Bret Keisling addresses ESOP myths that came up in a recent episode with business owner/consultant Craig Leary, including whether transactions are more complicated than non-EO M&A transactions and whether ESOPs are less profitable than non-ESOP deals. Bret also addresses the source of many damaging myths: ESOP professionals who did a great job of scaring away potential sellers.
Previous guests referenced in this episode:
Chris Michael: Episode 151: Chris Michael and EO Trusts.
Mini-cast 215 Show Notes
About Craig Leary:
Craig Leary has been in the remodeling business for over 30 years. He has worked with some of the top companies in the industry. Included in his experience has been helping industry leading companies scale efficiently while quickly driving revenue.
Craig has found his passion in proving that the interior and design build space is scalable through process and proper people. He is proving this everyday with the team he has assembled at Home Remodeling Pros of Central PA.
To learn more, visit the Craig Leary Consulting Group.
You can find out more about EOS (the Entrepreneurial Operating System for Businesses) on their website. Note: Craig Leary is not affiliated with EOS (although he's a big fan!)
Shout out to The Tobacco Company in Lemoyne and Harrisburg, PA, where Bret and Craig first met, and where Bret also met his partner at Capital Trustees.
Mini-cast 215 Transcript
[00:00:00] Bret Keisling: Welcome to the ESOP Mini-cast. Thank you so much for listening. My name is Bret Keisling, and as it says on my business cards, I'm a passionate advocate for employee ownership. For the last two weeks, I've featured Craig Leary of Craig Leary Consulting and Home Improvement Pros of Central PA on our primary EO/ESOP podcast. He appeared on Episode 230, talking about EOS, which is the Entrepreneurial Operating System, and he was back for Part Two on Episode 231 where we discussed how companies could transition to employee ownership.
[00:00:40] Craig raised a couple of great questions that we often hear from business owners contemplating employee ownership, and I wanted to share the exchange with you because I think it's important to address the myths head-on. I hope you enjoy and if you're contemplating employee ownership, I hope it's helpful.
[00:00:58] Craig Leary: And, and so my goal for my business is employee ownership. I don't know if that's ESOP because I struggled with understanding how to do it and what does it look like, but plan B is that, you know, I'm going to sell this business to some subset of the employees and have a strong profit-sharing program in place before I move on.
[00:01:21] And, you know, and so to me, as I talk to people that aren't you about employee ownership, I hear it's complicated, it's hard, it's, you know, you may not meet the requirements. Well, I don't even know what those requirements are. So, it would be...
[00:01:36] Bret Keisling: And we won't tell you the requirements, and it's mystical and you need very expensive experts who hide behind the curtain.
[00:01:45] There's a guy named Darren Gleeman, and I hope that listeners will check out his podcast. But Craig, I'll drop you the link to his podcast as well. And Darren has addressed this head on and has changed the way that I talk about employee ownership. Because I did a Mini-cast and Darren was on and it was just for a couple of minutes. But if -- I call it ESOP world -- if ESOP world ran the airlines and you called up and you wanted to buy a ticket somewhere, because you just really want to go see the most beautiful places on earth, before I sell you, the ticket, I'm going to explain aviation. I'm going to explain what happens in the event of a crash. I'm going to explain physics. I'm going to throw in the theory of relativity. I'm going to talk about the FAA investigations in the result of a plane crash. And you are not going to want to fly! You may not want to travel anymore, but you're not going to fly.
[00:02:35] The reality is, it's not that ESOP transactions are complicated and I'm not trying to minimize it. It's just any merger and acquisition is complicated. You bought, I think you had said, you bought the home improvement business for half a million dollars, in rough numbers. Well, there were certain complications with that and if it had been a $5 million business, there would've been more complications.
[00:02:59] Craig Leary: Yeah.
[00:02:59] Bret Keisling: The fact of the matter is there are plenty of experts who can demystify it for you. The one disadvantage with employee ownership is we do tend to, you know, at the conferences scare the hell out of people and even the experts, and I was an ESOP trustee for seven years, and I did this of: Man, it's scary. It's very complicated. But if you hire me, I can get you through it.
[00:03:22] I wish our experts would stop perpetuating the fears. Yes, they were complicated. I never, when I practiced law, I never did, I never practiced ESOP law, but I also never did mergers and acquisitions, a whole different world than what I was used to.
[00:03:34] So, you get people who are the experts. There are certain size efficiencies, I think generally speaking, if you're going to convert to an ESOP even on the small side of fees, you're probably going to run 150 to $200,000 in fees. Because there are different players. You need a trustee, counsel, valuation advisors, et cetera, et cetera.
[00:03:53] So, the business has to be a size that's worth a $200,000 in closing costs, if you will. So, if you are too small, that doesn't make sense.
[00:04:03] Craig Leary: Mm-hmm.
[00:04:04] Bret Keisling: There are, there is such an easy answer though, Craig and the options for employee ownership are fortunately growing; an employee ownership trust where the shares of the company, and it can be any proportion of the shares, are set aside in trust to benefit the employees. And there the expenses are under 50 grand. It's not that different, you know, if you and your partner were setting up an educational trust or, you know, I know you'll love dogs you decide to set up a trust to benefit a canine organization, you would have cost for setting up the trust. But employee ownership trusts are a very valid way to get the shares in the employee's hands.
[00:04:44] And by the way, one other great myth that we often hear in employee ownership is, well, I won't make as much money selling to an ESOP as I will if I sell to a strategic buyer.
[00:04:54] First of all, if there's a strategic buyer that's got Oprah money, you know, for lack of a, and they just want to pay because they either want something that you've got or they want you out of the way. That kind of irrational purchase price, employee ownership can't necessarily compete with that. But Darren does a great job of pointing out if structured properly for tax purposes, oh my goodness, these are just as lucrative as other transactions. But that again, is part of that education, you know, just knowing how to do it and we can get to the experts.
[00:05:25] But I think that you'll find, Craig, that just knowing you as I do that employee ownership really fits, is a great capital structure for the vibe that you're already trying for, you know, through EOS and whatnot.
[00:05:37] With that we're going to wrap up today's episode of the Mini-cast. I hope it was helpful. Thank you so much for listening. This is Bret Keisling. Be well.
[00:05:47] Bitsy McCann: We'd love to hear from you. You can find us on Facebook at EO Podcast Network and on Twitter @ESOPPodcast. This podcast has been produced by Bret Keisling for the EO Podcast Network, original music composed by Max Keisling, branding and marketing by BitsyPlus Design, 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 cannot guarantee the accuracy of the transcription. Please refer to the original audio when citing sources.