Is an ESOP the Right Choice for Your Business Exit?

In this episode of The Faces of Business, Matt Middendorp, Business Consultant, ESOP Partners, shares information on Employee Stock Ownership Plans (ESOPs) that could help you determine if an ESOP exit is right for your company.

In this episode of The Faces of Business, Matt Middendorp, Business Consultant, ESOP Partners, shares information on Employee Stock Ownership Plans (ESOPs) that could help you determine if an ESOP exit is right for your company.

Matt talks about the benefits of transitioning to an ESOP model, real-world stories of the challenges and triumphs of ESOPs, and answering questions to help owners determine if an ESOP is right for their company exit.

With an illustrious career that spans over two decades in banking and business consulting, Matt has become a luminary in making ESOPs accessible and beneficial for both business owners and employee owners alike.

Download our free business valuation guide here to understand more about business valuations and view our business valuation FAQs to answer the most common valuation questions.

Matt’s passion stems from firsthand experience with the profound impact of ESOP ownership – a journey that began during his college days and has since shaped his entire professional ethos. Matt now dedicates himself to demystifying ESOPs, providing clarity and confidence to business owners across the nation.

Beyond the boardroom, Matt lives a life fueled by adventure and discovery – from musky fishing to competing in triathlons and fossil hunting on vacations. His dynamic approach to life mirrors his professional philosophy: to engage fully, pursue passions, and empower others to find their path to success.

Damon enthusiastically begins the Livestream with Matt. The guest is equally pleased for being invited to the show, praising the intro music as the best in the podcast world. The host wants to learn about Matt’s extensive background and understand how he became involved with ESOPs.

Do you want to know if your business is ready for your exit or what you should do to prepare? Learn this and more with our business exit assessment here.

Matt recounts his professional journey, starting from his early years at Result Publishing in Stevens Point, Wisconsin, an employee-owned business where he experienced the unique culture and success of an ESOP firsthand.

After leaving the ESOP sector, he transitioned to banking for a decade, rising to leadership positions and gaining insights into finance and business development.

In 2013, Matt ventured into entrepreneurship, founding his own business focused on team-building and business development. He reflects on the consuming nature of decision-making and entrepreneurship and how it deepened his understanding of business owners’ experiences.

Get the most value for your business by understanding the process and preparing for the sale with information here on our Selling a Business page.

Damon prompts Matt to recall his initial impressions upon entering the ESOP-owned company at 25.
Matt discusses two key aspects of the ESOP-owned company culture that stood out to him. Firstly, he notes the level of communication. Financial information was shared in a way that connected employees’ actions to the company’s success. Secondly, he discusses the organic nature of the company’s culture and engagement.

Initiatives came from employees at all levels rather than just from top management. This grassroots approach led to a more cohesive and collaborative work environment.

Similarly, Matt stresses the holistic approach to improvement within the ESOP-owned company, beyond just process execution. He discusses the cultural focus on reducing waste and errors. Additionally, he notes the interconnectedness of different roles within the company and how understanding these connections develops a sense of collective responsibility.

Damon advises business owners to understand ESOPs if they want to learn exit strategies.

Matt views ESOP as both an employee ownership vehicle and a business transition tool. Transition doesn’t necessarily mean exit and ESOP can fulfill the intrinsic needs of business owners while still providing a return for their business. ESOP aligns the financial goals of people and the company, leading to increased profitability, productivity gains, and the ability to hire and retain better talent.

Damon comments on the tax advantages of selling a company to an ESOP. He discusses how prudent it is to leave money in the company when selling it. By reinvesting profits into the business instead of taking them out, people can avoid paying taxes on that money. He asks Matt to talk about the prerequisites and costs associated with this ESOP transaction.

Matt discusses the key players involved in this process: the seller (business owner), the company being sold, and the ESOP trust, overseen by a trustee chosen by the seller. Control of the company remains with its current management, and negotiations aim for fair market value. A successful ESOP company, is typically a well-run, profitable business with strong balance sheets and cash flows, as these qualities make them attractive to potential buyers.

Damon queries Matt about what constitutes good cash flow, as the term can vary depending on the size and structure of a business.

The guest responds that there’s no one-size-fits-all answer. The uniqueness of each ESOP scenario and the tailoring solutions to fit individual businesses. Matt suggests that businesses of varying sizes and financial situations can explore ESOP options, even if they need to start gradually or pursue alternative approaches like a growth ESOP.

Moreover, Matt discusses the cost of setting up an ESOP, indicating that it typically falls between $50,000 and $500,000 depending on various factors. The process is crucial and varies for each ESOP, making it challenging to provide a precise figure. ESOPs often result in tax savings, making the transition financially neutral or even positive for most businesses. He also notes that while there are costs associated with setting up an ESOP, they are usually lower compared to selling to a third party or private equity through a broker.

Damon inquires about the basic steps involved in preparing for an ESOP, acknowledging the one-time nature of the costs and the relatively lower ongoing expenses.

Matt explains the initial stages of considering an ESOP which includes education and exploration. He describes the process of moving from initial interest to conducting a feasibility study, which is a decision-making tool to assess the impact of an ESOP on the seller, the company, and the people working at the company. Matt’s goal is to educate business owners to have a clear understanding of whether an ESOP is a viable option for their specific situation before investing further resources.

The ESOP guru discusses the next part after deciding that an ESOP is the right choice, which involves creating an ESOP plan and working with professionals like trustees to negotiate the transaction. At this stage, a deep analysis is conducted to determine the ESOP partner’s administration, unique culture, and communication. This stage can also include training and certification for management teams and ESOP committees.

At Damon’s request, Matt discusses the gains typically observed in businesses after implementing an ESOP, citing revenue increases of around 2.2 to 2.4%, productivity gains of just over 3%, and a significant decrease in layoffs during economic downturns.

Toward the show’s conclusion, Damon notes the difference between traditional investment ownership and ESOP ownership. With an ESOP, decisions can be made with consideration for the employees’ best interests and the community’s welfare, leading to more flexible, cohesive, and sustainable outcomes.

The show ends with Damon thanking Matt for his time.

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Damon Pistulka, Matt Middendorp

Damon Pistulka 00:03
All right, everyone, welcome once again, the faces of business. I’m your host, Damon Pistulka. And I am excited for our guests today, because we’ve got none other than Matt Middendorp. today talking about. We’re answering the question not talking about we are answering the question is an ESOP the right choice for your business exit? Matt, welcome. Damon.

Matt Middendorp 00:29
awesome to be here. Thank you so much for the invitation. Gotta admit, I think you have the best intro music in the podcast world. I was. I was given I was ready to go. I was surprised when the screen came up. I was I was integrated.

Damon Pistulka 00:41
Yeah, you kind of got to get going in there. And sometimes I know, they’re catching me. I’m still dancing. When we get done with that. I’m getting ready for this. But it’s great to have you here today, Matt. I mean, this is a question that a lot of people think about because, you know, business owners really considering legacy. A lot of times this comes up is is should we somehow sell this, this business to employees? So I think it’s just gonna be fun. So, I

Matt Middendorp 01:10
mean, how often do you get to talk about something like ESOP, right? Where, yeah, it’s a different mindset. It’s a different approach that a business owner needs to really take going into it. And it’s one of those deals that it’s not for everyone, but for the right person. It’s the perfect solution. So I can’t wait to shed some light on and so it’s gonna be good.

Damon Pistulka 01:26
Yeah, yeah. I’ve personally seen people and be very successful with it and love it, love the way it changes our company loves the way it shapes our legacy, and good things there. So Matt, we always like to start out by understanding your background and you’ve got a heck of a background here. And I think that’s it’s worthwhile for us to really dive into that a little bit and then figure out how you got into Aesop’s.

Matt Middendorp 01:52
Well, I rolled up my sleeves, let’s get serious, right. I gotta admit, you’re you’re right, that made me blush a little bit. But it’s all true. It just when you see it in writing, it feels good. Right? So yeah, it’s an interesting path to get to this world. And it actually, if you don’t mind, I want to step back. So I want to start in college. I had a different path in my professional career in the fact that I went back to school when I was 25. And I went to school full time during the day got my degree in two and a half years. But I worked at a business called result publishing in Stevens Point, Wisconsin. And that’s significant because we’re Zola publishing was employee owed. And having come from a retail background, going back to school, thinking I knew a lot I came into this environment and just went, Okay, this feels different. Right? Everybody’s engaged. Everybody understands how the company works, how the company makes money, the financial goals of us, the the full time employee work in three to 11. Running the inventory department had the same outlook as the executive team at the same look as the part time person stuck in the vending machines. So it was such an interesting perspective coming from a management background and retail, going into management, this manufacturing firm, that’s an ESOP. And I felt it, I felt it and the company was successful, I think very much because they were in play on. So it’s neat, then when I leave the the ESOP world as a as a rousing 28 year old college grad, somehow I ended up in banking. Yeah. And it’s very different. It’s a very different environment. And you could see, the difference was very stark in the way that people lined up with what they do. So I was in banking for 10 years did commercial lending rose up to the leadership and executive world had a ton of fun had a ton of success in banking. 10 years. I mean, you can’t do something for 10 years if you don’t love it. Yeah, yeah. But I also love building teams more. So what happened then is after 10 years of being a commercial lender, digging into finances, again, interacting with employee owned companies, as a commercial lender, seeing companies go through that transition, seeing how the culture and seeing how the profitability changed after on the balance sheet, right, getting to see the financials for that, still something that just kind of stuck with me through the process. And then I checked the trifecta. As a commercial lender, finance guy, student and lover of ESOP. I became a business owner myself. So I left banking June 28 2013 4:15pm, give or take a couple of seconds. And I started my own business traveling all over the country, teaching banks how to build better teams, and specifically how to do better business development through better relationships, having better conversations. I did that for 10 years. So did the finance piece was an ESOP lover continued to see ESOP went out on my own as a business owner. Gotta be honest, as a banker, I never really understood how a business owner could be consumed by their business right how be something that takes over their life. And then you’re a business owner and you go, yeah, that makes sense. I get it. That makes complete sense. Right. So, so for 10 years, I did that until last spring, when I had an opportunity to join ESOP partners. And like I said, I checked a lot of boxes when I joined them for my own satisfaction, right, I got to get back into the ESOP world. Heck, ESOP partners is an ESOP, which isn’t so Okay, looking, say in the ESOP space that they they’re right, I was our employee on. So I got to get back into that world, I got to use my finance background, I got to use the banking side of things to really see how everything comes together. But then the other part of it is, is as a business owner, I felt like I was very uniquely positioned to get it. I get it. I get what people like you go through every day Damon in building something that you love that consumes you, that’s a huge part of your life. So I can have a different conversation with the people that I work with. And it’s just a lot of fun to see the process come together as they’re making a decision, like you said, whether or not ESOP is right for them. Oh, that was wow.

Damon Pistulka 06:08
Yeah, that was we just need to need to digest that a little bit. Okay. Because, you know, it’s you really, from the beginning. Yeah, just take a breath, because from the beginning, you were an ESOP, started out in college in an ESOP. And then came back around into another ESOP. Now in in with ESOP partners that are helping people explore Aesop’s or do Aesop’s if it’s appropriate for them. So what when you started at 25? Came out of retail, got into that ESOP owned companies, what were some of the first things that you felt was different in that company?

Matt Middendorp 06:50
No, that’s great. Number one, just a level of communication. That was something that really stood out to me. And the fact that and again, the financials were shared, but they were shared in a different way. Right? It wasn’t, it wasn’t a hate, we think you should know this. It was a hey, this is how you impact this conversation. Mm hmm. Right. So the company at the time was going through ISO 9001 certification. And they were able to articulate why that was so important to us from a bottom line perspective, what it meant to us and how the company could be more successful. And of course, that rolled right back to us as employee owners, again, it’s so neat to see the financial goals of the company line up with the financial goals of the people that work there in a way that just doesn’t happen normally. Right? If you’re not an owner, well shoot, when you’re an owner is things just make sense. The other thing that was really exciting and neat was the involvement and the engagement in the culture of the company, it came from the bottom up, not the top down. So it wasn’t necessarily the people in the C suite who are defining what was happening on a day to day basis and who we wanted to be. Now, of course, right control rests with those people and an ESOP company just like it does on a regular company. So they set the course. But the culture and the way that people interacted, the way the departments interacted, the way the silos were broken down, happened organically from the people that just wanted it to be better. So it was just a really neat way to see that come through, just in the way that people came to work. Well,

Damon Pistulka 08:24
you said something that is really telling about one of the things that we’ll explore a little bit more, you said, people wanted it to be better. And that simple statement escapes so many companies that they they might do things well, they might have great systems. But if the people don’t want to be better, that did you just feel like because of the ESOP ownership and everybody being an owner, that that was one of the one of the fundamental things that really pushed the company to be better faster. Oh,

Matt Middendorp 09:03
absolutely. Absolutely. And it wasn’t just be better, it wasn’t just executing the process better, right? It’s eliminating waste and shrinkage. Right. So when, when are printing books, what happens when you put the cover on upside down? Right, which I got a really slick copy of the New York bartenders guide with the cover upside down, right. So. So those things happen, but you feel that as an employee when that happens, so it’s cultural, it’s about it’s about working harder to be more on top of what you’re doing making fewer mistakes and fewer less waste. It’s about making sure that the people in the backroom understand how what they do affects the people in the front room and that that flow comes through in a different way. So the people that are making the plates in a printing company, if that plant needs to be redone, what does it do to the scheduling the productivity and the efficiency of that day? I think the other thing that really stood out to me there too, as I just want to highlight this was the fact that people do didn’t leave.

Damon Pistulka 10:02
Ah, it

Matt Middendorp 10:03
was hard. When I left after two and a half years, I got my four year degree in two and a half years. And when I left, that wasn’t normal. So there was also a lot less turnover too, which was a fascinating thing. So less turnover means they were hiring better people, they were keeping better people, they’re longer, which meant we’re talking about efficiency, greater efficiency, because you’ve got better people that are getting into the groove with their job and investing more time and energy into it. Efficiency equals profitability.

Damon Pistulka 10:31
Yeah, yeah. Now, I want to jump ahead, but I’m not going to It’s all right. Because I think that that there, there are some things you know, where you said is a nice off the right choice for your business exit is something that, you know, I know business owners often often think of they or or they don’t even know it’s an option. So let’s back up and explain what an ESOP is what what it really means, because I want to make sure that anyone listening here, and if you’re listening to go ahead and drop questions in the chat, and we’ll answer them while we’re going live here, bring them but explain what an ESOP is. So that that we understand because I, I would jump past that, but let’s go back and do that. No, I think

Matt Middendorp 11:21
that’s great. I think this, you know, the really cool part is, is I think the example of my college experience as a kid a little wet behind the ears who didn’t even really know what he was seeing or experiencing. Yeah, I can tie it all together, because at its core, Dave, and ESOP is three things. The first thing we’re going to touch on is the thing we’ve talked about the most it is an employee ownership vehicle. So, by the way, these are in no particular order of importance, but we’re going to start with the one we talked about as an employee ownership vehicle. It is that alignment of the financial goals of the employees and the financial goals of the company. Most businesses never get there in an ESOP. It’s just an intrinsic part of doing business as an employee owned business. We’ve already talked about the gains that people see in profitability inside of an ESOP compared to a non ESOP company. We talked about the productivity gains that people see the first year after they become an ESOP, that we talked about the ability to hire and retain better talent, because your employee owned those things all factor into creating a stable, successful base of employees that help you get to the next level as a business. It just makes sense, right? Now, I’m not gonna lie, it’s not automatic that just because your employee on that happens, right, you always have to work to build a culture. But it’s one of those things where you have a an advantage built in, when you’re giving them a statement every year, showing them the wealth that they’re building because of their efforts. And it’s one of the really cool parts about ESOP that I just want to talk about very quickly, when we talk about employee stock ownership plans, ESOP employees don’t have to contribute to it financially. Right. So that’s a big thing. It’s not like a 401k, where they put money in their contribution is their time, and their talent and their expertise, driving the growth and profitability of the enterprise they represent. So it’s a kind of a neat thing, how that comes together, where man, I just got to work hard and show up and be better, and we’re gonna make more money, and I don’t have to contribute anything other than the time I’m already putting in to build wealth for myself. Okay, that sounds like a pretty, pretty great place to be. So it is an employee ownership vehicle. But because this is the exit your way, the faces of business podcast, we have to talk about ESOP as a business transition tool, as well. Right? So an employee ownership vehicle, it’s a business transition tool. Now, I want to stress that transition is the key word here. It doesn’t necessarily have to mean exit. Yep. Do I work with business owners who are 65 years old, they’ve owned an excavation company for 30 years. And they have these people who help them wanted to build it, and they’re deciding it’s their time to transition out? Absolutely, I do. But I also work with a 30 year old restaurant tour in Salt Lake City, who has no interest in leaving his business for 20 to 30 years himself, but he grew up on a dirt floor and Mississippi and wanted to pass that wealth that he has built for himself onto the team that helped him get there long before he’s looking to exit. So it’s not just about leaving or exiting. It’s about what’s best for your business in that moment. And sometimes it’s employee ownership as a as a transition tool for the business owner. Maybe it’s diversifying your investments, right. Maybe it’s not having all of your eggs in that one business basket if you have multiple businesses, but it’s a it’s a transition tool first, for a lot of business owners who are looking at ESOP. I want to stress that the return does not have to sacrifice to be employee Elon, you don’t have to give up the type of return you would normally see from other ways of selling your business. Maybe it’s private equity or third party. In fact, people selling to an employee owned business often see a greater return. Yep. Not always. Right. Every business is different. But I think what you’re gonna find is the things that make successful employee owned businesses are the same things that make successful businesses in general. Yes, right. It’s not like there’s some magic sauce where you can play on and suddenly a more successful, you have to be a good business person to make an ESOP work. But if you’re motivated by this transition, and taking this elack, illiquid asset, your business and making it liquid, if you’re motivated by creating wealth for the people that help you get there, if the name on the door means something to you, if your role in your community means something to you, I work with a lot of business owners where their name is on the local high school football field. Yeah, right. So they don’t want to sell to somebody who’s not committed to staying there. Yeah. Right. They want to keep jobs in maybe their rural community. Yeah, it wouldn’t have their jobs coming back if they closed down. Right. Yeah. So employee ownership is a transition tool is a way for a business owner to fulfill some other intrinsic needs, while still getting the return they believe they should get for their business. So transition doesn’t necessarily mean exit. But it’s a great way to take that and make that illiquid, illiquid asset liquid. So employee ownership vehicle. Did you ask a question, David, I’m sorry. Oh, go

Damon Pistulka 16:31
ahead. Go ahead, your

Matt Middendorp 16:33
business transition tool, but I really want to get to the third one, because this is the one that gets a lot of people the most excited and your smile just got a little bigger. You know, let’s comment. Yeah, ESOP employee stock ownership plan is a qualified retirement plan. Right, it is an IRS qualified retirement plan. So what does that mean? We’ve already talked about employees do not have to put in their own cash to participate. They give their time, talent expertise. But for the business, to say you’re an S corp, it means that if you’re employee owned, you no longer pay federal or state taxes. As a business. I think we need to take a moment to like that. So yeah, yeah. Is there anybody listening who wants to pay more? Taxes? I mean, come on, right. So that in itself for a lot of you right, now you’re calculating, and you’re going okay, this kind of makes sense, right? Suddenly, I see. Yeah, hey, the name on the door means something, I want to have an impact on my community, I want to have an impact in the future lives of my employees. But if in the meantime, my business isn’t paying state or federal taxes anymore. Okay. Now, I want to stress that that is based on the percentage of the company that’s in play out. And so if you’re 100%, in play on, yeah, that’s the way it works. If you’re 40% and play on, then you get 40% of that benefit. Right. So it is proportional. Yeah. All right, man. Look at your company do with that money? Yeah. Right. So it’s one of the it’s kind of the secret sauce of employee ownership. And he’s Yeah, typically,

Damon Pistulka 18:11
I am gonna stop here, because I just want to talk about this. Yeah. So basically, then I sell my company into an ESOP. And I’m making just say, I’m making a million bucks a year. So our math is easy. I, you know, I’m taking wages because I’m the CEO, you know, I’m still the CEO, after it’s gone on taking my wages, I pay taxes on my wages. But the money that we leave in the company that’s either reinvested in our in our employees or reinvested in equipment, and as long as it stays in line, I don’t in the business, I don’t pay any tax on that. The company does not, the company does not, yes, the company does not pay any tax on it. So that means if I was paying taxes on that money the year before, so say I’m paying 25 30%, whatever the right number is 25% because that’s easy. So clearly, we would have paid $250,000 out of that million dollars to taxes, no matter what I did with it. I have $250,000 more the next year if I just gonna leave it in the business and reinvest it and do what I want to do inside the business that I have available to me. Yep.

Matt Middendorp 19:22
So we just end this here. Well,

Damon Pistulka 19:24
I it’s it’s something that I you know, it’s something that if you seriously want to grow your business, you just added it, okay? Because how many business owners and there’s gonna be a bunch of them that are out here listening, get to a point that they really don’t take more money out of their business because they’re growing it fast and it stays in the business. You know, they’re either using it to fund growth or excuse me, fungal growth or they’re using it to, to do different things in the business, whatever it is. But getting that extra money could be a way for you to significantly grow your business won’t just because you’re not paying taxes on that money anymore, that money is still available to you

Matt Middendorp 20:16
might drop. Yep, yep. No, you got it. You absolutely nailed it, Damon. And it’s one of those things that it’s not for every business. No, right. But for the businesses that see that as a viable path, there’s obviously some very strong incentives to take a look. Yeah,

Damon Pistulka 20:37
yeah. So everything. Something like this doesn’t come easy. We got to do some work to do it. There’s some cost to it. And I don’t know what those kinds of things are. But what are some of the things that that a first of all, are there requirements for a business to sell? Do any solder?

Matt Middendorp 20:58
So let’s talk about what an ESOP business looks like. But if you don’t mind, I want to take a half a step back and talk about the players. There we go. Right. Yeah. Because I feel like that’s really important when I started throwing out good stuff. So um, you know, in every transaction, there’s essentially three different entities that are part of it. Right? There’s the seller, aka the business owner, aka the person who’s looking at that transition. There is the company, their baby, this thing that they built. Yeah. And when you sell to an ESOP, you’re establishing something called an ESOP trust. So the ESOP trust buys the company from the seller. Yeah. Okay. So those are the main players, the trust is overseen by a trustee. Yep. This is somebody that a you as the seller higher. So one of the cool parts about ESOP is you’re choosing the person who’s going to represent your employees in the ESOP trust, but also the person that you are negotiating the company sale with. And it’s one of the really neat things about negotiating an ESOP sale is we’re trying to get to a fair market value. And it’s something that both sides have a very good sense of what it’s going to be going into a negotiation. Now, it doesn’t always line up one for one, and there’s, there is a negotiation that Department of Labor requires to happen. But the trustee overseeing the trust does not want to run the day to day of your company, the control stays with the people who see it now and run it now. You know, it may look a little bit different. If you don’t have a board, they may want you to have a board, every trustee is different there. That’s part of why we match up your appetite as a business owner with what you want their business to look like after your employee owned as part of my job. But it’s something that you maintain control, and you get the return that you want, for the most part for me something obviously not a guarantee every business has different legal disclaimer scrolling across the bottom. Yeah, that’s no different than if you’re negotiating with private equity or third party either. Yeah. So that’s how these transactions happen, who the players are. So let’s talk about how, right let’s talk about what a good ESOP company looks like. I’ve already said one thing that’s really important, good ESOP companies are typically good companies anyway, right? They’re profitable, their balance sheet looks good. They have a really solid cash flow. Why? Because who’s gonna want to buy a company that isn’t solid? Doesn’t have a great balance sheet doesn’t have a cash flow?

Damon Pistulka 23:35
Yep. I mean, it’s gotta have money to pay for itself, right? Because that’s really what you’re doing with the company is you’re buying it over time. With the cash flow from the business. Yeah. But

Matt Middendorp 23:48
a lot of people come into this thinking, oh, I’ll just sell it to my employees when I’m done. Guess what employee ownerships not magic? Yeah, if they don’t want the company, they not gonna buy the company, you know. So we

Damon Pistulka 24:00
had that very thing happened with a with a potential client two years ago, I will the sell to the employees, it still hasn’t been done. They thought that it was not something you know, something that they could just do. And it’s not easy to do, because you’re trying to get liquidity as the business owner that wants to sell the company. Sure. You want to do right by doing it, to sell it to your employees, but when you’re doing it without the help of a trustee and a company that understands what Aesop’s really want to do, and, and that is a tough challenge. It really is.

Matt Middendorp 24:35
I agree with that completely. So again, it comes back to a good business as a good business. Yeah. And that needs to be one to be an employee on business. But again, that’s no different than selling in any other channel. Typically, in a play on business has a minimum of 15 to 20 employees. Now, you’re going to find that a lot of things in the ESOP world are more guidelines than rules. We can do Aesop’s with you fewer employees. But I mean, I’m going to be honest, 15 to 20 is kind of a great spot to start. If you have fewer than that we can have a conversation about it. There’s just some things we need to make sure of like, is everybody related? Strangely enough, they frown on the fact that if if my wife and I own a company, and we’re the only two employees, if we sell it to ourselves and stop paying taxes, they don’t like that. I don’t understand. So so we need to make sure that it’s a divested employee base, but in 15 to 20, we work with employees, employers that have 4000 people in their ESOP. Yeah, you know what I mean? So there’s really no limit from a size standpoint, other than you kind of want to be 15 to 20. You got to be profitable, you got to be successful, you got to have good cash flow, to stay successful to pay for the transaction, to go through the process. Yeah. So that’s kind of some characteristics of ESOP companies. Where do you start then? Do you wanna go there, Damon? Well, I

Damon Pistulka 25:51
want to ask you, you talked about you gotta have good cash flow. So what what is good cash flow? I mean, because you could have five employees and have, you know, 10 million in cash flow, or you could have 2500 employees and have $100,000 in cash flow. So where, where when you look at the profitability of a business or EBIT on a business on an annual basis, where’s it really start to make sense to consider an ESOP?

Matt Middendorp 26:17
You’ll have to forgive me if I don’t just pop off a number. Oh, I understand that. And you know, of course, there’s always a number that comes to mind. Right. But the thing that I guess want to stress is, every ESOP is different. Yeah. And I don’t want to have somebody listening to this saying, well, shoot, I have 250 employees, and I only have 100 grand in cash flow. I can’t do this. Right. There’s a way for most businesses, if they’re serious about it, that it can make sense. And may mean they step into it versus going all the way in. Yeah, right. They do things incrementally. But that doesn’t mean that Aesop’s not an option. I work with businesses all the time where they’re a startup, and they’re just barely making revenue, but they know they want to launch as an employee on business while shoot they aren’t going to sell 100% of the company. They’re gonna work their way up through something called a growth ESOP. Okay, right. So so there’s a lot of different ways to go about it. We call them snowflakes, everyone is different. Everybody has different needs. Everybody has different things that they want to include and not include. It’s just a matter of listening and learning and understanding the business owner you’re working with and making sure you’re doing the right thing that suits them and their business the best. Yeah. How’s that for cliche?

Damon Pistulka 27:29
Well, it’s pretty good, but I’m gonna roll back into it. Because I’m gonna push I’m gonna push because I mean, we got business owner sitting down here and then said, Listen, I got a, you know, I make a half million dollars a year, I got 25 employees been around a long time. Is that something that’s an ESOP? Or should I really be looking at? I need to be more like a million dollars a profit a year kind of thing and, and doing doing some things there. You said, the startup you can do these things.

Matt Middendorp 27:56
If they’ve got 15 to 20 employees, and they’re making a half a million dollars a year? That’s a great candidate. Okay. That’s a great candidate. Absolutely.

Damon Pistulka 28:04
Cool. Cool. That’s it’s good to know, because some of these people listening might, might really go us, not for me. But it could be in the new also saying that you can do a growth ESOP where you really trying to launch and work your way into being that ESOP over time. And that’s a cool thing, too. I didn’t realize that happens. Yeah. Younger

Matt Middendorp 28:23
companies that can still work again, the profitability piece still comes in, right? Yeah. It’s just taking a bite of the apple versus the whole elephant. The other thing worth mentioning, and just if you don’t mind, David, I just want to say this, if anybody’s not sure, and they’re watching this, and they want to have a conversation 90% of my job is educate. Yeah. So but if you’re listening to this, and you’re going okay, so he just said this much. Well, I’m this much. You know what, when I

Damon Pistulka 28:49
talk to Matt, talk to Matt das and ask more questions. Why work so hard? Just talk to me. Yeah, yeah. Talk to Matt, and even fight Matt Middendorp. On LinkedIn, you can find them at Aesop partners. I’ll say that you can get that over right now and do it again later. But yeah. So when we look at an ESOP. What’s it cost to do an ESOP because there’s there’s things I know a little bit from the outside. I mean, you have to do some valuations you have to do otherwise there’s diligence work and all that kind of stuff to get to get the thing done, but what is it what are we talking is 50 bucks or 50,000? Or 500,000?

Matt Middendorp 29:28
Well, so I can tell you it’s not 500,000 Okay, but I’ll tell you what is somewhere between 50 and 500,000. Okay, okay. And really what it comes down to Damon is process, right. So so forgive me if I don’t give you a specific number. And again, it’s it’s because every ESOP is different. Oh, yeah. Every every customer that we work with has a different there’s a different project scope, right. So I don’t want to I don’t want to build this in but what I can tell you is a couple of things. Number one, people when they do Aesop’s because of those tax savings. Most businesses, it is either a tax neutral or tax or revenue neutral or revenue positive event by the time they take in consideration those taxable events. They’re not paying anymore. So most businesses now obviously not all. But that doesn’t mean that setting up an ESOP shouldn’t hurt your company. Yeah. Right. It shouldn’t. You know, and when you compare costs of setting up an ESOP to the cost of using a broker to sell a company to a third party or private equity, it’s a lot cheaper in most cases. Yeah. Right. So

Damon Pistulka 30:38
when you when you look at it, then and it’s a one time kind of thing, there’s some ongoing costs, but they’re not that that. So they’re less what are the steps? I guess it because costs aside, what are the basic steps that you have to go through to get ready to be the do an ESOP.

Matt Middendorp 30:58
So it’s one of the beautiful parts about Aesop’s. So I love this question because I don’t want anybody watching this to feel like they need to know when they’re done with this. Whether or not ESOP is something they really explore. Right? All you need to be is a little bit ESOP. Curious to be ready, have a conversation. That’s all I want

Damon Pistulka 31:15
you to take not to be dangerous. Yeah, not really dangerous. That’s always good enough.

Matt Middendorp 31:19
So when I meet with somebody for the first time, the first stage of becoming an ESOP, I call I think I want to write I think I want to ESOP, maybe it’s the transition piece, right? You’re ready to exit or you’re ready to for that next step in your company. Maybe it’s the employees, you want to reward, maybe you want the tax benefits, but you’re thinking I Kevin might want to do this. So that’s where these conversations come in. So much of what I do is education for business owners. And I can tell you that every business owner, I meet with the goal at the end of that first meeting, Damon is not what do you think? It’s Did you hear enough that you want to go back and digest it? And get together again, so you can ask more questions? Right, because it is a firehose of information. We’ve been talking for 37 minutes, and I’m gonna be honest, man, it’s the word, we’re four or five layers deep already. You know what I mean? So So if, if this is the first time you’re hearing this, you’re gonna step back, you’re gonna watch the replay. And you’re gonna have questions. And my goal is to say, okay, is this interesting enough to you that you want to talk again, right? And if you don’t, that’s fine. But if you want to get back together and ask questions, and here’s some of these things for the second or third time, that’s all you need to do is just keep absorbing that information. Now, you’re gonna get to a point, though, where you really want to explore it, officially and formally. And again, that’s where you can take a bite of the elephant without having to swallow the whole thing. And that is doing something called a feasibility study. Okay, so you can put a little bit of time a little bit of money and a little bit of energy into formally checking out if an ESOP is right for you. Right, that’s when you get that question answered. Because the goal of feasibility, the goal of doing the study is to give you a decision making tool. Yeah, that’s it, David. So you can look at and say, Okay, I know what the impact is on me as a seller. Right? I know what the impact is on my company, not just from a tax saving standpoint, because of course, that’s part of the model, but we model the cash flow. See, you’ll see what that looks like for the for the length of the projection, you see, and that includes the cost of setting it up and the ongoing cost of maintaining and administering your ESOP, right? So you get a complete picture on how that affects your company. But you also get to see how it impacts your employees and the balances that they’re going to build over time. So you get to really look at this holistically and see each of the important segments that we talked about when we talked about those three vehicles, those three parts of ESOP, and see how it all works. And then with that decision making tool you can make a decision. Yes, ESOP is the way I want to go or no, ESOP is not the way I want to go. Maybe right now, maybe permanently. Right. Yeah, I gotta be honest, my job is to make sure that if you’re getting to the point where you do the feasibility study that my my experience, and intuition means that you’re probably a viable business for Aesop. Right, so I don’t want people coming in saying, Oh, I’m gonna spend money on a study, and then I’m gonna find out it doesn’t work. No part of my job is to figure that out for you before we even get there.

Damon Pistulka 34:21
Yeah. And he gets one of the basic questions answered to make sure it’s, we’re at least in the realm of it’s a good possibility that you’re gonna be, it’s gonna be good for

Matt Middendorp 34:30
you. Yeah. So so once you’ve decided whether or not that’s it you think you want to transition into I know, I want to write and when you when you decide that yes, ESOP is right for you, that’s when you start actually working with somebody like me to create your ESOP plan. Right? What does that actual plan look like? That’s how you get together with somebody like me and we work together to find the professionals you’re going to work with like the trustee we mentioned that you’re going to be negotiating with earlier. That’s how we start to work on negotiate Asians together. What’s our strategy going to be when we are negotiating with that trustee? And how does that look and part of feasibility is here’s a worst case scenario. But this is where we think you’re going to end up. Yeah. Right. So so we put those pieces into place, we lead you through the transaction to the close. So what happens after the close? Right? Well, I’m going part of ESOP is administration. Right? You’ve got to be able to, you need somebody like us who helps manage that plan going forward. Right. So of course, that’s a big part of it. And that’s all part of the feasibility study is the cost of the trustees and the administration and all that stuff. So that’s not new, but it is part of it. But the other thing that we do, Damon that I just want to take a second to talk about is we mentioned earlier how ESOP culture doesn’t happen by accident. And I think one of the huge things that ESOP partners has invested in that nobody else does, is we actually have people who work for us, we’re their only job is Culture and Communications. So when somebody sets up an ESOP through us, and they go through that whole process, we actually come in, and we train and actually have a certification process for their management team. Okay, we have a certification process that they go through for their culture and communications team internally, right, the the people in the business who are helping to create that ESOP culture in that ownership culture that lifts all boats, right, yeah, we are actually there and part of the launch when they announced the employee ownership to the team, so we can provide context and information. And they have resources in us in the Certified Management team in the certified ESOP committee. And the cool part about that is, is what happens then is they don’t feel the need to go on Google. Right, and find answers for themselves. They have resources that they can go to and get good information about what just happened. Yeah. And then we come back a year later, when your first share price is announced. And we help put that into context. We help them understand it and celebrate it. Yeah, we create and we help you do the hard work of creating that ESOP culture that gets you that productivity that gets you the stickiness that gets you the ability to hire the talent and make you more profitable in the process. Yeah, it’s not an accident, that our customers are successful in their Aesop’s.

Damon Pistulka 37:21
Well, yeah. You mentioned something and I wanted to hit this. You talked about gains after the first year of being in an ESOP. What are some of the gains that you see is I mean, what just talk about that a little bit?

Matt Middendorp 37:37
Sure. So if you don’t mind the exact numbers escaping me right now. I mean, I’m I’m in Wisconsin, it’s almost six o’clock. I should be three linings in right now. But but, you know, typically in the first year, you’ll see revenue gains of off the top of my head like 2.2 to 2.4%. Just because you’re an ESOP. I believe it’s it’s just over 3% in a productivity game. Right. So it’s one of those things where, and I can tell you that ESOP companies are 25% less likely to lay somebody off during an economic downturn? Hmm, right, or 400 times or something like that. So so it’s a significant issue. When we talk about keeping employees hiring and retaining better talent, it is a significant job. I mean, I know a lot of businesses that are saying, okay, so if I go ESOP, and I’m going to grow on average 2% More automatically. Right, that’s just kind of baked in for the average ESOP. They would take that. Yeah, they’re on top of tax benefits on top of everything else. So

Damon Pistulka 38:42
yeah, yeah, that’s super cool. Super cool. So what’s the most fun you have about teaching people and helping them learn more about Aesop’s?

Matt Middendorp 38:57
So there’s a couple of things that really jumped out to me, and I love that question, Dave. And that’s probably one of the best ESOP questions. I do things like this all the time. And that’s probably one of the best employee ownership questions I’ve gotten. Part of the fun for me. And there’s two directions that my mind immediately went but part of the fun for me is seeing people who have had a business for 1520 25 years, I’m thinking specifically about a group of business owners I’m working with right now. They own a couple of retail establishments in in a niche industry and forgive me for for maintaining the privacy a little bit. Retail in a niche industry. It’s two sisters who are twin sisters, a husband and an ex husband that own this business. And they are great. They work together fantastically. But the thing that’s amazing to see to me is when I’m talking about this with them, and this is a thing that they have worked hard on they have worked weekends, they have worked nights, there were times when they didn’t take paychecks, you know, they got through the they bought this business during the great recession and got I told what are you doing? You’re wasting your time. Yeah, money. And now they’re making real money from it. Right? They are realizing their dreams and they’re getting ready for their next set of goals. And they’re younger than I am. Right? Which maybe means I’m older. Maybe it doesn’t mean they’re young, I’m not quite sure. Right. So but I tell you that story, because when we started talking about it, they were tired. Right? They were successful, but they had put so much into this, they were tired. And now when we started talking, they’re like, I don’t know, 123 years, maybe we’ll exit. Now, they’re energized, and they’re excited. And they’re seeing how this is going to work for them for their employees, for their communities for their business. And now they’re talking seven to 10. Yeah, right. So all the change in their business, is that they are a illiquid asset, liquid? Yeah, they’re cashing in. Yeah. But they’re also doing something for their employees in the process that they’re really proud of, and they can’t wait. They’re talking about new locations, they’re talking about additional product lines with this money from the tax savings, maybe buying out a competitor in the community that they’re in, it’s just a really neat way to see them revitalize their love of their business, because it’s something that they can be excited about. Again, it’s not just a grind. It’s, it’s a shared stake that they are passionate about.

Damon Pistulka 41:25
Yeah. Yeah. That’s awesome.

Matt Middendorp 41:30
You got some goosebumps there.

Damon Pistulka 41:31
That’s awesome. Because, you know, it’s, it’s, well, it’s this is this is just that this is a way, you know, we business owners don’t really take the time to comprehend all the different ways that they can leave their business. And I, I tell people all the time, you know, selling a business may not be for you, you know, and especially in a smaller business, sometimes the best thing to do is run it until you don’t want to run it anymore and close it down. Sometimes you you build your business up to the size to where somebody else might want to buy it, sometimes. There’s just you just all different situations. But I really think that the thing that’s the coolest about the ESOP. And all truth being told, we’re talking about this with the client. Now, they’re not going to be ready for a few years. But they want to keep the ownership in the region, if they can, or that kind of focus, because they specifically would like to not see the same thing happen to their business that every other business that gets to a certain size, and that is getting taken over by an investment owner. That is in it for the profit. And we all have seen those those businesses before where they could be really good, like your clients you were just talking about. They sell to a big, vague firm of some sort. And two years down the road, they’ve decided to close one of those stores or two of those stores or change what they’re doing and things just, it’s just not the same success formula that will keep that business going. And you look 510 years down the road is gone. Or an ESOP gives you that this that extra like we’re going to be there fixing up the Little League every year.

Matt Middendorp 43:29
Yeah, absolutely. And so a great example, I met with a business owner who owned a biotech firm in California. And he sold the firm to private equity, I want to be clear, there’s nothing wrong with private equity. There’s nothing wrong with a third party sale. Every business owner has different motivations and different opportunities. So if that’s your direction, then take it ESOP isn’t for everybody, it takes a mindset to go through with employee ownership. Now, in this case, though, he sold it to private equity. And within two years, employees were leaving his former employees, it was a shadow of itself, because like you said, it was a profitability game not not the same level of service and quality that they provided their clients before the business was shrinking. So his thing that he did was he started the same business two years later, and took his best people from his old business and started over and immediately said, Okay, we’re gonna do this right. And we’re gonna go and play on a ship right from the start. Yeah, right. So that’s a very different mindset. But he saw what happened and said, That’s not what I wanted for my business. Let’s do this. Let’s do this again, and do it the right way.

Damon Pistulka 44:34
Yeah, yeah. And it’s it is there. There are also there are great investment owners or all that kind of stuff. It’s different when you have to you have shareholders, that you have to make a few promise somebody that you’re going to get a certain percent return. And you don’t do that for so many years. I mean, you’re up against a rock and a hard place. There’s just no no getting around that. With that. Um, ploy stock owner the ESOP owned company, the employees can understand that your board of trustees can can work through that they can understand what the employees really want to do and then make a more cohesive decision based on what’s best for the long term of the people in the company and the community. Yeah. That’s what’s cool about it,

Matt Middendorp 45:23
I think, well, and one thing I didn’t make clear, David, that I’d like to really quick, but that’s okay. Because you’re right. It’s really cool. But I do want to make clear that employees are beneficiary owners that they don’t actually have. Yes. They don’t get to change the paint color. Yes. Right. Yeah. They don’t get the changes. They need to move business to mix the construction, you know, yeah. So yeah, they don’t get to hire and fire people. Yeah, control still stays with the people that had that, that power before. So I just, that’s a question I get all the time. And I just wanted to make sure that that was Yeah, that’s a great one to answer. Nobody’s listening anymore. Anyway. So looks like that enough. Yeah,

Damon Pistulka 45:59
it’s good, though. Well, Matt, I just want to thank you for stopping by. And we could talk a lot talk a lot longer on this. But we’re, we’re at about the time, we should wrap up. Appreciate it. So what’s the best way for people to get a hold of you mad if they want to talk about an ESOP? If they want to figure out you know, just is this solution right for you?

Matt Middendorp 46:18
Yeah, no, I appreciate that. Damon, there’s a couple of different ways you can do that. Number one, feel free to reach out to me on LinkedIn. There’s only two Matt Middendorp on there. ones are the restaurant tour in Iowa, who’s about this tall and then there’s me. So if you see this, then then definitely don’t hesitate to reach out. He’s a super nice guy. By the way I’ve met him. You can always email me at M Middendorp at Aesop And I’m sure that’ll be in the show notes for this. So my email address will be there. But you can also just give me a call directly, if you don’t mind. So if you don’t mind, I’m gonna put my old man reading glasses on and I’m gonna go direct phone number. You’re ready, guys. Direct fine. 207506521. Again, 920-750-6521. Why do I not know that off the top of my head because it’s forwarded to my personal cell phone?

Damon Pistulka 47:08
Yes. Yeah. Yeah. So

Matt Middendorp 47:12
20506521 There

Damon Pistulka 47:16
we go. Well, Matt, you know, I just wanted to thank you for Dave, because we’re trying to help answer the question of an ESOP is right is the right choice for your business exit. And man, you really, you really came and delivered. Thanks so much for being here today.

Matt Middendorp 47:30
Well, and let me just thank you, David, for the quality of the questions you asked and the engagement that we had, I really appreciated that. And, again, I want to tell everybody out there that if they want to have a conversation like this about their business, my job is to teach and help you make a decision about whether or not you want to explore it in another level. That’s all I do. So give me a call shoot me an email, reach out to me on LinkedIn, even if you have the most basic question. This is the fun part for me. It really is. So I really appreciate everything you brought today today and this was great. Awesome,

Damon Pistulka 47:58
awesome. Thanks, man. Well, I thank everyone for listening today. And and and those of you who have you got in here late, go back to the beginning. Rewind, listen to Matt. And also on this one, you made this Oh, somebody that could really use this forward this to them or reach out to Matt directly or forward Matt’s information to him because man, this is something that business owners need to understand and can make a huge difference in their life and their exit of their business. So thanks, everyone, for being with us. We’ll be back again later this week. Matt hang out for a moment. We’re gonna shut the stream down and you and I will finish up. Alright, thank

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