EP8 - Knowing: Warrants and SARs for ESOPs

This episode provides the background on both Warrants and SARs in an ESOP transaction.  The typical usage of synthetic equity structured within a deal can create a solid win-win for the shareholders and the company.  Within the topic, the podcast uses the Nicolas Cage film “Knowing” as an example to explain how a warrant and SAR model help to predict the future just like so that we can create a lasting legacy for the company and a successful reward for those that are taking on the future risk of the enterprise. 

Transcript

[0:09] Hey everybody this is the journey to an ESOP and Beyond podcast where we talk about employee ownership Employee Stock ownership plans how they work whether you're thinking about an ESOP as a potential transaction or you're already an existing, ESOP company and your concern with different things in your company how that works so thank you for joining today this is our sixth season and we're just working through some different topics today I wanted to kick off this.

[0:37] 50 years ago the students of William dolls Elementary imagine what the future might holdunveiled their legacy. It's a list of dates every major Global disaster for the last 15 years in perfect sequence.

[1:07] So this movie called knowing from 2009, had come out this is a long long time ago for some people but had come out and really cool storyline and I'll just share the story line because I want to kind of play off of this a little bit first off the word knowing right knowing what's going to happen is it kind of the. You know the inference here it's like knowing what's going to happen so 50 years ago in the story linethey had this time capsule. And in that they buried this this group of of numbers which have been essentially was dates and the calendar and every single historic cat catastrophe was kind of 1 of these dates and then so they could basically use this to determine the future. Of what would happen going in the future when potentially another catastrophic event might happen so super cool like storyline right, obviously um I'm using that today to talk a little bit about the idea like numbers themselves how to numbers help predict the future and it was a maybe a few weeks ago or a week or so ago somebody had a head reached out and said look you really do on the podcast need to kind of talk a little bit more, deeper about the synthetic Equity programs that are used in esops that are particular to a transaction which are going to be warrants.

[2:31] And also stuck appreciation rights or SARSso 1 of the things I I I wanted to highlight here today as we start is that the the idea of using these of course I would just say in general is a standard a very standardized. Um part of any ESOP deal not pretty much every deal but a big part of most deals are going to include warrants in SARS so it's going to have a lot of of, application to discuss these and say hey how would this how would these work on your transaction and so we're going to talk aboutwhat they are.

[3:06] Their usage and then the practical application of saying yes I know that would work for us or know why practically would this work in in transactions and when and again the other side of that question is is why would they not work. Or why would you not want to use them or what what are some of the limitations on them so that's what we're going to coverthanks for joining the podcast if you like what you hear pleas subscribe and also tell a friend, you know you might know a company that's going through that hey I'm thinking about an ESOP and rate and review the podcast give us 5 Stars if you know the the way to do that technically and if you don't again I I probably wouldn't be able to help you but it is, nice to it it's nice for other people to say when they look at a podcast resource say this is something that could benefit you.

[3:54] Also go to our website journey to an esop.com. And if you have a question post it there we'll get back to you um because we want to make sure that we're interactive and helping others as we go that's part of our mission here.

[4:06] So let's open up this whole can of worms in the sense of the numbers and the idea of knowing.

[4:14] So the story line if I come back to it of course um very famous Nicholas Cage is the main character and. He's going through like he's a not like a numbers guy and he's going through all these numbers that come out of this. This capsule is Time Capsule and real when he realizes this it's like now Panic is like hey we got a major catastrophe happening and I won't spoil the movie but the concept is is interesting because it really does relate to what we end up doing.

[4:42] And it can almost feel like that when you look at a big sheet of numbers you can be like it wow I don't even know what you're talking about right and some some cases um it could be overwhelming to look at a bunch of bunch of numbers right but they do tell us something about the future which is kind of the the the essence of.

[5:00] What we're trying to accomplish in determining, the first thing is yes or no yes I want to use warrants and and or SARS or no I don't want to use them and and that kind of thing so we're trying to make that yes and no decision when this happens for us as cell site advisors what's happening is we're normally. Going to do in our processes we're normally going to do a pretty in-depth valuation model.

[5:27] Um I just talked to somebody today about their model and basically all the firms are just using some multiple of IBA.

[5:35] Our models aremore in depth because what we do want to do and and this is a whole podcast but we want to do, a better understand like why is the valuation itself why do we feel like it's going to you know like nail down that number maybe we're going to be in a range of multiple that was similar to what your multiple of you but from your, advisor was showing you but at the end of the day that's going to help us to determine. Um based on a very good detailed valuation model what the ultimate forecast is going to look like what we really feel is a reasonable forecast for the financials.

[6:12] The reason I bring it up because once we get that number now nailed down it always connects into the modeling towards the way we would structure feasibility. In terms of the structure of the debt the structure of of what the payments are going to be the the tax benefits whether you're an s or a c and the second step and so we have to connect these 3 pieces together right the third piece once we've done all that, is to now create some type of estimate for the warrant model and also the SAR model.

[6:41] And in order to do that we we're needing we're going to need to really understand um the the. Numbers behind the forecast which yield the debt numbers which then yield of course the cash flow numbers to pay that off which ultimately will then yield a potential of calculation for future value and that's going to be important for us to understand what would be due with the warrants or what would the warrants actually. Come out at you know in terms of the potential buyout or payout of that warrant payment and of course the other side of that is how would it actually play out for the stock appreciation rights as well.

[7:21] So keeping all that in mind, I wanted to kind of lay out like the idea that you have um the definition behind what is what is a warrant what is a sar and this is for a lot of people like you already get that you already been through this a lot so let me just say it um high level you know the warrant and SARS warrants and SARS are synthetic equity.

[7:43] That are available to accomplish 2 different things the warrants are going to accomplish the return on investment for the selling shareholder holding a loan into the transaction meaning that they're going to get, payment on that warrant as compensation for holding the note in addition to the interest rate that they get so the warrant shares themselves are, going to beextended andproduced at the time of closing. For the amount of of shares that they have depending on the negotiation of the the actual. Deal itself as it comes down to the compensation for the seller noteand so basically all that means is that they're going to get compensation based on some net internal rate of return on. Letting the company borrow money from them.

[8:40] And I'll get into that a little bit deeper but what happens is the warrant warrants themselves are shares that that that would be issued at the time of the of the closing for the ESOP transaction and they don't change over time they're just there right, and they're either you're going to be in the money or out of the money and warrants as time goes on meaning that the warrants have value if the company's value goes up in the future, and if the company's value goes down in the future then they're going to lose value. And there's no real ceiling on that value so if the company goes up significantly in value then the warrants can have a significant amount of value as well.

[9:18] And on the Tsar side the stock appreciation rights are are. Available to key employees and now it's important that most of the time the trustees we're going to say the SARS will not be available to the shareholders that sold their stock.

[9:35] And the reason is is that that that's kind of a a a rule of thumb but the reason is is because the SARS are not there. To give the the individual owners another bite at the Apple based on the future value of the business they're there specifically. To reward those key people for their future efforts and staying not only staying at the company as a retention. Portion but also performing and helping the company accomplish its targeted goals in that forecasts which are namely the targeted future IBA or your future cash flows of the company. So keeping all that in mind it's important tothink about this and say all right well. Um this understanding like these 2 different programs are really combined and 1 of the first things that has to be. Thought about in their definition is just like how how do warrants and SARS impact the deal. Why are this why are warrants and SARS part of the negotiation with the trustee why would the trustee have any say so over these types of synthetic Equity programs. And the primary answer there is that that those in combination whether individually by themselves or combined are going to dilute the value of the stock for the ESOP shareholders. Now the trustees job is to make sure that he or she has trustee protects the interests of the shareholders for the ESOP as a retirement plan.

[11:03] If the trustees just decide hey we'll just give whatever warrants out whatever whatever you want to do um without any max dilution then there is going to be you know obviously a. Our consequence to that right the as those pay out there's a dilution to the value of the ESOP shares so they're going to have some level of of. Required or maximum dilution that they're going to feel comfortable with and again. As you think about the trustee also keep in mind you got to think about the buy side team the buy side team b u y.

[11:35] Is the negotiation um of the stock valuealong with the other elements of the deal including the transaction trustee. Their independent valuation firm and likely an attorney an ESOP attorney that represents them so as we talk about these issues those 3 different roles. Combined create the buy side negotiation that are going to have to think about this opine on it from a fairness opinion and make sure that they've they have. Umagreed to like the actual net net numbers when you look at it. So all that being said what I'm saying in the very early planning stages that we just discussed, a few minutes ago is that once the valuation models are created that we the way we provide them. They're going to feed into the feasibility models to help to build normal cash flows that also helped to build debt schedules. Those in that information is going to help us to build now the warrant in SAR model as we go into the next step of this discussion.

[12:42] Music.

[13:10] So he's writing down numbers on a whiteboard and he's now figuring out that the numbers um from this is from the movie the numbers are showing, 1 of the dates being 9 1101 which of course we all know would be um 911. And it's like what happened because this was 50 years ago in this time capsule right so 1 of the things about this is the predictive nature of the knowing movie The predictive nature of these numbers and. Where that why I want to start with that so I want to start with that as we get into a little bit of a deeper layer of warrants in SARS.

[13:46] The re the first off as I left as it kind of discussed the idea of Warrant models and Saar models. Is the is the reality the real world is we don't necessarily know what the future's going to hold. But we do want to do something to predict in a sense what the actual outcome could be and and what we do know right so what we do know in this as we transition to building a warrant in SAR model um is going to be really a couple different variables and before I jump into that the details behind like what is a warrant in SAR model actually includeI want to, connect that to why would we want to build a warrant in SAR model and and the the primary reason at the front end of the planning.

[14:30] For working with a a client to think you know sometimes they sometimes people don't really understand like what how warrants and SARS work so this is part of the reason we're doing this podcast.

[14:42] And so by doing a model we can kind of demonstrate the potential. Value of of a warrant payment and the value of a sar paymentand how that might be meaningful related to some of the assumptions that were created at the front end of this and so. The actual warrant model and the star model kind of worked together in the sense of f a future value calculation just like we're as we're as he's thinking about the future, potential now he's he's he's gone back and he realizes the numbers that he has in this movie were predictive of actual outcomes right our modeling is trying to predict an outcome and as we do that it I would just kind of copy out this and say look we're not trying to say we know it we're definitely going to say this we're not saying we know what the outcome's going to be however. If this if these are all exactly the the right numbers right this is what the impact should be so let's talk about what the what the variables are within that warrant and SAR model and the future value calculation the first um variable is going to be the assumed number of Warrant shares. And then of course this assumed number of SAR shares so as we talked about this as being synthetic equitywell what we mean is these are shares ofsynthetic Equity that are not real Equity that are a. Liability.

[16:09] From the company to the individual that has the rights of those specific synthetic pieces of synthetic equity and I said as we said the warrant was going to be there for the seller notes the SARS are there for the key people and the idea is that.

[16:23] The potential value of what those are going to be are going to be number 1 the number of shares that they get issued now how do we calculate the number of shares of warrants that are issued at the time of closing the they're going to depend on a couple variables depending on um. Again the the work that gets done in negotiations but the 1 variable is the the assumed negotiated internal rate of return.

[16:51] An internal rate of return, is in finance the actual return on the investment that the the investor made in this case the investor is the seller and shareholder who holds the selling note the investment that they made was the entirety of the of the balance of what they've actually lent the company.

[17:11] Keep in mind that if you have some Bank financing and seller notes these would be appropriate on the seller note side the bank financing, for for the company is really there to provide liquidity to the sellers at the time of closingwhatever is left over. It's going to be it's going to be the obligation of the selling shareholders to hold a note back as paper to the company the company being the borrower and that. Selling shareholder then becomes the lender in that scenario right so the internal rate of return is the return that the selling shareholder makes on the investment of the seller note over all the time period that that note has been in place and so what happens is the assumed interest interest rate that gets negotiated which is part of the uh composition of the internal rate of return plus the number of Warrant shares will be targeted to to.

[18:08] Um pay out at that internal rate of return so um and this has been. Easier kind of done in a model but the the in the future basically what we're saying is is is basically in the future to hit a targeted internal rate of return of let's just say 13 14% we are going to look at all the payments as they go backwards in you know from the time that it originated with the negative payment being the investment that the the selling shareholders made and then calculate an internal rate of return calculation to back into the number of shares um to make sure that there's enough shares to hit that Target internal rate of return, with the assumed debt structure of the seller note with that interest rate so that's a lot that's a mouthful right so but that's mechanically how that works and. A couple things happened in that calculation we're also within that calculating to get to the Target internal rate of return we're calculating each yearthe future value of the of the.

[19:08] The stock in the company the future value is going to include theebit of value or the EBA Target. The forecast going back to the forecast times the assumed multiple. With potentially a the multiple growing over that period of time because the company as they get larger would. Hopefully and assumingly be able to reduce risk and increase their their multiple. So any ebit at times the multiple equals Enterprise Value. For each year going out into our future value calculation and these are normally calculations that for a warrant we're going to do over 10 years just typically could be less could be could be more.

[19:51] Now we're going to also then take that Enterprise Value and subtract the debt so what do we do when we did a leveraged buyout transaction for ESOP we just put debt on the balance sheet so we're going to. For each year we're going to we're going to reduce it for the amount of debt that's left on the balance sheet. In the first year we're going to have 1 year of Debt Service in the second year we're going to have 2 years so depending on how we've structured the seller notes. If they're behind the bank note then in the first year we may not have any change in the debt second year on and on and on until we start paying off the bank debt and then eventually the subordinated seller note gets paid off.

[20:25] Then we're going to add any cash that has accumulated now again. Depending on the the type of B type of structure that we're working with it could be a partial or a 100% either way that the actual cache position, in addition to and above beyond the working capital which is going to be built into the, a cash calculation is going to be added back so we're going to have each year those Enterprise Value based on the E bit at times multiple minus the debt plus the cash is going to equal Equity value and that Equity value is going to be then discounted for the lack of marketability or whatever discounts that are applicable that's going to give us a net Equity value and that net Equity value is going to be divided by the number of shares of stock. That then will give us the new per share value each yearnow.

[21:14] In the original model we're going to make an assumption related to the day 2 price so the day 1 price is what we negotiated the value of the stock for for sale the day 2 price is going is going to be what is now been. Changed in the in the model is that the balance sheet now has a lot of debt on it from the debt from The Leverage, so now each year we're going to have a future value calculation that would again be the ebit of times the multiplewhich is your Enterprise Value minus the debt plus the cash minus the discount. Safe for lack of marketability, divided by the shares of stock is going to equal a per share value against the day 2 price anything above the day 2 price would be your in the money on in the warrant so as time goes on after all of the seller notes are paid off then as time goes on all of that matures and the warrant now is going to um be exercised in the future assuming that and in order to get to the Target internal rate of return we are going to say all right that's the number we we need to get to for umthe net net calculation to be um. The net Target internal rate of return that's going to get a circularly back to the number of shares of warrantsthe SARS are similar but the SARS we negotiated on a percentage of equity.

[22:30] And as a percentage of equity what we're looking at is um how much of the equity would be um, a portion to a sar pool now within the Tsar pool um let's just say there was 150,000 star shares. Um within that SAR pool we're going to now. Diddy up the SARS 2 individual key people within the model that's going to allow us to estimate the potential value for those key people, for what the Tsar might be worth in 5 years assuming the same future value calculation we just did for the warrant.

[23:06] And what we're doing there is we're trying to determine the potential incentive that it would be that would. Be rewarding those key people to 2 things stick around retention second perform performance SARS where the where they hit the company hits those IBA targets. Now those so those 2 things as they work together really helped us to kind of now put some clarity um beyond the definition conceptually but around the actual deal structure and so that we can then work towards.

[23:37] Understanding now the practical application of of why this would work for some companies and why it would not work for others and so it's important to.

[23:48] To do that because we do know that as we let me just say a couple things that are implied but I think are important to spell out.

[23:55] Is you as you build warrants in SARS into the into the deal it becomes more complicated right I mean we just added a whole level of synthetic equity. We also have some issues that we have to kind of cover in complexity with the idea that we're going to have, synthetic Equity added on to an ESOP now if the ESOP is going to be an S corporation ESOP. Meaning that the company is is an S corporation and is owned by the the trust. Then thatESOP as an S corp is going to be subject to 409 p, and within 49 P assuming a couple things under under the umbrella of like who's participating in the event that the owners are still working for the company. They've sold their stock but they're still working they could be eligible to be part of the ESOP so when we calculate their existing amount of. Shares from the from the allocation what we're doing on 409 p is we're going to determine how many how much percentage would they have if we did a mock allocation of the share.

[25:04] So 409 P if you're not familiar is an IRS code sectionand sometimes referred to as the anti-abuse test. Is to identify potentially any disqualified persons in an ESOP plan for an escorp specifically. Now where warrants and SARS play a factor here is that we have to add the number of Warrant shares in addition to the allocated shares of ESOP stock that they're going to get. On an on a mock allocation meaning we're just gonna like pretend all of the shares got released immediately which is um part of the way it's tested. The re the way most shares are released and allocated are going to be based on compensation of the individual employees so if my owner. Is obviously a W2 employee they're going to get their eligible allocation plus the warrant shares if they're above 10%. Then we have to now test the other next test which is are they do they own more than or do they yeah have more than 50% of the equity so that becomes a partial s-corp ESOP issue. And sometimes an issue with um using warrants for in general so.

[26:11] SARS work the same way and so SAR SAR allocation um would say assume everybody got their exact number of shares even though they have to be vested um test that with allocation and now you can look at do they are are they in violation of 49 p as well same thing 10% or more um and now in combination with that with under with within 49 P there's also the aggregate family test in that if they have more than so many umour family members you put all those family members together and if they aggregate group has 20% or more than they are now deemed, um disqualified and we do the second test so real quick I did that really fast 49p that could be a whole episode by itself but the point is is what we need to check that out right and so there's some guide where there's some guidelines here and some guard rails on how this actually works but the bottom line is if. That all works together in the plan then we and we start looking at the practical application of does this work for the selling shareholders and did do the SARS do the SARS or the SARS meaningful enough to make sense for the key people.

[27:21] It's not.

[27:23] Music.

[27:38] So the whole thing as we finalize the warrants in the SARS is will the prediction come true in terms of the model that we just talked about for the warrants and the SARS and. I want to get into the idea that um we talked a little bit about how this whole thing works right and there's in a in this honestly a complex. Topic so it's hard to do it justice by saying you know all the things that how it is and all that but hopefully you you gained enough information now. To start asking questions about kind of you know how it works but why would you want to use this in this scenario so as we finish this this topic I wanted just to kind of go over a couple things in terms of some of the whys behind warrants and some of the whys behind SARS and. In general um I think overall they they both contribute a lotin terms of the structuring of the ESOP.

[28:34] And I'm I'm a very big proponent of both warrants and SARS in in almost every single ESOP transaction so so that like the reason I am a proponent and I would say a lot of people across the ESOP industry are. Is because they allow us to do some things that have more of a deferred nature towards the benefit. To the. Who's who's participating in the ESOP and how can they benefit but how does this how does this become and again our our goal and objective for an ESOP transaction is and I've said this a million different ways but is a win-win-win right we want the the shareholders to win we want the company to win we want the employees to win so the the first thing is that generally both warrants and SARS are a good idea is because they do allow us to create and use this tool to help each of those parties win by by making some things that are deferred in nature create some value towards the participants that are that are included in those so so we're we're thinking when we think warrants immediately think the shareholders that sold their stock and we think SARS think of the key people that are are helping to either run the company or very important to help you know build and Bridge for the future for the company's cash flows and everything that it takes to build value in the business.

[29:57] So what the warrants what's happening the why behind that is that it helps the the shareholders.

[30:05] Um take um a a little bit of a a edge off of the interest that they get up front right so that's what it costs them but in the long term they they always are going to have seller note risk anyways so, we might as well go ahead and push some of that seller note risk into the future by using a warrant and helping the the company go through a a process so at the same time the company's cost of capital to borrow the money to buy the the company from the shareholders is is in a way financed by the the the deferred payment that happens with the warrant paymentso so the shareholder can now look forward to the seller note being paid off and when that does happen they get the the compensation of the of and the repayment of the risks that they had um for holding the note and being a sense the the lender and they subordinate position for the company's cash flows.

[31:02] Meanwhile they're incent they're helping the company have more cash flow available to service the other debt if it's senior debt and nature or any other senior type of debt, structure and so the company can then keep keep on track with making those payments and of course build more value for the participants early in the process as opposed to. Later in the process so that that all kind of works together. Um at the same time generally the the the nature of a sar plan is that there's a deferred payment on the Tsar. That usually is about a 5-year payment window that the key people can participate in, um again assuming the company's value has grown and so both of these are based on the value of the business in the future and so from a predictive standpoint we're we're going to only use. The in the analysis we're doing in the warrant and the Saar models we're only going to be using.

[31:55] The forecast right so we're not really predicting a uh this this if the forecast is pretty reasonable right what we're saying is is that what should the company hit.

[32:06] And when we talk about forecasting and we go deeper into that sometimes people might say hey I want to I want to use something like my forecasted targets to get to you know not my targets but my yeah my my sales targets or whatever which are probably above and beyond or or higher I'm talking about the if we go backwards a little bit into the modeling the forecast that's really more reasonable in nature so what we're saying is if that's the case as long as the company does that then there there should be value for the warrants and if again value for the SARS, and they work obviously in different ways in combination so that the the key people would be able to participate in the value in 5 years and that gets.

[32:47] Paid out and monetized every 5 years as as time goes on and the appreciate as long as the company for the most part is hitting those targets they are going to invest from a performance standpoint on the performance SARS in and have a benefit there so the first reason of of say why for both of them are that it does provide a very solid win-win-win process for everybody involved so it's a tool that really does work to strengthen the whole ESOP deal and when you think about the the seller note risk and then you you have the SARS being something that everybody's in obviously the key people are involved in what happened what's happening really is we're we're connecting the interests of the people in the process at the very beginning all the way through the process meaning that they everybody has an interest in the value of the business going up.

[33:40] And I think that that again is a very general way to say this is going to be a good thing for the company because let's just assume we didn't have that interest level um the shareholder said hey I don't really care I got enough money off my seller note I'm just going to kind of do whatever and and there is no interest in the future for them. You know and and they have what's happening in most small businesses midsize businesses or whatever is that the owners that our owner operators, get to a certain point in their in. Careers with the company and they're like well we're going to start I want to start to kind of phase out right but at the same time they probably have more because they've been doing this for so long have more to contribute to the the building of the business in the future and so giving them a good interest in the future of um and a reward for that um actually really does make a lot of sense so that's kind of a good overview of why um now when you get deeper into some of the things about.

[34:37] The warrant specifically um and and reallypart of this is structuring you know so it's it's do I want more warrant shares, versus Les warrant shares and some of this has to do and depend on the and that is the internal rate of return We negotiate with the trustee some of it has to do with the differential between that internal rate of return let's just say it was 12 to 13% and if I lower my interest rate that I'm taking on my seller note, then I'm going to have a larger differential between internal rate of return and the warrant, or or the interest rate that on my seller note and that's going to yield more warrant shares meaning I'm going to put more risk in the future more reward in the future if I'm if I want to do it that way I've had clients go through that and say look I we don't want any Bank financing. We want to go ahead and and assume an an internal or a seller note um interest rate at AFR adjusted federal rate that's the IRS. Required rate and we want to get obviously the internal rate of return that makes sense to negotiations um and and what makes sense in negotiations I think of talked about this a little bit is is we can't exceed a dilution factor on the ESOP shares meaning that because it's synthetic Equity between warrants and SARS it's going to dilute the value of the ESOP shares so assuming all of those things are in place.

[36:00] Then we can maximize the shares of warrants and what what that, shareholders doing in planning and shaping and structuring is that they're saying hey we we're okay with um making the company a lot more successful in this front end by having more cash flow and reducing our interest rate at the lowest point because we want to put a lot of our, um reward towards selling the business at the back end where the seller notes paid off.

[36:27] So you're going to see in the why behind using the warrants it may be hey we want to take a take some chips off the table now move a lot of them in the back, means the value of each the valuation isn't as important so there's a lot of that and I would say just in general. Yes I want to use them as warrants and and the why behind it becomes more of the shaping and putting it together structurally. Keep in mind that some of that shaping of of the warrant has to do with the fact that that the warrant payment is going to be a capital gains tax payment. Um as opposed to a. Uman ordinary income on interest rate so if the interest rate is like a 37% you know interest rate.

[37:10] Or the interest income is 37% tax rate and the capital gains tax rate is 20%. So what what that means is that actually I'm going to have a better tax play by using the warrants than I am by doing the interest so that's just a. A food for thought as far as why and how that kind of thing of of using the warrants now in the SARS. Um using the Stars I think the 1 of the things I would say is the why behind it it makes sense to use them to when you have a situation where you have multiple employees.

[37:38] Um maybe 1 or 2 employees that you feel are are going to go above and beyond continually in the process and you want them to be thinking, not just with ESOP shares being an ownership thinking but you want them to have an above and beyond thinking of saying hey I really want to move the dial on the on the on the numbers in the future I want to make this this thing really work and there are people that I would say that you might have considered to buy out your shares on a management buyout you might have considered them you know a strategic. You know higher coming into the company that's going to make a big difference in the future and so that's 1 of the reasons you would want to use them now 1 of the things about, but applying the the the SARS are first off do the modeling do all that stuff up front don't worry about the SARS until after you close and the problem with with telling people too many things about like exactly the the math behind the SARS in terms of what it's going to look like in the future is you don't have enough data concrete data at the front end of the planning meaning that we you still have to negotiate the deal that's going to yield a day 2 value, and you're going to have to then go from there to.

[38:47] You know analyzed within this the pool of SAR shares that you negotiate who's going to get what and so what we would typically typically say is that best practice is, close the transaction go back to the Tsar modeling look at all the key people and make a very um.

[39:05] Solid decision and 1 of the reasons this is good too not just because we have all the data after the closing is also because, the ESOP transaction and is is honestly a lot of things to be thinking about and so by putting this into the after closing bucket it really does help make a better transaction where you're like I can think about this you may not want to use all the Tsar shares that's typical like in the pool you may want to use some of those um and then move on in the future keeping some reserves there in case you hire somebody down the road so so both warrants and SARS are very very useful as a tool and the as we come back to the and you know what we're trying to accomplish today was you know using this moving knowing it's like the idea that we don't know the future, but we can try to predict things using the variables that we laid out and that can be very very helpful especially if you're on the fence whether you do going back on the fence of being on whether I'm going to do an ESOP or not sometimes the warrants and SARS really do. Complete the whole picture of like yeah this makes sense let's I want to do, the ESOP plus the warrant stars because all that together does mean that the deal does work in a lot of different ways like that so, thank you so much for listening today check us out at journey to an ESOP calm and we will um look forward to our next step on this journey to an ESOP.