My Company Is Worth $100M. Here's Why I'm Not Selling It to Private Equity

Kevin Hohe has taken 60 calls from private equity firms wanting to buy Complete Fence. He's turned every one of them down.

In this episode of Better Questions, Kevin sits down with an advisor from FMI to get a real education on ESOPs — employee stock ownership plans — and whether selling equity to his own people makes more sense than selling to outside investors.

They cover the full mechanics of how an ESOP works, the tax advantages that can make it more lucrative than a private equity sale, governance and board structure post transaction, and what it actually means for the people on the ground when their company becomes employee owned.

Kevin is 36, doesn't need the money, and is asking the one question that actually matters to him: what do I owe the people who helped build this thing?

If you run a trades business or any small to mid size company and you've ever wondered what your exit options actually look like, or whether you even want one,  this is the episode to listen to.

Transcript

SPEAKER_00 0:00

What I'm hearing from you is it's not about getting the biggest check, it's about, you know, there's a philosophical thing going on in your head about what is optimal, and there's probably some legacy stuff built into that. I'm hearing, you know, some sense of responsibility for your people. All those things do kind of push you towards an ESOP because of the fact that it does accomplish a lot of those goals, right? So uh it's a wonderfully graceful way to exit a company, right? But again, you know, do we want to exit, right? We don't have to. So some people look at this, like I said before, as a chips off the table transaction, and sometimes they don't even need the money.

SPEAKER_01 0:42

I reject this idea that businesses were built to be sold, um, but for e-sops, I think esops are awesome. So I guess what I want to just you know, I think I think I told you I've I've taken like 60 calls from the private equity guys, and and um each one less original than the last, it seems. Um and I don't mean to be condescending, but um I don't my people are extremely like please never say we don't want to work for those people. I've seen the effects of it. Um and so I I view this as an epic alternative. Anytime I see a company that's that's that is employee-owned, they get it, right? I think they're living out their purpose, and I think it's just a a better means to do business. Um and so I recognize that saying that publicly is gonna get me shamed. So I I suppose my question to you would be um who shouldn't be thinking about eSOpping and why why then? And also who shouldn't be, and why wouldn't I? I guess. Yeah, let's play with the team.

SPEAKER_00 1:40

Good question. So let me give you two scenarios, right? And this is these are two live uh client situations we went through last year where one did an eSOP and one did something else. Uh let's just say a third-party sale. Um, so first scenario was there, and they were both actually in the same region, both in the same industry, right? So very similar, and actually relatively similar from a size perspective. So, scenario one, you've got ownership that could have sold the private equity, um, you know, or strategic, whatever it may be, but they felt like you know, they were a 65-year-old company. I know you know you kind of have a history too, uh, so there's some common thread there. Uh, and they felt their next gen was up to the task, right, to take it to the next level. So uh they felt very comfortable. And I think this there has to be when you're considering selling your biggest asset, which for a lot of our clients their company is, we think being informed is also good, right? But regardless, they felt like they knew what the market was for private equity, as you probably do if you've taken 60 phone calls, you have a sense of what the market is, right? Um, but they wanted the company to stay independent and they felt very strongly about their next gen and their people, and they ultimately did an e-sop, right? So company number two was not a good fit for an ESOP, and they kind of knew it going in, but we had a conversation with them anyway to kind of figure out what was the best path, right? Because whatever you do, whether you sell the company, don't sell the company, sell to a third party, sell to an eSOP, sell internally, whatever the options are, you got to know what the options are first before you make a decision, I think, right? So, anyway, I think due diligence in considering a sale of a multi-generational asset is is very important. Um, so this second company felt like they didn't have the next gen. They felt like it was a family-led business, second generation, and they felt like they'd taken it as far as it could go. And they felt like the right operator could do much better by the company. Now, there's also a financial element to this, right? So, one of the things you see with a third-party sale versus an e-sop, oftentimes, not always, but oftentimes when you're looking at the feasibility of a transaction, you can you can recognize more cash in the near term, potentially with a private equity or strategic sale than you can with an e-sopp, right? So I think some people look at it and from a time horizon perspective and a risk tolerance perspective, will say, now is the time. I feel like you know, I've been doing this 30 or 40 years, whatever the the runway is, and you get to know the market pretty well, I think, after seeing multiple cycles and running a business for a very long time. And sometimes it just feels like the time to get out, not because storms are coming, but maybe you know this the cycle is right. We're at the right kind of you know, cycle of the wave where you know there's still some some power left in it, but you haven't, you know, it's not you know, you're not missing it, right? So I think that's a big deal too, where you know an Aesop may not be a fit. So I think what we see is there's successful examples of all different kinds of ways to transition a business, but the big but is it's it's gotta align with what's important to the stakeholders. And that's where Aesop oftentimes finds a really good home, is you know, it really potentially when done right, can be a good deal for everybody. No one has to get left out in the cold. Does that make sense?

SPEAKER_01 5:03

Yeah, and um is there I guess uh yes. Why why why don't we talk about the mechanics so that I understand and then so everybody can understand? Because I mean in my world there's this just this it's a fad. I don't know, I don't mean to say it that way. Like read Cody Sanchez's book, go buy a business, sell a business, like the greatest wealth transfer, all that. I I'm like, there's this fad. Do the easy thing, get an SBA loan by a business. I think I'm at least one tier above that, maybe not. But I want to dig into the the mechanics of of all of it. Um so you said something, and and I guess before I ask my specific questions, is there any is there any generalizations that are thought of in eSop land that don't apply that you'd like to eradicate? I I've I've heard like I've only had two people roll their eyes, like, why would you eesop it? And I'm like, I yeah, there's that's a really good question.

SPEAKER_00 5:59

I think the biggest thing that people get wrong about eSops is that you have to take a discounted price to a third-party sale. Sometimes that's true, right? So we're representing companies on a regular basis that are 100% employee-owned that are trading at a certain multiple, right? Because we know what the multiple is, because they they get it every year from the trustee. They say, okay, well, your EBIT was this, and here's your value, so we know what the multiple is, right? What if the market for that company is three or four times higher in the open market than what you're trading at, right? So I think you know what we see is there are disconnects to the positive and to the negative, right? So some companies don't have as big of a market from the standpoint of private equity or strategic buyers, right? So you think about things that start to detract from the marketability of an asset, like bonding, right? Um union, right, project-based work, right? Is this starting to sound familiar, right? So that starts to make it a little bit less interesting, and certain kinds of businesses don't aren't as attractive for outside investors, but are potentially very attractive for an ESOP buyer. So there really is some very interesting gaps in the market where it's rare that you're taking a huge discount to what the open market will pay, but there are times where you are. That absolutely does happen. Um, but most of the time it's very close, if not a little bit better. Uh, the big if a valuation perspective, the big difference is timing of cash, right? That's what I think um you know really makes a difference, right? So let me explain what all that means, right? So let's talk about a $10 million transaction, right? So let's say you sold your company for $10 million. Well, if you sell to a third party, right, you're gonna have some taxes, right? So that $10 million becomes maybe seven million dollars, right? So let's just say you're paying 30% taxes, right? So you walk away with $7 million, best case scenario, you probably have some kind of earnout or some kind of rollover component, which means maybe you're getting five or six dollars, five or six out of that ten million dollars in actual walk-away cash, right? So then let's talk about an e-sop, right? So let's just say you can sell for the same ten million dollars, right? So you might only get five million up front, right? So that's the big delta, right? Is you may get six or seven up front with the third-party sale, but here's the big but you're gonna get another five million dollars with the ESOP, and if you do it right, all of that money is tax-free, right? So would you rather have ten million dollars or six or seven, right? Some people would say, yeah, but there's an extra two million dollars in there potentially now, I don't want to wait. Other people will say, I'll take that bet any day of the week, right? Because I'm gonna effectively bet on myself and the future of my company for another three or four years to get, you know, significantly more net after tax proceeds. That's the big math equation with eSOPs.

SPEAKER_01 8:50

Uh is it escrowed, or how does the cash and how long is it escrowed, or what is the time horizon to get that full value?

SPEAKER_00 8:56

Yeah, good question. So that gets in the mechanics of it. So let's just say the typical ESOP happens between, let's just say, five and seven times trailing 12 months EBITA. Right? So if we use kind of a round number, let's use six times, right? So, you know, let's say you agree to a deal for six times EBITA for the sale of the company. Well, you've got to get some cash. You don't have to, but most people say, yeah, and I'd like some cash too with that, you know, 100% sale, right? So where does the cash come from? Most companies will go to a bank and say, Lend me some money in order to facilitate the buyout, right? Just like buying a car, buying a house, you know, whatever it may be. You're borrowing against the company's credit worthiness to provide the financing. Well, nobody's gonna lend you six times EBITDA, right? Uh it's unlike that in terms you'd be willing to borrow at, right? So uh the market is like two to three times, three times at the kind of the tip of the iceberg, and maybe more commonly two to two and a half times EBITDA, right? So there's two choices there. You obviously only have, let's say the best case scenario, you've got three times EBITDA on a six times deal, that's half your money, right? So on that same $10 million deal, right, we're getting five million of our cash up front, and we've got two choices with the balance of it, right? We can take back a seller note for the other five million, right? Or we can just sell 50% or 49% more commonly and hold back the rest of the equity for a future event. So that those are kind of the big choices if you think about it structurally. Got it.

SPEAKER_01 10:28

Okay, and so the bank that makes sense.

SPEAKER_00 10:31

Um Yeah, I think that's the biggest one is people think I think there's this perception that they're gonna just walk away with significantly less money because they did a you know what's perceived as a good thing for their people, and you know, good things usually come with discounts or costs, right? They don't in this case.

SPEAKER_01 10:48

And so the debt service on the uh let's just go let's just stay in hypothetical impossible then, because I'm a simpleton, and I'm hoping that my people are simpletons too. So $10 million, let's say they do write the whole thing, and so we've got debt service. Let's just say the debt service is 10%. Um how does that how's that different in my environment than a private equity? Because private equity is throwing debt at it anyway, right? So it worse for the financials, so let's because it's a good question.

SPEAKER_00 11:15

So here's here's the kind of the the magic of it, right? So there's I said I talked I told you about one of the tax benefits, right? Which is you don't potentially can avoid paying the capital ins tax. That's a big one, right? That's a personal benefit that the shareholders can take advantage of if they do an eSOP. There's also a corporate benefit in e-sops that effectively makes the debt service very simple for most companies, right? So let's just say you're that $10 million company and let's say you're generating uh $2 million of EBITDA, right? Right, so you're gonna pay some taxes, whether you're an S-corp or C Corp, somebody's gonna pay some tax, right? So let's just say that tax is between 20 and 30 percent of your earnings, right? So, you know, if you're talking about you know two million dollars of taxable income, there's hundreds of thousands of dollars of tax being paid every year. Well, in an ESOP setting, most companies will do a transaction as either a C Corp or an LC, but most of the time we see C Corp transactions, right? So the company then gets a huge tax deduction because they did an ESOP, which they can use to effectively reduce, if not eliminate, corporate tax liability. So what do we just do? We just gave you that, you know, let's call it $500,000 in tax, either the company or the shareholders were paying. We've now got $500,000 effectively in money to service the debt, right? So that not you know, the first question that people ask is well, how can I borrow you know five or ten million dollars and cash flow? Well, the answer is you're not gonna be paying any corporate tax, you're not gonna be paying any you know, distributions for tax to the shareholders depending on your status. So now you've got more principal available to service the debt and pay back the money. That's a big difference because private a private equity buyer, again, they're gonna use a similar leverage profile, right? But the big difference is they don't have the tax benefits, right? So they've got other things, but um you can potentially retire the debt a lot faster in an ESOP setting because you're not paying any taxes. So that's a big difference.

SPEAKER_01 13:21

Are you guys into the one other and I I we'll dive into my real example and I'm I'm curious what your advice would be, and it's kind of interesting to just go um unbridled online with it, but I I think it's the most beneficial thing I have is my story. But uh, are there a um oh my gosh, now I lost it. Oh, are you guys playing banker? I've heard so I'm uh one of the guys I'm a big fan of her, like he didn't use a bank, or he self-funded, so I think he just did the whole thing as a seller's note. Are you guys is F and I a bank often, or you guys connect us to a bank?

SPEAKER_00 13:58

Yeah, good question. Yeah, so the financing is not something that we provide, right? But we do assist companies in securing the financing, so just kind of high level on how the financing market works. Most of the time, you're seeing regional banks or kind of super-regional banks fund these transactions. That's the most common source of funding. So Truist would be an example, Citizens Bank. I'm trying to think of you know, some in your region, Wind Trust. Um, you definitely see the Wells Fargos and the PNCs and the B of A's occasionally, um, but it tends to be these regional banks, and they um tend to look at these loans from a cash flow perspective, which is a big a big element, right? So most of the time, as long as you kind of have a certain minimum threshold of profitability and critical mass, you're not guaranteed you're not signing anything on that loan personally, right? So it's a corporate obligation, which is obviously a risk transfer thing, right? So if you borrow some money from a bank to finance your transaction, but you're personally guaranteeing that loan, kind of just taking money out of one pocket and put it in the other, it's still stuck at the bank's still got it legally, right? So the financing element is important because most people, when they sell their company, want to receive some cash. Not everybody, it doesn't have to be, but one of the elements I think that's very important to consider when you're going through this is the tax deferral piece, right? Like we touched on that earlier, the ability of the sellers to avoid or not recognize the capital gains tax on the sale. Um very impactful, obviously, but you've got to do some kind of an investment portfolio. And I don't want to get too far into the weeds on how that works, but you need some principle to do it, otherwise you have to pay the tax. Now, if you don't care about tax, then it's less less impactful. Um but I would ask you the question why are you doing an eSOP if you don't care that much about taxes? So but and it's not listen, it's not all about tax, right? Tax is a big element, uh, but the tax is you know is is a really important piece that gives you some really interesting incentives to do these things, but it's gotta be a right fit from people, values, goals and objectives, timelines, all those things also have to align for this to make any sense to you.

SPEAKER_01 16:19

And um is there a target size where eSOP makes sense? Is it this is it what when do for you guys I know you guys are dealing with the bigger fish, but what is what is generally the guidance for eSOpping or any of that? Is it is it the same as private? They're not really interested unless there's two million in EBITDA. Is that really the game?

SPEAKER_00 16:39

I mean, it's not really about I think interest for the community because I see companies that have two or three million dollars of EBITDA do e-sops all the time. It just becomes a little harder to finance them. So banks have, you know, is the smaller the company is from an operating results perspective, the more risky the banks look at it like, and then it just limits the market for cash, right? So that's not necessarily a bad thing, but for someone that's saying, hey, I want to be able to do a risk transfer type of transaction and take some real chips off the table, so it's just a little bit hard to make the numbers work. And then I would say the other point is there are some fixed costs to do an ESOP. If you want, in my view, if you want to do it the right way, independent trustee, um, with their own legal counsel, their own financial advisor, you have a lawyer, right? And that's before you get involved with the bank. Right? So it could cost you before you hire someone like FMI two or three hundred thousand dollars in professional fees to close the transaction. So there again, there's a threshold level there where, hey, we want to do it right, but if it's five or six or seven percent of the total deal just to get it done, it starts to become a little bit less attractive. Um, but yet, long story short, two, three million of IBITA, I would say, you know, if you're looking for a more market, you know, kind of deal that would compete with a private equity or a strategic type uh transaction, I would say two or three million dollars of EBITDA is where it starts to make sense.

SPEAKER_01 18:03

And then is there any wisdom or is it all preference percentages, right? Is it you know you see 100% ESOP, you see 40%, does do people do better when they can retain control? Is there any any wisdom in how much of it you sell to back to the employees?

SPEAKER_00 18:20

That's a really good question. So we do a lot of minority eSOPs, and there's a variety of reasons why. So I think a lot of it is timing, some of it is structure, some of it is mechanics of you know, the variety of the dynamics that go into a transaction. But let me give you a couple examples, right? So we did a minority transaction for an electrical contractor last year. Uh two brothers owned 100% of the company, or not 100%, most of the company. Um and they really just they weren't ready to sell, but they felt like they had some big goals, some charitable goals they wanted to accomplish, some personal needs, and it allowed them to really continue to operate their business almost the same as they were before, but get significant tax-free liquidity, right? So that was the motivation there. You know, chips off the table, right? It's we're not ready to completely exit, but we like to you know have some liquidity for other needs. That's very common. Um, sometimes it's you know a shareholder buyout, right? So what you've got multiple shareholders in a group or an individual or a group of individuals wants to exit and the others want to stay, right? That's also a very common reason for a minority transaction, different timelines, right? Um you know, so there's there's lots of reasons why. Um and I I don't think it's really as simple as is there you know one path that's just better. I think if you were to just say, let's put two these two deals on paper, right? And which one is gonna pencil out better most of the time, it's gonna be 100% sick, right? Because there are some additional benefits to doing it that way, um, you know, it typically pencils out better. But if it doesn't meet your goals and it doesn't fit your objectives, who cares?

SPEAKER_01 20:08

And if we were talking on behalf of or for the like, I don't want to the the people that that may think this doesn't apply to them, so I want to make sure this applies to them, right? So, like if you're not gonna grow your company to being two, three million dollars in EBITDA, or you know, but you've got let's say you've got a healthy company that's generating somewhere between 300 and 1.2, let's say two, I don't know, say 300 to 1.2 million dollars in some type of earnings, questionable, all of that stuff. Is there a play to be made in this realm, somewhat of a bootlegged play to give to give it to the next generation, an arm's length transaction where it is a ESOP, or is that really just a is that really just a handshake deal from operator to next operator? Like how does it work on the lower levels or does it?

SPEAKER_00 20:55

Yeah, that's a really good question. So what we see more commonly is a management buyout type structure in that setting. Um the other issue you run into with smaller companies is employee count, right? So as I'm sure you know, depending on the type of construction company, like there can be a huge variance in how many employees they have, right? So, for example, we're working with a GC right now that's gonna do 90 million in revenue this year. So, not you know, not huge, but not insignificant either. They have about 30 people. Um, the threshold to really kind of make this work from a regulatory perspective because it's a qualified plan and you have to do testing and you got to comply just like a 401k plan is about 20 to 25 people. Um, you know, and then when you've got union potentially involved as well, that you know, we we see put companies that have that are of material size that have you know 10 or 12 employees that aren't union that are W 2, that becomes an issue from a compliance perspective. So the smaller you get, the More these kind of you know issues start to arise where feasibility becomes more limited, um you know, of an ESOP, right? So uh there is another option, right? So I like to say there's kind of three paths here. The first is you know, kind of a management buyout structure where you can 100% pick and choose who gets the stock, you can decide when they get it, um, who the people are. It just doesn't come with all the tax bells and whistles that an ESOP comes with. Number one, number two, they're usually structured to be more closely held, right? So instead of having everybody that works for you be eligible, there's maybe five or ten or maybe even less. Right? So there's a whole host of structures. I would say in this industry, the construction industry, that's actually quite common, you know, even for larger companies, to do their ownership transitions through a management buyout, right? So pluses and minuses, right? So let's talk about it. Pluses, it's relatively affordable, right? Doesn't cost a lot of money, you don't have to pay, you know, an investment banker and all these lawyers. You may you may need an attorney, drop some documents, but you could probably do that whole thing for a few hundred thousand bucks all in, right? Versus seven or eight hundred thousand dollars maybe for an ESOP transaction, and maybe even less, right? Um so that's the upside is you know, it's it's very feasible, it's relatively easy to get into. The downsides are it takes a long time, right? Even if you're only transitioning four or five million dollars of equity value, most of the people that you transition to don't have that kind of money laying around. So there's either a phased approach, you know, a note or a new old co new co approach. There's a lot of different ways to do that transition, but um typically doesn't come with a liquidity event either, right? So it's a long-term plan of liquidity. So those plans can take seven to ten years, sometimes longer. Um, and if you think about it from a tax efficiency perspective, remember we talked about the two big tax benefits for the ESOP, right? The shareholder doesn't have to pay tax potentially, and the company gets this big tax deduction. You don't get either of those with the managed buyout, right? So, and then the last point I would say is that when you're thinking about value spectrum, right? Most people think at the far end you've got kind of that strategic who's willing to pay whatever they have to pay to get you, right? Then maybe you have private equity, and then Aesop is somewhere in the middle of the spectrum, fair market value concept, but maybe not synergistic or strategic premium. And then on the lower end, you have managed buyouts, which are typically done at book value, right? So most people, when they think in terms of how a company might be valued, they look at book versus fair market, fair market's usually a lot higher. And the reason why you can transition that fair market value instead of book with an ESOP in a similar or faster time horizon is the tax benefit. That's the big benefit. But, you know, again, it's expensive, it takes some degree of critical mass, um, you know, and it is something I would say I thought of a couple other things. You you talked about, you know, some reasons, you know, misconceptions or why people don't or do or don't do these deals. Big one is debt, right? I would say maybe 10 to 20 percent of the people I have an initial conversation with tell me they don't like debt, right? Which is kind of a problem if you're going to do leverage bio, right? So, you know, I think you have to have some comfort level with, you know, in doing an ESOP, and for private equity too, that the company is gonna have to borrow some money to facilitate a transaction. That's absolutely a fact of life, whether it's a seller note or a bank note or whatever it is, company's gonna have to borrow some money in order to facilitate a transition of ownership.

SPEAKER_01 25:46

So that was you said three options. So you've got private, like private market sale, eSop or management market. Management, yeah. Right, okay, very interesting. Um okay, so now for my well, anything we didn't hit, otherwise I'm gonna dive into complete fence, and I just want like your you're completely fair, and I'm curious why you you would advise the way you would advise. So we we grew, and I'm sorry if I've already told you this, but we grew too fast. So I made the like we fumbled from five to fifty, and we'll be somewhere between ninety and a hundred and twenty million this year, top line. Bottom line has bottom line should be improving. Like I would say last year we did we did probably five on fifty, so we ran like a ten percent. I think we'll do fifty, we're we're budgeted for fifteen on ninety and ebid off this year.

unknown 26:37

Okay.

SPEAKER_01 26:37

And I built this company for this day forward. I really, I was my problem was I I was way out in front of myself, like I knew what would happen. So we're kind of I don't need them to tell me what we can do. Like, I think we could hit a billion in three years, probably more responsible to do it in five years. And at today's mark, I need no more dollars. I don't need, I've set my life up to be, I'm fine. I don't so the difference in an exit or a partial exit or isn't it means nothing to me. That to be said, I mean, it is all of my net worth is there, right? I haven't been like right, and so my question is is it failed? Like, and it's hot, right? I'm very aware the fences are white hot. They're that's why I've had 60 calls without trying at once. So so it's like, do would I so we'll we'll we did 50 last year, we'll do 90 this year, and I think we'll we'll we will comfortably it'll be 150, I think it'll be 220 um top line next year on improving margins. If you said like what is that like, um you could take it to the bank, like you could almost take it to the bank. That's why I don't mind saying it on here. And if I F it up, I'm happy to get on here and be like, hey, I was wrong. Like, guess what? But I'm so so my question would be timing, right? And I'm curious for me and my people, should I let's say you know, we were doing, let's just say four years ago we were doing the two and a half million on 30 million. Now I'm at this inflection point today and the market's hot, and who knows when they get bored and want to go do whatever they want to do the next, whatever the next bad is for those guys. Um, so I you know, I said I said today that you know, like if we started doing it, we'll be able to get, I would assume we would transact on this year's numbers, um, last year's numbers are gonna affect, and then I have a pretty healthy pipeline that we can demonstrate. But at what point in the process do I explore this and why? And I'm just you can tell me, don't do it, wait, or you should have done it last year. I'm just like, I'm just curious what you would say because I'm I and I'll give you. I was exploring it for the last year, and I'm I every conversation made me more and more angry with these fucking nerds that think they can do it better, and whatever else. So I'm like, you know what? I am just gonna kick your ass. Like, I'm just gonna beat you. So that's where I've landed. I'm like, you know, so I'll keep it. Maybe maybe I'll sell. I don't know, I don't mean to be closed-minded, but yeah, what's your advice?

SPEAKER_00 29:04

Fair enough. Well, here's the other big thing that can cause a technical problem with the transaction. You have to have a desire to sell stock, right? And for whatever reason, I don't care what that reason is, but you have to have a desire to have to sell stock and have that stock be broadly held, right? And again, that's another, I would say, point number two where some people raise their hand and say, Is this ain't for me, is the broadly held thing, right? So you gotta have some sense of you know belief that that works, right, from a mindset perspective. So I think that's a big deal. And I'll answer your question, but I think that's that that's where it starts, right? You have to have a desire to sell some stock. You don't have to have a desire for cash or liquidity, but you have to have a desire to reposition and sell a significant portion of your stock. It doesn't really work very well. I've seen them done for five or ten percent. Um, you don't get all the tax benefits, and it's not meaningful enough to your people to really move the needle, right? So you've got to start thinking like 30, 40, 49%, you know, or it starts to become a benefit that people can touch and feel, and it starts to you know kind of impact your life. Um, but a lot of it is just, you know, what do you how do you see the world? I think that's a huge element for someone like yourself, right? Because we actually run into this problem quite a bit where people come to us and say, I don't need any more money. Okay, well, fine. That's that's that's okay, that's a problem we can solve for. What what do you need to solve for, right? So what I'm hearing from you is it's not about getting the biggest check, it's about, you know, there's a philosophical thing going on in your head about what is optimal, and you know, there's probably some legacy stuff built into that. I'm hearing, you know, some sense of responsibility for your people. Um, all those things, you know, do kind of push you towards an ESOP because of the fact that uh it does accomplish a lot of those goals, right? So uh it's a wonderfully graceful way to exit a company, right? But again, you know, do we want to exit, right? We don't have to. So some people look at this, like I said before, as a chips off the table transaction, and sometimes they don't even need the money, right? And that's fine too. Um, you know, there are charitable things you can do, there are, you know, there's lots of things you can do with money, right? And it doesn't have to be spend it, and you know, there's again lots of utility there. Um, but I think you have to start with what does it mean to you and what would it mean to you, you know, if you were to sell a significant portion of this company to anybody, right? So that's where it starts, is that willingness, desire to do that. So the financial arguments for the why of it, um it's hard to make one right now given what you're telling me about your earnings, right? The argument I would make, right, is not about you, it's about your people, right? So um, if you think about what this means for your people in the next 10 years, right? Because you're not an old guy. I don't know how old you are, but you're not old. You're a little older than you. Uh I can tell that you've got less grade.

SPEAKER_01 31:59

36, 36, I got time left. Yeah, I got time in the tank.

SPEAKER_00 32:02

You guys you got you got a runway, right? So, you know, part of it is okay, well, what a lot of people do is they say, you know, I'm gonna do this ESOP and you know, I'm gonna wait till I'm ready to retire, right? Which is fine. Again, nothing wrong with that. But the benefit of doing something sooner rather than later, it doesn't have to be this year or whenever you want to do it, is if you really believe this company is gonna grow to a billion or somewhere in that range in value, you're gonna create a tremendous amount of wealth for your people by doing it now, as opposed to waiting until you're done and then letting them figure out what comes next, right? So you, you know, I I've seen people that have done it just for that reason because we need to, we feel like we need to get equity in the hands of our people so that they can come along for the ride too, right? Very common approach. You see this with Silicon Valley companies, for example, where everybody's got RSUs and um you know, or some kind of pre-IPO stock, there's gonna be a lot of new, you know, billionaires and millionaires out of the SpaceX thing, for example, right? So very common, right? And I think um probably critical to your trajectory to get to a billion dollars is gonna be not just keeping your people happy, but adding some new people, I would think, right? That's probably a fair assumption. Yeah, all right. So one of the paths to getting there, getting there, is a lot of talent acquisition. Well, this is a differentiating factor, right? You come to work here, we're gonna pay you well, right? And I'm assuming you pay well, um, but not only are we gonna pay you well, but you're gonna have an opportunity to build real wealth in the company you work for through an ESOP, and that's a differentiating factor. Is it gonna be the one reason why people come to work for you? Absolutely not. But will it make a difference, right? And will it allow you to do better at attracting and retaining the talent you'll need to get to the next level? 100%. It's a differentiator. So that's kind of the big reason why people in your situation would consider doing something like this. Not because you know there's a lot of cash, because there would be a significant amount of cash that could come out of this, right? And it would be a change to your you know, kind of overall personal financial strategy and your family and all those things. Um, but the biggest utility would be ultimately for you is you know, starting the kind of legacy you know aspect of it, and and you know, maybe starting some form transition, but um ultimately building out that kind of long-term plan. And um we have clients that ask us to build 15 and 20-year plans, and that sounds crazy, but people think like this. They, you know, especially business owners, they tend to be long-term thinkers, they're planners, they want to look at scenarios, um, you know, think about kind of all the possibilities. So I think that's the reason, right? Is you've got a lot of people, you're gonna need more people, so the ability to add, incentivize people the right way, and get them all swimming in the same direction, that's that's your care.

SPEAKER_01 34:55

And is the and uh I I guess I didn't do it, yeah. It's all for the people, like the only reason we're having this. I mean, that is my decision, is what is what do I believe is best for my people both now and in the future. Like, that's my job, like to me, is to take care of them, and that's the only reason. Yeah, so uh that to say um on the percentages, like is there uh the mechanism, right? So like let's say we forfeit control, let's say we I we trust that what is the mean like you see the day pournoi is my favorite story, and I think it just happened again somewhere where they private equity came, bought them, did their thing, jumped out. What happens if, or what is what is the bedrock of like surrendering that control? So let's just say we do 100% and and I stand in a position let's call and you know where where do I ensure like have I forfeited? Uh obviously I forfeited control. So what are the mechanisms that you put in place to maintain the direction that I don't want to say the ants are running the ant hill or whatever, but if it gets we get how do you keep it on the rails, I suppose?

SPEAKER_00 36:04

Yeah, that's a great question. And you know, some something that I think that's that's very important to understand is governance in an Aesop setting, right? So how does it change? Well, first of all, um trustee does not want to sit in your board, most likely. I've never seen a trustee actually sit on a board of a company, and they don't want to run your company, right? So what they want you to do is they want you to run your company, they want you to run your board, right? Because you're really good at it. I've noticed. You've done a really heck of a job building this company, right? So they're gonna notice that too, and they're gonna say, as long as he's willing to work and govern this thing, and whoever that group may be, we would like them to continue to do that, right? So that's a huge difference between an e-sop and a sale to an outside entity is control, right? So let's start with a minority sale selling less than 100%. So there are quite a few, I would say, more than the majority of minority eSOPs, so there isn't even an outside director required on the board. It does happen, right? So especially with a larger, more complex company. But the most common uh approach there, when it does happen, is let's just say a three-person board with one independent director. Right? So two of those three board seats you're gonna have discretion over, and the third is gonna be someone you nominate, and the trustee will have approval rights over, right? So you'll nominate the slate, two of the three are discretionary, the third is gonna be independent, and you know, look at it like an opportunity, right? Add someone you know to your board that is gonna help you get better, right? Someone that you have a relationship with. Listen, as long as it's not your spouse, one of your kids, your accountant, your lawyer, uh, or somebody that works for you, again, the trustee's objective is to get a well-functioning board that's going to add value to the business, right? So from a standpoint of setting direction, the board has a lot of power in an ESOP setting, right? They're gonna elect the executive officers, they're gonna set comp for officers, they're gonna make a lot of decisions around governance, right? So this is probably one of the biggest changes people don't talk about when they're doing eSOP transactions is well, we gotta live with this thing, and we still have to govern this company going forward. Um, most companies have to get a little bit better about governance, right? We see very large companies that have no real bordel. You know, companies making you know $100 million in profit that don't have much of a governance structure, which is fine as long as you don't have to answer to anybody. When you have you know a few hundred employee employees that are beneficiaries of retirement plans invested in your stock, it's just a little bit of a different you know operating environment for the board to live in. So you do need to get a little bit better, and I'm assuming you need to get better. Maybe your board is already great, but you know you're talking to one, it's one of one.

SPEAKER_01 38:53

One of one, okay.

SPEAKER_00 38:54

So you have to add two, right? One can be anybody you want, right? Or and the third is gonna have to be somebody that you know the trustee is gonna have to approve. But again, think about a push comes to shove, two of the three board seats are in your control, right? Now, trustee, again, their you know, their job is to wash the shop, right? Take look out for the best interests of the employees, make sure you're abiding by whatever you agreed to, make sure you're doing your filings appropriately, doing your testing and all the kind of actuarial work and the legal and uh tax filings, and then they want you to go grow the business. That's their objective. They're long-term buy and hold investors, um, and they're gonna look out for the best interests of your employees who are incentivized to grow and again help the business get bigger and better.

SPEAKER_01 39:39

That's great. Well, I my people do listen to this. Don't get excited, we're not doing anything crazy, we're not, we're just exploring a lot of you know my set, my uh and I don't would you I this is a task for me right now is how do you set up an effective board? I've most of the feedback I've heard is like you know, I don't want to set up a board that is a barrier, a bureaucratic barrier to uh an efficiently well-run company. So I like I think of a productive board. Do you guys is that where do where where does a man start? I'm just a posthole digger that managed to do something by accident that worked well, right? Like where would your what would your guidance be?

SPEAKER_00 40:18

Yeah, I think first of all, talk to your network, right? I know you have a a big voice on LinkedIn of you know, see your content on uh maybe I'm just liking too too many of your videos, but um, you know, hey, whatever you know, any pub is good pub, right? But yeah, I mean, you know, start with industry contacts, right? So, you know, uh people that you think highly of, right? Ask, you know, start asking how you know your friends and colleagues, have you you know approach governance? Do you have a board? You know, FMI helped regularly helps people with things like governance, right? So we have a whole group that you know comes in post-closing with eSOP companies to help them with setting up a board if they've like they'd like it. So um we have a a slightly different approach to kind of getting people through an eSOP because it's very different than a third-party sale where there's a very clear kind of mandate post-closing in most cases. The eSop is, you know, we find this quite a bit where people do the transaction and they for some reason just assume everything's gonna be different the next day, and they come to work and they're like, wait a minute, everything's the same, I just have a bigger, more zeros in my bank account, right? So I still have to do succession, right? I've still got to do the hard people stuff. Um, you know, the board and the you know, all the all the things that come with really, you know, for a lot of people, handing over the keys, right, are not financial, right? So I think the people stuff is something we spend a lot of time on because a lot of our clients come to us and say, yes, we want a transaction, but there's this other thing, right? It's sometimes it's hand over the keys, sometimes it's you know, I have a next generation, it's sometimes it's family, you know, whoever, whatever it may be, you gotta solve for it.

SPEAKER_01 42:01

And two other questions. So what is your what is actually, and I'm sorry if you said this, FMI's role in the ESOP trend, is it a facilitator? What is the actual good question?

SPEAKER_00 42:11

So I'm gonna try this for the first time, so bear with me. So I've been doing this for 26 years, right? Guys like me have been using sports analogies for like my entire life, right? So what do you get? Let me guess. Let me give you a guess. One guess to figure out what people the the sports analogy people use for the investment banker. One guess. It's the quarterback, right? Everybody knows the quarterback. Put the quarterback in, he distributes the ball, and you know that that's the analogy, right? Well, no more am I the quarterback, I'm gonna be your GC, right? So everybody know in this industry knows the GC, so what do they do? They organize all the parts, all this, all the trades, manage the budget, make sure that the thing gets done, and then when it gets done, they collect hopefully some profit. Right? We're doing the same thing, right? So we facilitate the transaction, bring in all the parties, help you negotiate, help you raise the financing, really hold your hand through the entire transaction process from the very beginning where it's you know we don't know anything, but we know we need to do something to all the way through to if you want, hand over the keys.

SPEAKER_01 43:18

Um God, it's sorry about my family scene in the background. Um are the uh I guess I'm gonna ask one pointed question that knowing what you know, is it irresponsible? Is it irresponsible to not eesop versus third? Like why would why third-party transactions?

SPEAKER_00 43:35

No, no, no, I don't think it's irresponsible. I think, look, there are lots, people view the world very differently, right? You know, I'm a little older than you, but you you you see this in your life, right? You you know, you can look at the same thing as somebody else and they they think it's you remember the whole green what was it, the green and white dress that some people thought was purple and on social media, do you remember this a few years ago? Like people can look at the same exact thing and have a completely different reaction. Right. Um, you know, and uh that's okay. Right. So I don't listen, we see very successful examples of private equity transactions, strategics, eSops, internal buyouts. Again, you know, values and the way you look at the world are what really drive people to do things, not necessarily the biggest, you know, just purely the biggest check and the you know the most zeros in the offer.

SPEAKER_01 44:24

Fair. I appreciate that answer. And then is there any statistics? And I know you guys are a pseudo-statistics company. Is there any for uh like so? Let's let's like if we do and I doubt it. I'd be shocked. This would be awesome. This I would invest in finding this out, but like if you have we're just gonna you have catastrophic success, you have just like we're gonna put this range of mediocre, mediocre, nothing changed, it's not it's null. We'll call catastrophic success null and catastrophic failure, right? Is that those statistics exist to do the side-by-side comparison? I'm like, I was trying to look at a board truck and a GM right now.

SPEAKER_00 45:02

Like, is there is there are some metrics, right? And uh FMI did not publish them, and my boss may shoot me for using another firm's statistics to support our argument, but there's not been a lot of empirical research done on the success of eSOP companies versus non-esop companies, right? There is one that was published recently last year, a company called Stout, which is a big uh financial advisory firm. They do a lot of evaluation in the eSop work. They took a sampling, and maybe not a sampling, maybe it's their entire portfolio of eSop companies, which is hundreds, it's not thousands, but it's not a crazy sample size. I mean, the SP is 500 companies, right? So bigger, yes, but still sample size, right? And they looked at performance versus the market, and there is some hard data. If you look at their piece, I'll send it to you so you can look at it, but it's not a hundred pages, it's not bad, I promise you that. But um, eSOC companies do do better. That's what their report says. Um, there are some that go very badly. There is some catastrophic failures. Um, I will say that the reason why eesop companies fail is not because they're an eSOP, it's because they were going to fail anyway, right? And we just were the catalysts, that's it. Right? So and companies that are super successful were probably going to be super successful whether they did an ESOP or not. But the ESOP can be a very meaningful tool to getting you to new heights in an organization because it will change behavior, right? But the big but is you gotta tell people about it, right? You can't just say, hey, we did an ESOP and snap your fingers and all of a sudden you're doing 20% more even out, right? That's not what happens, right? It's a process, you gotta tell people about it, incorporate it into your your ideology, put an employee-owned logo on your branding, like just all the things, and then it does pay off. There's no question about that. Uh, and eSOP companies do statistically uh perform better, lay off your people in downturns, weather the storm better, or they just they think differently, they act differently, and they get better results. So that long story short is yes, there is some empirical data that says e-soft companies tend to do better than other ownership structures.

SPEAKER_01 47:09

I love it. Uh, please do send. I I'm not gonna ask you to say the name again. I I didn't hear it. But okay, one and I I would I do want to give the floor to you before I let you go on. I know we're coming up on time, so thank you for being here. But uh, the thing that I did a poor job of, and I'm so nervous, so I need to say this again. If my people are listening, like, please, this is just an exploration for the sake of the global audience, please. Like, I'm just waiting for one of my executives. You gotta stop talking on the podcast. People are asking when we're east off, but whatever. Um, what does it mean for them though? So the day, let's say we do it, and the day, how does that how does that look on their side? Just what does that more mean in their world?

SPEAKER_00 47:46

Yeah, so really nothing changes, right? And that's a good thing in the short term, right? So the next day you you know you close your transaction, you hopefully do an announcement, and everybody looks at you funny and says, Well, that sounds great, and everybody's clapping, so I guess I'm clapping too, right? So that happens quite a bit, right? Because most people, your rank of all the they may have heard of an ESOP, but like what does it really actually mean? Nothing, right? And then you know, a year goes by, they get the first statement, they got five grand in their ESOP account. So what, right? Well, what happens is that over time that five grand becomes 50 and 100, and they're hearing in the background, hey, we're an ESOP, we're an employee-owned company, everybody gets stuck. If you stick around, there's gonna be a retirement benefit, and then it starts to become real, and all of a sudden it's like you've got you know rank and file people with hundreds of thousands of dollars of money they didn't have before just because they came to work and did a good job, right? And that's where the change starts to really happen, right? So um I would say that what you got going for you is esops are very common in this industry, but still, you know, it's not widely known, and it's gonna take some time to build that cultural advantage, but it will absolutely, with the right amount of effort and the right practices, make a huge difference for your people, and it it's going to be hundreds of thousands, if not a million dollars, for lots of people that work for you. And again, the why of this for you is the ability to do that, right? To give people and and and and for some people that in and of itself is enough, right? It's like, okay, maybe I don't need any more money, but I've got a hundred or two hundred or three hundred people whose families can be permanently changed by selling some stock in my company that maybe I didn't feel like I really needed in the long run, right? So um that's kind of the pickup, and it will make a material difference. Again, we're assuming the company succeeds and all those things, but you're going to you have the ability, uh, and that's very powerful, right? Is to change a lot of lives.

SPEAKER_01 49:46

And in there, it's just uh, and I'm sorry, sorry to do this if you need to go. No, I got some the the um let's just say I I've been there for 10 years. No, let's let's say five and I made I got fifty thousand dollars in my e-sub account. Is that theirs when they leave or they have to be there for a liquidity event, or how does that how does how does that materially become theirs? Yeah, it's a good question.

SPEAKER_00 50:09

So generally um it's a retirement benefit, and there are things like vesting, um, which means they got to stick around to get it, right? And there's something called share allocation, which I'm not gonna bore you with at this point. If you get further down the line, I'll tell you all about it and see if you can stay awake during it. But that there's a formula, right? So every year you make contributions to the ESOP and then they release shares. So that net is we tell people it's about seven to ten years before anybody can get any meaningful benefit, uh, but they're gonna see it and it's gonna start to accrue. It's just gonna have a lot of hooks in it, right? Which is I think important, right? Because what we don't want to do is give everybody a big check and say, here's all your money, you know, please keep coming to work for us, right? So, what we're trying to do is create that incentive to uh grow that nest egg and kind of grow as a collective. I know that sounds bad, but you know, that is there is a socialistic view on this thing, right? So over time they accrue benefit, and then when they reach an event, right, retirement, death, disability, things like that, um, they can do a rollover into an IRA, right? So you have to, the company has to buy that stock back from them at some point, and you have a good amount of control over what those events look like, right? So you you would design a do a plan document design, which is gonna be the governing document for the plan for the ESOP. Um now there are limits, right? You can't just do whatever you want, um, but there's a lot of things you can do to customize the benefit to fit your people uh and incentivize people to perform the kinds of functions and the types of behaviors that you want. But absolutely, they're gonna have cash and you know, accumulated or value accumulated in company stock when they reach an event. You know, again, typically retirement is the most common one. You're gonna buy that stock back and they can do a rollover if they want, or they can take the cash and pay the tax.

SPEAKER_01 51:58

Understood. Um, I have many more questions, but I'll keep you all night. So I appreciate you making the time. Is there anything that I didn't ask, we didn't talk about that I should address when exploring this?

SPEAKER_00 52:10

I think this is a really good start. Um, I tell you, man, my biggest challenge is getting this much information into someone's head before they start to glaze over and their eyes start watering a little bit. And I can kind of see that happening with you a little bit, but no, I was with you.

SPEAKER_01 52:24

I was with you.

SPEAKER_00 52:25

Okay. Um yeah, no, it's uh I think bite-size, you know, this is about an hour. I think that's a good length for uh first first conversation, and um I'm sure you'll have questions and as we listen back to it. So give me a holler. I'm happy to talk through more.

SPEAKER_01 52:39

That's awesome. Um, I'm gonna uh end the recording, so thank you for being here.