151: Chris Michael and EO Trusts


Bret Keisling is joined by Chris Michael of EOT Advisors to discuss Employee Ownership Trusts (EOTs), their rising popularity in the US, and why EOTs are significantly easier and less expensive to implement than ESOPs.


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Episode 151 Transcript


Bitsy McCann: [00:00:04] Welcome to The EO Podcast, where we amplify and celebrate all forms of employee ownership.

Bret Keisling: [00:00:16] Hello, my friends. Thank you for listening. My name is Bret Keisling and as it says on my business cards, I'm a passionate advocate for employee ownership. Employee ownership trusts have been a hot and growing topic for the last few years. And it is red hot now. You hear a lot of talk about it. A lot of chatter. We've never really covered it on the podcast.


And as I've looked around social media and see everything about employee ownership trusts a lot of organizations are promoting them now, and there are a number of people involved, but one name keeps coming up time and time again, almost every time, and that's Chris Michael. The preeminent EOT guy in the United States, I would say.

And I am so delighted to say, Chris Michael, welcome to The ESOP Podcast. Thank you so much for joining me.

Chris Michael: [00:01:03] Thank you so much for having me, Bret. I really appreciate it.


Bret Keisling: [00:01:05] So you and I first connected it might've been 2018 and we had a couple of conversations and almost had you on the podcast and I'll be honest with you, and I'm so looking forward to this, at the time the podcasts were produced by my trustee firm that I was managing at the time. And I remember saying, hey, you can talk about these employee ownership trusts and then I, as a trustee, I'm going to say, blah, blah, blah, blah, blah. And now I've realized, as I just promote employee ownership, first of all, I support the trust wholeheartedly because it's cool and you'll explain why. And the second thing is, my attitude was in the visor as an ESOP trustee, and these aren't ESOPs! So I was trying to use that prism.


So with that, Chris, we like to start with our guests, with their, what we call the EO A-ha Moment. That transformative moment that said, hey, my life's going to go in a different direction. I'm that passionate about employee ownership. Do you have an A-ha Moment or two?


Chris Michael: [00:02:03] My first job out of undergraduate was I taught algebra as a high school teacher in New York City. And who knows where they get the teachers from, who knows where they get the principals from, but the particular principal that we had was just, just unhinged. What you would not want in a school building, running up and down the halls barking, really yelling at the school children. And it just seemed to me at that time, and I was like, 21 years old, that the teachers could probably do a better job picking our leadership than the [Department of Education] DOE.


So this is not a private sector context, but it was a kind of a instinctual response about what adults can do to conduct their working life in a way that would be best for themselves and also best for their, in this case, consumers would be students, of course.

And then the second moment was, and that kind of got me, this is like '99, 2000. The internet had not quite taken off exactly. And so you couldn't just punch in into the computer and find a million answers. It kept me thinking about the potential for that kind of workplace organization, but it wasn't until 10 years later that somebody in a graduate school class, I'd gone back to start a PhD at the time, and That's somebody mentioned Mondragon in, in the Basque region of Spain. I think for a lot of people, that's a big A-ha Moment. And I was like, holy. And that was my real A-ha Moment where I was like, holy bejesus!


That just snapped me into gear and more or less, from that point forward, or within a few months of learning about that, I was off to the races, had decided to add a law degree to the stack of things that I would do to help become more of an advocate for employee ownership.


And then just, yeah, the last, that's been the last 10 years of my life, so.


Bret Keisling: [00:03:56] Chris, those are both great. And I love you're recognizing as a school teacher just broadly there could be a better way and it wasn't informed about employee ownership, just there could be a better way. And I will tell you, I'm delighted you are the third or fourth person to reference, Mondragon in their A-ha Moment. It is so inspirational. Two of the episodes have already aired. One more is recorded, we haven't dropped yet. But for anybody listening We're getting signs. If you want to get motivated, Google and look up Mondragon, and figure out what, what drives so many people, including you, Chris.


So I like that quite a bit. So what I'd like you to do, Chris, is you have shared that you have a PhD, you have a JD. Anything else about yourself that you'd like to share and perhaps your firm, and then just take it and what do you want the listeners to know about employee ownership trusts?


Chris Michael: [00:04:52] Thank you again so much, Bret. I'm now operating the first advisory services and investment banking firm in the country focused on helping business owners transition to an employee ownership trust in the US. Adjacent to that, I have the first law firm in the country focused on helping business owners transition to an EOT. So that's EOT Advisors is the advisory firm and we work all over the country.

We've helped to set up, in the contemporary period, we've helped to transition to our knowledge, every single EOT that in the contemporary period that operates under US law, we've had a hand in helping to set up.


Bret Keisling: [00:05:28] So I was correct, Chris, when I said that you seem to be everywhere, because literally you're touching all of them. Can you give us a sense before you go on and just how many EOTs there are in the United States now? I imagine it's not huge. You're building.


Chris Michael: [00:05:42] That's right. It's not that many. It's a dozen. And, but that being said, I'm on track to set up another dozen this year alone.


So I think it is the -- I think it's the kind of thing that is going to ramp up quickly. And it, a big part of that is that they are ,they can be implemented in really any size company in a way that ESOPs while you can -- as you very well know as many of your listeners know -- you can dip down to 20 employees with a million EBITDA, but you're really getting, it's kind of getting nervous down there.


And I think there are probably a lot of business owners that are self-selecting out of ever even contacting an ESOP advisor, because they're just, it just seems so expensive, so daunting, so complicated. And so I think there's a bigger universe of businesses out there. And so that's the reason I think it's going to pick up.


One other thing, though, I'd like to share about my background here, which is that I feel like I'm just, I feel like I've just, I'm like the right. I'm not just at the right time in the right place in all of this. I'm so lucky to have been, become involved in the Rutgers academic network around employee ownership.


I was just going along with my business, doing some advocacy around employee ownership, but also doing my academic work and also starting to do practitioner work as an advisor and as an attorney. And I got joined up with this Rutgers academic network back in 2013, 2014, which was headed, instigated, led by Joseph Blasi and Doug Kruse and others, Marianne Beyster also another important founder and Michael Keeling also really helping getting everything going with that. And that was just such an amazing opportunity to get to know, not just the academics, but many of the senior practitioners in the ESOP field who really started the whole thing off -- and they're still running with the ball, in the ESOP field.


And in terms of moving over to the EOT as an option, I think it was just, I was like the right age, the right place around this cohort of people at with the Rutgers academic network meeting up twice a year, having breakfast, lunch, and dinner with these people. Marveling at what they had accomplished. Also hearing the problems that were raised, the issues that were raised. And we, everybody, we all know in the ESOP community, we all know what those issues are.


Not quite having a, like my job or my business on the line, being 20 years into my ESOP practice, or my ESOP trustee practice. I'm like, I'm what they call a "Zenniel", so half the Gen X, half Millennial. So, I'm just at that next generation that's looking at, maybe, looking at what. What's behind -- or not behind, what just happened and what's the, what are the ways we can do a little bit simpler? A little bit easier? Millennials have that reputation of making things a little bit simpler. We just want one big button instead of 25 buttons. So it's that kind of an attitude, I think a perspective that I might've brought to it.


And bringing us back to, so 2015, it wasn't long thereafter, 2015, it just occurs to me how come we can't, and talking with colleagues and talking with these mentors, why can't we just, I think it was the very first Rutgers meeting. I said why can't -- yeah, okay, trusts make sense. But then how come, how come we can't just do a trust outside of ERISA? Because then that would get rid of all these problems you guys keep talking about? And everyone just said, uh, I don't know.


And then, it was October, 2015 and there were no EOTs in the US that we knew of at the time. I didn't know the word EOT. I thought I was inventing something out of whole cloth. And in October 15, I published an article in Tax Notes, which basically outlines the use of a non-charitable purpose trust to hold stock for employees in a very simple way. Not a lot of bells and whistles. That would be fair over time to all future generations and employees.


Published that in Tax Notes in October, 2015. I think, anytime I write something, I realize that I only finally got to say what I really wanted to say in the second half of the paper. So then I took the concept that I, came out of writing that and re repackaged it into an article that came out in January, 2017 in Probate & Property, which is an American Bar Association publication for trust attorneys. And that's, I think for me the real piece that I'm proudest of. Called The Employee Ownership Trust, an ESOP Alternative. And even there, I feel like the second half of the piece is the part that I liked the best, I'll probably repackage that again in the future.


By 2017, I realized from trolling Twitter and all the rest. I found that oh, duh, that what I thought I was inventing from out of whole cloth, that actually has been the main vehicle for employee ownership in the UK for decades. So we're not going to scratch our heads as to what we should call this thing. It's the employee ownership trust.


And I had already, at that point started just to work with some companies to set up EOTs at a really a small scale. And it was around that time that the WATG got set up, which is an international firm, I think, with a US space. But then they set up an EOT using UK law. And I met Graeme Nuttall, OBE, who's the main EOT attorney in the UK. And so we started meant a little bit of a mentoring relationship there as well. And a partner in crime as far as an ad, being an advocate for EOTs,


Bret Keisling: [00:11:11] Chris, that is great. And I would like you to transition towards, what the EOT is and differentiate it.


But first I want to say something to you and for the people who are listening. I've talked in a few, look back on my archives in the last year, I've talked with so many folks that are doing great things in employee ownership, and I'm happy to amplify and celebrate what they're doing, but I also feel the need to play a little bit of a cheerleader role.


You don't only have a dozen EOTs. Oh, my goodness, you have a dozen EOTs! You have been working your tail off for years. I'm telling folks who are listening, these are going to take traction. I'm not going to say it's better than any other form of employee ownership or worse. What I will say, and you will give us the details, there are scenarios where no other form of employee ownership will work and this is a perfect fit. And there are other things, depending on their goals, where maybe this isn't a fit, but dude, you are at the start.

And just to let you know, and not to tangent, but I'm building a EO ecosystem on Clubhouse, which is a new app. And I've been on there for a month, pretty much by myself at first and then Tom Roback and other folks in EO have joined me. We had a room, you may appreciate this because social media you've got to be a provocative, I set up a room with a guy named Abraham French this past weekend called ~"Why do Socialists and Capitalists all love Employee Ownership?" and we ended up having 25 people just talk about employee ownership. Five of us in the field, 20, who were just curious and wanted to know the topic. So as I'm building that ecosystem and I'm looking from five people in a room to 25, to really seeing, Chris, before long where we can say Chris Michael is talking about EOTs and getting a couple of hundred people there. Dude, you are on a roll and I am so happy. I didn't realize that you have been involved in all of them. And I hope your attitude is there would be no greater measure of your success than for you to be at capacity and have other people be developing EOTs as well.


Chris Michael: [00:13:27] Yeah, that's exactly, that's exactly where my head's going nowadays.


I'm ready to work with people around the country, but --and thinking about how to best serve future clients -- but, absolutely, there is going to be time very soon, maybe this year, maybe next year, when there's going to be other firms offering this as a service. And that's the way it should be. Because I really think that there will be demand for this.

And completely agree as well that this is not about being better than other forms, I always say, and then I always remind people that I always say, that I just, I've just started a 300 page dissertation about how the ESOPs are the best thing ever. It is abundantly clear that the ESOP model has revolutionized, has invented really in a way, employee ownership as a viable solution for business and for exiting business owners and for conducting business at scale.


And so now I think we're just tweaking the model a little bit, is the way that I see it. And here, to my mind, the ESOP transactional model is perfect, right? We have a cohort, a field of practitioners who understand employee ownership, serving business owners, giving them everything they need A to Z in terms of financing, advisory services, legal, trustee services, administration in the case of an ESOP, valuation, education, national membership associations for education, national membership associations for lobbying. It's amazing. And, I don't think that there's ever been anything like that in the kind of the modern period here. And the EOT is just like a slight down-regulation, adjustment of the ESOP in terms of its complexity.


Bret Keisling: [00:15:18] So Chris, let me, if I can put on my former trustee hat for just a moment and just give a 30-second, this is how an ESOP works just to tee up and that will allow you to say and here's what's different. Is that okay?


Chris Michael: [00:15:32] Yeah. Perfect. Perfect.


Bret Keisling: [00:15:32] So as an ESOP trustee, when the selling shareholder, and I feel like I'm going to run through this, and there are dozens and dozens of podcasts, people can check in the archives.


Selling shareholder wants to sell their company. Although we call it employee owners, they are not technically owners of the company. A trust is established, the trustee, which is what I did for seven years, makes the decision acts on behalf of the employee owners. There is a transaction. It is heavily regulated. There is a train of thought that we are too focused on the ugly side and not on the glory in terms of the transactions, but they are heavily regulated. You're going to need all the professionals that you talked about. You're going to need a trustee, whether they're an internal trustee or an external trustee and year after year, they are regulated. And as an ESOP trustee, I was grateful for the regulation because it helped me protect the employee owners.


But you take away a lot of those layers. So maybe start with the transaction. There's no -- you're establishing a trust, but it's whole different. So take that as a jumping off point.

Chris Michael: [00:16:35] Perfect, Bret, I really appreciate that. At the end of the day, what you wind up with in the ESOP is a retirement plan. Regulated to protect employees as retirement plan holders. And it's like this kind of like a conveyor belt where people get shares along the conveyor belt when they get to the end of the conveyor belt, their shares are bought back and the business has to forecast the needs of its future retirees to be able to repurchase their shares. And it's that commitment obligation to repurchase shares that creates a lot of the challenges and complexity of an ESOP.


EOT is what they say, I like repeating this the, my clients often do too, it seems: EOTs the employees are naked in, naked out. That's what the UK, that's what they say in the UK, naked and naked out.


Just like any law partnership. You're not paying money to come in. You're not getting bought out in any way. The benefits of being a law partner are the annual profit shares, the fact that the partnership is being run for your benefit on your behalf.


With an EOT, you get the same array of governance choices that you get with an ESOP where you can, just like an ESOP, you can have circular ESOP style governance, where the board selects the trustees selects the board, but beyond that there's an incredible amount of flexibility. Even to the point that you can include equity compensation on top of an EOT so that you do realize the growth in the value of the business. And then it's not -- the profit sharing, element here is the default for an EOT, but you could include rules in EOT that do have a gain sharing element to it, or are entirely based on gain sharing. Alternatively, you can sprinkle stock options or equity incentives on top of, or outside of the EOT.


So nothing prohibits this for companies that want to lock in the employee ownership for the long term, protect the employee ownership for the long-term, but also include an equity compensation later.


Bret Keisling: [00:18:45] Chris, would I be correct in thinking that it's very difficult in the ESOP world, because as participants everybody's treated the same, but here, and I don't want to call it a drawback because you can address it in ESOPs. But here, if you have a high performer, if you have a key member of your management team that it would be devastating if they left, these are all things you can address let's say easier in the trust than with an ESOP?


Chris Michael: [00:19:13] That's one of the best parts about the EOT is just the flexibility here in terms of both rewarding people in the team, but also perhaps preserving elements of family ownership, right?


There are a lot of companies that are maybe 49% ESOP, 51% owned by a family trust, or I don't know how many companies are like that, but you have a lot of business owners retaining ownership With the EOT, you can structure in family elements, you could structure in alternative purposes. So if you're, if employee ownership is your main goal, but you also want some environmental benefits to accrue through the business, you can actually lock that into the DNA of the business.


If your interest is, you mentioned in terms of the equality of the participants, this is another thing that I think we recognize in the ESOP community that did the haves and have-nots problem is a real challenge to reckon with. I've signed up for podcasts, you know, to hear webinars myself on this topic and you often get to here's the 11 things you can do none of which really -- this is controversial, but I have heard it said, here are the 11 things you can do, but none of them ultimately finally solve the issue so the 12th thing is that you can sell the ESOP, which doesn't solve the haves and have nots problem!


So whereas with the EOT, you can, on the flip side of the question here, the EOT is very straightforward to set up in such a way that you are able to really establish an institution that is going to continue to benefit employees in an equitable way over time. And you're not winding up with what you get in, unfortunately, a lot of ESOP companies where the lion's share of the stock belongs to the people who were there during the buy-out period. And then of course I know there are ways to plan around that and you can make a longer inside loan, outside loan, stuff like that. But this just makes it very simple.


Bret Keisling: [00:21:06] And Chris, let me just say, if anybody in ESOP world would want to come in and say that wasn't said quite right. I just want to point out that you are close enough for discussion purposes and there are ways to work around and I don't mean anything to put to you by that. But to those who are listening, particularly the ESOP practitioners, there are, again, I'll just reiterate, there are lots of benefits to ESOPs. You're not knocking them, you're providing something different.


Chris Michael: [00:21:34] Oh, absolutely. Absolutely not. And if I frame that, if it wasn't spot on the framing of, I was speaking to generally, I'm sure I would readily agree to whatever is proposed here in terms of a solution. I just continue to hear a bit as a a challenge to the point, you know.


Bret Keisling: [00:21:48] And Chris, the reason I'm smiling is when you went through the 11 points saying, hey, it doesn't really address, honest to goodness what I was thinking is two years ago, if I went down that path on a podcast the practitioners who were my referral sources would have an attitude.


[Laughter]


And now the reality is I'm not looking for trouble, but we need to have conversations about strengths and weaknesses. And so I'm just saying, if anybody's listening you, that was my point -- you didn't say anything wrong or mischaracterize anything. I've got that little bit of ESOP practitioner antenna, and I'm just saying, hey hear it out.


So let's talk about the establishment of the trust. And it's I guess trusts are established all the time. So the mechanics of the trust may be straightforward. It's all of the details. It's what the purposes are. You mentioned if there's environmental concerns. What came to mind is if they want to be a B Corp also, That sort of thing.


So can you talk a little bit, is that where the heavy lifting comes in for someone like yourself? You've got to talk about the trust, but then the details.


Chris Michael: [00:22:53] Yeah. The work here of course is helping, and, of course I'm able to provide the advisory. I can provide the legal. I can help with valuation. You don't need an independent valuation, which has their, where they have their own attorney. They have their own valuation person. So I'm able to provide these services myself. And so it's really doing everything you need to walk the, this retiring, this business owner who wants to sell their business, from A to Z. Walking them from the, through planning how the transaction is going to be structured. Planning the future of design of their company. Making sure that we have all the forms they need. Working through those forms, either directly with them or if they have if they want to have their counsel, work on the documents alongside. Valuation and then close.


The one thing I don't do is I don't do that kind culture kind of work afterwards, that's, I think there's a special type of person, I think that work is probably best suited for. And I like getting to employee ownership in place in the company.


Bret Keisling: [00:23:56] Chris, I've got a question. I know some of the best culture people in employee ownership and probably you do as well. Is there anything specialized in -- and by the way, a lot of our culture folks are ESOP specialists, the reality is it's just good business. You know what I mean? And they're in the niche.


Is there anything specific about employee ownership trust or should some of the folks already in the EO space be listening to this podcast and say, hey, we want to focus on employee ownership trust as well. Is it a different animal or is a lot of the same stuff?


Chris Michael: [00:24:30] I think the skills, totally, crossover completely. The main thing with the EOT is that in many cases, not all cases, but in many cases, EOTs are and will be simpler than the ESOP. And it should be a lot easier to do the work of motivating the team because, to the extent that a company's EOT is primarily, or based, on a profit sharing mechanism, it's very straightforward to convey to the employee owners that, hey, the benefit comes at the end of this year.


And again, this is stuff that I've picked up through the Rutgers academic network is, that some of the people who are quickest to raise the ESOP flag and have contributed the most to our community are also, very, readily admit that employee owners don't really get the ESOP. Don't really understand what it's all about until 10 years later, when the first group of employees exits and gets cash. And then all of a sudden the paperwork, the account statements, all of a sudden it becomes real.


Bret Keisling: [00:25:33] And I agree with your point. I --particularly, if the company doesn't work on the culture -- and I did as an ESOP trustee, we'd close the transaction and I would go and do a kickoff meeting and announce stuff and would start with "we're going to do our best to simplify this, but you're going to be back in one year and hear it again." So I'd like to think within a couple of years, we get them pretty educated. And having culture experts is very important, but you are absolutely right. Nothing gets everybody on the same page than someone, seeing somebody retire with a big check. That's where it becomes very real.


Chris Michael: [00:26:12] And then also, you know, all the usual stuff. One of my favorite things is, I don't know if I should say, who said this to me. Some people might know audience might know. But somebody very senior in ESOP field said you know, of course they are a huge advocate of employee ownership and of ESOPs, but they said, the day after the ESOP closes the guy next to you who tells bad jokes, still tells bad jokes. The person who sits across from you at lunch, who has bad breath, they still have bad breath. So it's not utopia, right? This is just a slight -- more dignified work, more pay, better job.


Bret Keisling: [00:26:47] Chris, I don't want to take you down the path of culture, but I love the fact that you're identifying all of the issues and for anybody who's in the culture space I'd be reaching out to you, Chris and saying, hey, I'd like to look at the cultural aspect of EOTs and I assume you'd be happy to work with them.


And so to sum up and first of all, I love the fact that, although you're here to talk about trusts, You can go long on the culture stuff, because it's important. I also love that you recognize it's not what you do, but it's important.


And I'll sum up everything in terms of the person with the bad breath or all of the bad interactions. The very worst thing that can happen is for an company to become newly employee owned by ESOP trust co-op whatever, but newly employee owned no education. And the day after the selling shareholders, you guys are now owners and nothing's changed! Without the education, nothing changes. So I guess the point before I took you down the culture path education was a lot more straightforward with the EOTs.


Chris Michael: [00:27:57] And, just to raise some other issues here, why I think -- some of the advantages of the EOT here. In terms of raising the banner for employee ownership and getting as many folks into the fold as we can here, a lot of business owners in addition to wanting to design the employee ownership the way they want to design it, not to be beholden to the specific structure that the ESOP requires. And putting aside, of course, regulatory stuff, a lot of business owners don't want to exit their business into a regulatory forest. But there's another way of framing some of those things or saying it in a different way is, I think, the EOT keeps things private. And business owners who've been king of the castle for 30 years or queen of the castle for 30 years, they might not want to be on a phone call with 35 professional service providers picking through, sharing the nude photos of their business to strangers. And so the fact that with an EOT, a business owner can just still keep it in the family. They're only working with one service provider. I think that's very desirable as well.


And of course, we also have the other sort of, go-to, I think, differentiators. On price, EOT is much more affordable. Simplicity, just worth stating again, for its simplicity for the sake of simplicity is sometimes, simplicity's very often a good choice. And I think there's an interesting discussion to be had about the other major differentiator, of course, is that presently, the EOT has no tax benefits and the ESOP has all the tax benefits. And I don't know if this is the right place to have this conversation, but I think there are those an interesting conversation to be had about what those ESOP's tax benefits are really worth to the exiting business owners. What they really mean in the final analysis for the business itself or for the employee owners?


Yes, they are amazing undoubtedly. Yes, they facilitate transactions. Absolutely. If I could wave a magic wand and change nothing about the EOT it would be great to have them. But I think there's a lot to be said there, especially with fewer and fewer business owners electing to use the 1042.


Bret Keisling: [00:30:18] Chris, it's funny by the time this episode airs, we will have aired an episode with a guy named Darren Gleeman. Blew my mind. His approach, what caught my attention, is ESOPs are not boring. And I reached out to him and I'm like, dude done them a long time. I've never said that.


And he actually has the counterpoint to what you're saying. And he says it with exuberance. And as I edited the episode, it's unusual where I'm the sedate one on the podcast and he's just brilliant! And his point is, to counterbalance yours, that we're not looking, for example, another downside of ESOPs is the perception that you're not going to get as much money as if you sold them privately. And his point is, you're not looking at the tax benefits. And he said, you've got to do the 1042s. And if that, and with great exuberance, that it's better than you think. So it be interesting to see that contrasting styles and the point of view.


But on the trust, so obviously the startup, and you did say this, but I'll make it clear. If someone's selling to an ESOP, they first get a feasibility study which has a valuation advisor. Then they're going to get their counsel involved, ESOP specialty counsel, and they already have company counsel involved. Then they're going to bring a trustee in the mix. And this is just the way not only it is, but it has to be. The trustee is going to have their independent value advisor and their lawyers.


And you're absolutely right. I've done so many due diligence meetings where there are 15 people in the room and as a trustee, and I wasn't a jerk about it, hopefully, although that might be in the eye of the beholder. What does the trustee want to know? Everything! What are we going to ask? Anything that comes to mind! And so to that extent, because if there were, and it comes back to the regulatory stuff, and this is connected. And part of your point is you don't have this with the trust. I was very mindful and my firm was very mindful that if there was a look back down the road, the DoL [Department of Labor] could ask me why I asked certain questions and they could ask me why I didn't ask certain questions. So we ask everything and we fit it in. So for those who are hesitant, or don't want to, that is better with the trust.


So I talked about the advisers that makes the transaction significantly more about the trust. We do know in ESOPs there's an annual valuation update, again with the trustee its independent valuation advisor.


With the trust there needs to be some value. I'm just, can you tell me how that works on an annual basis?


Chris Michael: [00:32:57] So there's no need to get a valuation on an annual basis. Some of my investment -- ESOP investment banker mentor, friends, say, you might want a valuation because how else do you, you keep score? So you might want to do a valuation for that purpose. Of course, that could be done by hiring somebody. It could be done by, internally, But there's no external need for it.


You could theoretically have an inside trustee. I think an outside trustee is probably better, but there's no statutory reason for that. You don't have the litigation risk that you do with the ESOP. And so the cost, the annual costs here can be zero. They could be 10 K a year to have an outside trustee.


Now you're looking for a states, you're looking for states that have good trust law here. So you might want to have a trustee sited, situated in a state that it gives you access to better state trust law. That's one consideration, but it's a minor one. It's very common to shop different states.


Bret Keisling: [00:33:54] The trust can be situated in a different state than the business itself is?


Chris Michael: [00:34:01] Yeah, and we keep the corporation wherever it is. The business can be wherever it is. We might use the local trust law. That's fine.


Bret Keisling: [00:34:06] If it works.


Chris Michael: [00:34:07] If it works. Exactly.


Bret Keisling: [00:34:09] Yeah. So tell me about funding. And how the money gets to the trust. And in the ESOP space, we do a valuation and shares are allocated. And at some point there are repurchase obligations. And how do we get the money in there? And again, in ESOP space, people can listen to a lot of podcasts about that, and I mean my podcasts. But tell us, how does money get into the trust or how does this work?


Chris Michael: [00:34:34] It's very simple. Basically, the transaction is conducted as a stock repurchase, so the money that's being used to buy back the business owner is coming straight from the corporation. It's being taxed at C Corp rates. For the time being, it's a pretty good situation in terms of fairly low taxes But, just again, this is what I -- hats off to the ESOP transactional model. And I think it's really only because of 50 years of, hey, look, this works, you can do seller financing to employee owned business to employee ownership. And it works. You don't have to worry about it.


And it's not just because of the tax benefits, right? It's because it's a solid business model. And along those lines, then, even though the tax benefits aren't present in EOT it's easy now to say, look, this works! People have been doing tens of thousands of ESOP companies. And so the business owners I work with are all very comfortable to do seller financing.


Now that being said, I do have a FINRA license or some FINRA licenses, and I am interested and available to help to raise outside financing from private investors to support these transactions.


But I think just like a lot of business owners selling to an ESOP, they prefer to keep, you know, this is part of the privacy thing. They want -- a lot of business owners, they want to keep outsiders out. They want to keep banks out. They want to keep private investors out, PE firms out. That's one of the reasons they're doing employee ownership in the first place.


But it is something that I'm set up to be able to do.


Bret Keisling: [00:36:05] Chris, we're going to start towards wrapping up and I really appreciate your time, but there's one or two more things that I want to talk about. And the first is a, perhaps a little bit awkward. I talk about all forms of employee ownership. I come from the ESOP space and that's my natural inclination. If I had an institutional bias in my mind, it probably is towards ESOPs, but I see the value of the co-ops, collectives, and the employee ownership trusts. I'm all in. And one of the drawbacks that you referenced of the employee ownership trust of not having the tax benefits, I'm completely convinced that we all need to work together. Every form of employee ownership should have the same tax benefits. And to be honest with you, I would, and I want to say this the right way, I would encourage, urge, push, beg and plead the various ESOP organizations to be more mindful of bringing along our other employee ownership, cousins in all of -- that's an introduction by saying, let's talk real for a moment and you've been very good on this podcast.


You have promoted, in a positive way, employee ownership trusts, and a couple of times I've said ESOP people might say this and you are cognizant. You're not looking for trouble, et cetera. So I'm going to say a couple of things and give you a chance to respond.


First of all, ESOPs don't work for everybody. Period. Co-ops don't work for everybody. And for anybody to say, don't talk about this because it might offend ESOP world is missing the point. And again, I don't want to take to task my ESOP colleagues, but the other thing that I think is a missed opportunity for all of us is when they have a potential ESOP and it turns out not to be a good fit for an ESOP, they're not talking about trusts, or co-ops, or collectives, as other alternatives. It's a zero end game. You're either getting an ESOP or not.


The other thing, Chris and I am on record as -- and I don't know how I got here -- as kind of Switzerland of employee ownership. I support and talk about everybody and I'm a fan of everybody, but there's a certain amount of disruption to what we all have to do if we are going to turn this into a movement, which is one of my themes, and I'm going to give you a chance to respond. I'm on a little bit of a roll. I'll give you an example.


Lyft and Uber revolutionized society and was despised by the taxi cab companies as they did it. Meanwhile, and I'm not sure where it will air in reference to your episode, I've just recently recorded a podcast with Darden Isufi of Eva Coop, which is a cooperative rideshare app in Montreal and Quebec City, so employee ownership is getting there.

You are hesitant to not offend the ESOP world. And what I'm saying is how do we get to a conversation, Chris, where you can be talking about employee ownership trusts and not making the ESOP people threatened. And more importantly, that if the ESOP is not right, they're calling you. How do we get there?


Chris Michael: [00:39:29] I like a lot what you're saying. I've been doing this for five or six years now. And when I first started out published that first article in '15 and doing my first few transactions and starting to go to, ESOP conferences and doing sessions about EOTs, you know, very reluctant to say anything critical in the slightest about ESOPs and really, only pushed the most clear distinguishing factors for an EOT. For example, I was just, I was saying, oh, EOTs are perpetual.


But as I've continued, I've and, in part that's because it's, again, it's so clear to me that ESOPs have really invented the employee ownership space as a legitimate and viable space and manner in which to conduct business and again, I wrote a book about this, ESOPs are amazing. And it's also brought so much to so many workers, so many employees at the same time, it's also the case that, as I mentioned before, some of my people that I consider to be my main mentors and friends are people who helped us build the whole space, the ESOP space and I'm thankful to them and I look up to them so much, I would not want to do anything that would offend them or in any way, cast ESOPs in a negative.


That being said, in a kind of thoughtful, delicate way, I think that we can talk about the challenges that ESOP has. And we do talk about those challenges. We can also in a thoughtful way, talk about the ways in which the EOT can address some of those challenges, but can also talk about the ways in which EOT doesn't have all of the same benefits that an ESOP has, or it's just different than an ESOP.


We can also talk about the ways in which an EOT might simply -- turning the page here -- eOT might simply accomplish the goals of, different set of goals for business owners. And if you're a business owner that for example, really prefers the profit sharing approach to an equity sharing stocks, you know, then this is the way to go.


Bret Keisling: [00:41:36] The employees might prefer that!


Chris Michael: [00:41:38] And that's right, too. The employees, especially younger employees, don't plan on being with business for 20 years. Often these days, people stick around at a business for two years or five years. And that's a long -- five years is a long time. So it's just, it's a different approach.


Again, I appreciate you having me on so much to The ESOP Podcast, Bret, just to be able to have this conversation. I try to be sophisticated. I don't know if I achieve that, but in a nuanced way.


Bret Keisling: [00:42:04] You were great, Chris. And first of all, it's funny because we try to present ourselves through logo and branding as The EO Podcast. Unfortunately, somebody in 2014 got The EO Podcast name, like "environmental opportunities" or something. They've never used it. So if it were up to me and my team, we would be The EO Podcast, but we can't be for Matrix reasons that I'm not smart enough to understand.

Let me now put on and there are a couple of things, Chris, and I'm getting back on the high horse a little bit because people and I'm talking to you ESOP practitioners. I was one for seven years and my firm that I left in 2019 is still nationally recognized. Been there, done that.


I wouldn't be looking at, oh my goodness. EOTs are a competition. If I were still an ESOP trustee, I would be reaching out to Chris Michael and saying And I'd like to be an EOT trustee, can you work with me? If that's a thing.


Culture; we have already talked about that. I would be reaching out and saying, how can I add EOTs to my arsenal as a culture coach? It's not about the twelve eOTs that exist now, it's the 150 that will be here in two years. And if you're a culture person beyond the ground floor. And the other thing is at your website as a culture person, Chris, we are all in this together, and I know I'm preaching. If you, as part of your culture, business website, list EOTs as one of your service areas, you're putting EOTs on the radar and helping to grow what you're trying to do, Chris.


And I'm not done! If I were a lawyer, perhaps an ESOP lawyer, granted, I assume you don't really need to trust lawyers on the transaction, but I would be sending referrals to Chris, again. Have your crack, if it's an ESOP make it an ESOP, but if an ESOP isn't the right fit, I'm not saying line somebody up as an ESOP and then bring Chris to have a competition. But if an ESOP is not a good fit, send them over to Chris for a conversation. Don't even qualify them. Just say, hey, wasn't an ESOP. Do you want to talk to them? And let me make a bet. You in turn, Chris, will be sending over referrals if something looks like an ESOP.


Chris Michael: [00:44:28] There you go.


Bret Keisling: [00:44:29] Same thing with valuation advisors.


Chris Michael: [00:44:31] There you go. I'm not interested in begin setting up a bunch of ESOPs. You want to do your thing and do it well. So exactly that. If it looking like it's going to, they're not, I always a third of my clients, I say employee ownership isn't what you really want to do. You want to -- you just want to make a few people partners and that's it.


A third of the people I say an ESOP is what you want to do. Go to an ESOP firm and that's what you want to do. It's not going to be me. And then a third of the people who speak with me, I say, oh, no, I think it EOT is the right, is the way to go. Exactly what you said.


Bret Keisling: [00:45:00] I think that's great. And by way of wrapping up, Chris, it sums up a recurring theme. And it's why there's a little bit of a serious inflection in my voice. There are too many folks in employee ownership in various positions. Practitioners, organizations, and I love everybody, but their attitude is either grab or protect and not grow.


And if we are all, and it's so frustrating for me, boy, I could forty-five minutes of Bret derails. It's so frustrating because we say to the employee owners grow the pie, share the pie, and then as professionals we're protecting and grabbing pie.


Grow employee ownership, completely. Chris you're going to do very well. And there will be a lot more EOTs. And dude, may you have a long life and success and happiness, and may you be recognized as a lion of employee ownership as at the end of your career. And that's the path that you're on.


But folks don't listen to what competes or what you don't like, look into this, just a, another opportunity and let's work together and grow it all together.


Chris Michael: [00:46:14] Couldn't agree more. Thank you so much for having me, Bret, I really appreciate it.

Bret Keisling: [00:46:17] Chris, keep doing what you're doing. Please, let me know how the podcast can help. You are welcome to come on any time, if there's anything exciting. Quite frankly, Chris, nothing would please me more as your clients unveil EOTs for you to come on for five or ten minutes and just celebrate the client so that we can all talk and know what's going on.


So our platform is open to you and I wish you all the success in the world, because that will mean employee ownership has all the success in the world.


Chris Michael: [00:46:48] Appreciate that so much. Thank you so much.


Bret Keisling: [00:46:50] It has been my great pleasure to be joined by Chris Michael. His firm is EOT Advisors. You can find links to various things in the show transcript. So check out the transcript, check out Chris Michael and add EOTs to your own arsenal.

Folks, I end every podcast for the last year the same way. Everyone in the country and indeed our world is going through an awful lot together these days. That's how we're going to get through it, together. And that's the best spirit of employee ownership.

Thank you so much for listening. This is Bret Keisling; be well.

Bitsy McCann: [00:47:26] We'd love to hear from you! To contact us, find us on Facebook at KEISOP, LLC and on Twitter @ESOPPodcast. To reach Bret, with one "T", email Bret@KEISOP.com, on LinkedIn at Bret Keisling, and most actively on Twitter at @EO_Bret. Again, that's one "T". This podcast has been produced by The KEISOP Group, technical assistance provided by Third Circle, Inc. and BitsyPlus Design. Original music composed by Max Keisling, archival podcast material edited and produced by Brian Keisling, and I'm Bitsy McCann.


Standard Disclaimer: The views expressed herein are my own and don't represent those of my own firms or the organizations to which I belong. Nothing in the podcast should be construed as guidance or advice of any kind in any field and the fact that I mentioned an organizational website or an advocate or a company on a podcast does not reflect an endorsement, but if you've heard your name or your group's name mentioned on this podcast, I'd love to have you come on and talk about it yourself.


A note on the transcript: This transcript was produced by Descript, an automated transcription service. While it has been reviewed by The ESOP Podcast, we can not guarantee the accuracy of the transcription. Please refer to the original audio when citing sources.