How Employee-Owned Companies Grow 2.5% Faster (And Pay Less Taxes)

**[00:00:00]** Hello everyone, my name is Armando Perez-Carreno, and welcome to the Web Talk Show. Today with us is Matt Middendorf from VisionPoint Capital. How are you, Matt? I'm doing very fantastic, Armando. How are you today? I'm doing great, thank you. It's raining today. Didn't expect that, but of course we turned on the sprinklers yesterday, so of course it it had to rain. Well, as long as you take responsibility for it, it is I'm up here in beautiful Wisconsin, and it is an ice storm right now, and I take no responsibility for that. So Yikes. Yikes. No, it was hot here the rest of the week, really hot, then suddenly Texas weather is very funny. So, Matt, tell us for the audience, what do you do at VisionPoint Capital? Absolutely. So, my role at VisionPoint Capital as the director of ESOP consulting is very simple. I educate business owners, right? So, uh 80% of my job is education. What I do is we have conversations about the strategic opportunities that they have around transitioning their business, which sounds really, really fancy, but really the conversations we're having are about price and control, and I their identity as business owners and their legacy as business owners, and figuring out which of the options out there fits their vision, their goals, their ideas for what's next best. And hopefully in a lot of cases, that's employee ownership, ESOP specifically. ESOP is a term that I expect a lot of the audience will not know what is behind it. It's employee stock ownership plan, is that correct? Very good. Very, very good. Absolutely. What does that mean? Okay. So, an employee stock ownership plan is three things. Number one, it is a business transition tool, and we'll dig into all of this, right? It's a business transition tool. Is employee ownership vehicle, meaning **[00:02:00]** creating wealth, creating opportunity for your employees. And it is a qualified retirement plan, which has some special tax benefits for the business. So, yeah, we'll dig into all of those things. I When I hear the term stock ownership for employees, it's it reminds me of cuz I have friends that work at at companies like Tesla and other companies. And you you hear how they get into these tech companies, etc. And they get stock options and it's part of the whole thing. But in the small business world, you don't hear about that as often. So, is is it in any way related to to that where where employees get stock as part of what they're doing or or is it a completely different vehicle? Completely different. Right? And that is Excuse me, pardon me. Something that I hear a lot, right, is the ESOP is in stock employee stock ownership plan versus stock options. So, in an ESOP transaction, what happens is a business owner strategically sells part or all of their business to a trust. An ESOP trust specifically. So, what happens then is the employees don't actually become owners of the business directly. They're beneficiary owners. So, the seller retains control. The people that run the company before that transaction continue to run it after. But you're aligning the financial goals of your employees with the financial goals of the business for the first time. Which is why ESOP companies are more profitable, why they grow faster, why they're more productive, why they're less likely to to lay people off during tougher economic times than non-ESOP companies because everybody's pulling in the same direction. Wow, that makes a lot of sense because if you have stake in the game, you you sort of play a little harder. Yep. I've got stories. We'll we'll definitely get into all those stories about how that works. Yep. At what point does a business owner **[00:04:00]** start thinking about ESOP? Is this something when they're just starting out, when it's growing, when they're about to retire? Uh the answer is yes. Mhm. Um so, I have for example often times it's connected to exit, right? Transitioning out of the business. And that's very common. I've got a client right now. He's in his mid to late 60s, uh has a business that's worth roughly $20 million that he is trying to figure out what's next for. He's been getting private equity offers or or strategic buyer offers for years. But he's always seen those for what they are and that is paper tigers, right? It sounds really good when they give you an offer here that you know after due diligence is going to be here and after buyouts is actually going to be here and oh yeah, by the way, they want you to stick a few million dollars of your own money into the business. So, you don't walk away with anything close to what this was supposed to be. So, he rejected those and he's looking at ESOP and lo and behold, he's actually making more than he would have if he had sold to those other people in the to begin with. So, he's not sacrificing something to create a legacy with his employees. I've also got clients though that are in their 40s that aren't going anywhere. They're staying in their businesses for 15 years, but they want to pull liquidity out and they want to do some different things, invest in different places, build wealth in multiple ways without having all of their eggs in that one business basket, right? So, um there is no limit to what ESOP strategically can do for a business and a business owner. It's just a matter of what your goals are and when is the right time to have that conversation. Let's step into that first example a little bit. Exactly. I hope it I I don't I don't think we realize what you just said about these BC offers. Mhm. Um we hear all the niceties about it. Sometimes we hear the not-so-niceties about them taking control and all that, **[00:06:00]** but but I hadn't considered that part of like with many things, you see this number and then it turns out to be this other thing. We're not even talking about the tax implications, by the way, either. By the way, for the seller. That's very good to know. So, how does it work? You You You briefly mentioned a few of the items that get taken off, but can you Can you elaborate a little because I think that will really help a lot of business owners start to consider alternatives when they're getting these types of offers. Yeah. So, let me Actually, if you don't mind, I'm going to tell you a story. Okay. If that's okay. I have a another client right now who's going through this process and he built this company over the course of 20 years. Built a fantastic company. Um HVAC, pipe fitting, construction, very tight, right? Huge facility, works all over the country. Got an unsolicited offer from private equity about 7 years ago. And looked into it cuz it just came at a time where he was thinking about what's next, wanted to spend more time with his family, his daughters were in high school, and he started digging into it. And actually, it came out okay for him from a price standpoint. Yeah, they started here and they ended up here, but he was a pretty shrewd negotiator. It was a really good strategic move for them because they had another partner that they thought were going to mesh really, really well to to create a real profit center for this private equity firm. Mhm. But guess what? He exited. They alienated his best people. He had never lost a foreman before that, but they were all gone within a year. They started raising prices and his best customers in in turn and started walking away. So, he lost his institutional knowledge. He lost his best customers, or the company did, and 2 years later they started asking him to come back in and say, "Help save us." What he did instead was he bought the company back from them for pennies on the dollar. Basically, the cost of accounts receivable. **[00:08:00]** He made out huge just from that versus versus what he sold it for versus what he bought it back for. And over the course of 5 years, he built it back up. And now, he's selling the company to an ESOP. He's going to make more than if he had uh than if he had the than he made the first time. You know, they gave him an offer here the first time. He built it back bigger, now he's coming back here. Um he's winning, the company's winning, his employees are winning. Um just a fantastic success story about what private equity did to his business, how he was able to bring everybody He brought all that talent back, he brought all of those customers back, and got got to the point where he's like, "My legacy and who's in control of my company after mattered more than price. But oh yeah, I don't have to sacrifice on price, either." That is I think one of the most important parts. Not Not just the the price part, but the issue that he saw once he was out of people leaving. I've seen I saw it very recently. BC firm comes in, takes control, the day they put in a new system, people just walking out the door. Because there's a mismatch between goals and values and and where the company is headed. And I was just talking with um we had Josh Gold in the last episode from the big word. We were talking about the um the sheer amount of knowledge that people gather through their lifetime and how maybe they're going to start making a comeback. All these people that retire, **[00:10:00]** but really actually they have all the knowledge like in your case they they harass you to come back, right? Suddenly you find yourself hiring three people to do the job that they did by themselves cuz they know how to do it, right? Yes. And so it's it's amazing that that it's still happening, but regardless of whether where that company was going to be headed, the fact that the the main people like his foreman start start walking out and don't want to be there, it's a huge loss for the company because that's everything for it to continue to grow. And and it's just doesn't make any sense from a logical standpoint. If you show this to a kid and we're like, well, we're going to do this and this is going to what that's going to happen. Do you think it's okay? You're going to be like, that makes no sense. It doesn't, but it's a story that we hear over and over and over again. Not just on my side where people come to me going, "Okay, I did it this way the first time, but I want to do it right this time." Right? Uh we hear stories like this all the time in the business community. I'm a former banker. Uh former business owner, right? So I've seen the numbers. Um I'm former business owner, so I get how important it is for a business owner how how Let me put you this way. When I was a banker, I didn't understand the people sitting across from me just how much their businesses consumed them and how important they were to them. Like in in my case a fourth child, right? So when you have your own business and you're trying to figure out what's next that's where things like ESOP can make a lot of sense in knowing that you don't have to sacrifice your return. You don't have to give up control of the company. The people that ran it before are going to run it after. That you can maintain your identity as a business owner. You can be proud that your name stays on the door. Mhm. And you're building wealth for your employees that they would have never had. So, your legacy inside the building as well as in your community stays intact. Checks all the boxes for people who are looking to check those boxes. **[00:12:00]** Is this something that any type of business can do or is it specific to a an industry? Sure. So, here's what I'll tell you. Here's who this is for, right? We're going to talk about who it's not for, too, but who it's for. You got to be US-based. Got to be an American business. It's it's you know, Canada, the UK, they all have versions of this, but for my purposes, right? For the purposes of our audience, um we're going to talk about the American rules, the the US rules for ESOP. Um got to be profitable. This isn't an escape hatch. I get calls all the time where people like, "Yeah, I tried to sell my business, but nobody wanted to buy it cuz I wasn't making any money. So, I'm just going to sell it to my employees." That don't work that way. The trustee's got to want to buy it. Right? Mhm. Even though the trustee has no say in what happens in your business after you sell it, they're not involved in a day-to-day basis, um it's still got to be a sellable business. Typically, want to have 15 to 20 employees minimum. Right? The more the more better. Um and you got to have a culture that aligns with these ideas. If if you have a culture of uh not being involved, if you have a culture of employees not being engaged, um good good culture takes work, and if you don't want to put the work in, then you're not going to see the benefits of being an ESOP. Right? The extra growth, the productivity, the return on on assets that you would normally see in a in a successful ESOP company. So, that's who it's for. Um from an industry standpoint, um the number one industry is professional services, uh engineering, architecture, that kind of stuff, right? A lot of accounting firms like that kind of that kind of that kind of industry, manufacturing Mhm. is huge in ESOP. Construction Mhm. is hot. Um it's hard to sell a construction business unless you're super regional or regional or very tightly niched, right? It's hard. So, ESOP is a great opportunity for them. And believe it or not, number four on the list is financial services. A lot of banks are partially **[00:14:00]** employee-owned, and most people don't know it. Interesting. Is Is it a If you were to try to find an average, is it mostly white-collar employee-based businesses or because you mentioned manufacturing as well or is it just it or does it even work better or worse in in a place where you might have I don't know, 20% white-collar and then 80% 70% blue-collar jobs? Yeah. Um it works for both, right? A lot It's huge in the engineering world because it is One of the biggest parts about ESOP is being able to hire and retain better talent. Mhm. Right? So, if you can get into engineering, which is incredibly competitive, for example, keeping those engineers that you're bringing in and training and developing, we've already talked about institutional knowledge, right? How important that is. Um but you know what the largest ESOP in the country is? Crazy enough, it is um a grocery store chain in the southeastern United States. Really? Yeah, absolutely. They're the largest ESOP in the country. And you have cashiers there, right? About as humble of an employment opportunity as you can get working for them. And they worked there for 20-30 years cashiering and they retired multi-millionaires. Yeah. That that was actually where I was going with the question where many times we see in a chain of jobs in a company, if you go to the lower rings that there's more turnover things like that. So, it's very interesting to see that in this scenario where perhaps the entry-level if you want to put a level to the to the **[00:16:00]** job position still is attractive enough for someone to want to stick there for 20-30 years and and continue with with the mission and the values of that that company even at any level. By the way, it's the grocery store chain. I I blanked for a second, it came back, we're good. Um so, yeah, but the the the stickiness of employees in an ESOP company can't be understated. They stay four times longer on average than in a non-ESOP company. Yes. So, Yeah, it makes it makes a lot of sense. And that's good because that one that's one of the main problems with companies that just the turnover is super expensive. Yeah. Absolutely. And again, how many times have we said the words institutional knowledge, right? It's about profitability and ESOP companies tend to grow 2.4 to 2.6% faster than non-ESOP companies. Hard numbers. It's And I as a banker I saw my clients who were ESOP continue to outperform their non-ESOP peers over and over again. So, I've seen that in real life uh even before I got into this space helping to make them for a living. I I have absolutely no experience in in this particular sector. Um I remember a the only thing that it comes to mind that that that I've sort of heard before is one of our clients at some point was a B corp and it was it was sort of a part employee owned. Does that have anything to do with this? Is it similar? Is it aligned? Is it completely irrelevant? So, so a B corp is not an ESOP and an ESOP is not a B corp, right? But the two philosophies Mhm. tend to line up very very well together. So, um So, it is something that a lot of B corp B B corp company shareholders are aligned uh strategically with the goals of ESOP. So, absolutely. They're not one in the same, but it's it's that same thought process that if you're a B corp, then yeah, for a lot of **[00:18:00]** opportunities for ESOP makes sense. Why do we hear as much about ESOP programs in the wild? Yep. So, I'm going to give you two reasons. Number one is because I am not aggressively calling. I am not sending letters. The ESOP industry isn't doing what private equity is doing and going out and just blindly soliciting people, offering them the sky, knowing that's not where it's going to end up, right? But you get people on that road and they're so invested in it that eventually they're just like, you know what? I've got so much time and energy into this even though I started here and now I'm here and after taxes I'm going to be here. I guess I got to follow through, right? That inertia carries through. Um, so the private equity industry, the business brokers that facilitate those transactions don't want you to go ESOP because they aren't making money from it. That's a big part of it is the people that most business owners call when they're thinking about what's next for their business aren't asking for this because can't make 5 6 8% from a transaction selling to an ESOP. Right? They don't do it. They don't know how to do it. They got to send it to somebody like me who's an expert and they don't make money. They make money selling to a private equity. They don't make money selling having you sell the company to a trust where you're hiring the trustee. Yes, that's right. By the way, in an ESOP transaction, you're hiring the person you're negotiating with who represents the trust. Which is amazing and I want to stress one more time that trustee does not take control the company. The trustee represents the employees through the transaction, but they are not involved in the day-to-day of what happens next. So, the control of the company in an ESOP transaction doesn't change. The other reason that you don't hear as much about ESOP is because the people again who you're go-to beyond the **[00:20:00]** business brokers like your accountants, your banker, your business attorney may not know a bunch about it. Your accountant, I hear it all the time where people come to me and say, "Actually, the the transaction I mentioned where the guy had sold a PE and was now going ESOP." His accountant said, "Don't do it." He wanted him to go back to private equity again. Why? Because he said it's complex, it's expensive, it it it's uh requires care after. You don't just get to walk away. But, the truth of it is is the accountant didn't think through well, it's not complex beyond the fact that yes, you don't usually walk away from an ESOP after you sell it. You're going to be involved on the board in a governance capacity or still in the day-to-day of running your business. You don't have to. People do sell their ESOP and walk away, but most people don't. It's not expensive. It's actually a lot less expensive than going through a business broker because you shouldn't be paying success fees in an ESOP. It should be a flat a flat fee transaction. So, instead of paying 4 6 8% like you do to a business broker, you're paying typically less than 2% of the cost of a transaction, but it's flat fee, so you know that going in. If somebody tells you to pay a success fee in an ESOP transaction, run away from that person. Because they're an M&A person who pretends to do ESOP. Yes. Right? So, run away. Save yourself. You should never pay 3% of a transaction. The other side of that is um so, you know, we talk about the complexity the again, the accountant just doesn't understand it, so they don't know it's not complex. It's not more expensive. It's actually cheaper than selling through a third party. Um and yeah, you're going to stay involved, right? You're going to stay involved in your business. That's why you're doing this, cuz you don't just want to turn off the switch and walk away. You want to sit on the board in the governance capacity. You want to be a part of it. But what your accountant doesn't know is that if you are an ESOP company and you're an S corp, for example **[00:22:00]** if you're 100% employee owned you no longer pay federal and in 46 out of 50 states, state taxes. Those K-1s for the tax bill that used to go to the shareholders now goes to the ESOP. And the ESOP doesn't have to pay. We should probably pause and just let that sink in for a second. Okay. So, wait. So, if I'm 100% employee owned and I'm an S corp, my company no longer pays state or federal taxes in most states. That's that's big. What are you doing with that money? ESOP companies are buying other companies at an insane rate. ESOP holding companies that are investing and pulling people in and are are a very big part of what's happening right now, because ESOP companies have money to invest because of that tax of the tax obligation that isn't there. Now, that is proportional. If you're 30% employee owned, you pay 30 you get 30% of that benefit, right? So, it's proportional, but at 100% that is huge. We briefly talked about this before the show that many people don't know about family offices, right? And and Kim Kim Hiller can came on the show recently and he was talking explain how all this works. And that was exactly what he was talking about where a family office has the difference especially for someone who owns a business or is worth 20 million, etc. The it's you have everyone under the same roof. You have the attorney, the accountant, right? The the insurance. So, so they all play the same game together in the same team. And so things like this don't slip through the cracks. They'll they'll have the best interest at heart, right? Whereas and he was saying this, when you have everyone separate or or even people pretending to be family offices, but they they outsource everyone fends for themselves. And so, **[00:24:00]** like you were just saying, maybe this one will get a cut of this or that transaction or maybe they just won't know the tax implications that that you're talking about. So, that that makes a lot of sense. And then the fact that you get that extra money to be able to grow the company more or or invest in other companies, that's huge. Yeah, right? So, and that's just the company, right? So, the part of the goal of this is to leave your company better off after you sell it. Why would you not want to do that? It's your baby. It it it is like I said, my fourth child when I had my own business, right? So, why would you not uh want it to be in a better financial position when you move to the next step versus again, selling it to private equity or third-party and not knowing what's going to happen after. I know what they're going to tell you, but that's not usually the reality. The other side of this is the sellers also get preferred tax treatment. There are paths in an ESOP transaction that don't exist in these other opportunities where you can defer the taxes so you don't have to pay and if you defer them until you pass away nobody pays taxes. So you don't even have to pay taxes on the proceeds if you don't need the money. How does the transaction work? We we we've talked about the transaction a bunch, but walk us through what happens when a business owner decides okay, we're going to do ESOP and this will will work with the employees and and we're going to get to a deal etc. What does that deal look like? Is there money exchanged? Is it mostly ownership based? What what actually happens in the flow? So I always say that there's three steps to becoming an ESOP. Step one is the I think I want to phase. And that's where you're learning about it. My job like I've already said is 80% is 80% education. **[00:26:00]** Where I talk to business owners and we figure out what's most important to them. Let's go through those boxes again. We talk about price, control, identity and legacy. Let's rank those. Let's talk about what each of those means to you. Because the truth of it is if all you care about is price ESOP's probably not a fit. Right? So and it's not about not getting the price, it's about your goals lining up with the solution. So the education that we go through is what are their goals? What are they really trying to accomplish in this transition or their next steps for their business? And along the way we educate. We talked about things like the tax implications. We talk about what the company looks like. How the employees are involved because the employees aren't putting their own money into this. That's like I said, it's a it's an indirect benefit, so um they can create real life-changing wealth just by giving their time, talent, and expertise to help the company grow and be more successful. We outline all of what it looks like. And that process through education ends in something called a feasibility study. And a feasibility study is a decision-making tool. So, you don't have to hear the concepts of ESOP and say, "Yeah, that sounds fantastic. Let's do that." You have to You get to hear the concepts of ESOP, how it works, what it is, the pros and cons of it, and say, "Okay, I like it enough to put a little bit of money into it to study it." And create a decision-making tool. So, when you're done with that feasibility study, you're going to know the value of the company. You're going to know the impact on you, aka your return as a shareholder. You're going to know the impact on the company, aka the cash flow. How does it impact the company? Is the company better off if we do this in the long term? And you're going to see the impact on the employees. As a lot of As a matter of fact, a lot of the business owners I work with through these studies actually want to start with, "Show me the wealth I'm creating for the people that helped me build this." **[00:28:00]** Right? And then they come back to the company and themselves. So, you get that study, and when you're done with it, you're supposed to be able to say, "Yes, no, or gosh, that sounds really fantastic, but now's not the time." Right? If it's no, awesome. You got some information. If you're looking to transition out of your business, you now have the information you need to successfully negotiate with other people through these other options. Mhm. If the answer is yes, then we transition out of this I think I want to phase, and we go into the I know I want to phase. And that's where we actually build the team, right? We hire a trustee. I already said, we're going to sit down together, and we're going to interview two or three different people who you're going to negotiate with, and you're going to hire one of them to sell your company to or to negotiate with to sell the company to the trust. Mhm. We're going to get the attorneys and everybody that's involved in these things. We'll do that together. We go through the due diligence together. We go through negotiations together. Um and by the way, I want to stress, if you've ever been through due diligence at a private equity or third-party conversation, you know how combative that is. You know they're coming into the room with a baseball bat wrapped with barbed wire ready to cut a million here half a million there and get you to where they actually think your company should be, not what they promised when you started. An ESOP due diligence meeting is sitting in a room and confirming the story, right? Understanding where your business was, where it is, where you're going to. Um making sure that the things that we've shown them line up with the reality of it. And here's what's really cool about that is it's very collaborative. I have sat through due diligence meetings for a for third-party or private equity transactions that took 8, 10 hours, bled into the next day. These are typically a morning. Start at 9:00, done by 11:30. Right? We walk through the process. So, it is very, very, very different from a **[00:30:00]** normal M&A type process. The negotiations are done almost entirely through email. And just take a couple of weeks. Because you're trying to get to a fair market value for the company. It's a legitimate negotiation. But their range of values, your range of values usually lines right up and that's how you get a great fair market value for your company. So, we go through that process, we close the transaction, and then we transition into from I know I want to to we are an ESOP. And that's where the education starts with the employees. That's where um everybody gets on board and you start to see the financial benefits of the ESOP that you're hoping to see where the company grows faster, it's more profitable, your employees are building wealth that they never had, the seller is getting the return that they wanted on their business, and and hopefully when you get to that point, everybody learns how to win together, too. So, I know I I I think I want to is where you're doing the education and getting the data you need to make a decision. I know I want to is the actual process where I lead my clients through that process to get to the outcomes and the goals that they wanted. And then the last part is is we are an ESOP where we work to live up to the promise that we started with in the very beginning for the company itself and the employees that work there. When this happens, at what point do the employees get involved, and do they have any say in the matter of does the company become ESOP or not? Um the short answer is no. They do not have a say. Um now, obviously the seller, if they are not key managers, right? They should hopefully they're they're uh they have a transition plan in place, right? They've been working on succession. They have managers and leaders. Uh you want to make sure they're on board, because the last thing you want to do is go through this process and have them all go, "Nope." Oh, right? So, we make we help make sure they're on board, and I wouldn't be the first time that I've educated key leaders in the **[00:32:00]** company because the seller hasn't been involved in 10 years down the day-to-day, and the people running the company need to know, right? They're in part of that process. Uh I have never gone through that process and not had them go, "Why didn't we do this 10 years ago?" But yeah, they need to be involved. You know, for the rest of the employee team, my advice to my clients is uh do what fits best in your culture. But my advice is at least wait until we've got an agreement of terms so we know what's happening. Mhm. Um I not that the that the negotiations fall apart very often, but let's just be honest, sometimes they do. Sometimes you don't get to where you think you should be. Um a great example would be is I have a client who was looking at ESOP that the transaction didn't close. They were a landscaping company, but part of their business was snow removal. Mhm. And there was no snow that winter. So, where we thought they were going to be based on the previous 5 10 years of projections, suddenly their revenue was way down and we decided to wait because the revenue was way down because there was no snow, nothing they could do about it. So, we waited a year and did it a year later when things came back. There was a snowy winter and everything was as it should have been. So, Timing complete. It's about timing. Timing. You got to get the timing right. Yeah. But and it makes perfect sense also to to keep key players involved so they're not sidetracked. Blindsided. Yeah. Blind sided. Yeah, that's the word. And and then everyone else you don't want to over promise something that they might get excited about and not actually turn out to be the thing, right? Well, you know, the truth of it is is you've heard me say a few times 80% of my job is education. You know what the other 20% is? Managing expectations. It's what I do. I'm like an ESOP therapist. So, yeah. Are there any third-parties involved in **[00:34:00]** the transaction in the sense that well, you get to a number and the valuation and all that. And then what like is there is there money exchanged? Who because you mentioned the trustees and all that the trust well, how does that side of things look? Yeah, so you are putting together that team with the So, again, I've mentioned a few times you're hiring the trustee. So, yes, you're paying them, right? A flat fee for the transaction for the cost of that negotiation. The trustee is going to hire a valuation firm to put together their own range of values. They aren't just taking my word for it. Um our team does a fantastic job. Uh VisionPoint Capital is first and foremost evaluation company, so we carry a lot of credibility with the trustees we work with because they know we're good at it. So when we tell them this is what the analysis looks like, we're not giving them an end number, but we're giving them the data to form their conclusion, and they trust that data. But they still need to have somebody on the team who can take that data and turn it into a range of values for negotiation. The sellers were going to hire an attorney who specializes in um Uh it's called ERISA. Uh it's the law that established ESOP and by the way established your 401k. They're all established under that same uh qualified retirement plan umbrella. The trustee is also going to hire an attorney. Um and the attorneys in this case my 90% of their job is after negotiations, uh drafting the paperwork. So it's not attorney driven per se. Um right. Uh but they are part of the process, and that's the team. So you're going to have somebody like me guiding you through it. We're going to have an attorney, and we're going to work together while the trustee has their team and their attorney and their evaluation firm, and and that's how we come together to come to the outcomes that everybody So everybody wins. Nice. This is so interesting. I I had no idea that that this existed, first of all, which is which is great. **[00:36:00]** That's why why I like the show, having people like you on because it's we're always learning about these little niche products within different industries, and uh we hear very little of a lot because the mainstream just talks about the same thing. Well, and what's crazy about this is it's not that rare, um but it's not that common, either. There are over 7,000 ESOPs in the country representing billions and billions of dollars of wealth for employees. So, while they are not uncommon, you're going to find a lot of the companies that you know and love are partially ESOP. Uh it's so so it's something that like Publix, for example, like Bob's Red Mill was an ESOP. Right? So So it's not rare, but it's something we should talk about more as well. Yes. Yes. Many people, because I I get them as well. I'm sure a lot of people get these emails like you were saying from VCs or family offices. They're just cold emails, cold calls, and they're like, "Hey, we we'd like to put some money in your company. We have this portfolio." And And it may sound appealing to many a business owner, especially if they want to grow or or whatever the the position they're in. It just It sounds interesting, right? Um what would you recommend people do when they receive these Is Is this Does it make sense to answer? Does it make sense to do research? Talk Is there Is there a like a person that or type of person that one should reach out to like to really get yourself course, but who do we call, right? Like who's the the like you were saying the **[00:38:00]** ESOP therapist. What What is the concept or the name of the type of person that we should try to reach when we are curious about these things as a business owner? Yeah, absolutely. Well, I'm going to come back to if you're listening to this or watching this, decide what's important to you. And yes, you can call your accountant, your attorney, your banker. Um if you have a a fellow business owner that you really trust, you can call them. I know when I was in business, I was part of a mastermind where I sat with a group of guys uh every Friday morning for 10 years. And we talked about what was working in our businesses, the challenges. And I guarantee if I got a call like that and something about it made me stop and say, "I want to pursue this." I would go to them. Right? That would have been That would have been part of my conversation is, "Okay, let me just talk through the pros and cons of this." and get their feedback because we built trust with each other. But I want to come back to your goals. And I'm going to say this again for the 50th time during this conversation, decide what's really important to you. Because here's the simple truth. 40% of the businesses in the United States are still owned by baby boomers. The the the client I mentioned who was in their 70s, late 60s, early 70s, who is in the process of a transaction, who got call after call and letter after letter, actually went down the road with several of them, and recognized every time because he had a good team around him that the rubber did not meet the road with what they were promising. Figured out that price wasn't his primary driver. And I've already said, you don't have to sacrifice price. You don't have to sacrifice your return to do an ESOP. You're not Mother Teresa. You don't have to be a saint to sell your company to your employees. Make **[00:40:00]** your money. You built it. Please, please, please, cash in. Right? Don't hesitate. You earned it. You took the risk. But it's not just about price for most people. Those baby boomers who are still holding onto their businesses can get the price. What they're not comfortable with is who's going to be in control of my company after. Mhm. Right? Who's going to run it? Cuz they don't want to stick around and consult for 3 to 5 years like most of those offers want them to do or God help us put a million or two of their own money back into it. Mhm. Right? Like, hey, put it into this fund, right? They want to know that the people that are running the company today are going to continue to run the company after they sell it. And that doesn't happen in those in those instances. So, is it about price? Is it about control? Is it about your identity as a business owner? Have you ever really thought about what's next? Have you really ever thought about who you are if you don't own this? For some, that's the most painful part and that's why I have one client, he's 83. And he hasn't sold because he hasn't figured that out. And is still struggling to figure it out. So, you got to really come to peace with who you are as a business owner in that kind of situation. Again, with the ESOP, you don't have to make that choice. Price, control, identity, and legacy. Do you care? Do you care that your name is on the door? Do you care that your name is on the local high school football scoreboard, right? Do you care if you can look your employees in the eye when you walk out the building for the last time? And again, I want to stress, if you don't, that's okay. Some sellers don't. They built this thing. They built it to sell it and cash in and they're not thinking about the people that helped get them there. That's okay if that's who you are. But for all those baby boomers that still own the businesses and haven't **[00:42:00]** sold it, it's not about price. It's about who's going to run it. It's about who they are after they sell it. And it's about what's going to happen to the people that helped me build this and get where I am today. And until they have those answers, they can't make that choice. So, they need somebody like us, you and me, Armando, to have conversations with them about another way that can check all of those boxes, so they can high-five their employees on the way out the door and know that they have changed their lives. Right? That they don't have to give up who they are, that their name is going to stay on the company door. And that the people that they chose to run it are going to continue to do it in a way where the culture is consistent with what they expect. Oh, and hey, by the way, again, they're going to make their money. Yeah. Man, if more people knew about this, more people would do it. I bet they they would. The whole idea of businesses, for people who have never owned a business, you you you're alienated by the space between you and the business, right? And so, a lot of people see a shop or a restaurant or or a brand or an e-commerce, and they they just think of the product and they think of the branding, but they don't they don't step back and think of the business owner who who started that business, who very likely, and like you said, there's exceptions, but very likely built that business to help others, to fulfill a need that wasn't being met. And they put sweat and tears into building that business. They lost a lot of sleep. Lost a lot of sleep and family time, and then started getting employees, and then lost more sleep when things got rough, and they had to do whatever they could to be able to still pay their employees. And we lose sight of that when we're just buying things or visiting a place or leaving a bad review. Right? And I talk to business owners all **[00:44:00]** the time that at some point along the way, they stuck their own money back in to make payroll. Right? Absolutely. Yeah. Yeah. And these types of tools s- sound great because for all these people, like you were saying, the baby boomers, that have put so much into it with the hopes of keeping their people going and keeping the brand and keeping that legacy, this is a way for them to not just retire, but at least know that when they step back from it or leave us, that it will continue and all that work that they put in will be maintained. Exclamation point. Mic drop. Well said. So, I feel like we should probably take a second here and talk about the fact that this isn't perfect. Right? That there are some things about this that don't fit for some people. Do you mind if we do that, Armando? No, go ahead, please. Okay. Um because I don't want to paint a picture of this perfect utopian solution where everybody wins, you know, everybody gets paid, everybody gets taken care of, the company's better off, woo, right? There are some little things about this that may not fit your goals. And I want to be clear about them. And the biggest one for a lot of business owners when they're looking at this that they have to decide on is you get paid over time. In almost every instance with an ESOP transaction, you get paid over time. Now, let's be honest about PE transactions, you don't get paid all up front anyway. You don't get a You don't get 100% of the proceeds at close. They'll give you a percentage and then they'll hold the rest and pay out over time. And and and with uh with earnouts and clawbacks and all the caveats that you're no longer in control of whether or not you get. So, let's just be honest, a PE transaction's not clean, either. But, the example I gave of the person who sold a PE and bought the company **[00:46:00]** back and is now selling it to an ESOP. Um he is getting in bank financing 25 to 30% of the transaction up front from senior debt. The rest of it is being seller financed. Now, he's earning interest. 7 8% interest. So, he's making real money. But, on the same token for some people they want this. And that's not what an ESOP is. So, you're going to get paid out over 5 7 depending on the company it could be 10 years. Which is why a lot of people will stay involved if not in the day-to-day on a governance and a board capacity. This is they're still involved with the strategic direction of the company. There is a cost to it. Right? We talked about that. There is an ongoing cost to being an ESOP because you're going to have a trustee. You're going to have a valuation done every year to set a share price. You're going to have an administrator just like you have for your 401k and in some cases it's the same person by the way. You can hire the same company to do both. But, there are ongoing costs. Now, if you're saving millions of dollars in taxes because you're 100% employee owned, you don't mind spending a few thousand dollars a year on these things. But, they're there and I you got to know about those going in. Right? You don't want to be you don't want to be blindsided by what do you mean there's an upkeep? There's ongoing. Well, yeah, there is and I want to be honest about that. So, um it's not for everybody because if you just want to be done and you don't want to think about it it's it's not a fit. I I think by the nature of how it works and how you put it back into the employees' hands Not control, but the fact that they earn **[00:48:00]** and have a stake in it. I feel it naturally aligns with those who don't necessarily want to pay out right now, but rather want the company to continue growing. Do you think that's the that's the case? Again, I've said a few times ESOP companies grow faster than non-ESOP companies. 2.4 to 2.6% productivity in the year after they become ESOP typically increases 4 to 6% in the first year. Um and here's what changes. Uh I actually just spoke in Austin, Texas at an ESOP conference down there. And the the presentation that I did with a trustee uh who I work with it's called Built for the Storm. And it's about why ESOPs survived during challenging economic times. And one of the stories he told was a company an electric an electrician went ESOP. And suddenly in that first year, they saved tens of thousands of dollars in tools because the employees were no longer forgetting their tools in somebody's attic. Or in some in some in in in somebody else's truck or So, suddenly they had a vested stake in keeping track of their own equipment. Which is just blows my mind that that wasn't a cultural thing before, but suddenly they saw the value in Okay, how do I impact the bottom line of this company? Because if I impact it, it's going to come right back to me. And one of the ways that I can impact in this case was to make sure I kept track of the things I needed to do my job so the company didn't have to buy them again. Tens of thousands of dollars in the first year saved just in that expense, which is beautiful. It is absolutely beautiful. Um I mentioned the company earlier. Uh they're a pool construction company, but they also have a retail presence. And every business owner listening this can can relate. How many calls do you get in a week from people trying to sell you stuff? Right? Constantly. And these sellers **[00:50:00]** were in their early to mid 40s. They're not going anywhere for 10 to 15 years. They love their business. They just wanted to get pull money out and invest in other places and do other things with it. But guess what? They're employees now. Even though they're still in the office every day, they're employees now. When they get a call saying I'd like to talk to the owner, they you got him. That's awesome. Does that not capture the whole essence of what this is supposed to be about? Yes. Wow. Well, that's that's an that's a very outside the box repurcussion that you exchanges a whole intake. It changes a whole way they Of course, like you said, they don't they don't lose their tools and things like that. But the fact that they would even say that on a call tells you how how much they feel as part of that family. Which by consequence means they're going to do such a much better job at whatever it is they're responsible for. Again, lining up the financial goals of your employees with the financial goals of the company where all they have to do is contribute their time, talent, and expertise to the success of the enterprise. Just show them how. Show them the way. You don't have open books, but they need to know how they impact it. No, for sure. I'm glad you mentioned the example of the attrition. That was going to be one of my questions. Does it fit into like a home services space that's typically very informal unless those are part of ABC owned thing that just ate up a bunch of them, right? Um the ones that do well have some sort of structure. **[00:52:00]** Mhm. I always find it sad to see that plumbers, electricians, and other professionals are drive like they could be master at their craft but drive a beat-up truck with old tools because they're missing the structure part of it and it's heartbreaking when they get the offer because they make they make decent money and they decide to sell, but then it just changes completely the way they work and it destroys the morale and and what they were building and now it's a job and it's not like it's not why they got into it in the first place. So Well, and and all too often those private equity transactions result in a company and those jobs going somewhere else 3 to 5 years later. Yeah. Right? Yes. So it's gone. And a lot of the communities So I'm in I'm in Wisconsin. I've mentioned that. A lot of small communities here with one or two major employers. It's one of my personal missions is to make sure that those employers stay in town in those towns because if they leave, they're never coming back. Those jobs are gone and those communities are going to struggle for decades, generations because of it. Yes. And if it's employee owned and it's a local one Mhm. and they they they could stay for the long run. I'm always excited. I was talking with a company here in town that you you've never heard about like if you're local, you probably never heard about. And they they said it themselves. It ran with Texas Scenic, it's called. And they build things for stages, theaters, things like that and they they they do the actual curtains for the theaters and it's very exciting. We're going to have a tour on it I think next week. And we're talking and it turns out the company is I don't want to mess up the number but it's like 90 years old. And it's a local company and she's been **[00:54:00]** there like her mom worked there and like it's a generational thing now because they love the company so much which I mean I see that and everything you've talked about with Aesop it's sort of alliance with with that like having a company that has a culture that everyone feels that they're really a part of which they are in this case. I I mean of course there's downside like you said there are potential downsides but but it sounds great. I I hope more people learn about this that that could take advantage of it because it's it's not we've already said it it's not as well-known or talked about as it should in my opinion. You mentioned there's thousands of these what 7,000 8,000 is not enough in my opinion for sure because there are plenty of businesses that are in the right range and with the right values that they would want to do it. So I'm really happy that we're talking about it because it's one of those things where somebody listening to the show might have not heard about it might just have an inkling of what am I going to do next and the only thing they know is either they're going to retire they're going to sell and and it might never cross their mind except that they listened to what you had to say today. And it happens too often that people wait until it's too late. So, I mean do we have time for one more story? Yes, for sure. There's always time for a story. One client that we helped uh in his 50s had a son who had just started in the business who was in his mid-20s, just out of college. And the son was being groomed to take it over, right? Dad had 15 more years left, uh 10 to 15 more years left. Well, suddenly Dad had a **[00:56:00]** liver disease. Dad had a year to live. The kid wasn't ready. The dad didn't know what to do. So, fortunately they had a good management team. They could run the company on a day-to-day basis until the next generation was ready to rise up. But he sold the company to an ESOP because there was no other option for transferring that knowledge and that wealth within the company. He had to take care of his wife. Right? So, he took care of his family took care of his kid and made sure his kid was able to stay inside of the business. Uh and saved the people that worked there. So, it's a great story and and uh it's a horrible story. But it shows that if culture and control and that idea of uh legacy matters more to you then he could have just sold it out and been done and just said this is happening and I'm going to sell it or he could have stayed in it and and passed away and the company didn't have a direction for after. And he chose a direction for them and left them in a better a better way than he could have. It's all horrible and amazing at the same time. It is. But it captures the essence of it. Yeah. So, I appreciate you sharing it. It's It's what I think we need to hear. Because stories are the way we we really understand things. So so I'm glad you came on the show and we're able to listening to this heard that and say, "Man, that sounds like me." Um hopefully hopefully some of the other stories resonated and hopefully that one everybody goes, "Man, that's horrible and yeah, that's not fortunately that's not my situation, but man, I need some education around this. Talk to me." Yeah. Yes. Yes, I agree. If anyone listening wants to learn more **[00:58:00]** about ESOP, about their possibilities, um how can they find out more? Who do they reach out to? Is there a website? Um what do you suggest? Yeah, let's make it simple. Go to esopready.com. e s o p ready.com. And at esopready.com, it's there's tons of information and there's tons of education on there. But you can also take an assessment to kind of measure your goals, to kind of see where you're at, and see from a structural standpoint if ESOP might be a fit. Um but the other side of that too is if you've heard enough and you're like, "Okay, Matt, I'm ready to be educated." You can also just schedule a time with me from there too. You can get straight into my calendar, find a time that works for you, and we can start the process. And honestly, if we talk, the only goal of that first meeting is to say, "Okay, have I heard enough where I want to continue the conversation?" Or did I hear enough to say, "Yeah, thanks, Matt. That was great. I appreciate it, but I'm going to go in a different direction." That's excellent. I'll put that in the show notes as well so that anyone listening can see that. Is there any type of social presence or somewhere people can find you online or is the website the main point of reference? You know, esopready.com is the personal favorite. Of course, if you're on LinkedIn, just look up Matt Middendorp. Um Matt just find me on there and absolutely connect with me. I have conversations with every day with business owners all over the country on LinkedIn about their businesses and uh their goals for what they're trying to figure out what's next. Those are great places to start. Um and believe it or not, from a social standpoint, don't tell anybody, that's all I do. Cuz that's that's where the people I want to work with are. Excellent. So, that's what you need to do. You focus and if that's where the people are, that's where you're going to stay. That's excellent. Thank you so much, Matt, for sharing your experience and knowledge with us and all your stories. I I'm sure our listeners really enjoyed **[01:00:00]** it as much as I did. If you haven't liked or subscribed the to the show, please do so on Spotify or YouTube. And I'll have those links in the show notes as well so that you can reach out to Matt or fill out your assessment for E-Myth Ready at e-mythready.com. Thanks, everyone, and I'll see you in the next one. Thanks, Matt. Thanks, Amanda.