign in. So I'll just say one more point on this.
I tell all my business owner clients when we're going down the path of starting these stuff, I say, you need to assign somebody to be the point person on this and they need to take responsibility. Otherwise you're buying yourself a new part time job. And you don't want to do that, but maybe you do.
But if you don't do that, you're going to come back to me and say, well, this isn't happening. Well, it's because it's, it takes a little bit of time.
Mike Goldman: what's the downside of an ESOP?
And we probably talked about some of it, but you know, there's upside from the standpoint, you know, from an ownership standpoint of being able to pull some money out, not retaining full control to your point, but maybe more control than if they're totally selling, or it's a PE firm, there's benefits, you know, to the employees, to the company. the downside?
Jeremy Huish: Yeah. Yeah. So let's talk about the seller downside as well as the, just the company employee downsides. So for the seller downsides, it usually takes longer to get their full payout. Yeah. Whereas a deep pocketed private equity or outside buyer can pay them out much quicker. And then you have some risk there is that it is going to take some time.
And what happens if the company goes under? What happens if another covid like event happens? What? So you have more risk there as a business owner. That's your downside. Obviously, the tax savings could make it a positive and worth the risk, but that's the sellers risk that they take on. For the company, for the employees, there's only upside and let's just understand that because they pay nothing for the ESOP.
But I think overall, when I've looked at ESOP run companies, one of the struggles that they could have if they do, and most don't struggle, most are superior to their peers. What they do is that if you don't have great leadership, that are successive, the successor leadership in there, then you just have a manager.
You don't have someone that's incentivized like you did before. Usually that original owner has the magic, has a secret sauce, has a way to work with clients, has a way to personality work and make things happen. But can that next set of CEO or the leadership team do that same thing? And usually the owner, the prior owner, has equity in the company and they're super motivated.
But we need to make sure that next round of leadership that they are incentivized and have that same or similar skill set to lead the company. So that's where an employee owned company like an ESOP could struggle. Some is if you don't have a strong leadership team coming in afterwards and then you're subject to fighting for clients and customers.
Just like any other business. And the ESOP doesn't give you secret sauce to try to win over those customers.
Mike Goldman: there a transition? are there situations where there's an ESOP, but the leader, the CEO stays on board, the leadership team stays on board. They just choose to go this route or does it always happen along with a transition of leadership?
Jeremy Huish: That's the beauty of an ESOP is it is up to you to decide. You could, I've had clients retire the next day after they sell to an ESOP. I've had some where they want to stick around for 10 or 20 years, keep their office, keep their benefits, keep their role, keep their leadership, keep their team. The choice is yours.
Even if you sell 100 percent of your company, You still are not kicked out of your responsibility out, out of your role. So you can choose when along that timeline you want to step back.
Mike Goldman: and is this kind of a basic question, but. You could sell a hundred percent to an ESOP. Can you sell 30 percent to an ESOP and 50 it is it up to you how much you're selling to an ESOP or is it, if it's an ESOP, you're selling a hundred percent.
Jeremy Huish: That's one of the where areas where the ESOP is superior to outside buyers is the ESOP's willing to do a partial and much more willing. And many more of my deals are partial ESOPs, meaning I'm selling 30% or 51% or 70%. I don't, it's not a hundred percent or not. But the owner, I've had many owners that say, I'd love to get some liquidity, sell some of the stock, get the employees going, test this whole thing, call an ESOP out, but not go all the way.
I still want to feel like I have some equity outside of the ESOP in there. And that's the beauty of an ESOP is you can do that. And we do that all the time.
Mike Goldman: if a business owner is interested in pursuing this or pursuing potential of an ESOP, what are the first two or three steps they ought to take?
Jeremy Huish: Yeah. So step one is have a call with me or some consultant like myself, but I have, what's called an ESOP one on one. It's just myself and the business owner and whoever's in their close circle of deciders. Sometimes it's just them. Sometimes it's others that they have a CFO or a CPA or an attorney. And we go through the ESOP transaction.
and since it's just a small group, they're usually comfortable sharing specifics on financials. And I can, within that call, give them a pretty good idea of where the ESOP would come out on in terms of valuation and such. And at the end of that call, they can decide, do we want to have more discussions, more conversations or.
We'll look at something else. The next formal step then is to engage someone to do a feasibility study or some analysis to do evaluation on the company. Prepare a report. It's much like hiring an architect to draw the blueprints out. We need to draw out these blueprints before we hire the construction company to go build something.
Let's draw out the blueprints. and see what this looks like and then maybe move some doors and some windows and some things around in this building to see. And then after you've drawn out the blueprints, and sometimes that takes stages, then you go hire the ESOP transaction team, which will be a trustee, which will be a few different attorneys and an independent valuation firm.
And you actually negotiate a deal. And I'll work with them on their side to prepare a term sheet. We'll do an offer. The trustee side will do a counter offer and we'll negotiate back and forth. And the process takes some time and it's similar process to what happens if you had an outside buyer coming in.
Usually there's a term sheet and you're going back and forth on those deals. And then once you get to agreement on the terms. It's not just price, but other things involved in those terms. Then the lawyers finish up all the transaction documents and you plan a closing day, signing ceremony. And then, usually within 30 days after that closing, that's when you announce it to the employees.
And so we, most employees don't know about the ESOP happening until after the close. Then we throw a big party. I've had clients with balloons and DJ and photo booths. I've had some rent out. Big pavilions at, you know, at the steam parks and announce it to all the employees and congrats, you know, part owners of this company.
and then it's back to business as normal, except the employees are now part owners in that.
Mike Goldman: long does that process? From the time someone says, Hey, let's go do this to the time the deal is closed. Is that typically 6 months, 12 months longer? How long, what's the range?
Jeremy Huish: Yeah. And a fast clip is going to be fast as I think theoretical is probably four months. Maybe it's way to go faster, but four to six months is typically there. So I'm telling clients, if you want to get done by the end of this year, we got to get started now, this summertime, it just takes that long to get the negotiations and legal drafting and the bank finance and everything set.
And then some clients, they bring us in to do some early design analysis and road mapping, and they're not ready to sell for a year or two. Maybe the business needs some help in growth. Maybe they need to work on their. CEO transition plan a little bit more. Maybe certain personal things need to happen.
and so we come in early, do some initial valuations to set them some targets for where they need to head to. And then once they hit those in a few years, then it's the right time to sell.
Mike Goldman: This is such important stuff for business owners who I think kind of like me, why I wanted to do this, don't know enough about this and the benefits. So if people do want to find out more about you and the work you do and contact you, and this will all be in the show notes, but what's the best way for people to, who are interested in exploring this?
What's the best way for them to find out more about you and what you do?
Jeremy Huish: Oh, sure. Our website is corp T C dot com CORPTC.com that stands for corporate transition consulting. So they can certainly go there and my contact information. But I recommend that if they, for a lot of people, I just say I can probably get you up to speed faster in a short phone call than you spending hours trying to google and find out what an ESOP all about because you may go down paths that are not that productive.
And so I just recommend Let's just schedule time, schedule, call, reach out to me in your show notes or through the website. And, and let's get you where you need to be. And I do those ESOP one on one presentations three, four times a week with people that are interested, whether it's their CPAs or attorneys or business owners, they're just curious.
And I try to show them where it can be done and then plant that seed of what could be done.
Mike Goldman: Excellent. Well, I always say, if you want a great company, you need a great leadership team. Jeremy, thanks for getting us closer there, today. This was great.
Jeremy Huish: Thanks. Thanks for having me. And thanks for the opportunity.