How ESOPs Help Family Business Owners Exit Without Losing Their Legacy | The Family Biz Show Ep. 40

Speaker A: Welcome to the Family Biz show where family business leaders become family legacy architects. We believe the future of your business, your wealth and your family doesn't happen by accident. It happens by alignment. Each week we bring you bold conversations, practical tools and generational insights to help you build a self operating business, a coordinated family wealth plan, and a sustainable legacy that lasts. Because it's not just about success today, it's about significance tomorrow. This is the Family Biz Show. Build the flywheel, protect the legacy.

Speaker B: Welcome everybody to the Family Biz show. My name is Michael Columbus, Family wealth and Legacy in Rochester, New York and today we are going to be talking about Aesops and the family business. And I'm really super excited to have Rob Brown and Tracy Till with us today. Welcome to both of you.

Speaker C: Thank you. Pleasure to be here.

Speaker B: So, as we often do, um, would you, with the two of you each just kind of kick us off and tell us, you know, um, your story. How did you get, you know, working with ESOPs and family businesses and you know, where did that come about for you? So Tracy, if you don't mind, I'll have you kick us off.

Speaker C: Of course. Thank you. Um, I am, um, most recently, um, as of 2020, the chairman was the chairman of Butler Till, which is a media and communications marketing company based in Rochester, New York. Um, currently about 200 plus people. And I became a founder of Butler till in about 1997, 98 with my partner Sue Butler. And we formed Butler Till to be a unique entity in Rochester, um, servicing brands all across the United States. Um, seeing at the time media being a very diverse, uh, specialized field and capitalized on that and grew quite rapidly. Um, in about uh, 2009 my partner came to me and said, how will we retire? And I thought she was insane. Um, she happens to be a little bit older than I am. So I had to acquiesce and say, all right, teach me, what do you want to know? Um, we talked about private sale, we talked about, um, looking at a variety of options. But one that came to us via our CFO was that of an esop. Um, we had a very family oriented, employee based, focused firm, um, that for an esop really, really sounded phenomenal. And we engaged, um, experts such as Sir Rob Brown and uh, educated ourselves further and ultimately decided to say, you know what, we want in on this, this model and sold the business to our employees, became 100% employee owned in 2014 and have enjoyed the benefits of that, um, emotionally, financially and very proud of the structure we created. So it's my story.

Speaker B: Love it. And real quick, today, what are you doing? You're working with the Private Directors association as well as world.

Speaker C: Tell us about m. That. Yeah, Yeah. I really, um, I really loved the work of a board in terms of setting the strategic intent and direction and measurement of a farm and growth. And with that, basically said, I want to do this for other firms like me, a, ah, private firm who needs to develop a board, who wants to use the board strategically and bring in independent directors to elevate certain characteristics or skills. Um, so I do work with the pda. I work with the nacd, which is the national association of Corporate Directors. Um, I now serve on a couple nonprofits for the employee ownership world, as well as a, ah, private employee ownership firm in Buffalo.

Speaker B: Great. Thank you, Tracie, and welcome.

Speaker C: Thank you.

Speaker B: Now that I know the right correct title, I apologize. Rob. Sir Rob Brown.

Speaker C: I just knighted him.

Speaker B: Tell us about your journey.

Speaker D: Yeah. So, um, I started practicing law before erisa, um, and I was the youngest kid on the block in a big law firm. And when ERISA came out, the people in the tax department, which is where employee benefits was in that firm, said, we don't want to learn this stuff, kid. Go read this book. So for one brief instant, I was an expert on erisa because I had read the book and nobody else had. And then it turned out that, um, as I went through that firm and went through another firm that I started, uh, we focused more and more on family businesses. And as you know, uh, ESOPs are governed by ERISA. So it became one of the tools that we used to help people exit from, uh, their businesses. And then in about, um, 2011, I got together with, um, two other lawyers in Connecticut, and we started, uh, this small boutique firm that practices nationally in the ESOP space in employee ownership. And now we have an office in Spokane and one in Kansas City, Missouri, and the one in Connecticut and then Rochester, and we have another one in Syracuse. But, um, our partner there sometimes works out of Rochester. So that's kind of how I got into the business. And as I, I always tell people, the older I get, the more I have to focus so that I understand what I'm talking about. So now we're doing just employee, uh, ownership.

Speaker B: Great. I'm going to just pop that real quick. All right. Um, I was getting some feedback there. So I just wanted to turn, as we're not speaking, if we could mute, that'd be great. Um, let's see here. So, so we're talking about ESOPs and family business. Why don't you kick us off, Rob, and talk about, you know, just, we don't need to go through the whole ERISA rules on esop. But, uh, what is an esop? And I think it was you that said, you know, it's kind of like blowing up a balloon. Um, so walk us through that a little bit. And.

Speaker D: Well, the way it's like blowing up a balloon. I had a math teacher and when I wasn't doing well at math, she said to me, you just have to keep doing it over and over. It's like blowing up a balloon. It gets easier each time. So, um, the fundamental conception of an ESOP is really very simple. What we do is we take an ordinary profit sharing plan, uh, that you would see a 401k plan is a profit sharing plan that has special rules. So we take a profit sharing plan and we add some special rules to it that Congress has required, and all of a sudden that plan can buy the shares of a related, closely held company. So what we've now done is create a market for shares that wouldn't otherwise be saleable. So, um, the nice thing about it is if you're trying to sell your own company on the open market to a whole bunch of people, it's very unlikely that you can sell part of it because there's not really a market. You have to find a buyer to buy it all. Uh, with the esop, you've created a market for the shares. And so the ESOP could buy a smaller percentage, it could buy controlling interest, it could buy 30%, it could buy 2% or it could buy 100%. Now, um, um, in the late 90s, Congress, uh, changed the ESOP rules, uh, the tax rules related to ESOPs to make them even more attractive. And it turns out if you. Now, if you have an s Corporation that's 100% owned by an ESOP, you don't pay any state or federal tax. So there is a tremendous tax advantage for the company itself to do an esop. There are also some other special rules that enable you to effectively deduct a portion of principal that you pay to buy an esop. And there are rules that allow selling shareholders to roll over their proceeds on a tax deferred or a tax, uh, free basis, depending on the circumstances. So what you have is a market for the shares of a privately held company that has tax advantages attached to it. Now, I can instantly make this so complex that you're going to need to blow the balloon up again. But I'M not going to do that. I think the best thing right now is that what you've done is create a market for shares that has tax advantages attached to it.

Speaker B: Awesome. You know, I think that's a really good point, is that, you know, when we, Tracy, as you went through this process, you talked about it, you know, you and your partner were saying, we need to figure out what is our exit strategy. You understood, you were proactive, that, you know, most of us aren't going to work forever one way or another. And so you started thinking ahead on this. That's number one. Kudos to you and your partner for doing that, because not everybody does that. But, um, you know, I know, and Rob, you know, and Tracy, you probably looked at other ideas as well. And when it comes to exit planning, that's one of the things that I talk to family about all the time, is that there are several options. And it's really, really wise to go through an exit planning process so that you can be exposed to not just one idea and get, you know, uh, I'm only going to sell the business or I'm only going to gift it to my kids, or I'm only going. If you get stuck, then you may be missing some of the options. And I think that, you know, an ESOP is one of those options that, for exactly what you were saying, Tracy. Our employees were like family. And in many of the family owned businesses, you know, that I served through the years and Rob, you know, that you've probably been involved with, that's the way they think of employees. And so that ESOP is kind of that next generation, that next, you know, the next valuable step, I think, in, in thinking about things. Um, again, it is one of, you know, there's 15, 18, 20 different ways to exit your business. Um, but at the end of the day, you know, it boils down to just a handful of different options. And understanding those options are really important. Tracy, what other, what other things did you look at before narrowing it down to say, you know, we're going to go down the ESOP road?

Speaker C: Yeah. Um, you know, we are blessed to live in a marketplace of Rochester, New York, where there's a ton of great, great marketing communications firms. There are not a lot of media and communications firms, but there are a lot of great brands here in Rochester. And we certainly gave thought to, boy, you know, it would be natural for us to approach one of those businesses and look to merge our companies or be acquired. Um, the other thing we looked at was on more of a national Scale. Could there be an entity, a holding company who would like us? It's the way our business works. Excuse me. And what we found was the big stopgap for us was always the fact that, wait a minute. These individuals who work with us, we trust completely. They know us. They know our brand, they know our value. If we were acquired, if we merged, it would be very likely that a good chunk of our employee base would go away because it would be a duplication of the foundation of that business. So that acquisition became less attractive to us. We couldn't imagine, you know, letting sue or Bob or anyone go for that reason of our own desires or wealth, you know, desire. Um, what we also looked at was, um, how the transitions go emotionally for employees. You know, it's not very easy to merge cultures. And I think there's a stat out there. It's like 70 or 80% of mergers fail or acquisitions tend to fail because of poor planning and poor kind of adoption. It just wasn't in our DNA to do it. And so when we looked at, um, the model for an esop, we were leaving money on the table from a private sector sell. But what we did was gained money on the tax basis to allow us to, number one, fund the loans to the business, and two, keep investing in the business to keep it growing and fruitful. So for us, we did look at a magnitude of options, but at the end of the day, we came back to the esop.

Speaker D: Great.

Speaker B: Before we started the recording, Rob was talking about, um, culture and that, that it really makes a big difference that the culture of the company has to fit that Aesop thinking. Um, and, you know, Tracy, when I look at, you know, your bio, one of the things it says is culture Builder. Um, what I want to do, what I'd like you to do, is just talk about how you built culture. What was the culture like at Butler Till. And then Rob, we'll throw it over to you to talk about, you know, places where you've seen that lack of culture, you know, fit not working, and why it's so important.

Speaker C: Um, thank you. I think, um, for sue and I, we are a very unique partnership. Um, we both have very different personalities and styles, but at the end of the day, we valued performance and work ethic and human humanity. We valued all of that. Um, we also were pretty scrappy. Um, when people opened a door for us to participate, we participated fully. There was no hesitancy. Um, we employed our, UM leaders to do that with their own staff. We talked to our people about being just Proud of what it is you do for a living. And to look at that with the best of intentions, um, we supported them, we inspired them. I think that was probably the key word for a great culture. Do you inspire as you lead or do you dominate or do you criticize? You know, there's a lot of different styles. Ours was based on inspiration and quality of work. Um, it was also based on being very human. If someone came to our offices, we always said our doors were open. Um, if someone came to our offices and said, you know, my, my uncle, um, is over in, um, in the military overseas and I'd like to form this kind of group and put together these boxes to give to this, his team, his troop. Of course we would. You know, someone's, um, niece became ill with cancer. Of course we stepped up, but we did it as a community. And whether or not a person could participate in that financially or emotionally or write a letter, it didn't matter. It was that we stood side by side with our people. We live with, if you will, more so than our own families. So our culture was very unique and it paved the way, I think, for this to be a successful esop.

Speaker B: Love it. Rob, um, why don't you, why don't you pick up from there and just talk about, you know, some examples of where culture worked, where it didn't, and why it's so important.

Speaker D: So, um, we have one ESOP company, um, one. One of the characteristics, and excuse me for saying this, um, Tracy, that characterizes Aesop Sellers is that they're used to control. And that's because they started the business and they always make all the rules and everybody in the company looks up to them. And the problem with that can be, uh, it's not a problem with Butler Till I'll tell you. But the problem with that can be that people don't develop individual initiative because they're always afraid they're going to be second guessed. They come in as the controller and they put all this stuff together and they go to the CEO and they say, I've got a great idea for streamlining. Uh, are accounts receivable? And the owner says, yeah, we tried that in 1984 and it didn't work. Go away. I mean, they don't say go away. But what happens is you can chase better people away by doing that and end up with yes people. Now we have one company and I'm not, uh, obviously going to give much identifying information, but the owner is still hanging around and, um, she sold the business 15 years ago. Uh, but key employees will come and make a presentation, and she'll say, well, I wouldn't do it that way, but it's your company now. So you've immediately sliced the legs off of the people that you're trying to mentor and bring along. Um, the corollary to that is to build the family that Tracy talks about. Um, and most of our clients have built that family so that what you're all doing is pulling together for the family good, just like you do in your nuclear family. So sometimes if mom's overworked, everybody chips in and does all the things that she typically does because she's got to be relieved. And when that starts to happen in the culture, then you're really putting a powerful organization together. The other thing that I think is very interesting, and I was actually talking with, um, uh, an esop, some people at an ESOP company this morning about it, is when we say the words ownership, that's a conclusory term that doesn't have much definition. So if you own a car and the bank has a lien on it, because you still owe the bank money, you own that car in a very different way from somebody who bought it outright or from somebody who has a collectible. And what you need to do, you can't just parrot the words and say to people, well, now you're owner and owners, so you got to act like an owner. Because people, first of all, don't know what it means to act like an owner. Because very few people are owners, but they all think they know what this conclusory word means. So we had one company where, um, they made a mistake, and we advised them not to make this mistake, but they put in their ESOP that they were going to pass board decisions through, uh, shareholder decisions through to the employees, and it's going to be open book management and whatever. And they never defined it. And it turned out the only thing people wanted to know was how much money the other guy made. They didn't care about the financial statements, they didn't care about the strategy, they didn't care about the projections. They just wanted to know what that bugger next to them, um, was taking home. And it didn't work. Right. So I would say that one of the things that you need to do with any culture is to define very carefully and thoughtfully what you're talking about. And, uh, companies that. I find that companies that have defined employee ownership in a way that is inclusive and based around the mission work much better. And you can do an ESAP I can do a structural esep for you blindfolded, but the company has to build the culture that cannot be built by a stack of papers. It's gotta be built by intention. And if I could just say one other thing, I think that the characteristics, uh, well, it's not one other thing. It's one other concept. Uh, the characteristics of people who are good Aesop, um, prospects are that they have a legacy feeling. So they're very proud of Butler till they've built something that works. They've built something that they believe adds value not just to their pocketbooks, but to the world as a whole. Uh, okay. As Traci pointed out, there's a real feeling that employees are a part of the family. The third thing is they don't want to give up control over this thing they made. And the fourth thing is that in return for that, they'll take fair market value rather than a strategic price. Uh, if you have somebody who's looking for the top price, there's a good chance they're not a good esop prospect. Now, when, uh, people always talk about, well, strategic value is higher than fair market value, but in fact, nobody ever gets strategic value. I mean, occasionally they do because you can have somebody who's trying to establish a market, uh, monopoly in some specific place, but most people just think their businesses are worth more than they actually are, and, um, they're gonna get a fair market value no matter who they sell it to. Uh, if you happen to have the world's greatest cure for cancer, yeah, you probably get a strategic value. Uh, but if you're just another vaccine maker or supplier to vaccine makers, you probably get fair market value.

Speaker B: Agreed. You know, I would say that it probably goes back to that if the, uh, if the business has a purpose beyond profit, it's that culture piece again. You may. And if. And if getting strategic market value and getting that highest value is important to you, so be it. But you're going about it probably exactly the same way. Creating a great culture, having a purpose, you know, having, you know, um, a business where it runs without the owner having to be there. So somebody can be, you know, running the. The somebody could come in as a. As an investor, not just, you know, not just a manager of the business and. And buy their job. Um, I find it so important. Go ahead, Tracy.

Speaker C: I just wanted to add, I also think that, um, anyone who really goes down this route, family owned, private owned, whatever it is, to me, it's all about the foundation of your business sense and your business successes. And what you've done to date. Right. Because when you look at this as a model and you look at the plan it takes to execute it, you look at the future in terms of succession plan with your employees, it's about being a damn good business person. Uh, so whatever your structure is, you adopt this like you would any other business challenge, and you tackle it. So I think we did that as well.

Speaker B: Tracy, talk about real quick. Your leadership team at Butler Till, and how did you inspire them? And, um, what were some of the ways that you worked with them to get them? You know, you weren't planning an esop, but you were managing. You and your partner were managing already in a manner that fits. So talk about that a little bit. I think that's important to. To hear.

Speaker C: Yeah. Well, interestingly, we always referred to it as an executive leadership team, and then we looked at it as strategic leadership team. Right. Um, we couldn't do everything we were doing and growing at the pace we were growing. So we had to adopt and bring in talent that was better than us in certain areas. Our cfo, our, uh, HR person, our technology transformation person, A lot of people we adopted and brought into that leadership team because they were key to our growth. And with that, we were very transparent and we were very inspirational, and we gave them the opportunity to fly, and with that, we benefited. It's a good business model. Right. The thing with the esop, however, was when we decided to do it, our CFO was highly involved, which was critical. Um, and the trust factor was completely there for all of us. We approached our senior leadership team, those that we wanted to lead in our absence, and said, this is what we're thinking. Are you in or are you out? And we had that frank conversation, and we explained it and we talked about it. We engaged them across the board with this. So, again, like any good business does, they engage their leadership, they communicate honestly, they have trust. And to me, it's very similar to a family business. It just is. To me, you know, it's. You trust one another, and when that can't be faulted, you can do incredible things from a business perspective. So our senior leadership team was involved from the get go, and we continued that process in our secession plan by making sure they adopted their junior teams, and that whole kind of transformation occurred across the organization.

Speaker D: Great.

Speaker B: Rob, go ahead.

Speaker D: One of the really interesting things to tag on to what, um, what Tracy was saying, obviously, succession is, is very important, um, because businesses can't continue. And we have many ESOP clients that are in, um, their second or third generation beyond the founders. And the characteristic of the ones that are successful is that they recognize that all businesses are dynamic. So that Butler Till, when Tracy was there, is not the same business as Butler till three years ago, or Butler till now, or Butler Till in five years. And when you have a healthy culture that's working with a distributed, um, share of profits, which is really what the Aesop does, what you do is you encourage that dynamism, because people with different ideas will come to the fore. And if the culture is right, those ideas will meld into something that nonetheless matches the basic mission and vision of the organization. But it may look terribly different. Uh, there might be different, um, executive positions, there might be different organizations, it might move in a different direction in terms of its market, but it's still the same company that's growing dynamically. It's like lifelong education for humans.

Speaker C: Right.

Speaker D: You know, you keep learning, and if you keep learning and you keep practicing learning, you will get better and better.

Speaker B: Yep. It's the rules of physics. It's entropy. You're either growing or you're dying.

Speaker D: Right.

Speaker B: And you have to recognize that. Um, and one of the neat things, you know, we did a book club last year on Simon Sinek's the Infinite Game. And that was, it was just fun to read. Because when you think about it, you know, business has no end as long as you're thinking along the lines of the business as its own entity. Which is why they do have their own, you know, ein number. Right. They get their own Social Security number, so to speak. And you really need to treat them that way. You're just, as the owner, current owner, you're just the current steward. And if you're really thinking about what's next, you know, for all those people that are working there, you're really, um, being thought filled about it. And Tracy, you and your partner definitely did that. I think. You know, where the word that we, that we've used a couple of times that I want to make sure that we're hitting on is that word trust. And with the leadership teams, you know, uh, when we're coaching business owners, it's how do we work to develop trust along that leadership team is one of the most important pieces. One, you have to have the right people, as Jim Collins says, the right people on the bus. We know that. But I think one of the ways to keep them and attract them is that you're able to garner their trust. And, you know, when somebody does come with an idea, we're not batting it away and saying, well, I wouldn't do it that way. We're open to it and we're, we want them to go out and you know, experiment, so to speak, and make mistakes and grow.

Speaker C: Yeah, I think it comes down to a couple things. One is, you know, you get the right people in the room and you have a vision for where you want to go and it's, you're trusting that as well. But it's also about us as founders and or as leaders that uh, there is an ego portion to this. And I'll not, I'm um, not going to sugarcoat it. I think when you've had success in leadership or when you feel like you've birthed that baby, letting go of it in your normal capacity is really, you know, it needs to be profile that needs to be tackled and discussed and you need to have someone who can say to you, you know what, it's their turn, it's their turn to be stellar. And that's your job now. Your job isn't to say no, it's not going to happen that way. Your job is to say, what can I do to make you successful? Because if you're successful, I'm successful. That's leadership to me. Um, so I think what we did was we had to really look at it and I probably bowed out of it a little bit faster than Sue. But the day to day in terms of where I was, very heavy client focus. I just switched it, I switched it to the corporation as my client versus the day to day client work. And I let others tackle that and I was always there if they needed it. But again that trust had to be there for me to shift. And when you clarify your roles, this is what you're going to tackle. This is what you're going to tackle. You clarify it. You still have to deal with your own issues, you know, up here, but you know what your jobs are and that really, really helped everyone trust where we were going and what we were all doing and we communicated it.

Speaker B: Yeah, we, when we talk about it, we talk about the cores, you know, the, the core purpose, the core values which, you know right there, what they, um, the core customer. Um, but then it's the core processes and then it's the function accountability chart, you know, so if you, if you understand, you know, the organization, that's one thing, but then who's responsible for those and in tracking our core cross our uh, core processes across the business to make sure that we're staying on top of those things and that allows you some freedom, doesn't it?

Speaker C: Exactly. Yeah. And I think when you, when you communicate that success and that like, wow, this is phenomenal what they did to your employee base. You start to shift the trust. You start to. Or expand the trust. Right? So now all employees are looking at that leadership team is saying, it's not just sue and Tracy, it's the senior leadership team. And wow, those guys are really kicking ass. Uh, because that's what you need to do. You need to make sure that you're transitioning it properly.

Speaker B: Love it. There's. Go ahead, Rob.

Speaker D: So, Michael, I wanted to add, uh, just a word on trust. Trust is one of those words. Trust is a word like ownership. It's one of those all inclusive words and nobody knows quite what it means. Sometimes if you say, I don't trust that guy, that means that you think he's probably a crook. But what we're talking about is trust. That is more like reliability. I can rely on my colleagues. I know that if I jump off the cliff, they will catch me on the way down. It's not an absence of mistrust. It's an actual reliance. And I think that's what makes it so powerful as it develops in an organization. You get to the point where you say, well, if, if the CFO has figured out that's the way to do it, who am I to say it isn't? You know, because you have delegated your reliance to another individual and you are saying to them, I believe that you will look out for my interest and your interest and everybody's interest. And that's a very powerful affirmation of humanity and skill.

Speaker B: I love it. Thank you for that. You know, uh, bringing that to light. I think the other piece to that I would throw is that trust that when I do have an idea, I could, uh, go back to the reliance. I can rely on people to just be open to talking about it and that I will be heard. And if you. Like you said, if I'm always squashed on my ideas, how am I? I'm not going to trust that I would bring out anything new or anything different. We're not going to have that growth that we need. So, um, I want to change just briefly, and then we'll. And then we'll move on to the next section here. But if you were to give advice, both of you, you're talking to an owner that says, I know I need to retire, I know I need to let go of the reins, but I did birth this, and I did, and I'm having a really hard time making that transition from being the leader to being the mentor. Um, or, you know, how would you, how would you help that person? What's the conversation? How do you, how do you help them to make that turn? What would you say to them,

Speaker C: Rob?

Speaker D: Well, I think one of the things you have to do is start with the inevitability you are going to exit your business. The interesting question is whether it's on your terms. And I think that if people really understand that concept, then they start thinking about the ways that they can leave a legacy that's more than the name on the door. That is really an organization that can continue. Cause, you know, they won't be there forever. I mean, some people think they will, but they won't.

Speaker C: Yeah. Yeah. Uh, you know, for me, if I could tell more people, I would say, you know, look at, look at your life. Don't just look at the business and say what's important to you. You know, do you want to be a grandparent who's hands on or do you want to be, you know, a next level traveler and, you know, do all those things you'd hope to do in your time? Um, those are important factors. You should look at your life because you are a human being first and foremost. You are blessed to have this corporation or business that you now want to exit, maybe with a better plan that you thought of. Um, I would really advise people to, um, speak to other people in your same scenario, actually, or the Vistage Group coaches, um, strategic planners, folks like yourself, you know, who can really lend insight and knowledge. Knowledge is power. And that's not a cliche. It is about finding out what other people are doing, you know, but birthing the baby, I can tell you this. I'd rather go out on a big ass high than go out with no money in my pocket and no employees with paychecks. It just was not gonna happen. And so for me, it was a combination of all those things. My own humanity and what I wanted in life. And you know, because, you know, both factors matter. Um, so that was it for me.

Speaker B: Great. Thank you. Talking about, you know, advantages and disadvantages and ESOP is not for everybody. There are some huge, you know, advantages and there are definitely some, some drawbacks to having an esop. So let's just hit on, you know, a handful of those each and talk about Rob. What do you see are, you know, you talked about tax advantages. Maybe discuss that a little bit more, but. And then add some of the other advantages.

Speaker D: Well, the, the tax Advantages are basically in, um, in the opportunity for the selling shareholder to, um, shelter gain in the right circumstances, that would be a C corporation. And immediately after the transaction, the ESOP owns at least 30% or in the tax deductibility of, uh, amounts that are contributed to the esop, which shelter part of the principal payments for any outside debt. Um, but I think that the real advantage of an ESOP is that it can retain your legacy. If you sell to Big China Inc. You will be the Rochester development or the Rochester division of Big China Inc. You're no longer going to be Rob Brown's little widget company. And that's a real advantage for people because people who build their own businesses base their whole social relationship on their business ownership. When they go to the Valley Club, they are the person who employs 500 people. When they sell the Big China Inc. And Big China Inc. Moves all the jobs to Beijing, they're the goat that let 500 people down. So I think that what you have to think about, one of the big advantages with an ESOP is that legacy continuity. The other thing is that, uh, people who build their own businesses love riding the Bronco. These people are not risk averse. They take risks all the time. In my simplistic world, uh, there's a division between employees and owners. And employees are critical and smart and well trained, but they would like to take direction and do the best possible job they can to get those directions completed. The owners will go out one day and say, why don't we take a flyer on this? And they take a huge risk and they get a high from doing that with an esop. Because you can sell part of your company. You can monetize enough to keep grandma and the grandma safe and the grandkids in college, but you can keep riding the Bronco. And that's a big advantage for a lot of folks. Um, the other thing is that just protecting your employees is very important. We had a local company here that you may remember sold to another big company in Michigan and they thought they had some kind of an agreement to keep the employees here. And within a couple of years, all the employees were given a choice of moving to Michigan or moving out. And, um, the people who lose their employees in that kind of way are often very unhappy because of the fact that, that they have a relationship with these people. So those are some of the real advantages. Now what are the disadvantages? You have to deal with the Department of Labor and you have to deal with the Internal Revenue Service. And those guys are obnoxious. Even in the best circumstances when our clients get audited, and knock on wood, we don't usually have any bad results from audits. I always say to our clients, the goal here is to keep your costs down to a waste of your time. And if we can keep it down to where all that happens is our client wastes their time dealing with the government, then you have a win. But sometimes that's an expensive waste of time because both the Department of Labor and the Internal Revenue Service have huge resources and they can poke around for no good reason for whatever they want. The other thing is transaction costs are relatively high for an esop. Now they're not high vis a vis, uh, the sale to a third party using an investment banker, because there you're going to be paying, uh, some kind of a success fee, maybe double Lehman Brothers formula or something, and you could have a huge cost. But in this area right now, in 2021, the total all in cost, if you have a bank financed ESOP with say warrants attached to it, is probably $150,000 or $200,000. So if you got a business that's worth a million and a half dollars, you're really going to have to think hard about spending 10% of it on soft costs. If you have a business that's worth $5 million, then you know, so what if you try to sell that on the open market, you're going to have double Lehman Brothers formula. You're going to end up paying $350,000. So, uh, esops are not magic, they're just tools. And I've often said to people, if you have a nail that's loose in a piece of wood, you can probably pound it in with a crescent wrench, but you'll, it'll be really inefficient and you may well wreck the wrench. It's much better to use a hammer. So you have to look at your own business and see whether you want the hammer. Maybe that's the esop, or whether you want the, whether you need the crescent wrench, which might be an out and out sale. Now, one, one, uh, I don't want to digress too much here, but one of the, one of the valid techniques for exiting a business is just to take out as much money as you can for n years and then quit. That has a totally different set of values attached to it. But if you own your business, that's a perfectly rational choice. And you might do that if your business is not saleable or if somebody has a unique Skill that can't be replaced because the price that you get for your business is always based, at least in part, on the net present value of the continuing income stream. So if you just take the income out for 15 years and then one day come in and pull the shutter down and lock it at the bottom, that's a perfectly valid exit strategy. So I guess the question is, for ESOPs and anything else, use the tool that fits the task.

Speaker B: Love it. Tracy, what would you add to that? Having been through one and, uh, doing.

Speaker C: Yeah, I think, you know, he's right. The dol, the irs. I'm writing down as he's talking, you know, things that have always plagued, um, my brain, good or bad. There's a lot of advisor fees on an annual basis. But the benefit of that is it does keep the DOL and the IRS off your ass. And those are invaluable, you know, services as well as. I don't know how many times we approached Rob with a question, hey, we're going to do this. What do you think? And he is a counsel for that business strategy and growth, which is invaluable. Again, I mean, it's very, very critical. And when you form partnerships with these folks, you're. You're covering your. The company, really. So those fees are well worth it. Um, you also get greater financial awareness, I think, as a corporate entity or as leadership goes. Um, not only do we look at projections with our CFO consistently, but you're then looking at, you know, what's the repurchase obligation of your shares that you're selling to both, you know, exiting or current employees, and how does that work and are you financially fit for that in the years to come? Um, you look at an annual valuation and an assessment of your business year to year. Where a lot of companies don't do that. There's not that clarity and there's not that intelligence to help you make good decisions. Um, I think ESOPs are known. I mean, this is a proven fact today, coming off of 2020, was, you know, employee retention's better, growth is better. I mean, Butler Till had an incredible year in 2020, ironically. Um, and most ESOPs did as well. Um, in terms of the sophistication of an esop, there are some complexities to it, as I mentioned, the advisor fees, the structures. You've got a valuation firm, you've got lawyers, you've got different CPAs, you've got plan, um, authorities and monitors. But one of the biggest factors that I think grew our business further and made us Ladder up as leaders was the formation of a board of directors for an esop. Um, the formation of a board of directors for us was a game changer. Not necessarily the first year, but by the second year, third year, fourth year, certainly we had a lot going for us. It was a focus for sue and I. It was a focus for bringing on independent talent in areas that were far, um, far more important than just Sue's in my vision. And with that, that opportunity for growth and strap planning and senior leadership and just, it totally, um, elevated our game. And when you do that, I'm a big person on people product and process as well. Um, when you do that and you look at those three categories and a board's focus versus a CEO or an executive leadership team, we are pushing and inspiring beyond the norm. That's a great board. Um, if you're able to do that with your ESOP or your firm and a family owned business a little bit more complex. I know, um, getting the right board of directors into place can be a game changer. And thankfully an ESOP requires that great.

Speaker B: That's huge advice. And one of the banners that I'm waving on a regular basis is if not, um, a board of directors, at least a board of advisors. And if not a board of advisors, then at least get yourself involved in a CEO roundtable so that you're getting exposed to other ways of thinking, you know. And I just, I love that. Uh, I wanted to mention, you know, every one of our businesses today having a 401k is mandatory. And so as we talk about ESOPs, Rob alluded to it earlier, that's just there are ERISA laws, so the complexity that's there, um, it's already in all of our businesses at some levels where we have to, you know, we have to be a fiduciary, we have to, you know, do the right things when it comes to our 401k. And there's a lot of things that, you know, we may not be in the business of running that 401k or the pension plan or the, you know, the profit sharing plan, but that, you know, that is part of being successful. So you were already exposed to it at some levels. To your point, I think just the 401k or a profit sharing plan frustrates a lot of employers because there aren't systems and processes put in place to make it easy. And so when we put systems and processes in place for the 401 planning portion of things, clients love being freed of all of that. And I would Imagine that in the ESOP world, having somebody like a Rob or some of these other professionals that are specialists in the area of ESOPs really help to free your mind, because they bring in the systems and the processes to make life easier. And like Rob said before, you know, we're not going to avoid the Department of Labor or the IRS knocking on your door, but we just want it to be a time waster. And we feel the same way when it comes to the 401 plans is, you know, you can get audited, that's fine, but they're going to walk away because you have a compliance binder and we put all the pieces together and you have the systems and. And processes in place. Rob, would you. Does that make sense?

Speaker D: Yeah, I absolutely agree. I think, uh, it's always cheaper to focus on your core competency and avoid trying to figure out how to build your own plan or do your own administration or whatever, because your time is far too valuable doing what you do best.

Speaker B: Yeah. Love it. It's the, um, uh. Come on. Jim Collins talks about the hedgehog strategy, which is, you know, you could be the hedgehog or you could be the fox. And the fox has got a thousand ways of getting to the hedgehog, but the hedgehog knows one thing, how to roll up in a ball and stick its quills out and keep everything away from it. And we forget about that in the business because, you know, we think we need to be all things for everybody sometimes, and we just need to really get focused and put the blinders on. Well.

Speaker D: And, you know, Michael, the thing is that, um, for entrepreneurs, that's a danger, because at the beginning, you have to do everything at the beginning, you don't have an accountant at the beginning, you're in the garage and it's cold in the winter, you know, and so you start getting used to doing everything yourself. And then you decide that you do it well. That's where the real mistake comes in. So you keep doing it badly for years and years and years, and then all of a sudden, somebody comes along and says, you can't do it that way because you've gotten big enough to be noticed. Right.

Speaker B: Love it.

Speaker C: That is the other thing I want to add to that is. He's exactly right. Because when you do add in that talent, it ups your game. Um, the other thing is, is that when you have a board of directors, it's an executive look under every bed cover. We can see it all. You know, what to look for, how to look for it, uh, where we're where we're off, where we're not, if it's a question, and we're looking at that data on a quarterly basis. So there's never a point where, as a leader or as a founder or as an executive team, that you should be able to say, I don't know what's going on. I don't get it. That's not the point. You're getting that data and you can hear it in an executive format. So, um, again, another reason why a board of directors does help, especially with those financials.

Speaker D: Right?

Speaker B: So as a, you know, as a family business, what would you say, you know, are what needs to be in place before they start walking down that road of, you know, talking to Rob or talking to an ESOP specialist? What are the things that need to be in place first?

Speaker C: For me, it would be a conversation with, you know, the owners, the founders as well as the family in terms of anyone who's on that structure of influence. Um, and really kind of making sure that you've got the same vision, bringing in someone to counsel them if it's required and they're not meeting kind of that synergy they need to meet to say, yeah, let's pursue this idea. Um, I actually had a conversation with someone who's on a, uh, family board, an advisory board, she's a family member, and she said to me, you know, how can I talk my family off the ledge, like even to have this conversation? And that's the, that's the deal, right? It's just say, look, we're not looking to out anybody. We're not looking to make this a challenge or an uncomfortable scenario that we can't adopt. But you have to trust me that I'm going to lead you into the future. And let's have these dialogues.

Speaker B: Love it, love it.

Speaker D: Just to add to that, I often tell people that in family business, one of the most important things is what does grandma think? Think, because you can put whatever plan you want together. And if the matriarch of the family, whether or not she's the titular owner of the business, if she says, I'm not going to have that happen to my son in law, you're finished. So you need to bring the key family decision makers who are not, uh, the owner of the business, always, it's always an old white guy in my experience, and he always thinks he makes the rules. But that's a pretty laughable concept when it comes to actual family dynamics. Just as when you're a salesperson, you have to find who is Going to make the decision. When you're dealing with a family, you have to figure out, uh, who's going to make the decision. And it's not only, uh, it's not always obvious and people don't always admit to it.

Speaker B: Yeah, you know, it's interesting that you both said we call that family alignment and we spend. We interviewed 25 different family businesses and about 20 different family business advisors and coaches. And they all said exactly the same thing. Uh, every one of them said it differently. It was the lack of alignment within the family that caused the, you know, the inability to grow to the level that they really wanted to. And so, you know, we've created a process now where we can bring the entire family in. And Rob, to your point, you know, you, you don't know. And if you can't gather them all, it's not going to matter. And so it's getting that alignment, getting everybody rowing in the right direction. As my daughter learned when she was rowing, you know, on the crew team, you don't want to catch a crab. Um, as, as they say, as you're doing this stuff and that getting in alignment really makes a difference there.

Speaker C: And I think the other thing from a family owned business perspective is, you know, the buyout of an employee ownership firm, it could be in a fraction. It can be, you know, 30, 33%, Rob, for the next 20 years, or it can be, you know, 51% or whatever it is, whatever those numbers make sense, sense for that company to be. You can have a partial piece up, right, Rob? I mean, the structure don't have to be 100%. So I think that's the other thing family businesses don't really understand maybe is that it can be done in a very long time frame.

Speaker B: Love it, Love it. So there's, go back to that planning and thinking ahead. Uh, it can really make a difference there. Rob, we wanted to add something.

Speaker D: Uh, I was just going to say that we actually have a situation right now where two brothers dislike one another enough that they're suing one another. The only thing they both agree on is that they want to sell the company 100% of the company to an ESOP. So what we've done is we've managed to isolate the ESOP transaction from their other dispute and they're going to get paid this aggregate amount that their lawyers are going to fight over the division. So, you know, it can also monetize disputes.

Speaker B: There you go. Uh, well, Tracy, you know, and Rob, I want to say thank you to both of you. For joining me today. Um, I hope that everybody has gleaned some wonderful gems from this conversation. I have definitely picked up many from both of you. Um, Tracy, if somebody was looking for, you know, for somebody, you know, for somebody to help them to build a board and that, how would they reach out to you?

Speaker C: They can certainly connect with me via LinkedIn. Um, they can certainly get a hold of me. Um, if you want to publish my phone number or email, that's fine. Um, to your group. Um, happy to help. Love to do it.

Speaker B: Great. And Rob, what's the easiest way to find you out there?

Speaker D: Probably on our, our website, which is aesoplus2 Ps. Com. Feel free to publish that if you wish.

Speaker C: Great.

Speaker B: Again, I thank you both for joining us today. My name is Michael Palumbus, um, with Family wealth and Legacy, and this has been the Family Biz Show. Please feel free to if you've enjoyed this episode, subscribe so that you don't miss an episode going forward. Everybody, have a wonderful day. Appreciate, appreciate you both.

Speaker A: Thank you for joining us on the Family Biz show, the podcast for visionary leaders building alignment across business, wealth and legacy. If today's episode sparked an idea or a conversation, share it with someone who matters. And if you're ready to align your family business around a strategy that scales, build the flywheel, protect the legacy.