ESOP Roundtable

Posted by The Great Game™ Team on Jun 15, 2021 2:45:00 PM

This episode of the Change The Game Podcast is a recording of a live roundtable event discussing the benefits and pitfalls of being an ESOP company. It is not required to be an ESOP company to enjoy the benefits of the Great Game of Businesses practices and principles, but they definitely pair well together.

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Victor Aspengren, Anne-Claire Broughton, John Williams

(This episode was recorded in June of 2021.)


Key Episode Take-Aways:

1. ESOP tax differences for S Corps and C Corps. (click to jump to this topic below)  The ultimate ESOP tax advantage is 100% S Corporation. Because you pay no corporate tax. In a C Corp. ESOP, you get deductions, but you still pay a corporate tax. The benefit of a C Corporation is to the sellers when they sell, it's called 1042. And if they sell at least 30% of their shares into an ESOP, they basically can put that into their estate. And on their passing when they leave this world. Basically, they get a step up, and they pay no corporate tax, or no capital gains on those shares.

2. To get the younger generation to buy in and think long-term, you have to have good culture built on trust and help them understand they're important to the company. (click to jump to this topic below)  it is all about the ownership culture. I mean, you really got to have a great culture where people you build trust and people understand they're an important part of making the company work, and they understand you know, the vision and where we're going with this company and what you would stand to gain personally as a group if you stay there and contribute to it success. So that's why things like Great Game of Business are really helpful.

3. Do not focus so much on the current status of the economy but focus more on teaching your employees to think, act, and feel like owners. (click to jump to this topic below)  I'll call this hedge your culture based on the current status of the economy, the environment or whatever. I think if you do the few basic things, and a lot of this is open book management and Great Game of Business teaches very well as a teaching all your employees to think, act, and feel like owners. That’s where you're teaching them the business, teaching them how the business runs, and teaching them how what they do as individuals affect the business.  


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Announcer 0:03

The "Change the Game" Podcast is sponsored by Prairie Capital Advisors, helping businesses think forward. For more information, visit That's

Announcer 0:23

Welcome to the "Change the Game" Podcast, where we share stories of open-book management and highlight capitalism at its best. Thank you for tuning in to this episode of the "Change the Game" Podcast. This episode was recorded at a live roundtable event discussing the benefits and pitfalls of being an ESOP company. It is not required to be an ESOP company to enjoy the benefits of the Great Game of Businesses practices and principles, but they definitely pair well together. For more information on ESOP's, download our new white paper, Five Rules for Building a True Ownership Culture Inside an Employee-Owned-Company at

Victor Aspengren 0:47
All right looks like we're ready to roll. Welcome everybody to the Great Game of Business ESOP Roundtable. As you probably can see, I'm in my mobile office in a vehicle I had a little hitch in my giddy up at home, and some people are there. So, if I blip out for a little bit, Anne-Claire will keep the thing rolling, but we are here for an hour and a half. I just want to start off by thanking the Great Game of Business including Anne and John and I in this, this is something that I think the Great Game does a great job with. I was exposed to the Great Game back in 1998, I went to a two-day event, they never pressured us, we started our own gig. And now it's been what's that 20 some years later, I'm still involved with the Great Game, still learning still being apart. And they've been such a great advocate for the community of open-book management, as well as employee ownership on all forums. And it's just a great marriage. And I'm so happy that they put this together, with that I'm going to turn it over and let our panelists introduce themselves. So, Anne-Claire, would you go ahead and introduce yourself, please?
Anne-Claire Broughton 1:56
Sure. I'm Anne-Claire Broughton, Principal of Broughton consulting, I'm based in Durham, North Carolina in the USA. And the three things that I do are, excuse me, I do business succession through employee ownership, which could be ESOP's or could also be other structures like employee ownership trusts, or worker cooperatives. And then I'm thrilled to be a contract coach, excuse me with the Great Game of Business. And I specialize in working with employee-owned companies or companies that are considering that because the marriage of Great Game and employee ownership is perfect. But I also work with many other companies that are not employee owned. And then I write case studies and curricula around participatory management and how to build that terrific ownership culture that really makes an employee on business shine. And the other thing I want to mention is that two years ago, in response to the silver tsunami of retiring baby boomer business owners, I worked with other partners here in North Carolina to launch the North Carolina employee ownership center, so that we have a state-based center to bring people in educate them about employee ownership, connect them to people that can help them. So very involved in employee ownership. Over to you, John.
John Williams 3:17
Thanks Anne. Thank you, Victor. My name is John Williams. I'm the founder and president of Elucidate Resources. And for those of you who don't know what elucidate means, that is to make things clear, and I think that's our purpose here today is to make it as clear as possible. For all of you that have those questions. I spent about 35 years in manufacturing. 14 of those years, was with central state's manufacturing, who is an ESOP company and has been an ESOP company since 1991. And also, a Great Game of Business practitioner since 1996, or 97. So I work with companies in ESOP communications field and setting up their communication plans, especially new. ESOPs also provides sales and marketing coaching. And I am also a Great Game of Business certified coach. I've been involved with the ESOP Association, NCO and the Great Game of Business since 2006. And currently Chair of the OCC the Ownership Culture Committee for the National ESOP's Association. So very happy to be here. And hopefully, we can help you understand this whole ESOP thing a little bit better. So, thank you, Victor.
Victor Aspengren 4:43
Thanks, John. And just to give you a little more detail on myself, like I said, I was exposed to the Great Game in 1998. Shortly thereafter, I was exposed to ESOP’s, and I became CEO of an ESOP company I've never been in an ESOP I've never heard of an ESOP. It was immersion. by fire, so it was quite the learning lesson back in those early years and then I've also been in three other ESOP companies as presidents or HR manager. But I've also been on the service provider side. So, I was on the ESOP administration side with RSM McGladrey at the time. And I've also been with an investment bank that actually structures deals and does the valuation for ESOP's. So, I've been around the horn on both sides of the fence. But I can tell you, I will speak to this as if I was a CEO. Because back in the day, I can't tell you how many times I'd say, well, what about this and then I go back and ask my team. Well, nobody asked so I'm about open book. Get it all out there. There is no bad question. And the great thing about the ESOP community is everybody is more than happy to share their dirty laundry of all the mistakes that they made. It's one of the best things in the world. I've done CEO roundtables for 20 years for ESOP CEOs, probably talked to 200 of them and, I still continue to do that. So currently, I'm the vice chair of the National Center for employee ownership. I was past chair six or seven years ago; I've been a board member of the ESOP Association. I'm part of the cooperative Charitable Trust, which is a think tank on worker ownership, worker cooperatives and ESOP's, I've been part of multiple different things I, when the bug got me, they got me though, they put that hook deep inside me on when it comes to employee ownership, and open-book management. So, with that, we're going to launch right into this, I want to thank everybody out there for all of your questions. This is we have a huge amount of questions; we're going to try to get to all of them as best we can today and take live ones as we go. So, some of this will be rapid fire, some of those will be more stories from Anne and John Williams. But the key thing is, is if we do not get to all of your questions, the Great Game has committed already, we can have round two of these ESOP round tables, or around three or whatever we need to do to keep feeding you, so you have a better understanding before you go down this process. So, with that, I'm going to go down just kind of some quick down and dirty basics of ESOP's. And I'm going to start flying through some of these questions. So here we go. So, what are the pros and cons of ESOP's? And when does it not work? pitfalls? Well, I'm just going to give you the high version of this. The pros are, if you're an S corporation, there's no corporate tax, it's deferred. And the tax is paid by the participants at retirement. Now people say that's crazy. And if there's no corporate tax, why isn't everybody doing it? Well, a lot of people don't know about ESOP's. And there are rules and regulations through the DOL. But that's one of the big pros. The other Pro is the fact that you can teach people to think like an owner through financial open book management, through practicing strategic planning in the company and getting your people engaged. The other thing about an ESOP it's a legacy play for those founders or selling shareholders that say, you know what the people have made me successful work with me all of these years, the ESOP is a way for them, if they stick around to get their piece of the pie. If they want to stick around for another 10-15-20-15 years, they can have a nice chunk at the end of the rainbow. The cons, I think the biggest con are just the rules and regulations. And we probably won't get too deep into all those. But there are rules and regs that you have to follow that can kind of put some barriers into what you want to do. So, you have to treat everybody the same. And when does that not work? I think where it does not work is when the successive leadership team has not bought into the concept of employee ownership. If they thought that they were going to run the show, and they're going to be the dictator and reap all the rewards, then ESOPs tend to not work as good doesn't mean that they can't. But where ESOP's really work is when they leave it as a legacy play, when they want their people involved when they're practicing open-book management. Those are some of the bests. And then the long-term pitfall is just what they call the repurchase obligation, because you are building up a retirement benefit. And the stock value can go up very quickly. And at the end of that there, you got to pay the people. You got to buy out the sellers, and you got to pay the people down the road and the value of the company can really grow and sometimes that catches up. So that's really quick. What size should a company be to be in ESOP? Well, the general parameter is about 5 million in sales and at least 25 employees. That's kind of the general guideline. Now you can do them if they're smaller, but there's certain things you have to look for. But as a rule, 5 million in sales 25 employees you should be in good shape. How does it work? Well and ESOP, it's a trust. So, what happens is these shares go to the ESOP trust. Let's just assume 100%. sale to the ESOP so the ESOP trust owns the shares. So, one of the myths is that people think that employee owners own the shares, well, technically they don't they get the financial benefit of a share allocation. The shares are actually owned by the ESOP trust, there's a trustee or trustees for those shares. And that can be internal trustees, or external trustees. It depends on where you're at either way, works just fine. But they are there to manage the fiduciary responsibility of maximizing the shareholder value. That's the only thing that they can look at as the trustee. It's not how you run the business. It's not what equipment you buy, or how many people you hire, it's all about the value of the company. That's on the trustee side. On the corporate side, you have a board of directors, that is there to look out for the shareholder, which is the trustee and look out for the employees and the corporation. So, the board has a bigger parameter of what they look at, and what they're responsible for. But they do have that same allegiance to the shareholder just like the trustee, but they can consider other things. For example, they can consider employment that, hey, if we do something different, we're going to lose jobs. Well, the board can consider that they can consider the community and want to keep the business in play there. They can consider acquisitions or divestitures of certain portions of the company and not have to consider everything like a trustee would. So those are the two governing issues of an ESOP, you have a board, you have a trustee. The weird thing is, is the trustee picks the board and the board picks the trustee. That's just how ESOP'S work. So, the immediate question that people go to is, well, what happens if things get ugly? Well, the things getting ugly are extremely, extremely small. I can only think of two in almost the 25 years where things got ugly between the board and the trustee. Typically, they communicate well, they work well together. But it's a checks and balance of making sure you got qualified people on both sides of the coin. John and Anne-Claire, you want to add anything there. I've been going fast there anything you would like to add on any of that.
John Williams 12:37
I think there was one question there. Victor, I'm looking at the chat here. What if they are a C Corp? You mentioned an S Corp and taxes there. What about C Corp?
Victor Aspengren 12:54
Yep. So,

1. ESOP tax differences for S Corps and C Corps.

the ultimate ESOP tax advantage is 100% S Corporation. Because you pay no corporate tax. In a C Corp. ESOP, you get deductions, but you still pay a corporate tax. The benefit of a C Corporation is to the sellers when they sell, it's called 1042. And if they sell at least 30% of their shares into an ESOP, they basically can put that into their estate. And on their passing when they leave this world. Basically, they get a step up, and they pay no corporate tax, or no capital gains on those shares. So, if they don't need the money, the easiest way I say is if you don't need the money, and you're leaving it for your kids, or your grandkids or whatever, 1042 is a great thing. If you need the money from your company to actually retire on, then 1042 can become very complex. It costs money. And it may be just better to pay your taxes because you need it for retirement. So those are the two differences. The C Corp. Again, does not get the tax exemption like the S Corp. Thanks, John. Here's a question. Is this profitable for the owner or a sacrifice? Well, the quick answer is if you want to maximize and get the most money from your company or your shares, then you should sell it strategically, meaning you're looking for somebody outside with an ESOP an ESOP can only pay fair market value based on an independent valuation. So, there are other things that go with that. But there's typically a delta between that maximum and an ESOP. And that delta could be anywhere from maybe only 10% up to 30%. So, the issue is really up to the selling shareholder. If you're looking for maximum dollars, then probably the ESOP is not the right vehicle. You If you're looking for fair dollars, and the opportunity to leave something for your employees down the road, then an ESOP is a perfect thing for that. And I can also tell you that there are some owners out there, people may think this is crazy, that will actually sell for less than fair market. So, let's just say they get a valuation, they say, hey, my company's worth 15 million, the owners will say, you know what, I'll just pay me 12 million, and they'll leave $3 million of equity in the company that actually goes to the employees over time. So, they're even some owners that sell it for less than fair market value, which is really a great way to start an ESOP.
Anne-Claire Broughton 15:43
And let me just add to that, Bo Burlingham, wrote a nice book called Finish Big, he interviewed a lot of selling owners and noted which ones were happy about the sale and which ones were not. And there's many other instances, we can cite of people that just sold for the highest price, and then really regretted what happened to the company that they had built over time, if it was just split up for its assets and not, you know, it didn't carry on in the tradition and with a great culture that the owner had built. So, and ESOP is a way to keep that family together, keep your legacy in the community, keep the jobs and like Victor said, enable the people that help build the value to benefit long term.
Victor Aspengren 16:27
Yep. And here's one thing that I would say about that, to add on that Anne-Claire and I've said this for years. good business. Good ESOP. Bad business bad ESOP. A lot of people think that ESOP's fix companies, they don't if they're not profitable, there's no tax advantage. It's not a great thing. So, one of the things again, it's a myth. People think that ESOP's will solve your business problems, they do not. There's actually an added layer of strategy and commitments and everything. It's a great tool. But you got to focus on the business, which is why the Great Game is such a great practice to start with is you understand that business and you get everybody to understand it, because then that makes a fantastic ESOP. So just like traditional business, when things are tough, it is not fun.
John Williams 17:19
Victor, that's an important point. I'll recall over the years of attending the ESOP conference in particular, that several owners that I talked to, and they were there just to understand more about the ESOP because they were considering it for their company. And the reason they were considering it was because they felt like their employees didn't care. And they felt like their employees didn't think like owners, they only wanted to paycheck, and then they wanted to go home. So, their exact words were I'm going to start this ESOP thing. So, I can fix that behavior. Well, two or three years later, I would talk to the same owner, and I would ask him, how is your ESOP going? And he said, This ESOP doesn't work. My employees still think the same way. And I said, because you looked at them as the same thing. Your culture and your ESOP is different. They complement each other. But you're right, they will not fix your financial problems, your cultural problems, your employee problems Exactly Right.
Victor Aspengren 18:29
Yep. It's a complex thing there. There was a quick question on the threshold of 5 million in sales and 25 employees. There's a technical answer why that minimum is there, it's because there's a contribution limit of how you can actually finance the ESOP transaction is why I say that 5 million and 25 employees that's getting into the weeds, I won't go any deeper there. But that's why those 5 million and 25 employees, you got to have a certain size payroll based on the value of the company to make the whole transactions work. But we won't get any more detail that or that'll be a question. We can follow up with somebody after the roundtable.
Anne-Claire Broughton 19:10
Well, I do want to add that it's partly because I just put it in the chat that ESOPs are regulated by federal retirement law, or ERISA. So, there are expensive annual expenses as well as the original transaction expenses that make it a burden for very small companies. But there's lots of other alternatives, which we can talk about now or later,
Victor Aspengren 19:33
Go ahead Anne-Claire.
Anne-Claire Broughton 19:34
as well. Okay. One resource I'll put in the chat in CEO has a nice article called a conceptual guide to employee ownership for very small companies. So, I'll put that in the chat. The two other alternatives, we tend to look at the North Carolina employee ownership center, our worker cooperatives which are gaining in interest. So, I think there are just under 7000, ESOPs in the US, there's been some m&a activity there. I think there's more participants, but fewer ESOP's worker cooperatives. It's only about 400 or 450. But they're growing. And it can be a good alternative for very small businesses that are, you know, 1 milion-2 million in sales. But there's some financing available right now for worker cooperatives. And then there's a newer form of employee ownership called an employee ownership trust, which is the predominant form of employee ownership in the UK. And there have been many trusts there. There's been about 13 in the US, and we're hoping to close on a 14th. This month, actually. So that is a form of trust that holds the company on behalf of the employees and distributes profit sharing each year. But there's no retirement account, like there is with an ESOP so and there's also stock options, Phantom stock, there's lots and lots of ways to create ownership in much smaller companies.
Victor Aspengren 21:03
And what I would say just in general, I know this is the ESOP Roundtable. But if you are a fan of employee ownership, whatever it is, vetting out all these different options is a good thing to really understand. Because there's pros and cons to everything, folks, whether it's employee ownership, whether you sell strategically, whether you sell to private equity, when you're the selling shareholder, you want to understand the pros and cons of any transaction that you're trying to do. And especially if you're going to employee ownership, you just want to know what's going on there. So, when Anne-Claire mentioned the cost, so there are costs of doing an ESOP and they're not, they don't directly, the cost of the transaction doesn't go up. As the size of the company gets bigger. There's just kind of a bass line costs that it takes to put in an ESOP. So just to give you, I'm going to give you some general guidelines, these are very general, it depends on who's your service providers, it depends on where you're getting your service providers. And it depends on the complexity of the transaction as far as the cost. But I would say probably in today's world to get through a transaction, if there's just one group of advisors working on it, meaning there, we're kind of representing the company and the selling shareholders and everybody, and there's one group, you might get it done for $125,000. So, it's not inexpensive, but no ownership, transition is cheap. There's cost no matter which way you go. But in ESOP, it's there. And that cost can go up significantly, if you have two sets of advisors. So, this is how I'll explain it. The Trust has its own set of advisors as they do the transaction, if the selling shareholders duplicate the same group, so if you have an attorney for the trust, and Attorney for the selling shareholders, if you have a financial advisor for the trust, and a financial advisor for the selling shareholders, those costs, just go boom, boom, boom, they double up so fast, that if you had advisors on both sides of the coin, you could easily double that number, triple that number even more. Again, this is not right or wrong. But just understand that sometimes selling shareholders need representation, because if there's a group of them, maybe they don't get along, so they needed advisors, to help them figure out how they're to go through all the nuances of how they're going to sell their shares. Because you may have three or four or maybe 10, depending on the successive leadership of the company afterwards, they may need advisors over there. And a lot of this boils down to trust and having a clear understanding of what kind of equity, the selling shareholders are going to get out of there. And do they trust the company leadership afterwards? And I'll leave it at that. But it's not an expensive Anne or John, you have any comments on that?
John Williams 23:59
Yeah, I, I mean, I agree it is. And that's where I think some of the size I know, you mentioned the 5 and the 25 based on the payroll, but a lot of it has to do with you know, can you afford it is the return there? And what is the payback of these expenses? Because that does significantly affect the cash flows, which affects your value in the short term. So, I think you have, there's a lot of it's not just any one thing. I think Victor said that and Anne said that there are several things to consider when starting this, but cost is one of them. But if you're looking to sell your company, you're typically going to have to pay somebody and attorneys are going to be involved with that too, even in a private sale. So, and a lot of it is relative to the size or the number of employees you have a lot of that so that they I think it I guess the short answer is it depends.
Victor Aspengren 25:07
Very well stated, John. It does, depends, there's wide variation. But I will say on the cost, just no matter how you structure it, just be sure that if you go down the ESOP path that you truly understand the fee structures that are associated with that transaction. There's nothing worse than when the company and or the selling shareholders get a sour taste in their mouth because they clearly didn't understand the fee structure. And then they wonder why their bill all of a sudden, a half a million or even more than that, make sure you understand the fee structure when you go down this path. Another technical does every employee have to partake. Yes, once you meet the minimum eligibility, which is usually in general most ESOP's will say a year, you get into the plan, but everybody participates you don't top out when you have an ESOP or in the ESOP, whether you like it or not, and the reason for that is, is you're not putting any money in as an employee, or as a member of the management team. It's all it's your sweat equity, the contribution comes through this complex loan structure that goes through, but a portion of that pay back goes in your account every year. And I believe the average The last time I think the NCEO did is somewhere between 8 and 12% accompt was the average contribution. So, no more details, participate in the ESOP. And it says how does it help retain competent employees? Well, I'm going to leave that one for a little bit later. Because that gets it gets a little more there. does it create a more profitable company, it can create more cash because you don't pay taxes? But unless you engage the ownership mindset, as John indicated earlier, the ESOP in and of itself does not necessarily make a more profitable company.
Anne-Claire Broughton 27:13
Yeah, you've got to have that ownership culture where you've engaging people at every level to think about the business.
Victor Aspengren 27:20
Yeah. And then here's the last one on kind of our technical one, cause Anne-Claire covered the alternatives. But how to get started and what is the best time? Well, I would say how to get started is attending events like this or looking for other ESOP education events to get yourself up to speed. ESOPs are not simple. You want to get your own education. And then you want to find the right group of advisors, because there's a lot of advisors out there. And people say, well, who do you know, which is the right one and I say, here's what I'll tell you. It's just like your corporate attorney, or your CPA firm that you work with. In a traditional business, you're looking to other allied members of the National Center for employee ownership, or the ESOP Association, or ASCO are associated with the Great Game of Business. They're all qualified people. There's a lot of smart, really good people, but look for the cultural fit. Because every company has a little different DNA, some companies are a little more conservative. Well, if you get a real aggressive service provider, long term that may not work out, or vice versa, you're very risk-taking company and you got a super conservative service provider. Look for people that you think I'm going to like working with that person. And it's not just the people creating the ESOP. It's that group that's going to lead the ESOP afterwards. What do they think about these people do I like them? Because let's work with people we like this is a long-term thing. It's an annual thing, you got to work together to make it all happen. So that's my advice, as far as finding somebody. And as far as timeframe, just real quick Anne-Claire timeframe. Give yourself at least a good six months, you can get a transaction done and maybe two months or two and a half months. But you are, it's like drinking from a firehose, and there are things that are going to get missed, and they'll probably be miscommunications afterward, because you don't have a nice thorough process with the good pace of timing. So, everybody understands what's going on. There's not too much stress or pressure. I like to say the six months is a good time. Now this year, because of the threat of capital gains, because of the COVID halt of businesses, the activity is extremely high. I think the general service provider world, it's going to be a tsunami of transactions between now and the end of the year. If you're seriously thinking about it, you want to pull that trigger you better get it on Labor Day, because after Labor Day, everybody's going to be really busy. And it'll be tough to get it in. Not to say that it can't be, and I can't speak for all service providers. But as the time gets shorter as the fees go higher, and if you have to have it done, so the timing right now is a good time, if you're serious about it, you want to start going down that path and starting to pull all the triggers that you need to pull. Go ahead. Anne-Claire, you were going to say something,
Anne-Claire Broughton 30:26
I was just going to say to make sure your service providers have a lot of experience with ESOPs, or whatever form you choose. And the NCEO, the National Center for employee ownership has some fantastic resources. I put in the chat, a book that they compiled called, don't do that. So, they've compiled a list of mistakes that others have made to enable you to avoid those mistakes.
Victor Aspengren 30:51
John, you got anything.
John Williams 30:54
Oh, there's a question here that I've seen, Victor that I come across it has to do with the trustee. So how is the role of the trustee different when you do a contributory ESOP rather than a leveraged one?
Victor Aspengren 31:06
Yeah, the leverage on a contributory ESOP, the trustee, it's not as complex because it's really a kind of a corporate decision to do it. You probably have an internal trustee. And you're creating the ESOP at a very slow pace, might. Some people have done a contributory ESOP, where they start putting in 2% a year or 1% a year so it takes a long time to even get to majority, let alone there and the contributory ESOP's sometimes one year, it might be more or less depending on the performance of the company. But once you create the ESOP trust, then you need to have a trustee. Like I said before it can be internal or external. And if it's in many cases of contributory ESOP, as let's just say I'm the sole business owner, I own the company. I like the ESOP; I want to start contributing. I myself may be the trustee, especially until becomes my majority, ESOP, because there's a minority, it's a minority shareholder, just like any other shareholder. If the ESOP is less than 50%, then they're a minority shareholder, just like a traditional shareholder. So, you can be the trustee yourself and a contributory. If you want to, or you can have other people be there as well. Just understand, it's the highest fiduciary standard there is. And you can be personally held accountable to that. Just make sure you understand the risks that you're taking when you become a trustee for an ESOP. And again, I will say, in all the ESOP's that I've been in when I was on the corporate side, other than the transaction, the transaction, you always want an external trustee to represent the ESOP. But once the ESOPs in place, all four companies where we had an ESOP, we had internal trustees. And I would say today, it's maybe somewhere 50/50, between external trustee and internal trustee. It's more about risk management and understanding the roles and looking for what you want out of that trustee position. John, you're shaking your head. Any comment?
John Williams 33:18
I agree. I've been through both. I've worked for a company that had an internal trustee for almost 20 years, and then went to an external trustee. And there are a lot of factors, there are risk. I think some attorneys will tell you that there are some risk factors associated with having an internal trustee. But they're going to tell you that only if things go bad. And things go bad, very, very seldom. But a lot of it can be Do you have an employee that has the skills and knowledge to do this? And do you want to take that on internally, to have that be one of the duties because remember, that is fiduciary responsibility. And you'll definitely have to have some liability to insurance or something like that, to protect that employee in case something happens. So, there's some other cases, you just have to look at it. But I agree with you, Victor, I think 50 to 60%, especially the ESOPs that are young, start out with internal trustees, and they are usually not all the way, but the original owners sometimes.
Victor Aspengren 34:23
It can be that. So, let's go away from the technical a little bit. Let's get into some kind of meteor stuff legacy. So, John and Claire, I'll let you guys, how to get the younger generations to buy in and how do we get them to think long term? How's that for some loaded questions?
John Williams 34:43

Go ahead, Anne, I'll let you go first

Anne-Claire Broughton 34:46


2. To get the younger generation to buy in and think long-term, you have to have good culture built on trust and help them understand they're important to the company.

it is all about the ownership culture. I mean, you really got to have a great culture where people you build trust and people understand they're an important part of making the company work, and they understand you know, the vision and where we're going with this company and what you would stand to gain personally as a group if you stay there and contribute to it success. So that's why things like Great Game of Business are really helpful. The other thing is to balance your short term and long-term incentives. And we had a bunch of questions about that. Somebody asked, why do we have quarterly bonus payouts, and in GGOB, we have quarterly bonus payouts to keep people incentivized, we hit our first quarter goals and we get a small bonus second quarter goals a slightly bigger one, and so on until the end of the year, we get our largest bonus payout. So that tends to be more motivating for younger employees. Whereas older employees can see maybe a little bit more the value of saving, but the longer people are there, and the more they see, you know, real gains both to themselves personally. And as a group, the more I think they buy in. What would you add John?
John Williams 35:56
Yeah, and I think going back earlier to what I said, it's the culture that makes the ESOP great.
Anne-Claire Broughton 36:01
John Williams 36:01
It's not the ESOP that makes the culture Great. So, you do have that, but I think a mix of short term and long-term incentives, which is what an ESOP is, it's a long term instead of a mix of short term and long-term incentives, is what is needed, because there's this frame of reference that every employee is at that point in time in their life. And the younger people, including myself, I can think when I was 20, or 21, you're thinking about today, you know, you're thinking about four o'clock or five o'clock, when am I going to get off work? And as you get older, that turns into a week, a month, and then you turn around and you're 55 or 60? And you're like, oh, no, tell me more about this ESOP thing. But that doesn't mean give up on teaching the ESOP learning about it and continue to communicate it. You just don't say, well, people don't care. So, I'm not going to talk about it. Well, that's not the right approach, either. You need to continue to talk about it, communicate it. And I'm always a fan of teaching the employees how they affect the business, and how that in turn affects them as individuals. And I think that's what you got to remember. And you'll have everybody on board.
Victor Aspengren 37:22
Is your cash bonuses. Your short term, the bird in the bush is your ESOP. And you're right, John, when I was young, I could have cared less about retirement, give me my money, so I can go drink beer and go to concerts and do whatever else I'm going to do. That's just normal. That's just the way it is. But I do think there's a difference. That ownership mindset it's Do I have a voice? Because if you use the word owner, folks, when you put in an ESOP and you start telling everybody their owners, you better put some bookends on what that means. Because owner is a powerful word. mean, does that mean? Because when I own something is a Great Game has said, you rent a car? Do you take care of it? Not necessarily. If you own the car, you take care of it? How do you get people? How many people have been an owner in a company? Everybody just thinks, oh, everybody knows what it means to be an owner? Well, let's define that. What are the behaviors? What are we looking for? And then how do I have a voice? Because it's about having a voice? It's not about making all the decisions. Because you can't vote on everything. But it is how do I have a voice? And how does my input utilize within the company structure? and getting that understanding really helps. I think the younger generation want to stick around because they feel like they're contributing to something bigger than themselves.
John Williams 38:47
Yeah. And I think one more thing, Victor, it's also good on the short-term incentives are to match the objectives to the length of the incentives. In other words, if you have short term thinkers, and if you're going to put them on a monthly bonus plan, make sure the objective that the incentive is based on is a short-term objective, as well, because it just ties into their thinking of, I'm thinking about five o'clock today. So, what can you they're motivated that day? And I know, I'm speaking specifics, and it's not always that way. Exactly. But if you align your different departments of your company, and your different levels of your company, with incentives and objectives that match their frame of reference of where they're at. It'll work a whole lot better.
Victor Aspengren 39:52
So, what are the pros cons of using an ESOP as a succession planning tool? How can I use it to retire sell my business? As an exit strategy you guys got any commentary there or I'm sure happy to take that one.
John Williams 40:08
Oh, well, I, I'll give an example. And my job is several sites, a lot of the customers were lumber yards, and lumber yards are facing what a lot of businesses are, a majority of them been family on some of them for over 100 years, and they've been passed down from generation to generation. And then there's no more family to give them to, or that wants to be part of it. And private equity, you know, has really taken hold in the lumber industry and start to buy these, you know, and a lot of the owners that I talked to, they see that as their only avenue. And when they're looking at succession planning, there are other forms, you know, like Anne said, you know, and look at these, they just don't, they just don't know, you know, where to turn. But succession planning can mean a lot of things. And I think it's an individualistic thing. Is it like success in plan, like, I want to leave a legacy, and or is this a succession plan that I want to go ahead and sell the business? Now, my employees have worked hard, I want to take a 1042 election and buy another business or invest my money and defer those capital gains. Or there's some companies now like this year, Victor, that all you have to do is throw out a scare of increased capital gains, and everybody's running to the service providers saying get my ESOP up by December 31.
Victor Aspengren 41:43
John Williams 41:45
But you can control that, to some extent, I don't think you have full control. The reason I say that in controlling that succession plan, a lot of owners are still involved in the business even after the transaction, either in a leadership role, an executive role an advisor role, or even a seat on the board, you know, so that's not uncommon for them to still be part of the business, they may just not own the business, the other part of the succession plan is going from a minority. I know Central States did that they started out with 37% and went to 39%, and 41%, and then eventually to 100%. So, I think it's really what does the owner want to do? What is them? What outcome do they want to see? In this I think that has a lot to do with it. So, and it's a, and I will tell you this from being in the middle of it. It's an emotional thing for an owner to let go of their business, especially if it's been in their family for years and years and years. And I think that's why a lot of them consider an ESOP because it does preserve some of that legacy that name your differentiation in whatever industry you're in. It is a way to reward or give back to those employees that have built your business and that puts you in a position to be able to retire do something else different, or whatever that is.
Anne-Claire Broughton 43:23
Yeah, perfect. I just put in the chat, a case study of King Arthur flour, which is the oldest flour company in the US. And it was owned by one family for seven or so generations. And they started doing Great Game first and learned about ESOP's, they decided to start with about 30%. And then they move to 40. And then they finally changed the control and went to about 70 and finally 100%. And it's worked out very well for them. And they do preserve the values and the culture that the founders had created over so many years.
John Williams 44:03
I think we got another question here and this evolves. Victor. Does the equable value of an employee's participation in the ESOP have to be uniform across all employees? Or is it based solely upon time serve? So, the victor go off or?
Anne-Claire Broughton 44:20
Yeah, Victor when?
John Williams 44:22
All right then, Claire, I'll let you answer this.
Anne-Claire Broughton 44:25
Um well, I am not an expert on that. But I know that because ESOPs are regulated by federal retirement law, there are very specific rules for how ESOP accounts are allocated and it is everybody is involved, and I believe it's more by your PayScale. I don't know if this is part of that calculation.
John Williams 44:53
Yeah, for the most part, the contribution that is going to be made to an employee's count is going to be based on a percentage Their total compensation, there are limitations to contributions on deferred plans. And that will include any other deferred plan like a 401k. So, I think it's around 57,000. I'm not for sure. Don't quote me on that. But it's somewhere around that. But there's also some very, very strict guidelines on percent of ownership by any one person or family that you have to abide by. If you're a S corporation, because you can lose your S corporation plus be in a lot of trouble. I know a lot of money if you violate that percentage of ownership part. So, I do know that so. Alright, Victor, you're back.
Anne-Claire Broughton 45:47
Victors back. He's in the house. Victor, is there anything you would add about how ESOP accounts are allocated by law?
Victor Aspengren 46:00
There we go. Sorry about that. Everybody had a little technical difficulty, but I am back.
Anne-Claire Broughton 46:07
John Williams 46:09
And Victor. We were just talking about the question. And I think we got it answered. But you know, the equitable value of an employee's participation in ESOP has to be uniform is based solely on time served? I think our answer was, you know, it, the contribution part is based on a percentage of compensation, there is limitations. due to it's a deferred plan. We also we ended up with I think you caught this about the S corporations have to watch very closely the percentage owned by any one person or family so that they don't violate that.
Victor Aspengren 46:50
Yep, that is correct on the violation on that it's called 409 P. Any one person cannot, I think it's more than 5%, maybe it's 10%. If you had the larger the company, it's usually not a problem, the smaller the companies where you really got to pay attention to it. Because if you violate 409 P, basically, you will put the company, it'll be done, because the penalties are so severe. So, you just need to have a good advisor that understands 409 P that they can run the test, you'll be good there. On the contribution side, yeah, the maximum is 25% of the payroll is the maximum contribution that can go into the ESOP in any one year from a contribution perspective. Typically, that is based on w2 wages, which includes bonuses and everything else. So, it's your it's let's just say you have a million dollars of payroll and I make 100,000, then, you know, I get that percentage of those million dollars. So, the more you make, the more you get from a percentage basis, or from $1 perspective, but the percentages tend to be the same. This being said, a lot of companies today, I shouldn't say today, but probably in the last 10 years have used more of a point system, where they try to give a little more allocation to the longer-term employee. So, they put in a seniority component. So, it's wages, and it's years of service. So especially if you put in an ESOP, and I've already been working there 25 years only got five years left, I'm going to go well, whoop dee doo. What do I care about the ESOP? Well, by doing a point system, you can kind of tilt it to those longer-term employees, and then kind of normalize it over time. But again, a good service provider can help you with that. But there are several different nuances of how you can get the dollars into the participants. The big thing is you can't discriminate there just certain rules within the ESOP structure. You know, I can't just go out of my way and say, Anne-Claire's going to get twice as much as John. And that's just what I want to do. That's not how it works. Within ESOP, there's guidelines, there's just things you have to operate around within that.
John Williams 49:07
The other question, Anne and I saw before we get for gets good is give me give an overview of an ownership culture, what might that look like?
Anne-Claire Broughton 49:21
So, an ownership culture is where everybody feels like an owner. And everybody is thinking like an owner. So, we're not just thinking about what's in it for me. We're thinking about the big picture, and what we can bring to the table. And so, every system should really be set up around maximizing that ownership, culture maximizing engagement. That's why we love open book management because it's a way to educate every person about how the business makes money and generates cash and building line of sight between what people do every day and the numbers and getting people super excited to share their ideas, because the people closest to the product or service are the ones with the best ideas about how to do things. So, ownership culture is very it encompasses many things. But the bottom line is we want everybody's great ideas. We want everybody feeling like an owner and bringing 110% every day and celebrating success together.
Victor Aspengren 50:22
And I would say an ownership culture. Because the ESOP if you want, the ESOP is not going to fix your culture. The ESOP's not going to make people start acting like owners, it's going to be are you giving them the information to think like owners? Are you willing to be transparent enough to share the numbers? Share maybe how decisions get made, shared? what goes on in the board of directors or the senior leadership? You know, what's the transparency, you're willing to go there? And then the other thing, my first example, is we outlawed the same, because we always have, when, in my first ESOP, we outlawed that saying nobody could say it. I couldn't say it as the CEO, if I give you that answer, that's not good enough. There needs to be a legitimate answer, which we may not like. But at least it's legitimate. It's not just Well, that's just because we always have that is not an ownership culture. So that would be my little tidbit there. So, let's hear we left the legacy. We did that. One other thing I was going to add before I had my technical difficulty was the first succession planning. The good thing about ESOP's is you can take a bite of that Apple over time. So, there are people I know now that are in their 40s that are starting ESOPs. And they're just starting with a small ESOP. Now there's cost to it, but they believe in the concept. And believe it or not, there are significant partners out there some business owners, their significant others, they're saying, hey, when are we going to get some of that equity out of that company? Because that's where you spend all your time? When can we start feeling that so by taking some of those bites, it might be they take an early bite for college, to send their kids to college, or they might take a bite for a second home or whatever it might be? So, if you really think about succession planning, long term, an ESOP can be a great strategy not just over three or four years, it could be over 10 or 15 years that you could actually create a strategy of how you're going to move into employee ownership, that fits the need of the selling shareholders along with the corporation and get that benefit out. So, there's a longer-term play on succession planning. So, let's go back to some technical. So how do you value the shares? Well, the shares are valued by the trustee, the trust hires a financial independent financial adviser to value the shares. And that's just based on fair market value. So, in most cases in ESOP's, and this is a blanket statement, its disk future discounted cash flow, there are market comparisons depending on what market you're in. And if there are public companies that play in the same field, there is some assets if you have heavy assets, there might be an asset component to it. There's a variety of different components. But the major one in the ESOP world today is future discounted cash flow, and they go through a thorough vetting through you got to give projections of what you think your business is going to be. That's all part of it. And it happens every year on an annual basis to create that value. Now, the one thing I will say in the early days of an ESOP, you have debt, because when you create the ESOP typically, you're taking on debt. So, in theory, let's just go 100% for you take out $10 million of debt to pay out the selling shareholders, if nothing else changed in the company, and all you did was pay back that $10 million of debt, your value is going to go up. So, in the early years of an ESOP, you can see rapid appreciation, but you want to make sure that people understand, is it because you're paying off the debt or because you're actually growing your business? And I've seen it where people get in this travel. Look how the ESOP look at the ownership mindset, when really, it's a false statement. You're just paying off the debt. nothing's really changed. You're just paying off the debt. And making sure that when you go through this, if you explain it to people, this portion of it's because we're paying off debt, this portion of it is because we're actually growing the business because at some point, you're going to pay off the debt. Just like your house, you're going to pay off the debt, how you're going to build value. After you pay off the debt. Well, you can add on you can do other things, fix it up same way in a company once you pay off the debt. You're going to diversify; you're going to grow market share those types of things. So that's the fundamental of value. I'm not going to get into the whole. Anything deeper in there unless John or Anne-Claire, you have something to add on the valuation side.
John Williams 55:13
Yeah, I think the key is Victor, you want to do both. You know, you want to you want to understand you want to grow the value of the company, you want to be profitable, and you want to pay off the debt, you know, and so you can use that cash instead of paying off that debt to grow the company. So, I think that's key thing.
Victor Aspengren 55:35
Yep. Yep. So, here's the loaded question for the two of you. What is the single most important timely issue that all ESOP's should evaluate to thrive in today's economy? How's that one?
Anne-Claire Broughton 55:51
I'll let you go first John.
John Williams 55:52
Well, I've always been a fan of, of not trying to hedge.

3. Do not focus so much on the current status of the economy but focus more on teaching your employees to think, act, and feel like owners.

I'll call this hedge your culture based on the current status of the economy, the environment or whatever. I think if you do the few basic things, and a lot of this is open book management and Great Game of Business teaches very well as a teaching all your employees to think, act, and feel like owners. That’s where you're teaching them the business, teaching them how the business runs, and teaching them how what they do as individuals affect the business. And then letting them make decisions, which is they acting like an owner part and feeling like an owner, which given them a stake in the outcome, which is what ESOP does you're giving them equity in the company, you know, on a long-term basis, along with the short-term incentives. I think if you do that, regardless of anything else, yes, you're going to have hills and valleys, but it will get you through those hills. And valleys. I'll give you an example. Central States manufacturing in 2007, I think is 2007-2008. The stock market was like at 7000. If you could even imagine that. Okay, Central States opened a brand-new manufacturing facility, they had a $2 million expansion on one and another $2 million expansion on another. When the stock market was 7000. All of our competition was shutting down factories or cutting costs and doing all of this. And the reason we were able to do all that is not because what was happening then it was what we did before that happened. Now I know a lot of this goes with your culture and the way you do things. But a lot of it has to do with strategic planning, which goes with ESOP as well, you know, because you're going to have to be, you're going to have to think strategically, you're going to have to put together a five-year plan for the valuation firm. And they're going to measure you against that plan over a period of time. So, I think if you just stay with those core fundamentals, I think it'll get you through all of these different periods and not tried to change and tried to guess what you should or shouldn't do. So that's my take on it.
Anne-Claire Broughton 58:22
You just said the one thing that I was going to say, which is strategic planning, this is the time to get all your people engaged in asking what if? What if, what if? What if there's another big downturn, what if you know, just all the what ifs do growth and contingency planning right now, this is a really good time to do it, whether it's high involvement planning or some other form of strategic planning, this is the moment to do it. And I've been telling folks to not just jump back into normal and doing things the way you did before the pandemic, but to think bigger than that. So, one of my clients, which is doing high involvement planning, was planning to open a bunch of new offices just the way they always did it. And now they've decided to think differently about brick and mortar. They do consulting, they do architectural lighting design. So, they can work from home, as they've learned over this time period. So instead of just opening a bunch of new big offices with a lot of workspaces, they are opening flex offices that will have some built in workspaces and some hot desk, areas where you could work at home sometimes, or work in that space, sometimes room to meet together, and room to exhibit client work. So, I just encourage people to really be innovative, be creative during this time period. And think big about how you could do things differently going forward. And that's going to make you nimbler and more flexible. And I love what you said Victor, I never want to hear that's the way we've always done it. I'd like to engage every single person in thinking creatively about how we go forward. And what are our growth and contingency plans?
Victor Aspengren 1:00:04
And as far as my commentary, if you guys are dead on with all those things strategy, you can never do enough of that you can never get enough people involved. But I do think there's two things based because I serve on a number of board of directors of Aesop companies that people are really challenge with now is, is what's our new reality with you know, COVID forced move technology, probably 15 years, it was going to probably get there anyways. But it pushed us there 15 years before we were ready. And I think companies are trying to figure out what what's our new? What's it going to look like? How are we going to cope with this? And also, employees have experienced a different workplace, you know, they've worked from home, but they've never worked from home. And now they got people saying, I don't get to work from home, I'm not going to stay. And we've got a labor shortage. And we've got people retiring earlier, because COVID, everybody face mortality, we're starting to see a lot of those 50-year old's, those senior leaders are saying, you know, what, I'm leaving early, three or four years earlier. So, I think there's a lot of people issues, depending with the technology thing, how do you keep everybody? How do you attract them in and what's going to be your new vibe, that's going to give you a competitive advantage? But all that within people need to understand the numbers. So, I'm going to zip through a couple of questions here quick, because we're down to our last 30 minutes already. Does everyone have access to books pay salary, etc.? There is no requirement in ESOP that you have to share any of those things. You don't have to share the numbers. You don't have to share payroll or salaries. No, there's no requirement. Now best practice open book. Yeah. But you have to share salaries. No, you can put it in a percentage. There's other ways to do it. And everybody's an employee owner and the ability to get in there's eligibility. Many cases people say is a year to get in. Some people have them start being in the ESOP as soon as they get on all benefits. But again, there's some complexities there. There's cash flow issues you have need to consider. As far as that. How to fund an ESOP, how long would the conversion take? Well, and ESOP can be funded by the selling shareholders, they can take a note themselves and take a long term note and fund it all by themselves, you can go out to the banks, and they'll give you a nice chunk of that the prime, you're not going to get 100%, but you might get a chunk of it. And then there's more expensive money private equity out there if you really, really want to do but you pay a premium for that. But in most cases in today's world, selling shareholders have more of an appetite to carry the note themselves. And they get paid an interest rate a fair interest rate. Banks right now are very favorable. A lot of banks are familiar with ESOP's. They're happy to loan. The default rate on ESOP's is way less than a traditional business. ESOP's tended run tighter businesses and run just a little more conservative. So, there's a there's an appetite to loan to ESOP's because they perform well. Change in law anticipate under the new administration. I don't think there's any immediate threats that is on the horizon, if anything, there's some new bills being advocated for and tried to push through. But based on everything that I've heard from the ESOP and ESCA, and NCEO and everywhere, I don't think we have any real major threats. And people always ask this question, well, what happens if the rules change? And long-standing answer is there's enough there are enough people in ESOP's now that they just can't wave the lawn and ESOP's go away. They would have to grandfather them in, or some long term graduated scale to get rid of them. But right now, there's more energy around employee ownership, not just ESOP's, by Congress, then there probably has been and who knows how long? So, there's a lot I think there's high hopes there's a lot of excitement. The leaders in all three of ESCA, ESOP Association NCEO and EOX, the employee ownership expansion state network. There's just I think there's a lot of excitement on the political front. So right now, I don't think there's any major threats.
Anne-Claire Broughton 1:04:26
Yeah, I know a lot of us have been making phone calls for things like the Work Act that would allocate 50 million for employee ownership state centers.
John Williams 1:04:36
That might be the only bad part is true bipartisan thing we have to see some.
Victor Aspengren 1:04:42
Well, it is, and I think that's been a strategy I can tell you in the state of Iowa they This was several years ago. They had 98%. agreement on both sides of the aisle to create a seed fund for ESOP evaluations are figure that out to put money out there 98%. Now the politics killed it because the governor and State Senate had an issue. But eventually the year after that, it came back. And you're right, John, there is good partnership on that. One other quick detail. People said, what's the minimum percent of equity for an ESOP? I would say, most people try to do at least 20%, just because of the cost of doing the transaction, you can do less if you're doing as a transaction is you said John, a contributory, you could do it a lot slower, and there's not the costs associated with it. But if it's a transaction, I would say most ESOP's start at that minimum of 20, somewhere around there, 15 to 25, to get started, just because of the costs associated with them.
John Williams 1:05:53
Victor, there's one there in the q&a that just come up that's kind of going along with what we're talking about. So as an owner, can I take a note from the company and roll my own sell to management and employees with more flexibility? Is it the tax benefits that are compelling? Please compare self-versus an ESOP's. Oh,
Victor Aspengren 1:06:12
does it, you know, contributory from the seller themselves? Yeah. Yeah. The big issue there is if you want the 1042, the tax thing, there's really no tax advantage for the selling shareholder to do it slowly over time, that it's that 30% is the threshold in a C corporation, you have to be a C Corp has to be at least 30%. And that's where you get that 1042. Other than that, there's not a lot of tax advantages to the selling shareholder. And an S Corp, there really isn't an even in a C Corp, if it's not at the 30%. The one thing I will say is if you decide to do that, and you want to do it several times, not just one time. But if you start with that 30%, then successive transactions would also qualify for 1042. You don't have to take them. But as long as you start out with that minimum, the first one, then you have the opportunity to do it again and again. Or if you have multiple shareholders. So, let's say since I'm the old one here that I want out, and I want 1042. So at least we get to 30%, then down the road, John or, Anne-Claire can also take advantage of 1042, as long as you structure it right the first time. That's a nuance, it's really important for multi stakeholders, shareholders and companies to understand,
Anne-Claire Broughton 1:07:35
but you could just finance it yourself. And you could also do one of the other structures like an employee ownership trust, the one I've been engaged with, the owner is taking a note over time. But they are setting up that employee ownership trust structure, there is not the 1042 tax advantages, but there's a lot of other flexibility that makes it attractive to that particular selling shareholder.
Victor Aspengren 1:08:02
So, here's a question how do I retain control as an owner, but still want to give some ownership? How does decision making work?
John Williams 1:08:13
Sell 49% to an ESOP? I guess, Is that an answer?
Anne-Claire Broughton 1:08:19
Well, you have to be really clear about rights and responsibilities. Because selling even 100% to the ESOP doesn't mean that suddenly the employees, it's a democracy, because that's not you just have to be super clear about what you get if you're an employee in an ESOP and what you don't. Yeah,
John Williams 1:08:39
Yeah, there's a lot of misconceptions about that about the rights of all the owners, which are all the employees and what it what has to be voted on and what can be passed through. And all of that has to do with your planning document. And how you structure that there are some legal issues. I don't think I want to get too much into the details of that. But really your document is an important part of the ESOP. It's basically your guidelines, your rules for the ESOP and for a lot of from contributions to distributions to voting rights to all of this. So yeah, but Anne Clair is. Right, and, and there is some misconception out there about that.
Anne Claire Broughton 1:09:33
But there are plenty of selling shareholders that sell up to 49%. maintain control, and that's perfectly valid.
Victor Aspengren 1:09:42
Yep. We talked a lot about culture. We're getting down to their last 15 minutes here. Anything else you guys would like to add in regard to culture or go that one question here? Is it necessary for all employees to be brought into the idea of the ESOP equally There are employees that just don't care interested? How is an ESOP rolled out? So, they are interested, etc., etc.
John Williams 1:10:11
I can talk a little bit about the ESOP rollout. Because one of the things I do is provide that ESOP communication, I think it's really important is to have a committee. And I am not talking about the ESOP Committee, which is, can make decisions about the plan document that's mostly leadership. I'm talking What about a Communications Committee, some people call it a OCC, an ownership culture committee within the organization, it is set up of a cross functional group, I like to set them up to where no more than 50% are leaders in the company, the other individual contributors, and they're sole purpose is to not only teach about financial literacy, and the ESOP any self-awareness, but to also promote the culture, and the ownership culture of the organization. And they're also a way to provide feedback to leadership, about some things that that may need to be done differently. So, I always encourage that, because I've seen ESOP's that do a very good job with culture, they have one of those committees, and they do a very good job, they're very engaged, and leadership gives them for lack of a better term authority or gives them the tools and the resources they need to make sure that's done very well. I know Anne's been a part of those and, and as a believer in those as well. So
Anne Claire Broughton 1:11:46
yeah, that's exactly what I was going to say the ownership culture committee is key. Those are people who really immerse themselves in the ESOP learn all about it and find ways to educate and engage every single person on the ESOP and you will have skeptics and that's okay. But you can make a big deal about yours the day that you open your stock certificates, and you can have guests the share price numbers, and you can have parties. So, there's lots of ways to get the excitement up.
John Williams 1:12:17
And I think that will address the question in the q&a about, you know, at different the ownership mentality around people's whether they different in age, interest or values, whether they're 20-year-old, 40-year-old or 60-year-old it just goes back to human behavior. If you have employees or people that believe and you're on a ship culture are ESOP. Others, other employees will listen to them before they listen to leadership. Because leadership, they go out there and why don't you get this believe this I'm training I'm doing this whether if another employ is talking to them about the ESOP, they will listen to other employees. It's no different than your kids listening to their friends before they'll listen to their parents. Same idea. But it does work if you have what I like to call disciples of ESOP, and ownership culture working in your organization.
Anne Claire Broughton 1:13:15
And then when you start having people retiring from the company with a very nice, six figure or whatever ESOP account that's really going to hit home with people for sure.
Victor Aspengren 1:13:26
Yeah. One other thing I'll just stay this has been kind of a standard over the years everybody's come to it usually takes two ESOP statements, two years of statements, you get your first one, and then you get your second one where people start to connect the dots, even with open-book management. If you're practicing it, they get the first statement, they get a contribution. It's that second one where the value goes up or down, where they start to go, oh, now I start to see it. So don't expect miracles on that first statement. This has been around for years. This is coming from all the people I've known. It's that two years it makes a difference. The other thing is, is the ESOP doesn't become significant. It's in the eye of the beholder. When the ESOP account is significant. It might be significant at 10,000, it might be 50, it might be 100, it might be 500. But until that ESOP account is significant to the individual, you don't get the complete circle cycle of how it all connects together. So, you've got the culture, you've got the bonuses, and then you have the ESOP account. Once that account hits significance, it's like that now they get the whole circle really, really quickly because they bout all linked up together, like hey, I'm paying attention to all this now. So, it's just another thing is when significant for the individual. The other thing, there's been some questions here on the backside. So, we've been talking a lot about getting into the ESOP and all that well then how do you get out of Typically people are paid out most ESOP's. This is the vast, vast majority payout over five years. So, somebody leaves, and they pay out their ESOP account over five years. Now, they may ride the value over those five years, or they may not. And I won't get into the detail that, but it is an issue that people go well, if they're not employees, should they get the increase in value? That doesn't seem right. There have been some plans where people have the election to not take it, they don't force them out. So, some plans have been written where people kept their ESOP's shares for 2530 years. They're still out there. That's very, very old school. In today's world, every ESOP I know is saying no, we are going to force people out once they are no longer employees. And even with the five-year payout, some plans are written where the employee cannot make the election. A lot of ESOP's now are saying you know what, when your payment comes, either you're going to take it or we're going to roll it over into a qualified 401k. We're taking you out of the plan. And the reason for that is just the emotional. I'll give you an example. When a former ESOP participant, that was one of the maybe the sour grapes of the leadership team, came back to the leadership group and said, hey, thanks for you guys for busting your butts, my accounts worth more now than it was when I left and he still had two years to go, that doesn't go well to your internal people. So, it's something to really think about is how do you take people out? Just like any business, how you get into a business is sometimes the easier part is how do you get out? So, you want to really think through? What's the policy? What's the philosophy for how you're going to pay the people out, because we want to pay them their money, but there's an impact on cash flow, there's can be a potential impact on morale, and everything else on the backside of that. So, if you go down this path, be sure you understand the exit side, both from a corporate big picture, corporate perspective on down to the individual, John and Anne Claire, please add to or chime in?
John Williams 1:17:16
Yeah, it's true. And there's two sides of that, and the distribution policy. Now one definitely is the cash flow. You can't use 100% of your cash flow, to pay distribution. you've got to have something for capital to grow your company to do all these other things. So, I think getting that re repurchase obligation study is crucial to make sure that you understand the financial implications, but from a personal perspective, and I've heard both sides of the argument for years, well, they're no longer employed, we should pay them out as soon as possible. But one side of that is, there's one school of thinking this says, okay, they're going to pay more attention to succession planning, especially in a leadership role. If they know that their money is still tied up over a period of time, then, in fact, they're not just going to leave the company high and dry, or what they want to make sure that the company is set up, that it's going to continue to prosper and be successful. And I can see it both ways. But you're right, but at the, but the most important thing is you have to have the cash to pay it. You have to so
Anne Claire Broughton 1:18:30
I was going to say the same thing. The repurchase obligation is a big deal and doing those cash flow studies and making sure that you have a good age mix in your company if everybody's going to hit 65 at the same time. That could be a problem.
John Williams 1:18:44
Yeah, yeah. And that's going back to I think earlier, in the roundtable discussion when we started off, you know, who said, who should consider an ESOP. And I know it's not one of the most important factors, but one of the factors is if you look at your employee population, and the retirement ages spread out, across, then you will be able to manage that a lot better if they're all in their late 50s. You know, there might be some different things to consider there. So
Victor Aspengren 1:19:16
yeah, just another important factor, just generally that people, you can give Senor most ESOP's, you've asked over six years, very similar to a 401k. But just for those that might be considered Just remember, you can give prior year's vesting credit to the people have been there longer when you create the ESOP. So, whether you do a year for a year or one year for every three years, there's ways to get those long-term employees 100% vested from day one or shortly thereafter. It's something that sometimes gets missed, but it's a very culturally important thing, especially for those long-term employees when you consider it so that's something you may Want to know about? One of the questions on here was to and John and Anne Claire, you can chime in. They asked you know, how important is it to have an outside independent board member with ESOP experience if you put in an ESOP? You guys have thoughts on that?
John Williams 1:20:17
Ah, well, I think it is, I think it is important, especially if you have nobody in your company, especially from a financial side. And if you have a board committees like governors' committees and things like that, I do think it's important. But if your CFO is very knowledgeable of ESOP's and is not on the board and understand them very well, I don't think it's absolutely necessary. But I think somebody needs to understand it, because there are a lot of governance things that you need to pay attention to, that somebody needs to be aware of. And you can't just depend on your third-party administrator to catch everything and to make sure that everything's going right. You need somebody internally that understands it. That's my opinion.
Anne Claire Broughton 1:21:06
Well, there are also really good resources out there. So, the Bicester Institute has a class that a training that repeats many times during the year for ESOP, board members and fiduciary. So, if you don't have an outside board member with experience take the class.
John Williams 1:21:24
Victor Aspengren 1:21:25
Yeah. My take on is one independent directors in today's world are required by the trustees for the transaction, they will make you get one or two independent board members right from day one. And from all the years of my CEO roundtables. I've never heard a CEO say adding that outside independent board member was a bad thing. Typically, they're like we should have done that a long time ago. So don't be in fear of it. It's just a matter of tap into your service providers tap into the people that you know, who can be a good one. I will say that in over the years because this is ESOP's, that have been one year, ESOP's to 30. Year, ESOP's that a lot of the senior ESOP company said that they had to go back and do it all over again. They would have liked to have had a board member that understood ESOP's not just the whole concept of it, because there's a lot to learn. There's the culture, there's repurchase. There's all these different things. And they said, if we would have had an independent board member that had ESOP experience, it would have helped us accelerate our own ESOP understanding quicker. Now your service providers can do a lot. But I think their thinking is somebody that's actually lived it been through it gone through, it would have been helpful to them in those early years, you know, down the road, it all changes. But in those first, you know, three to five years is when you're really drinking, still drinking from a firehose after the transaction. So, we've got about five minutes left. John Anne any advice, comments, as we start to wrap this up, I got a few things to say at the end here. So, I'll let you guys go ahead and anything to add or summary.
Anne Claire Broughton 1:23:14
I would say learn everything you can. There's so many great resources out there and CEO ESOP Association. I would read everything you can go to events, talk to people who have been through it, that's probably the most important thing. If you know someone who's sold their company to ESOP or other form of employee ownership, talk to them and find out what went well, what they wish they'd done differently. And what advice they have for you.
John Williams 1:23:47
I would encourage that, and not just go to copper, I mean, the service providers. There are a lot of good stuff, majority of them, they know what they're doing. A lot of them have worked for ESOP companies themselves before becoming service providers. But I also encourage you to talk to the companies that have went through it. Talk to the where the ESOP is going great, talk to the ones where the ESOP is not going great. get both sides of it, get the good, the bad and the ugly. And don't just talk to the owners. Ask them if you could, if they can meet with the executive management or the staff to get their view of it. To get there take care of it. Because this is you know, it's not a decision to take lightly. So just get all your questions answered that you can, and I don't think you'll ever be 100% comfortable with it. At some point, you're just going to have to do it. But get as comfortable as you can. So yeah.
Victor Aspengren 1:24:53
Well, the one thing I would say that over the years I have become more steadfast in my thinking. And a lot of people as they go through it agree with this is that whether you're an ESOP or not practicing open book is a great it should be a prerequisite. before becoming an ESOP because I lived at that first company I was in, we didn't share a lick of information. We became an ESOP that didn't really change anything. It wasn't until we really started teaching people the numbers and started linking the cultural things about ownership and all of that together, of what it really started. So, this is not a pitch for GGOB. It's a practicality that if you really believe in employee ownership, it's a great way to start to set it up. Because then when you do give your people the opportunity for employee ownership, they're going to understand it and have more meaning by doing this ahead of time, because if you just put in the ESOP, you'll waste a year or two, just getting people up to speed, it's a way to get yourself get more gas in the tank when you get started. The other thing I would just say is, on Thursday, the GGOB is going to have Discovered the Game that's going to be focused on ESOP's. And I believe it might be in the chat already. But the password is ESOP, capital E S O P and it's for free. So, you can go to that event on Thursday as a follow up to this today if you'd like to. So, anybody here on this webinar today, or the zoom can go put in ESOP. And you can get into that event on Thursday. The other thing I'll just say about GGOB and SRC is, is I've known him for 20 years, and I don't ever push. It's about connecting and trying to put people with the right people to have the conversation, whether it's by market or by experience, or by whatever it may be, they do a fantastic job of that. So, after this zoom today, Kylie will be following up because there's questions we didn't get to today, which I apologize, but it's hard to get through them all. When you've got great stories, Kylie, there she is, we'll be following up to either connect you to somebody that can get you the answer or get you the answer that we didn't get to today. But it's all about following up because as volunteers, you know, it's as John or Anne-Claire or me to do it. Well, we've got other jobs too, and then things fall through the cracks. So, I think it's a great idea. It won't be a push, but it will be a follow up where if you have additional things, they will get you connected to the right people. And they will also I think be sending out a survey I believe that was sending out a survey to see should we have another ESOP round table to answer more questions or to go down a different specific path of this from an ESOP perspective? And what to last thing here we got all right. So, I got 30 second. Close. So, I want to thank Anne-Claire john, they've been in the field for many, many years. They're two great quality people. The GGOB, folks, Steve Rich, I suppose I should say Jack Stack too, but I know Jack, he doesn’t. Yes. high integrity people. That's the thing that I like is we work with high integrity people; they get high integrity people. And that's what you're looking for folks. So don't go this route alone. Look for the people that you trust. Get with them. And good luck on your journey down the road. So, with that, we'll see y'all later. John Anne-Claire, thanks again.
Anne Claire Broughton 1:28:41
Thanks, Victor. Thanks again.
John Williams 1:28:42
Take care.
Victor Aspengren 1:28:43
All right, goodbye.
Announcer 1:28:45
The "Change the Game" Podcast is produced by the Great Game of Business. To learn more, visit


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Hosted by Rich Armstrong and Steve Baker the Change the Game podcast highlights true life stories of organizations influencing positive change by doing business differently. They’re teaching people how business works and closing the gap between the haves and have-nots. It’s capitalism at its best. Inside each episode, you’ll discover stories of entrepreneurs who are Changing the Game.

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