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Mini-cast 54: Examining Leases and ESOP Valuations; and What Does it Mean to Act Like an Owner?

In Episode 54 of The ESOP Mini-cast, we celebrate Employee Ownership Month and four great ESOP companies; we explain how a trustee ensures a company pays fair rent; and we continue our look at what it means to #ActLikeAnOwner.

Shoutouts and congratulations to the following employee owned companies:


Mini-cast 54 Transcript

Bret Keisling: 00:00 In today's episode of The ESOP Mini-cast. We give shoutouts to four great employee owned companies, I give you a brief explanation on how an ESOP trustee can make sure the rent a company pays is fair, and we continue our conversation with Matt B. about what does it mean when we say "be an owner." I'm grateful that you're listening to this episode. My name is Bret Keisling and I'm a passionate advocate for employee ownership.

Announcer: 00:32 Welcome to The ESOP Mini-cast, a great way to wrap up the week.

Bret Keisling: 00:42 Hello, my friends. Thank you for tuning in. It's Employee Ownership Month in October and I hope you're finding lots of reasons to celebrate yourselves if you're an employee owner, or your clients if you're a professional. And I hope the various organizations and employee ownership advocates are taking some time this month to celebrate themselves.

Bret Keisling: 01:03 In honor of employee ownership month ButcherJoseph & Company

has put together a great compilation of their favorite employee ownership resources. We'll include a link to it on our show notes, but listen to the great organizations that ButcherJoseph counts on for their resources: National Center for Employee Ownership, The ESOP Association, the Employee Ownership Foundation, Fifty by Fifty, Certified EO, Democracy at Work Institute, Becoming Employee Owned, the Rutgers Research on employee ownership, and Employee-Owned S- Corps of America (ESCA) , [Beyster Institute at UC San Diego’s Rady School of Management, The Aspen Institute Economic Opportunities Program, and We The Owners.] There's one other resource that ButcherJoseph mentioned. We really appreciate it: The ESOP Podcast.

Bret Keisling: 01:43 Why I'm grateful that we got a mention in this resource guide is that we've grown for two years by talking about all of the other resources. Some of them compete with each other, some of them are in different parts of the sandbox. I'm so lucky to be on a list of folks that I respect greatly, for the sole reason that we brought their accomplishments to you. So if you have a chance, ButcherJoseph has this great list of resources and we hope that you will check it out.

Bret Keisling: 02:11 We get a lot of questions about the technical aspects of how ESOPs work and having spent seven years as an ESOP trustee, I thought I'd answer one of those questions today, hopefully in a simple, easy to understand way for the employee owners to grasp. Nothing that I'm going to mention is legal or fiduciary advice or anything like that. Just want to explain how something works.

Bret Keisling: 02:33 It's not unusual for an employee owned company to lease property from a selling shareholder or someone who is originally connected somehow to the company's ownership before it became employee owned. Oftentimes, when a new business starts, the owners will separate any real estate from the core business. So if it's a manufacturing facility, for example, the selling shareholders would set up a different company to own that real estate. There are lots of tax reasons or legal reasons why that should be done. It could be done. It's very appropriate, very usual. And there are also different types of situations even within that example. So let's say for example, that you're a professional office, accountants or architects, you're employee owned. You rent space that essentially is part of a strip center. Well, maybe your firm would buy the entire strip center. Half of it is for your own offices. Half of it becomes tenant space that you could rent. There again, as an example, where it wouldn't be unusual for the owner of the main company to set up a separate company to be the landlord and rent space to all of the tenants, the trust as well as the unrelated companies.

Bret Keisling: 03:46 So when the trustee and the valuation advisor are determining either value for a transaction or value during the annual update, the leases a company have are always reviewed on some level. The professional advisors will look at them. First of all, there's like anything else, a certain smell test if you will. If a lease were for 50 years, that would be unusual and therefore there would be questions about why the lease was 50 years. If on the other hand there was a one year lease with 20 options to renew and rent going up every year, that would be a little bit unusual. So the trustee or valuation advisor would take a look at that.

Bret Keisling: 04:30 Oftentimes, when there's no related party who owns the real estate, there are different ways to assure the value including trying to get a sense of what other people are paying in the area. If you've ever bought or sold your own home, a market comparable is what it's called. In the event that the landlord is a related party, they are connected somehow to the ownership that sold the company to the trust because a related party transaction like that one here is always going to come up in a DOL audit could be a source of a claim, et cetera, and fundamental to the value of an ESOP is that selling shareholders do not unduly enrich themselves by charging more for a company they used to own than they would for anyone who is unrelated.

Bret Keisling: 05:24 To start the trustee and the valuation advisor are going to look at the exact same things as they do if it's not a related party landlord. They're going to look at whether it just seems reasonable, whether it's within their understanding of leases and that sort of thing. They may be able to do a separate independent study to confirm that rent is fair market rent and no more and they may reach that determination that it's fair. There are a couple of different ways to do this. Let's take for example the accounting offices that bought a strip center and half of it's for their own offices and then the other half are divided against many tenants. If you have 10 tenants for example, and nine of them are completely unrelated to the selling shareholders or the trust and they all have leases, et cetera, those leases might be something the trustee or valuation advisor would use to show that it's fair market. But ultimately the fallback plan is the trustee or valuation advisor can always require or request but require that a rent appraisal be performed by an appraising professional who lives in that area or works in that area and that they would essentially certify, so to speak, that the market rent was acceptable. And once it's concluded that the rent being paid is appropriate, then the valuation can continue.

Bret Keisling: 06:45 I hope that helps with a little bit of understanding on what's looked at in examining leases and ESOP valuations. Next I would like to get to one of my favorite parts of the podcast now.

Bitsy McCann: 06:57 Shoutouts, thanks, and congratulations.

Bret Keisling: 07:00 Our first shoutout is to Cemen Tech, Inc. Formed in 1969, this employee owned company recently received a "Legend in Manufacturing" award from Elevate Advanced Manufacturing and the Iowa Association of Business and Industry. We congratulate Cemen Tech on this important recognition and we thank them for setting such a great example as an employee owned company. I also would like to thank Joe DeJong of Bankers Trust. It was Joe's post on LinkedIn that made me aware of Cemen Tech, and we're really grateful to Joe and the many other professionals and advocates who bring their ESOP clients' successes to the attention of the rest of us. So congrats, Cemen Tech, Inc., and thanks Joe DeJong for making us aware of it.

Bret Keisling: 07:39 From a 50 year old company, we give a shoutout and thanks and congratulations to Davey Tree Service, which this October as part of Employee Ownership Month is celebrating 40 years as an employee owned company. 1979 the Davey family sold its interest to the ESOP trust. Davey Tree does a great job integrating its employee ownership culture into its branding and we think that's a wonderful example for the rest of us. And at first when I was preparing this mini-cast, I thought, isn't that great? CemenTech 50 year old company, Davey Tree Service, 40 year old ESOP. That's really cool. But when I went to Davey's website, I found out that this company was actually formed in 1880 that makes it 130 years old. I'll be honest with you, I really wasn't aware that there were ESOPs in place that the company had formed in the 1800s so congratulations, Davey tree service on 130 years of excellence and 40 great years as an ESOP company.

Bret Keisling: 08:40 Next we have a shoutout and congratulations to Bollman Hat company founded in Adamstown, Pennsylvania. As a central Pennsylvanian by birth, I am very happy to highlight the Keystone state. Bollman Hat company has been featured in Inc. magazine's October issue. Bollman Hat Company has been an employee owned company since 1985 but the focus of the Inc. magazine article is that Bollman is still whooping its competitors since 1869, it's a 150 year old company! Folks, I was so excited about Davey Tree Service, and I still am, and Bollman Hat Company is 30 years older. So, congratulations to the Bollman Hat Company, one hundred and fifty years old. You're a great business. You know how to do it. You've been doing it a long, long time and thank you for being a great part of the employee ownership community and possibly the oldest ESOP we have.

Bret Keisling: 09:38 Finally, let's bring it to the more modern industry of insurance. We have a shoutout, thanks, and congratulations to Scott Insurance. Scott Insurance offers property and casualty, employee benefits, captive insurance, and surety bond solutions, as well as personal insurance services. It's an employee owned company and it's one of the largest independent agencies in the Southeast. Scott just tweeted about their newest employee owners as part of employee ownership month. They wanted to celebrate the newest folks there who became employee owners. And since it was important to Scott to mention them by name, I want to thank and congratulate them too. So special thanks and congratulations to the newest employee owners at Scott Insurance: Madie Roach, Erin Clay, Alyssa Lowery, Jessica Bagby, Leah Wilson, Taylor Zang, John Wooten, Diane Reese, Brandi Cooper, Annalies Chapman, Kristen Pereiro, Matt Merletti, Azia Hurley, Sarah Anderson. Thank you all very, very much for joining the employee ownership sandbox. And remember, Scott Insurance is special because they've been spending their entire careers in their field, but the fact that it's employee owned makes it a little bit more special.

Bret Keisling: 10:52 And by the way, folks, this is how I get excited all the time. Scott Insurance was formed in 1864, it's actually five years older than the Bollman Hat Company! So when I started the research for today's mini-cast, if you had asked me if there were any ESOPs that started as businesses in the 1800s maybe I would have taken a shot and said yes" but I'm not sure I might've said, "Nope. They all started in the 1900s." But to find out that three great companies started in 1864, 1869, and 1880. Folks, employee ownership, ESOPs are great business models, but as we've always said on the podcast, an ESOP won't make a bad business a good one or add to a bad businesses' life, but an ESOP can make a good business, a great business, and the research is very clear that employee ownership has a dramatic effect during times of recession and economic downturn.

Bret Keisling: 11:56 So folks, Employee Ownership Month, we are really happy to highlight these companies and give shoutouts to the companies as well as folks like Joe DeJong and Bankers Trust. And we hope that you've had a meaningful Employee Ownership Month celebration as well. If you'd like us to mention your company or one of your client's companies on the ESOP Podcast in celebration of EOM or for any other reason, if they've done something great that should be honored like Cemen Tech, just go ahead and tweet or LinkedIn about them and tag us with #KEISOP or the @ESOPPodcast and you'll hear other contact information at the end of this episode, but we really want to help spread the stories of anybody doing great work in the employee ownership sandbox. With that, here's Bitsy to tell you how you can help contribute to our podcasts.

Bitsy McCann: 12:45 Are you interested in sharing your passion on The EO podcast and ESOP Mini-cast? We're looking for correspondents to tell us their great stories of employee ownership. These one to four minute long segments can be recorded remotely over the internet or by telephone. If this sounds like something you'd be interested in, please reach out. You'll hear contact information at the end of this episode.

Bret Keisling: 13:08 Thanks, Bitsy. And folks, I've been saying it repeatedly on the podcasts and through social media. We're very grateful that we get to do the podcasts. We're going to continue. We'd really have you come on and talk about yourself and your clients so that we can talk about other things. So please, if you're interested in contributing, we'd love the help.

Bret Keisling: 13:28 And with that, in Episode 85 of the ESOP Podcast, I started a series called, "what does it mean to act like an owner?" For six months now I've realized that all my life, I've tried to act like an owner. I've trained people to act like an owner. I've set that as the expectation. Colleagues in the culture and communication space, the leadership space, and many others know that acting like an owner is really the crux of everything that we're trying to do. So imagine my surprise when I discovered I can't really define what it means to act like an owner.

Bret Keisling: 14:07 So we've started the conversations. It's going to be an ongoing conversation. We'll have different voices coming in in the next couple of weeks and ultimately we'll put together a series that is a more produced look at the question "what does it mean to act like an owner?" With that, earlier this weekend, Episode 85 of the ESOP/EO Podcast, we began with a conversation with Matt B. He's a 25 year old resident of Colorado and a 10 year veteran of the service industry. Matt had been told he acts like an owner, but he'd never heard that in training. So we're going to play you an excerpt from the conversation with Matt that was in Episode 85 of the podcast and afterwards tell you what's coming up in next week's episode. As we continue our conversation with Matt.

Bret Keisling: 14:56 I've made certain assumptions, everybody knows "act like an owner" and everybody's been trained that way. Maybe not. Here's Matt.

Matt: 15:05 I personally have never heard it. I've had people tell me that, yourrself included. I would say that...

Bret Keisling: 15:13 When you say, "you've never heard it," you've never heard which...

Matt: 15:17 That that term.

Bret Keisling: 15:19 So like in your training or all that kind of stuff, you were never told "act like an owner."

Matt: 15:24 No. Never.

Bret Keisling: 15:25 You've had customers come in who have said you seem to act like an owner?

Matt: 15:30 Yes.

Bret Keisling: 15:31 Okay.

Bret Keisling: 15:32 Since you've heard from other customers, myself included, that you seem to act like an owner. What is it you think we see when we tell you that?

Matt: 15:42 You know, knee jerk reaction might be a poise. But if I were to think of it on a more personal level and deeper, it might be the passion that I have for the place that I'm working and I think that that might come from the ultimate fear of my name is on that work. So if there is a mistake, the only person who there is to answer for that mistake is myself and when that ultimately comes down to it, especially in a family owned shop, regardless of it being a bar or even if it's a local mart, I think that there needs to be this idea of that is your name, that's your brand and people will remember that and you're not selling anything but yourself and the work ethic and attitude that you have.

Bret Keisling: 16:52 I appreciate Matt for letting me record conversations. He really is a remarkable person. He's very thoughtful and these conversations aren't easy to have. What you are listening to over some minutes on the podcast, we've spent several hours just hashing these issues out and each issue leads to another conversation. For example, after Episode 85 aired, Matt reached out to me and he said, Bret, as we're talking about what it means to act like an owner, sometimes owners are jerks. Next week, we will describe the difference between acting like an owner and acting like you own the place.

Bret Keisling: 17:30 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 mention 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.

Bret Keisling: 17:54 All right, everybody, I hope you enjoy your day and your weekend. Continue to celebrate Employee Ownership Month and join us next week as we continue to podcast about ESOPs and employee ownership. With that, Bitsy, tell them how to find us and show some gratitude.

Bitsy McCann: 18:13 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, 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.

Bret Keisling: 18:48 Have a great day and weekend everybody. Thanks for listening. I'm Bret Keisling.


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