EP27 - What is Employee Ownership: Interview with Corey Rosen of the NCEO

In this episode, Jason interviews Corey Rosen of the National Center for Employee Ownership. Corey tells Jason a story to unpack what employee ownership really looks like – the hopes, the doubts, and the decisions that define the first step of the journey. The episode is designed as an educational resource to make the concept of employee ownership approachable – simple, clear, and human. If you’ve ever wondered as an owner how to move from curiosity to confidence, this is a great place to start. 

Transcript

[0:12] Welcome to this 4-part special series on exploring employee ownership, my name's Jason Miller I'm an ESOP advisor and a host to the journey to an ESOP and Beyond podcast where we seek to make all things related to Employee Stock ownership plans uh accessible and understandable today we're going to broaden that out into what what is employee ownership in general uh and uh I have with me a very pleased to have with me uh Corey Rosen from the national Center for employee ownership, to kick off this very special 4-part series Coreythank you Jason it's a delight to be here.

[0:55] Awesome what we will do uh today we're going to cover really what what is employee ownership and it's going to be followed by other episodes in this series where you're going to hear directly from owners that have been in your shoes you're going to hear from the leadership of the inside of a company uh after making an employee ownership transition and finally you're going to hear about how employee ownership can be a growth strategy we're hoping to give you insight into all the different elements uh of the power and the magic of employee ownership but today it starts with a story and Corey and I are going to walk through the story of a fictional owner as he or she explores employee ownership and then we're going to use this journey to explain those fundamentals what they are why they exist and how an owner might first approach this path so with that uh Corey if you wouldn't mind uh introducing us to our our fictional owner today. Yeah so Peter is the owner of a excuse me a pie of a pie making. Machinery Factory so Peter's principled pies he calls it because Peter has some really strong values about what a company should be and how employees should be treated.

[2:17] And so he's created this manufacturing company to make Machinery so that Bakers can make pies, and Peter's getting on and he's in his mid-60s now and he likes what he does not quite ready to retire and he's not quite sure when he wants to phase out.

[2:38] But all of his assets pretty much are tied up in this company and so he needs a way to get some liquidity and he's he's looking at options he's gotten offers from, some private Equity firms now and then from competitorsbut he's he's not really thoroughly comfortable with that.

[3:01] I think those are are really common elements of successful business owners and the 1 of the key things that you had mentioned is a lot of of his individual wealth is tied up in the company that, he so loves and the people that have uh generated the success to to get Peter where where he is todayand a as, uh we look ahead as owners look ahead into the future uh wanting all of that to continue and and maintain their their legacy uh and the culture of what they built now it becomes uh very a primary goal or motivation with that what what kind of um anxieties or fears does Peter have as he he looks into the into this near future and identifies this is where I am financially, this is the the company and family that that I've built and I don't really like the the other uh options of of transitioning my ownership, that that I've seen what what else might he be afraid of yeah when he looks at private equity for instance you know he's heard the stories and maybe even know some folks, sold to private equity and they've made great promises but all the wonderful things that have happened and sometimes it actually has worked out that way but, often it hasn't worked out that way that company takes on a lot of debt to pay off a bunch of really rich people.

[4:29] Who charged him a big fee. For taking over his company and then of course he gets paid but the results of all that might be that some people get laid off. And if he's got these strong values those may not be the values that are the private Equity Firm that's really focused on making a lot of money in the short run. So they can flip this company to another company. 5 to 7 years later often another private Equity Firm and that cycle of late lading on more and more debt continues.

[5:14] The part of those synergies that they can lay off some of your staff because it's duplicativeso it thinks about well you know could the employees become owners and. You know that would solve the problem but and these people who helped me build the business they could become the owners.

[5:31] But where are they going to get the money you know that's just not parking just not practical this notion of employee ownership, that seems like uh quite the quandry to be in uh in understanding or identifying that's the really the best path forward uh but there's that's that's a huge stumbling blockum talk to us a little bit more about really inside of that in selling to the employees uh what what options there are specifically uh and then let's go back and tackle that that mountain of how how do we get Peter properly paid for his presence right so let's think about what happens when anybody buys a company let's say it's a private Equity Firm comes in and buys the company. Well they typically don't come and raid their very large piggy banks and pay you with cash. What they're doing is having the target company borrow money.

[6:29] And the that dad is going to be repaid out of the future profits that the company generates. Now when you think about it why would anybody buy a company unless they thought that those future profits could repay the borrowing costs or the investment costs that you've put into buying the company. So if that's the case the problem for employees is. Well they're going to generate those profits in the future too and in fact if they own their company they're going to make even more effort to make sure that there are those profits.

[7:09] But unlike P they can't borrow that money because they don't have the collateral to do it. And so what we need to do is somehow figure out a solution to that problem that allows those employees to use the same Financial mechanism any other buyer would use. To take those future profitsand repay the costs of buying the company and thus pay off Peter.

[7:36] I think that is a really important.

[7:41] Concept to understand is that regardless of the buyer what's being used to repay the investment the purchase that that's happening is is the future cash flows of the very same underlying company uh that that we're talking about um regardless of of the choice that's that's where the everything is the value is being derived from and then the cash to to make it happen for for all the parties involved and so why not find a mechanism uh that allows the the people that have made, that company successful uh to to to borrow or utilize those um for for their own ownership. What what uh at this point is is Peter thinkingwith i i yeah I've identified my preference. And now how how could this work if we know that the future cash flows are going to be repaying the buyer and then there's a gap between the employees that he wants the company to end up with uh and him holding the stock todaywell fortunately for Peter as he's going through this journey. He reads an article in a trade publication abouta company that's in his industry that did an ESOP.

[9:02] Oh that's interesting mean the employees actually bought here's a company I know about and they're doing well and and they became an ESOP and and he thinks you know actually when I think about that, we also sell I know to companies that provide pies to a bunch of these supermarkets and I I walked into 1 the other day I was public supermarkets in my neighborhood, and it says its employee owned and wait a minute how they do this how they figure that out. And so he starts to do a little bit of research you know he goes to the website of the national Center for employee ownership a wonderful idea that Peter had as a good place to start because we're not, uh providers were not trying to sell you anything other than to explain how this works. And there's this article on here's how esops work for business transitionand it explains that what that the magic is simple.

[10:00] That Congress authorized the establishment of a trust within the company that's the legal owner. And so it's the trust that's borrowing money not the individual employees. And the trust can use whatever collateral the company has to offer. And maybe Peter will sell just part of the company now so he can fully collateralize the loan with senior debt or maybe he wants to sell all of the company. And that he can use take back a seller note and be paid overtime for the rest of what he can't financed with a bank. So the trust is borrowing money. Relying on the good faith credit and collateral of the company it's buying and maybe Peter as well. And so what happens isthat the trust takes out this loan.

[10:56] Or there may be more than 1 loanandborrows the money to pay Peter off.

[11:04] The company now real loans that money to the trustto to allocate all the shares to employees. So all the shares go into the trust and as that loan is repaid the shares get allocated to employee accounts, now it turns out this is not just a practical mechanism to do thisCongress really likes esops so Congress said. You know if you'll do this Peterand we're going to do 3 really cool things for younumber 1.

[11:43] If you will sell to the ESOP and you meet certain rules. You can take all that capital gain that you've got and you can reinvest it in stocks and bonds of other companies and not pay any tax, on that until you sell those Securities and there is no other way you can do thatsecondly. The money that the company pays to re to to uh pay back this loan that's a stock Redemption that is not a tax deduction unlessyou do an ESOP then it is tax deductible. So if Peter's business is worth say $10 million he might have to have 14x. Earnings to have 10 million left over with an ESOP only needs 10 millionso the ESOP can buy his company much more cheaply than any other investor can and then third.

[12:43] If the company becomes 100% employee owned which most esops eventually do. Peter can turn it into an S corporation if it's not alreadyand then the company doesn't have to pay any tax and that's not a loophole that's a law.

[12:59] So there's this enormous tax benefits for doing this so it it scratches a couple itches he gets a fair price and we can talk more about how that happens. He gets paidthe employees get ownership. And he gets to feel good about the story that he can tell his friends and his colleagues and his employees about what's happenedCorey I imagine that. Peter's first thought after reading through this trade publication that he got from the nceo and look listening to other resources around esops isthat sounds really too good to be true, right yeah exactly that's a common reaction iswhat's the catch, there isn't a catch there have been 18 pieces of legislation since 1974 on esopsandthey have all passed without a single. No vote. Now imagine thatthat today you could have a bill that Tommy tuberville and Elizabeth Warren would co-sponsor this may be the last thing that we all agree on that this is a good idea.

[14:17] So the greases the skids have been graced for employee ownership as much as Congress can make that happen it is certainly sounding more and more like a fairy tale the longer we go in Congress agreeing uh you know T Tax Freedom income tax Freedom under certain structures um and for Peter uh getting to reward his loyal employees and remain involved uh in in the day-to-day operation that that he he's built and and lovedum you've mentioned, trusts and contributions and and sales um and in light of all of this and I think, his next kind of question uh to to himself would be something along the lines of this does sound a little complicatedyeah.

[15:09] Yeah. We hear that a lotand they're too big issues I think that come up and we should talk about them separately 1 is well, will I get paid a fair price and when will I get paid and secondly this sounds complicated and expensive let's look at the first 1.

[15:30] Peter like most owners might have thought at 1 Point. Selling your business can be pretty straightforward somebody comes along and writes you a checkand you go off and do whatever it is you want to do in life.

[15:45] It's not that simple in reality if you want to sell your business to somebody else, you have to be prepared that this can take a long time that there may be false starts with Buyers who don't work outthat the buyers who finally do come alongare, going to seem like they're offering you more than they are typically because that's their a good strategy that these offers are often going to come with a lot of contingencieswe will pay you, but we're going to pay part of it now and part of it later depending on how you doand we're going to decide what role you want to play Sorry Peter you can't decide even though you'd like to stay you know sort of ease out of the business sorry that's not an option for us.

[16:35] And you're still going to need a lawyeryou're still going to need an accountant. You really should have a valuation because how can younegotiate intelligently unless you have an idea what your business is actually worth. Uh you're going to maybe need a banker to help you deal with what you're going to do with the moneyso you're going to need a lot of advisors they're going to charge you a lot of money and all these potential contingencies. Are going to raise complexity and cost so the bottom line is selling your business is complicated and it's expensive, no matter what you do. It's not a question of finding a simpler way it's a question of finding a better way and yesesops are complicated. And you do need to get a team of really expert people this is notamateur stuff you need to find, those providers who are really experienced and knowledgeable about this field but if you do the good news is they will guide you through this.

[17:45] And the tax benefits that you're going to get, will dwarf the cost by many many multiples for most companies are there and we should talk about this laterPeter or hypothesizing is a good candidate but not everybody is. I think now is a really great time to talk about that Corey um because we've we've followed Peter through where where he is what his his particular goals and desires are and he's explored other outside options he's discovered employee ownership and esops and he's gone down the rabbit hole of what's involved in this and kind of decided for himself that this sounds perfect for me how do I evaluate that to know whether it is right for meyeah so 2 things Peter needs to figure outthe first is.

[18:43] Can I sell to the ESOP at a price that I'm comfortable withand the way that that works is. The trustee of this ESOP is going to hire an independent outside appraisal firm. And they're going to come up with a price based on what a hypothetical Financial buyer would pay now Financial buyer is not the same as a synergistic buyer who says you know if you combine our company and your company. Then 2 plus 2 is going to equal 5in this case.

[19:16] It's still it's just the 2 and so the financial buyer says how much would I pay, today to buy the rights to all of your futureearnings or free cash flow.

[19:31] Given the level of risk. That buying a company like yours entails that's a highly simplified way to look at it but that's the core of itand so what we typically see in ESOP transactions. Is the valuation somewhere in the area of 3 to 5 times earnings, but there's variation you know you you could have a pie or you could have it lower but I'd say a lot of transactions fall within that range. So Peter has to decide is that okay he could hire his own appraisal firm to give him a preliminary idea if he wants that can't be the firm that does the ESOP appraisal though, many owners will just say wellif we have a fair process for determining the price.

[20:26] I don't really have that good an idea what my company is worth so I'm willing just to accept what that is, others may want to test the waters and see well let's see what we can get and how that compares. To what I might get from another buyer so they might hire, uh providers people help them actually compare the ESOP to other sales to decide what they want to do they'll pay a lot more money to do that but that that's an option.

[20:58] The second thing that Peter has to decide iswell there are all these costs and some added complexity.

[21:08] And is am I really in a financial position to do this is our company strong enough. And so what he needs to ask himself for 2 questions first of all. Are we going to generate enough profits in the future to continue to run the companyand pay me off. If the answer to that question is I'm not sure I don't think we can then an ESOP is not going to work because that's where the money comes fromand the second question is. To the benefits of the ESOP that I'm going to get from taxes and personal satisfaction outweigh the costs, and the costs are going to vary a lot at the very low-end probably 150 to 200,000 at the higher end for typical companies 5 600 thousand soyeah he's got to decide whether he's successful enough and big enoughso that he really is a serious candidate.

[22:12] This requires a lot ofForward Thinking, on information that may not be available and what I'm hearing Peter um should consider uh is first that that threshold of, it is the price going to be fair to me uh and this is it going to work for mebefore I move on to now since this would work for me can the company we've already identified that the future cash flows repay any any buyeruh any any seller or any any debt related to that transaction it is that going to be enough, for it to continue to thrive and andand meet the price that uh that I set I think those are really great places to startum and I would say there's if you go to our website at ncco.org there is an ESOP calculatorso it can help you get a rough idea of what the numbers might look like, that's an amazing tool um so I.

[23:16] If Peter chooses to move down this path um actually before we start there as we've mentionedor you've mentioned uh this idea of of fair value and then we've talked about the the trust and um it it seems as though uh there would be some some uh and we've talked about Congress so we, we think that there there's likely some certain regulatory bodies that are interested in these 18 laws that have been passed uh to make they are being fairly adjudicated and followed uh by all the professionals and and by Peter in his quest for employee ownership can you can you talk about those.

[23:54] So the Department of Labor and the IRS or the regulatory agencies that overlook this the RS doesn't get that involved with esops except for. Cases where the ESOP is set up in a waythatreally violates what the law is so most of the time the IRS. Gets involved with an ESOP it's 1 of those deals where pretty much all of us in the ESOP Community anybody else who looks at it. Guys oh1 of my favorite cases where they did something really just blatantly illegal, was and this is true uh it was a tax case so it was against the commissioner of Revenue and the name of the company was steel balls and so the case with steel balls V commissionerand they lost as they should have the Department of Labor gets involved.

[24:54] More regularly because what they're looking at is are you operating the plan the way that you're supposed to be operating it is that that the ESOP pay too much for the, company for instance did you pay people out when you were supposed to pay people out did you follow the rules, there is a perception among some people that esops carry a high litigation risk. That's. Not truethere are about 6,500 esops there are 10 to 15 cases that make it to court each year, in the last year 2 of those came from the Department of Labor this year I expect we won't see any from the Department of Labor for various reasons wow, uh that may not be a good thing because there because some of these cases, really do involve Bad actors who are doing bad thingsso if you follow if you if you get good advisors and you don't try to. To push the law in ways that was never intended to goare your chances of ending up in litigation are extraordinarily small they're not zero but they are extraordinarily small.

[26:14] We've talked about the trust as the owner the new the new owner and let's imagine that Peter has uh done some initial work on getting evaluation that makes sense for him to continue for it it working out for the company as a whole engages a team of professionals to see him through uh this transaction it is an m&a transaction it is a sale like any other of his shares of of stock to the to the ESOPand uh the the Department of Labor and the IRS component of that and you've mentioned plan we've talked about the the trust and so uh how is the plan designed and where where is that governed and how why does that matter to Peter and the employees. 1 of the concerns people like Peter might have is well now the employees are honored so they're going to run the companyand the answer is not unless you want them to. So you have a board of directors like you do in any company and the trustee will elect the board but the board appoints the trusteeyou could allow the employees effectively to elect the the directors but you don't have to.

[27:26] Some of the typical ESOP company, the governance pretty much continues the way it did before at least at first and gradually transitions to adding some outside directors not because. Do you have to but because most ESOP companies find it's really useful to have some outside directors on the board I'm on a number of company boards and. Uh it and what we do is just hopefully provide some useful input and perspective and. But the managers are running the companyit is extraordinarily rare for the trustee as a shareholder. To want to get involved in anything the management is doing is managementthey don't have the capability to do that they don't have the time they don't have the interest. So they just don't get involved in that stuff what they do on an annual basis is make sure the appraisal is done properly and that you follow the rules of the ESOP properly but they don't get involved in running the company now. What are those rules well if you have a 401k you may be familiar with a lot of these rules because it'sthe same laws that govern 401ks largely govern esops with a few exceptions. So 1 of the things Peter needs to realizeis he can't pick and choose who's in the plan and how much they get.

[28:54] Once an employees worked for a thousand hours and a plan yearthey have to be in the plan he can make it more generousonce they're in the plan they're going to get allocations. Every year as the loan is repaid or maybe Peter didn't take out a loan he just put stock cash into the plan every year and buys his shares out gradually that's another way Peter could do this without taking on debt but either way those contributions.

[29:24] Get divided up amongst all the eligible employees based on their relative pay this year pay over 350,000 a year doesn't count excuse me doesn't count. And then that subject to vestingso if I've only worked there for a year and I leave I'm not going to get anything probably. So the typical vesting is you get 20% a year after the second year. Each additional year until you're 100% vested some companies vest faster but you can't vest slower. So now I'm fully vested and I got allocations. And by the way the typical employee over 10 to 20 years in an ESOP is going to accumulate between. 2 and 4 times their uh salary in the value of their shares. So an employee leaves let's say I've got a 150,000 dollars after 20 years.

[30:24] And of course they don't want 150,000 in shares they want 150,000 dollars so the company will buy back their shares, and there's some flexibility in how you do this and over what period of timeso that's how the employees. Become owners and then don't become owners anymore and those shares typically go backinto the trust to be real real allocatedto other employees, 1 of the other things that Peter needs to knowis.

[30:58] Well gee whatif this doesn't work what if we go bankrupt and you know things we can't pay this off. Well every company is different, but the default rate on ESOP loans where they've imposed imposed losses on creditors is 2 per thousand per yearwow so these companies are very successful as ESOP companies. And if Peter's a strong company going in he will likely be as strong or stronger going out.

[31:31] It sounds as though the and the the the trusts itself becomes the market for Peter's shares of of his company and then Remains the market for those shares to honor the promise of retirement to the employeesright. In that, uh this sounds a lot more like a transfer and a transformation of ownership from an individual in into uh from Individual ownership or shares into a retirement benefit yeah that, solves a lot of the um concern or problems around inviting 2 200 people uh in into ownership or direct ownership uh by by trying to be been benevolent to do thatum so the the governance of the board and management and the relationship with the trustee with the uh input and oversight uh of of the laws and regulations really kind of protects.

[32:35] Peter's intentof this ownership transition in a lot more hands-off way than I think they would anticipate would you would you agree with that. That's right the main things that the government is wanting to make sure that you don't dois number 1 these are pays a fair price. So if valuation firm says a reasonable price a hundred dollars a share and say nah I'm only going to sell for 150 and I'm going to find another valuation firm that's going to say yes to that now you have burdened the company with a debt obligation to pay more than the company is worth and that puts everybody at risk, so the government says we don't like doing that and you know you got out you you got paid but they had to pay this off. Over the next 10 or 20 years. And so we're not okay with that that's the biggest issue of potential litigation and wrongdoing the second issue is more.

[33:43] Making sure that people, yeah the rules are followed in terms of Eligibility allocation contribution levels andand the distribution and payment uh so those things the government, you know has that legitimate interest in making sure you do it the right way and frankly so do ESOP companies because once you've. Set up the plan and you've and Peter's been bought out.

[34:11] Everybody's better off if the ESOP continues to pay a fair price and pays people off when they're supposed to be paid off that helps make sure that the company continues uh in a prosperous way over time.

[34:28] This sounds like a really great deal for the employees of of the company. And the the um the results of their their labor that they've already been putting in continues, and they they are uh G gifted um awarded um the the ownership. In in the company through this this structure would Peter have any concern about is that too generous uh is this is this socialism uh this sounds crazy the further we we go down uh and and follow this through that it looks like they're getting a really great deal and it it it turns back into a fairy taleso I remember when I was working on, a senate staff back in the late 70s and actually wrote the legislation that Pro allows Peter to deferhis gain on the taxes and I went to my boss who was a very liberal very famous. Liberal senator from Wisconsin Gaylord Nelsonand I said you know I want to introduce I want to see if we can introduce this what do you think. And he said well that sounds like socialism to me.

[35:43] And I said well Senator I've already talked to Senator Goldwater staff Barry Goldwater the famous conservative and Senator Goldwater wants to co-sponsor this, and so okay that's great yeah let's do it so.

[35:59] Is it socialism know socialism is on the government owns the means of production I used to be a political scientist so I get upset when people use these terms incorrectly socialism in the government owns the means of production that's what it means. This is capitalismbut for just a lot more people. And you've turned your employees into employee owner capitalists who have a vested interest in making sure that your company does welland I know that sometimes people refer as well as a gift to employees.

[36:34] No this is something that they have to earnits the profits of the company that they are going to create in the future that pays off this debt. So they are earning itand so it's totally legitimate that they should get the benefits of ownership. And yeah those benefits turn out to be pretty goodthe typical ESOP participant. Has retirement assets 3 timesthe value of the typical participant in a comparable company. With just a 401K planand 50% of the private sector Workforce is not in any retirement plan at all. So yeah these these participants are doing a lot better but they're doing a lot better in large part because the companies that they now own, and are helping to prosper grow. Faster and make more money the research confirms that as well then comparable companies.

[37:39] You and I both know that uh an ESOP is a spectacular setup. And um for all all of these reasonsbutPeter umhas has to start thinking about, like what other misconceptions would I have and what what's left what are the what are the questions I would have left after following this through and you had mentioned earlier that there are 6,500 esops uh that that out there and his next question is if it's so magical Jason and Corey why why aren't there more yeah I think there are 2 overwhelming reasons the by far the biggest. Most people like Peter don't even know this is an optionif Peter hadn't heard about esops and he went to a an m&a advisor or a business broker.

[38:36] And he said how can I sell my business the chance or or his accountant. The chances that they would say hey if you considered an ESOP are very smalleven if they know what an ESOP is because let's say I'm an m&a guy. When Peter comes to me and he saysI need you to help me figure out, how to sell my business to an ESOP that's my preference I'd consider other things but I kind of like this ESOP thingwell the m&a advisor gets paid for finding a buyer. Peter already found a buyer or I should Peter pay them a success fee of 2 to 4%. The Act 2 to 4% of the transaction cost of the ultimate sale priceto find a buyer and he already found a buyer.

[39:31] So I've had people in those positions tell me yeah an ESOP is a great thing they're wonderful but I'm not going to tell my clients about it because I unless you can tell me how I can make more money doing it.

[39:46] So so e so most of them don't know what it is or if they have some idea they don't really understand how it works and they have misconceptions or if they do really understand and know how it works they'd rather a client do something else so that's the that's a huge obstacle agreed the second problem. Is a is a more real problemand that is. Let's say Peter wants to sell 100% of the company and by the way he doesn't have to you can do this in stageswhich solves a lot of the financing issues I'm gonna raisebut let's say he wants to sell 100% right away, and he goes to the bank and he says. Hey can you loan me a 100% of the value of the company and they said no doesn't work that way we'll loan you 30% maybe maybe 40% if you're really strong company. And so whereas the other money come from.

[40:46] Well the only other option generally is for Peter to take a note and say pay me off over time. For a lot of sellers. That's great because they're going to get paid an interest rate on this note that's going to be higher than what a senior Bank debt, rate would be so they may decide well it's fine it's the whole thing with the seller note I don't bother with the bank I get this nice rate of interest I can live on that, and you know that's good for me but other sellers this kind of hey I don't want to take the risk or B I need the money up front.

[41:26] And so now what am I going to do well now that's a problem. And you can try to find mezzanine level debt that's going to be really expensive but that might get you therebut can we afford that level of debt. So that's a barrier I think that there's a market that I think is going to develop I'm hopeful. That would allow Peter to take this seller note. And then immediately or at some time in the future if he chooses sell the note to somebody else, who'd say well you've got a ten million dollar loan at 10% interest we we we'd like to get that we'll pay you 87% of the face value of the note upfront. Now Peter gets paid off. And it doesn't have to worry about this anymore so I I'm optimistic that a market like that's going to develop for at least some transactions so that might help but that is an issue that 1 way or another. Peter's going to have to come to grips withI had a um.

[42:39] A brilliant Peter uh mentioned to me recently in in a light of a transaction he said I'm I'm taking this risk now. Already and in in doing this I'm just exchanging the the the stock for the debt instrument at at the fair value and right it's gonna be here for a while um and so I'm I'm already, I'm I'm stuck with the risk or I'm going to exchange it for a financial instrument that's going to pay me and set up the company for the future and for the long run which which is the which was the intention with with that particular Peter um right yeah that's a very good way to think about it.

[43:22] So we've gone through uh a lot of the thought process that that Peter has and what what his intentions are and he really loves the idea of of an ESOP understands the the barriers and maybe the concerns and we've addressed um the the idea of of kind of control oh over the the destiny of the companyand he's going to have 1 1 other nagging thought which is what are there other means of employee ownership that I could look at and compare against uh the the magic of of an ESOP. So if Peter's goal is to sell the companythere's really only 1 other practical option. If he wants just to share ownership there's lots of ways to do that in stock options and restricted stock and Phantom stock and things like that but that's not going to get Peter any money that's just giving people an equity interest, so the other option is something called an employee ownership trust this is very popular in the UK because it has a lot of tax benefits there.

[44:36] In the United States there's no law governing this and there's no tax benefits covering itso what happens is you set up what's called a Perpetual purpose Trust, and so this would sort of go along with Peter's principal Pi could have the PPP PPP right. And the Perpetual purpose Trust. Is set up to be the forever owner of the company so these trusts are designed to the company's not sold.

[45:07] And so what would happen is. Peter would and this almost invariably it's financed this way Peter would take a seller note for 100% of the companyand the trust. Would become the owner so that the trust would have to repay that loan in much the same way that the ESOP trust repays the loan so it's the same mechanism. Differences are that the money that goes into the trust is not taxed deductible.

[45:37] Peter gets to set his own rules about who's in the plan and how much they getPeter determines what the governance structure of the plan will be the trust can have a big role or no role at all. And there's no special tax benefits for employeesand the employees also, aren't literal owners so the trust is the Perpetual owner and the employees have no equity stake in the trust there are ways that you can. Provide them with an equity stake if you want but typically the OTS are not structured that way in the US or the UK.

[46:18] So the reason we're seeing some companies do this and we just saw a massive company do this a company with where this will cover 60,000 employees wow home health care company. Well set up an employee ownership trust that will allow 30% of the companyand another company in the health care space Epic Systems, that's a 30 some percent employee ownership trust that's pledged to sell the rest to the, eot that just turned down a 30 billion dollar offer for the company because the owner said no way not ever he's gonna to transfer to this eot. Uh but most of them are are very small companies where they just find that. The cost of an ESOP are more than they can deal with or but they want to set their own rules. So the trade-off you're making is it's a lot simpler and hence it's a lot cheaper. It's a lot more flexible and has no tax benefits at all it's taxable to the owner as a capital gainits a Redemption so it's not tax deductible. And the employees aren't in a retirement planthey don't have ownership they'll get a profit share and of course that profit share will be taxable.

[47:44] Let's imagine that Peter is the type that really likes the tax benefits uh and the the imposed governance of of an ESOP what at this juncture as we've walked through all of these pieces and and and talked through um what what the alternatives are uh and he he's he's settled on that what what would he logically do next and is there anything that he's not asking himself, that you think that that he should.

[48:15] So Peter should spend some time getting educated before he goes out and finds advisors that's not because he'll find an advisor who misleads him that a lot of really good people in the ESOP community.

[48:30] Buteverybody kind of has their preferences about this is a good way to do it or this is the way we usually do it.

[48:39] So he wants to find out on his own. I have these things work and what are the options in structuring it what are the different ways you can Finance it what are the different ways that you can, that you can structure the plan rules and requirements and governance.

[48:59] So he really has a grip himself on how this works before I start spending a lot of moneyon advisors and and time and all of that involved in thatso. Conveniently enough that we have all that information available for Peter on our website at the national Center for employee ownership there's a pre-feasibility toolkit that will walk you through, how these plans work all the resources that you would need to further look into this we have a book on selling to an ESOP, that provides a lot of detail we have live meetings we have webinars uh we have. A document Library like the documents that you'd want to look at in advance we have an ESOP feasibility calculator. Uh and we're a membership organization and if Peter joins you can contact us anytimewith questions and because we're not trying to sell him on hiring us, we don't have any skin in the game of what he decides to do whether he decides to do an ESOP at all so you know we can we can provide that first level of advice. Had information so that when hethen goes to our service provider directory to find Qualified people.

[50:26] He knows what he's looking forand what I always tell people like Peter.

[50:33] You're gonna need a lawyer you're gonna need a trustee. You're eventually going to need a third party administrator but don't worry about that yet because you have to set up a plan firstand you may want a feasibility study done by an outside expert. Talk to at least 3 providers in each of those fields to find people that you're comfortable with. Before you ultimately set up settle on a teamthis is now this is a huge decision. The biggest financial decision Peter is ever going to make in all likelihoodso it's worth spending some time on.

[51:13] I think that's a critical component and we've described Peter as me mid 60s not ready to to to hang up the Hat and to continue making pies as long as he wants to uh with uh the goal of again ex exchanging his his ownership uh for and and that risk for the the monetary consideration that's fair to himum.

[51:39] Andwith all of the different hats that owners uh this this is a huge event that is this is likely the largest financial event of of of their lifeand, uh Peter should take this this level of care and investigation and, remind himself that he's empowered with choice no 1's forcing him to do anything along this way uh or to arrive at a certain conclusion and if he feels that way uh maybe it should take a breath or a step back and then re reevaluate what what's coming in uh to to influence that that feeling or thought umthe nceo is fantastic resources Corey you you and your team uh have have contributed to the the community like none other than I know uh and I know that uh it's very welcoming uh to to Peter's at all stages both before and during and especially after and we mentioned that Runway of the future and the the changes at the at the board level that just makes sensefor a continuing company for going concern uh that's looking to to grow um before we sign off for today is there there anything else that you would like to say directly to all the Peters that are out there listening to this.

[53:08] So I was at a conference many years agoat the great game of business which is a conference put on by the people who created it Springfield remanufacturing now as far as he Holdings and he thought that was created in 1983 with 119 employees that now is over 2,000 and their stock price has gone up over 1 million percent 1 million percent Wow since then largely because of the ESOP and this great game of business management system they've set up and the keynoter said something that really stuck with me. He saidwhen you think about your lifeyou want to think as you're living it what do you want to be remembered for. And he said yeah there are some people. Who think what I want to be remembered for as I was really rich I had a really huge house side 2 Farrar and an Aston Martin and that's when I want to be remembered for.

[54:09] But he said most people want to be remembered. For what they did for their family for their Community for their colleagues for the people they worked withfor something bigger than themselves. That's what they want to be remembered for and if you live your lifethinking about that.

[54:29] That it can make life a lot more worth living.

[54:34] And it's the story that we want to tell ourselves about ourselvesthat really should inform the way we live our lives. And for Peterif we can bring this analogy of the silly company name to a conclusion. For Peter that story is I wanted to set up a company that was a good company a responsible company a caring company a principled company, and now the employees of Peter's principal pies will not just have a piece of pie but they'll own the pie making machinery, and that's the story I want to tell about myself. Very very good words and inspirational Corey thank you for all of your contributions and for being a part of this educational series and kicking it off for usuh listeners, in the next installment you're going to hear directly from owners who are Peters that have gone through this process and all the things that they considered in their own wordsuh as they walked through this this journey that that we've outlined so thank you for your attention and your time it's been a pleasure thank you Jason it's been a delight.