EP3 - Jumanji - Reality of Communicating ESOP to Employees

In this episode, we jump right into the expanded version of Season 5 by dealing some factors related to communicating the ESOP to your employees.  Jumanji is an ideal movie to explain that there is something that changes after an ESOP that can change the outlook on how employees see themselves - who they are and who they want to be - we want them to move from employees to employee owners on this journey to an ESOP & beyond!

Transcript

[0:10] Hey everyone this is the theesopguy hopefully I have caught you at a good time of the day as you Embark upon this very new ESOP podcast. 
 
 [0:29] Music. 
 
 [0:35] You're all here for a reason you know what it is you should be thinking about. 
 Who you are and who you want to be fortunately you'll have plenty of time to figure that out while you're cleaning up the basement. 
 That sucks. 
 We're going to figure out who you are and who you want to be so we're kicking off this episode as Jumanji. 
 And we're going to use this movie to just nail down some of the thoughts around. 
 Communicating your ESOP and this is going to be something that we're going to talk about a lot this year. 
 Because it is something that I'm telling you gets talked about a lot as we talk through folks on their own journey to an ESOP. 
 
 [1:21] What I wanted to get to in this topic so you just so you're prepared for what you're listening to is is some of the higher-level topics when it gets down to, the idea of energizing or re-energizing your ESOP so as you as you start listening this you may already have an existing ESOP company that you guys have. 
 Have pulled the trigger on or that's two hasn't been two recent or has been maybe maybe it's been several several years or maybe even more than several years, so the idea behind what goes into energizing your ESOP and Andre it or re-energizing your ESOP as it relates to your employees and so the understanding of the communications eyes really going to be important, and so. 
 
 [2:03] Part of what we're going to do today is just go over some higher-level Concepts behind what employees really need to know and understand as far as, the Employee Stock ownership plan and what they're involved in I think some of these are going to be a little more applicable to companies maybe there are brand new to esops, or going to be branded Aesop's but at the same time we might be touching on some other things that may be more mature except companies have, not done in a long while that might be super helpful for them to do so that's what we're going to talk about, as you listen to the podcast hopefully it's helpful to you share it with a friend if you think it might be, a benefit to them please rate and review the podcast that's super helpful for the audience of people that are tuning in or trying to figure out hey I need a good resource for under spreader understanding Employee Stock ownership plans. 
 
 [2:58] Please also go to our website at journey to an ESOP.com and find all the information on our podcast plus other types of topics and resources that we have available to you to better understand. 
 Employee Stock ownership plans okay if that is that. 
 
 [3:17] Here right here I think. 
 
 [3:28] Music. 
 
 [3:40] Is this game so in the scene let me just give you the this is Jumanji 2017 they're out there in the middle of the game and they're trying to learn what they're actually doing. 
 And one of the players is Jack Black who is you know one of the avatars, and so he's like the person who has the skill of reading the map. 
 And he realizes that they're in danger and so they start running because of 15 motorcycles with guns mounted on them kind of jump out of nowhere and they start just chasing them down so it's pretty pretty fun scene. 
 The point is as we as we connect this into the topic today what I really like about this movie as it relates is is that there's this there's this, awareness as it starts off like who you are and who you want to be, there's this thing that's this this challenge in the game but they're kind of thrusted into or forced into in a sense. 
 But it's very very similar in a sense like here comes the employee ownership concept right and we're what we're doing today is we're starting to kind of like peel back this idea and the question, how do I how do I employees going to understand this you know and that. 
 One of the things I've learned over the last you know say Four Seasons and doing a lot of different ESOP transactions is that there's there's definitely on people's mind. 
 
 [5:08] The idea behind like how to my employees going I'm employees going to receive this you know one of the one of the goals and objectives as we start isolating goals and objectives with a shareholder. 
 Comes down to hey what my employees to benefit from this and it, whether they want that from a return on investment you know as we just think about it from a business or they really do want to reward their people I mean that's really I would say it's much more the latter they really do want their employees to benefit from the ESOP, in one of the one of the things I always tell people when we're doing some discussions on on this topic or anything really just from a management standpoint. 
 Is just as like a human nature aspect what people do not understand or what they do not know. 
 They gravitate towards the negative and so one of the things that we as we talk about communicating your ESOP to your employees is this idea that we need to give them as much information. 
 As possible at the at the most appropriate times. 
 
 [6:16] And so we'll talk a lot about that you know in season 5 as we go through like some of the best practices and all that so so just keep that in mind and what I mean by that just just high level is that. 
 Don't tell them anything that you don't really know for sure right so the worst thing you can do is tell somebody something and then it changes. 
 I thought it was this but it's now it's this because what's happening there is that you're going to Road, trust with the with the people right so with whoever you're your employees are communicating so as we as we think about this of course were focused in this topic. 
 As you know from an employee Centric position right A lot of times when the topics for the ISA. 
 Podcast have been very shareholder Centric or there in keep manager Centric so this is really just a rank and file employee Centric as we start as we start thinking about it. 
 In where this goes is like one of the things I like about this scene to is it. 
 
 [7:16] As we go through the movie it's like illustrates one of the one of the main things that we all really know deep down is that it does take a team. 
 And that just means that that nobody gets there by themselves and you surround yourself in business with really smart people that have different strengths and weaknesses and you're going to get a way better effect or overall effectiveness in your organization as you as you blend. 
 Strengths and weaknesses and what this movie as we start kind of Jake, just reducing that down to this movie you have four key people that have different strengths and weaknesses in they're not all the same people and you could say well I'd rather be the strong guy that can run really fast and punch everybody out. 
 But the guy that can read the map is saving everybody from you know near Doom because nobody knows this is coming and here come the motorcycles with guns on them. 
 
 [8:09] So that's an important element as we as we start thinking about this and I hope that culturally that's that's kind of a. 
 We're how were you call it in your culture that is a core value like in our firm that I shared with you it takes a team but hopefully that is a. 
 An element of what you're doing the ESOP for in the first place because you want to reward the people and also you know as as we say that we're rewarding teamwork or rewarding, everybody stepping into their differences in the value that they create for the organization. 
 
 [8:43] The idea behind. 
 This first part is really the to kind of take the maybe again high level but then eventually as we start getting into this there's going to be a lot more. 
 
 [8:55] Specifics to it but this is a transition from an employee to employee owner and the concept behind that is. 
 Is that when you are an employee your whole career and you have never actually sat in the seat of ownership. 
 You may not have had the experience of understanding and some people have on their businesses and they've sold and they become employees right so I just want to be very very careful to say this is a very broad stroke. 
 Assessment but I would say that the employee that has only been an employee that whole career has not dealt with some of the things that the owner has dealt with at the levels of say stress anxiety risk you know those kind of things where they're you know the company's gone through difficult time in the the owner who's really in charge of everything who has all of their capital. 
 
 [9:46] Maybe all of their you know say 20 years of their time 30 years of their time invested in this business have a lot of perspective in that and so what were wanting to do is transition an employee to employee ownership with the proper perspective and we're not really looking to try to, look at them as hey you're now an owner like the like the classic example I've just explained. 
 We have the best in a sense that the opportunity for The Best of Both Worlds of being. 
 An employee with the benefit of being able to kind of not have to be so stressed out by the whole operation because it's been shared across the Styx hole. 
 Rank-and-file of employees of like what's going to happen in the future. 
 
 [10:32] But the same time the value that can be created on a long-term basis in an employee-owned company is really where we're trying to go and. 
 When you look at that it's really kind of important to try to be able to. 
 Aim at something when you're communicating to your employees and I think the main thing we're aiming here at is how do I get them to start thinking like employee-owners, anything we have to be very very important very careful to Define what that means because I think as it as a business owner I could be very. 
 Focused on my maybe my. 
 Mice very small definition of an ownership like this is what I think it is right but it's not going to be the same as just being a classic owner so I wanted to make that point I'm just from the last. 
 
 [11:23] Few days I just left ESOP site visit and so this is a company that's going through the ESOP process and we're you know we're going through all the stages of developing you know and getting closer and closer to negotiating their ESOP transaction. 
 So as I was at the site visit and then one of the things the client wanted to do which I thought was really helpful is to kick off the committee the ESOP committee. 
 So what this really is if you don't know and it's just there's no like there's no rule of thumb here there's no like oh you're every company should have an ESOP committee and you should have this person this person this person on the committee so there's no. 
 You know unfortunately there are some people just want that type of specific advice like how do I create the committee who should be on it. 
 Um I'm gonna you know I'm going to kind of lean or always towards this idea that it's going to depend on your organization like who should be on the committee the fact is you should have a committee and in general the fact is that that committee should not be dominated by the shareholder who sold their stock or shareholders, only because you want the committee to step into a place where they're there the intermediary between the what's happening in the company and the employees kind of like. 
 
 [12:42] It's a very bad example but kind of like a union rep like they're the people that your are the peers of the employees and. 
 So kind of we were as we go as we went through the site visit the second part of the agenda was to meet people that were interested in being on the subcommittee so we're really really ahead of things in this, in this conversation. 
 
 [13:05] And I wanted to share a few things that that are just real like they had questions that these employees had that I thought were these are good questions and and I'm sharing these because I think the main the main. 
 Part of what I want to get across today and this podcast is is, I'm guilty of thinking I know what the employees are thinking right I'm guilty of that idea but we don't know and that's why we all have to ask good questions and we have to be. 
 Inquisitive about or curious about there where they are with the idea that that. 
 
 [13:43] They haven't been through this whole process like they what happens typically in it you know East that process as we close the transaction and then we start and then we start the conversations with the employees. 
 
 [13:53] And generally what happens is like just say just for instance the company's ESOP process took six months. 
 
 [14:01] Could have taken longer some companies they've been researching it for three years and we finally pulled the trigger and they went through this whole process so the shareholders and I'd say you know a contingent of of key employees probably have a very good understanding, at least way better than of course the employees so the employees are starting at Ground Zero let me draw some of that hey. 
 
 [14:25] That's my famous pound cake cake. 
 
 [14:32] I think you said this bread I guess it's been so long I forgot what it tastes like. 
 
 [14:37] What's happening to me. 
 
 [14:45] You still black yes okay okay everything is fine, no no no it's okay it probably just meant that I love cake I couldn't resist it it's all good, okay so this is a good scene honestly the whole movie is good but, he ends up so so back up on that a little bit can't see the movie what happens is that you have strengths and weaknesses and this particular character his weakness is cake, and so nobody understands what that means until this scene when he actually mistakes bread for pound cake and. 
 So the idea behind it all is like he's like I'm fine I'm fine and then he just basically explodes and eventually gets a new, you know life comes back and blah blah blah so so that's kind of the the cool part about that scene as I start to to get into this other is it get into the deeper part is like what we interpret, in the ESOP as we as we think about this again perspective that we're going to continue to orient around this is the perspective of an employee. 
 
 [15:55] And how they might for like think about the idea of being an ESOP company you know. 
 And I think part of what I was trying to stress before is is there's there's what we have to do is pull ourselves back a little bit as the shareholder that selling their company to an ESOP because they've had all this background and experience and put yourself in the employee perspective. 
 And so I was giving a little insight into like this meeting that we had this week with a client and they had. 
 
 [16:24] Their own employees that would be the future ESOP committee and what I'm going to share a little bit as if some of the thoughts they have questions they had about, um thoughts they had and so just similar to the idea of like Just Cakes good right in this situation with the movie obviously that exploded the the character and. 
 You know that obviously isn't things we think are good are not always good right so sometimes people think you know the employees is going to love this like they're just going to love this but one of the things I will take I will say overall and then we'll get into the specifics that we were experiencing in that meeting. 
 
 [17:03] Is that the what the anxiety that might get created by having an ESOP plan and what we can do in that regard is is communicating as much as possible about the reality and the truth and what's actually real about the ESOP plan up to the point to we actually you know know the information as we know more and more as we go through the ESOP process and close the transaction and as we more no more and more we're able to share more and more of that information so that we could ease the anxiety but what really is good for somebody. 
 It's a matter of making sure they understand it from that perspective so that's what we're trying to do is give them a better perspective on on those types of things. 
 
 [17:50] So one of the things that came up was how do I you know what's the opportunity cost in this situation with an ESOP plan like what. 
 What might be helpful for some companies they have and when we're talking about Aesop's let's just automatically go to, what's the what are the options under retirement planning you know scenario so most of the time the company already has an existing 401 k plan. 
 And so what can be done here we're talking about, then ESOP first 401K is that you can just kind of contrast compare and contrast what is a 401k versus what is an ESOP in many many times what's happening is, the ESOP itself is not replacing the 401K, it could be in lieu of a 401k plan but it's not going to probably replace or in lieu of the match at the four okay but it's not like you're going to they're not going to dissolve the 401K plan so you're going to have this, this combination of like a I've got this over here on the 401 k side, the employee is putting their own money in and of course the company is matching in a lot of scenarios. 
 
 [18:55] And the ESOP side the employee is not putting their own money and they're getting this benefit. 
 That the company is basically funding the payment and it's being funded through the purchase of the shares in the the shares are going to be put into this ESOP plan. 
 So one of the one of the questions around that is the understanding that. 
 
 [19:21] Their thought process behind hey am I becoming an owner if I have a company that has a 40 people and I won't now 1/40 of an owner, in the answer that question needs to be really clear at the very front end like no you're not immediately going to have 140 of the company what's going to happen is, there's going to be allocations that will be released in stock over this period of time, that has to be established in the development of the ESOP plan itself. 
 And I always like to use the qualifying adjective it's a long-term retirement plan the benefit is there and it's. 
 There's all these different elements of the benefit itself but it is a long-term retirement plan and so. 
 The employee needs to understand that that's that's going to take time for that to happen and part of the rule of thumb here is that I think it because it's a non-discriminatory, retirement plan it is going to benefit all of the rank-and-file in the company and that's going to be really a really good thing. 
 And however it is going to be taking it is going to take time so I would say that. 
 In general that will benefit more somebody that's going to be you know a younger person in a company say they maybe they just started their career and they got you know 20 30 years of that company that person in the ESOP scenario, could potentially have way more value and their plan because it kind of will compound as time goes on. 
 
 [20:49] So round that other corner you know it's this idea that you know what happens for the person that's that's much older in the in the rank-and-file on the roster and I think you've got to talk through, those ideas as well in your ESOP planning, way before you get to the to the stage where you're ready to roll out this this idea behind what you're how your employees are going to experience it. 
 In keeping mind what's in it for them right what's in it for them how do they going to how are they going to perceive that an employee level. 
 With the goal here of course to transition employee thinking process into an employee ownership thinking process and trying to trying to connect the dots between the two, and I think one of the the very challenging aspects of all of this is that it is it is hard to. 
 You know when you have a say you have a population of employees that has you know everything from you know baby boomers to xers to z y you know Millennials so you have this huge Spectrum in some cases of of age differences in ages. 
 And how do you appeal to different audiences in that same population of employees with the same ESOP plan and the same limitations and all the things that exist. 
 
 [22:05] With that another thought or question came out of that, discussion about like the risk of you know being in the plan and what does that mean from an employee perspective like how would you even Define that from an employee perspective so I think the first thought process is that, you're as a business owner you're selling your shares you're not really thinking about, business the business risk side the way maybe an employee might think about it and so there might be some anxiety related to even understanding. 
 For the forecasted potential ups and downs of the business and how that is going to affect them so when we talk about risk to the employees. 
 I would I would have definitely asked like more clarifying questions like what does that really mean to you when your start when you're starting to think about it now. 
 There is a there is a risk profile I think most of this is around like the idea of my 401k has a diversified risk portfolio and I'm I'm as a. 
 Retirement asset as an employee what I want to do with my investment you know. 
 Advisor group who manages the 401K plan as I want to I want to make sure that that have minimized the risk of something that I know I'm going to need in the future so diversification is the way you do that. 
 
 [23:26] When we think about the risk of being in an ESOP plan especially when you have the combination of these two things the 401K an ESOP plan we know that the the ESOP plan is going to have a concentrated amount of, of the asset being invested in the stock of the company. 
 Which is really kind of the design of all this is the advantage and the disadvantage the advantages that a small closely held Company stock has the potential to grow significantly faster, and More in return larger larger rewards to the employee, then a diversified 401k plan so having that I mean one of the best things is having both of those together you get your diversification, and you get this other piece you have your cake and eat it too and a sense and I think from a risk of the employee standpoint is helping to I think this is an opportunity you know because one of the one of the aspects of communicating the ISA is going to be engaging with your people at and whatever level is appropriate for the company in within this idea of financial literacy and I think this this helps to kind of say hey, what are the things that we are how we how we how are we doing this in the future like what were some of the things that went into the planning and the development of the Esau. 
 
 [24:47] And so part of that question could be answered and hey if I'm thinking about the risk of the future of the company as it affects me directly as an employee now, even though I haven't paid for the any of the stock right it's been given to me in this ESOP plan it's still going to be you know in me in my mind a. 
 Rational thought process for the employee to think about the future and I think it's really good and it does set us up to talk about that you know their knowledge of understanding of, the value how the value of the business goes but I think going backwards is step and talking about, the way that the plan was created with the advisor and hopefully the advisor did this which is basically, working through the modeling to determine the sustainable structure of the ESOP which includes the valuation it includes the debt structure and includes the tax benefits of the company, and be by all of those are should be some kind of stress test to the cash flow. 
 That's something I would share not in specific nature I wouldn't share all the modeling but I would share that the idea is that the company has has conservatively work through a process to get to where they are now, that helps to mitigate the risk of the future company being in Jeopardy or having some major issue strength, karate Tai Chi Aikido dance fighting dance my name is that even a thing. 
 Weakness Venom. 
 
 [26:15] Seriously hey Leon tala G what does that even mean study of fossils I think. 
 It's kind of cool says the gorgeous karate badass to the old fossil guy who doesn't have any endurance. 
 
 [26:34] I hate this game weakness cake. 
 Yes cake is my weakness along with speed and strength huh strength is my weakness hey quick question. 
 How was strength my weakness Somebody explain that to me and why would I need to speed what I need to be fast when I'm being chased by an enormous killer deeper, so so this whole this whole scene is all about the idea behind strengths and weaknesses and they finally they discover like, you know that they're this video game and all that so we're kind of back and forth a little bit what I wanted to talk about in this part of it was just the idea that you have. 
 
 [27:15] You have strengths and weaknesses of course within the team that we talked about and when you think about the strengths and weaknesses of the ESOP what we're getting to is how do you explain this from employee perspective. 
 And. 
 You know one of the things is the strengths and weaknesses of just the ESOP itself I wanted to kind of talk a little bit about how the employee will perceive the ESOP being a strength to them and maybe a weakness and I think that's a good place to start. 
 One of the things that I think is important in the strategy of communicating to your employees is how you go about. 
 Explaining the way everything it kind of works from a from a financial literacy standpoint so we touched on that a little bit, earlier in there's there's really going to be a lot more to talk about to explain this but on a very high level basis I think one of the things that. 
 Your employees need to understand what is an ESOP. 
 You know pros and cons like what is it what is the strength of it what are the weaknesses of it so that that you're not going into this in this stage of I've seen your in stage of going through these at processing or like super excited when it tell your employees. 
 
 [28:28] What I would I would caution you to do is be careful not to oversell the ESOP and really, anticipate the strengths and weaknesses and be able to explain you know what it is and what it's not and so I've kind of dealt with that a little bit in terms of explaining this as a long-term benefit and how that works relative to how they're going to get their shares and how, really comes back to being a valuable tool for people that are going to be in the company for a longer period of time so I think that's going to be important, to to understand that now as we as we dial into some of these strengths and again I'm just giving you the idea behind, an employee perspective I think one of the things that they're going to want to understand is is the value the potential value of this to them over that period of time over some longer period of time. 
 
 [29:18] That is going to correlate with the idea of the future value of the company and if the value of the company has every value of the businesses itself as you start thinking about business valuation have drivers of value so I think what's going to happen when we connect that to financial literacy is you're going to want to make this connection to help your your employees understand this is kind of basic business education, and one of the things about financial literacy is going to be just general generally speaking so if you had like this, in your mind as you think about this like a an Executive MBA class for your key people or for your for your employees that kind of explain how the say income statement works in the balance sheet works and what is revenue and gross margin and net income. 
 And how does that translate to cash flow what is the balance sheet the working capital the accumulation of cash how does debt affect all of that as well, and so you're starting to kind of build I what I'd say is a foundation of understanding in the business as far as these financial literacy Concepts go, assuming you know there's probably people that have a lot of basic understanding already. 
 Depending on your your employee roster of who's there and then assuming that there might be some people who have completely no idea what we're talking about when we start talking about. 
 
 [30:47] So I would say that building the strengths and weaknesses around the ESOP what we have to do is lay the groundwork for financial literacy so that they can understand. 
 Other things when we start talking about the real strengths of the ESOP which I'm going to kind of. 
 Say you know in a very reduced level like and week I could go into this for a lot of and a lot of different directions but primarily, I would say this to people who would for esops in general but this idea that wealth is created in this country by come by individuals, starting up a company and Building Wealth over a period of time by the business the value of the business in the profit of that business growing that's where wealth is created it's it's. 
 Generally not created in somebody having this wonderful investment strategy, that they made a bunch of money but then they lost a bunch of money that's not usually what happens it's usually in our country it's usually some people, you know we're realizing the value of having a small business in the reason that is the creation of wealth is because small business stock can accumulate in value, much faster than a very large portfolio or large cap stocks that that you might invest in so you get the opportunity to get as an ESOP, employee or an employee-owned company you get the opportunity to participate by being given these shares that have the potential to grow in value. 
 
 [32:12] So with all that we're going to build on this idea for the ESOP communication episode so this is kind of like a big start for us to just kind of talked to through some of those there's so much more we need to talk about. 
 And we're going to invite people to do that with us so it's going to be a very interesting part of like I would say season 5 and a lot of the theme Here is to push towards some of the major questions that get asked about how do I communicate this to my to my employees and what should I say and how should I say when should I say. 
 So be looking for that thank you guys for joining today and we appreciate it go to our website if you have any questions at journey to an ESOP.com. 
 If you can share this this podcast with somebody that you know might be helpful for them if they're thinking about doing an ESOP. 
 
 [32:57] Please rate and review the podcast if you're technically able to if you're not then you're forgiven so have a great day and we'll see you on our next step on this journey to me.