Episode 441 : Unlocking Business Legacy: The Power of ESOPs with Matt Middendorp

Speaker A: Since 1974, I've read a book a week searching for what it takes to achieve business success. After thousands of books, hundreds of client success stories, and decades of hard won business wisdom, here's what I know for sure. Working yourself to death isn't a badge of honor. It's a failure of strategy. So thanks for joining us today. I'm Josh Patrick and this is the 5050 accelerator where we explore how real business owners are cutting their hours by 50% while growing their profits by 50%. No consultant BS here, no theoretical frameworks, just proven strategies from people who have actually done it. Because here's the truth. If you're still working 65 or more hours a week, putting out fires and missing family dinners, it is what it is. But that's not how it has to stay. So let's get started.

Speaker B: Hey, how are you today? This is Josh Patrick and you're at the 5050 accelerator podcast where we help you think about how you can make 50% more money and spend 50% less time at work. And today we're going to take a little bit off our normal conversation. We have. And I actually have a subject matter expert on, and we don't do that very often anymore. But the reason I wanted to bring Matt Middle. Excuse me, M. Uh, Matt Middle. Dorp.

Speaker C: Matt Middendorp. You know what? I've been called a lot worse. So just keep rolling.

Speaker B: We're good.

Speaker A: Okay.

Speaker B: Matt Middendorp, and he's from Vision Point Capital where he's the director of ESOP Consulting. And we're going to talk about ESOPs today. It's a subject I talk about a lot and it's one that I think you need to know about. Whether you decide to do an ESOP or not, it might be a strategy that works really well for your company. So let's bring Matt on, We'll start the conversation. Hey, Matt, how are you today?

Speaker C: I'm doing fantastic, Josh. How are you?

Speaker B: I'm, um, well. So I'm going to ask you my standard question I ask everybody when I start a conversation, which is, what's the problem that your company solves for its customers?

Speaker C: This is actually really very simple. The problem I solve for a lot of my customers is business owners create this business, they build it, they nurture it, it becomes a part of who they are. Right. Selling a business is probably the, uh. First of all, taking the risk to create a business is incredibly difficult. But then the. The option of transitioning out of your business is probably the biggest, most difficult decision you'll ever make. So my job is to help people do it in a way that they feel good about.

Speaker B: Okay. So that tells you what you do or the way you do it, but doesn't really talk about the problem you solve.

Speaker C: Yep. So let's get there. Right. So the problem I solve is a lot of business owners want to transition out of their business and they want to get, uh, the return they deserve. So I help them do that, right? I help them solve that problem. I help them, um, make sure their business is better off after they leave. I solve that problem for them. Right. They know that their business isn't going to get stripped down and the profits aren't going to go out of town. And I help them make sure that their employees are taken care of. So in short, what I do, the problem I solve for business owners is I make sure that when they sell their business, they know that their business is going to live on and their legacy is going to be preserved.

Speaker B: So the problem you solve is maintaining legacy while getting great financial returns.

Speaker C: That's a great way to put it.

Speaker B: Okay, so this is something folks who are listening, which is really important is that when someone asks you what the problems you solve, keep it to about three words or four words if you possibly can. When you go, when you. One thing's for sure, when you start using full sentences to explain the problem you solve, you're actually telling people what you do, not the problem you solve. So uh, problem solutions. For example, in our business we help people make more money and spend less time working. Very simple. And it's easy for people to say, gee, that's something I want or I don't need it or I don't care about it. But it allows you to make an easy decision about whether it's something that's right for you or not. So let's move on. Let's move on. Excuse me.

Speaker C: I help people sell their businesses and feel good about it.

Speaker B: Okay, great. So that's what you do, but that's not a problem you solve.

Speaker C: It depends on if they feel good about it or not.

Speaker B: So you always say, gee, what's from the, from the business owner's point of view, what's their problem? Now I can tell you with ESOPs, often the problem is their business isn't saleable. You know, I see huge construction companies become ESOPs.

Speaker C: Yes.

Speaker B: And ah, the reason why is a construction company is only as good as their last bid and buyers want recurring revenue. Now the owner knows they're creating recurring revenue. But a $500 million construction company. There's not a lot of buyers out for that.

Speaker C: Nope, absolutely not.

Speaker B: And ESOPs become a perfect solution, especially if the company happens to have what I call the culture of ownership. So let's talk about that a little bit, Matt. Perfect. What would the culture of ownership be for an esop? I mean, what makes that a good ESOP cad?

Speaker C: Yeah, absolutely. So, you know, when we're talking about employee stock ownership plans, uh, one thing I do want to be clear about is the are not actual owners of the company. They don't have extended decision making. So. And I know we're going to talk more about that. So when we talk about ESOP culture, um, I'm not talking about they have the ability to hire. Hire people. Right. Change the name on the building, that kind of stuff. So what a great employee culture is, what happens at ESOPs quite often is you find that people are suddenly engaged in a completely different way. And what's really happening is, um, the financial goals of the company, for the first time in most businesses are now perfectly aligned with their goals, too. So you see at least some of those.

Speaker B: Some of their goals.

Speaker C: Yep. So you see people, uh, who suddenly are thinking about being more efficient. Right. They're thinking about their job, and they're thinking about how can they be more efficient, how can they save the company money, how can they help the company make more money? They are engaged in the success of the outcomes that the company is trying to produce in a way that they never have been before. So if you ask me what a greedy subculture looks like, it's people. People want to make a difference for the place they work.

Speaker B: I find that creating an ownership culture often becomes creating a more humane workplace also.

Speaker C: Okay, so I guess, tell me about that, Josh. Why do you say that?

Speaker B: Well, the truth is, many people work at companies where the owners are dictatorial. Now, you can have ESOPs where the owner remains dictatorial, and there's a pretty good chance that ESOP is not going to be especially successful because they're not sharing decision making, they're not sharing information. They're doing the least they possibly can under your ESOP rules with keeping their employees informed. On the other hand, you have ESOPs that are highly successful. Um, I use King Arthur flower often as my example that they're a very large ESOP based in Vermont. And what they've done is they have created unbelievably open and honest communication in the company. In other words, they share everything except what individuals are making is, uh, in salary. So when people come to work at uh, King Arthur A, it's a values. That company, they know what the values are when they're getting hired. Either buy into the values or they don't buy into the values. And they have total transparency into what's going on with the company and they get a chance to voice their concerns or support or not support for the, that. And those are the ESOPs I think that uh, are going to be around 20 years from now.

Speaker C: Yeah. And you know, good ESOPs like that are hard work. Right. But it takes a dedication and a commitment on the fact, on the part of leadership, uh, to continue that process as well as the people that work there. And that's not easy to do. But it is, absolutely.

Speaker B: It's actually very easy to do. You just have the guts, have to have the guts to do it. You know, I, I m, I'm also a believer that you can have a culture of ownership and not have an esop and get almost all the benefits of having an ESOP if you run an open company. You know, one of the things I think is actually crucial is to use open book management. And you know what open book management is, is you're sharing all the financial information except individual salary, uh, numbers with everybody in the company. Now when I did that with my food service company and we weren't an esop.

Speaker C: Sure.

Speaker B: Now when you do that, what you have to do is you have to provide financial education to go along with it.

Speaker C: Absolutely.

Speaker B: Because the people working in your company are not financially literate and they're definitely not business financially literate, with rare exceptions. So when you talk about a profit and loss statement, I mean, what's the best way to make an analogy to a profit and loss statement for a rank and file team member?

Speaker C: Well, and I think it's also important then when you're having that conversation, helping them create that understanding, uh, not just what's in it, but how do they impact it. Where do they impact, what are specific things in their role that they can do to show improvement in that P and L or in that balance sheet. Absolutely.

Speaker B: So one of the things I'm just curious about because this, this question just occurred to me. How many ESOPs, Matt, besides having you, uh, know the money that goes into the ESOP for stock appreciation for retirement, how many ESOPs have cash profit sharing plans? Not to go into a, you know, a qualified plan, but a cash payout, uh, profit sharing plan as part of their ESOP operation?

Speaker C: Man, I don't have that data, but I can definitely make some phone calls and get it to you. I know enough people at the national center for Employee Ownership would be more than happy to share that. I'm sure they have it, uh, off the top of their head.

Speaker B: If you were to guess what do you think it might be?

Speaker C: So have additional profit sharing beyond the esop.

Speaker B: Yeah.

Speaker C: I can tell you, and I know there's a bunch asked for, I can tell you that ESOP companies are far more likely to have other qualified retirement plans like a 401.

Speaker B: But man, Josh, yeah, I know.

Speaker C: Yeah, I gotta be honest, I can't even guess. Yeah. So what do you got?

Speaker B: Here's how you really build alignment. In my experience, it's great to have the ESOP trust, which is what it is. ESOP is a retirement. And when you get right down to, at the end of the day, that's all it is. And that's great. But if I'm 30 years old and my money is going into an ESOP and that's all that's happening, probably not going to be especially excited about that. I might be, you know, for a week or two when the valuation comes out, if it goes up. But the real thing is I want more money in my pocket. So if you align uh, a product, a cash profit sharing plan with your esop, then everybody gets, they get an immediate benefit, the company performs well and they get a long term benefit when they leave their company and they get to cash in their stock value and they both have to work, in my experience, in conjunction if you really want to have a long term plan. Because the truth is we don't do well as human beings when we think about things 20 years from now. Does that make sense?

Speaker C: Yeah, so it does. That makes sense. So I guess the question I would ask is I have been around hundreds of ESOPs and I haven't seen an ESOP company do that. So I'm just wondering if you have and what that outcome was. Was different because ESOP companies tend to be more profitable than non ESOP companies. They tend to keep people around four times longer than non ESOB companies. They have a greater household, like a 92% greater median household in uh, um, wealth than non ESOP companies. So obviously works as is. So I'd love to. Do you have a story about a company that did that?

Speaker B: Gardener supply does it.

Speaker C: Okay.

Speaker B: You know, I know lots of non ESOP companies, companies that do it. And when they become an esop, they continue doing it, you know. So the truth is it's not, I don't think The NCEO does a national center for Employee ownership. I don't think they do a great job of uh, talking about things you should be doing besides the financial benefits of an esop.

Speaker C: So that's something I would be really curious. I would love to see some data on to be honest. So uh, that might be something I might have my team work on is are those companies more successful? Do they have have better retention than a regular ESOP company? If you pair that with profit sharing, I would be really curious about that.

Speaker B: The real key is do they have better employee, do they have better team member satisfaction?

Speaker C: Mhm. Which should lead to the outcomes and

Speaker B: what happens because we did this, we had a very good profit sharing plan. My food service company was tied to open book management. And here's what happens. At least without us this is what happened. Are really good performers would kick the mediocre performers in the rear end and say get to work. Be more efficient because you're taking money out of my pocket. Now that happens uh, uh, in a respect with an ESOP company because you're talking about you're hurting my retirement. So you still have the same sort of conversation but it's not as immediate. And the other thing is when you do interdisciplinary teams, what I also think really needs to happen in ESOP is what you find is different areas talk to each other and they find ways to make the company better because there's an immediate benefit, not just a long term benefit. And when you marry those two things together, you likely get a better result. At least that's been my experience.

Speaker C: Yeah. And I guess I haven't experienced that. So I would love to see some data on it. You know, and you talk about culture and people really only being fired up about their ESOP for a couple of weeks when the share price comes out every year. I think good ESOPs transcend that.

Speaker B: Right.

Speaker C: They're consistently communicating around it. They're building it a play culture shift that just isn't about esop. It's about the holistic vision of what that company is and how they engage in it. And ESOP is a big part of that. So it's not just about the bottom line, but it's about being in a place that they actually want to work and they want to contribute to the success of too. And that's again that takes work. You create that it doesn't just happen.

Speaker B: Yeah, it takes a lot. And where the work is, is doing the stuff in a consistent manner. For example, um, great ESOP companies will be values led and that doesn't mean putting your values on the board and just looking at them every once in a while. It means using them in day to day conversations about how you should be behaving when you're working at a company. And uh, it might even be how you want your customers to behave with you while they're doing business with your company. For example. One of my values is rights and respects. And I'm going to treat you with respect. I expect you to treat me with respect. If we don't, we're going to be separating. Mhm. And I've had customers that were unrespectful or disrespectful of staff. They became ex customers. And when you do that, you start building team member loyalty way further than you ever could believe. Because you're now putting your team members as being on the same plane, if not even higher in importance, with the people you do business with. And again, ESOPs tend to do this because it's the nature of the beast is that if you're going to be rewarding your employees on a high level, you're likely going to think about them differently. Does that make sense to you?

Speaker C: No, that makes absolute sense. And that's absolutely true. No, we see that all the time. One of my favorite things is I met with one of my clients who became an ESOP last year and I met with them um, a couple of months ago and just said no. So tell me what's changed in your business since you became an esop? And she told me the story. She uh, said it was funny because we get calls all the time from people wanting to sell us stuff, potential vendors, potential new, uh, sources of, um, goods. And she's like, you know what my employees do now? They pick up the phone when somebody says, hey, can I talk to the owner? They say you're speaking to them. Uh, and she said that with the biggest smile on her face because that was something that she really wanted to be part of. That process was for them to be able to say, hey, listen, I'm empowered and if you want to have this conversation, let's start with me and then we can go from there.

Speaker B: Now one of the things I think, I mean we talked about this a little bit last time we did our pre interview is that um, I think ESOPs all should become benefit corporations. I think there's a technical reason for it, but I also think there's a people reason for it. You know, a benefit corporation instead of just having to maximize profits, which is what a standard corporate charter is a benefit corporation is called a triple bottom line company. Whereas people plan its profit. You take care of your people, in fact, you take care of all your stakeholders, you take care of the planet and you make sure you take care of profits so you can stay in business. Now, one of the risks with ESOPs, which you know, and if you're successful, you're going to find out is you're going to get, you're going to get offers to buy your business that you may not want to consider from private equity. And if you're just a standard ESOP and you're not a B corp, your trustees have to consider those offers and see if they're in the best interest of the bet, in the financial best interest, not other best interest of the truck of the shareholders in the esop. Now, uh, when you're a benefit corporation, that goes out the window because that's only one thing you're considering. You know, for example, let's say I'm an esop, I'm based in Burlington, Vermont and I'm in the mail order business. Burlington, Vermont probably is not the best place to be in the mail order business. And if private equity comes in and they buy your business, they're likely going to close down that operation and move it to a better place. But what if the owner, as part of their legacy, wanted to keep all those jobs in Burlington, Vermont by becoming an esop? They could do that and becoming a B corporation, they could tell the suitors to go away. That would likely move the business,

Speaker C: keep the profits in town. Yeah, right. Well, and that's important because a lot of the places that are considering AESOP are the kinds of places they put their name on the high school football scoreboard. Right. They're very involved in the community. They're known not just as entrepreneurs, but philanthropists too, in their community. And uh, yeah, they want to make sure that not just the jobs stay there, but that the money stays in town too. That the profits continue to help grow the people that they live and work with every day. Absolutely.

Speaker B: One of the great examples of that is Jack Stack's company, Springfield Manufacturing.

Speaker C: Sure.

Speaker B: And um, you know where they were located, there was nothing else going on. And if they didn't make that company work, the city was going to be seriously affected and they were spun off into an esop. And they did make it work. And as a result it's been, I mean they've spun off tons of companies since then and they're all ESOP owned.

Speaker C: Well, heck, I'm in Wisconsin And Wisconsin is not a whole lot different than a lot of the country. There's a lot of small towns and by small 10, 15,000 people or smaller and they've got one or two major employers in town and that's it. If they leave, they're not coming back.

Speaker B: Yeah.

Speaker C: So if your community is important to you, then yeah, you definitely want to do what you can to keep your business there. And that's a huge motivation for a lot of people.

Speaker B: Yeah, it is. I mean I think that, you know, we don't. And on top of that, one of the things I really like about ESOPs, which is for the owner and again this is non financial, is that uh, one of the challenges owners have when they sell their company, especially to a third party, is they will likely experience serious sellers remorse because they lose their community overnight.

Speaker C: Man, if I had a dollar for every time I talked to a business owner who sold their business to private equity and then watched what happened to it. And then three years later we're coming back and saying, you know what, I'm going to start a related business. I'm going to. My best employees have already quit there so they want to come work with me now. And this time I want to start an employee owned because I don't like what they did.

Speaker B: I just happened with a potato chip company in Vermont.

Speaker C: Mhm.

Speaker B: And um, again, you know, their potato chips went back. You know, the, the crime decker guys bought the company, they ruined the formula, they made the chips less good and the old owner said, well this really stinks. So I'll start a new brand with my old formula and guess what, it's being replaced all over the, all over the place because the private equity people as usual, ruined the company. Mhm.

Speaker C: Well, I mean like I said, I, I have that conversation at least once a week with somebody.

Speaker B: Yeah. So the thing about this I like is that the owner likely will be involved for many, many years after they sell the company. They'll have cashed out, they'll be able to guide the next generation of managers and if they're smart, they'll have the next generation of managers be training the generation after that.

Speaker C: Well, that's one of the beautiful parts about esop, right Is it's the only business transition process where you stay in control of what happens before doing it. After the transition.

Speaker B: Yes. Well, there are other ways of doing that. I mean essentially all well done internal transactions, you stay in control for quite a while. But ESOPs are especially great because it allows you become the mentor of not only the next generation, but the generation after that. And if you're a good mentor and you're wise and kind and ask questions and are not obnoxious like I used to be.

Speaker C: Used to be? No, I'm just kidding.

Speaker B: Excuse me.

Speaker C: Uh, used to be. No, I'm just kidding.

Speaker B: So many would say still are actually. Um, it's really a wonderful way to transition. So we didn't talk about any of the financial stuff and. No, the financial stuff is great. You're going to make a ton of dough. It's pre tax. You don't pay tax on the sale of your business. If you do it right, you can run your business tax free. If you do it right, you need more than 25. All that kind of stuff is all true, but it's the non financial side I think is underplayed in ESOPs. And Matt, I'm sorry I talked too much today, but this is a passion thing of mine.

Speaker C: Well, you know what, you talked a lot but you made a lot of great points and there was nothing in there that I was going to argue, Josh. Nothing at all. And the truth of it is is when I'm doing a feasibility study for a potential ESOP client and we go through. You want to know what I start with? I start with the impact on their employees.

Speaker B: Yes.

Speaker C: I show them the balances that their employees are going to have before I get to their return, before I get to the company's benefit. And why? Because a lot of ESOP sellers really want to see that first. Because that's what's really making them feel good. They know they're going to get a fair return. They know their company's going to be better off. They're going to see that in a minute. But they want to see that their employee 10 years from now will have a million dollars.

Speaker B: Yeah. So that is fortunately, unfortunately, we're out of time. And um, if you're going to do an ESOP, I, or even thinking about ESOP or wanting to learn more about ESOPs, I think you should probably have a conversation with Matt. So how would they do that, Matt?

Speaker C: So there's a couple of different ways they can do that. Uh, the easiest way to do it is you can find me of course on LinkedIn at Matt Middendorp. And I assume we'll have some of the stuff in the show notes here too. Uh, you can also email me at matt.mittendorpissionpointcapital.com and I will be glad to have a conversation with you. It's all about Education. It's all about talking it through.

Speaker B: Yeah. I have two things I'd like you to do. One is please go to where you're listening to this podcast, give us an honest rating review. If you love us, give us five stars. If you hate me, give me one star and I'll only cry a little bit, and I might even get over it in the next four or five or six years. But do what you need to do, but give us an honest ready to review. And the second thing is, if you listen to this and you own a business and you say, gee, I've had some interesting things happen to me along the way, which I would love to share because it can make others lives better, or if you're saying, gee, I'm kind of stuck someplace, I would like to get a little bit of help, I'm happy to do that, too. All you have to do is go to jpatricktagetwosolution.com that's number two. And singular solution jpatrick@stage2 solution.com Drop me an email, say, hey, I'd love to be on your podcast. I'll send you a link. We'll talk for a little bit like Matt and I did beforehand, and we'll figure out whether being on this podcast is good for you. So this is Josh Patrick. We're with Matt Middendorp over at, uh, the 5050 accelerator podcast. Thanks a lot for stopping by. I hope to see you back here really soon.

Speaker A: Look, I spent enough mornings thinking and writing about what it takes for business success. Here's an important final thought. The old ways work for a reason. But the best legacy isn't just about what you build. It's about building something that outlasts you without burning you out in the process. If you found value in today's podcast, do me a favor. Take 30 seconds to rate and review the show. And yes, I mean honest reviews. I'd rather have the hard truth than empty praise. Your feedback helps other business owners find these conversations. Hey, I'm Josh Patrick, and this has been the 5050 accelerator. If you're ready to work less and profit more, make sure you subscribe wherever you get your podcasts. And remember, you've built something incredible. Now let's make sure you're actually around to enjoy it. See you next time.