34:43
SUMMARY KEYWORDS
esop, company, sell, retirement fund, benefits, fair market value, employees, owner, patty, paid, client, years, people, business, pe, ebitda, shares, aesop, good, leadership team
SPEAKERS
Damon Pistulka, Patti Plough
Damon Pistulka 00:02
All right, everyone, welcome once again to the faces of business. I’m your host, Damon pistulka, and I am excited for our guest today, because we have none other than Patty plow here with us, the ESOP evangelist from Excel legacy group, Patty, thanks for being here today.
Patti Plough 00:22
Thank you for having me.
Damon Pistulka 00:24
Oh, it’s going to be so much fun. We have a lot to talk about, because we’re going to be talking about protecting your business legacy with an ESOP. And I think it’s so great to be able to talk to you, Patty, because you did just that. So let’s do, let’s start off like we always like to is kind of getting a little bit about your background to understand more about you, how you got into what and and how you got into what you’re doing today.
Patti Plough 00:55
So my background is nursing. I’ve been a nurse for more years than I care to mention it’ll date me. But starting at about 1990 I started working in the employer, employer sponsored health care space. So doing preventative medicine, working with corporations, and in about 2005 that really started gaining momentum with corporate America and so and then so it really picked up. It became very popular wellness companies. And then another addition that was added is employer sponsored clinics inside corporations. It worked very well with self funded clients that combination. They could save up to 50% on their on their health care spend, so it was very edge, advantageous for them specifically. But fast forward to 2018 we there was another vendor in the state, in our state, that their strength was more the employer sponsored clinics. Ours was more the wellness and we decided to merge. Well, right after we merged, there was a lot of interest from PE firms about acquiring us or being part of a roll up for their clients. So we decided to look into what that would look like for us. If you know what, what is the company worth? Is it worth? You know, considering selling it. So we went down that path, and lo and behold, we were offered 30% over fair market value from a PE firm doing a roll up. And like many business owners, you’re so busy running your company you really don’t understand when you hear terms like a PE firm and they’re doing a roll up, and what does that mean? Well, I was on a board locally, and there was a gentleman on that same board, and actually we were in an industrial park, and their business was right down the road from ours, and I knew the story of with him there. There was the company that he had been at for 47 years, and most of the employees had been at for 40 plus years. Was 150 year old company, but the granddaughters inherited it, and they didn’t have any use for the company, so they sold it to a PE firm, and within seven hours, everyone had to collect their belongings, and they were laid off. Wow. And so I knew that in the back of my head that you know, this had happened. So I started asking questions. And we had 200 employees at the time, and I was there, there was a huge chance that our our business, could be moved to the other state that was doing the roll up so, but I had, there was a total of six partners. And I mean, when somebody offers you 30% over fair market value, how do you not take a look at that? So we were going down the path of looking at it. And my husband and I and another partner had met with a wealth management specialist, and when I found out he was an attorney, I started asking him questions about how we could protect our employees and maybe have contracts in place if they were going to move the company because. They had helped us build that company, and yeah, we could sail away with 30% over fair market value and 200 families lose their jobs. Yeah, didn’t that wasn’t settling with me very well, or my husband. And so during that conversation, the wealth management specialist said, you know, I have sat here and listened to you talk about protecting your employees, and we haven’t even touched on about what we’re going to do for your financial future when you sell the company. He said, I honestly think you’d be better off as an ESOP. He said, Do you know what that is? And we all said, oh, yeah, we have clients that are ESOPs. It’s an employee owned company. And he said, Well, do you know what the benefits of an ESOP are? And we didn’t know. And so I can go over the benefits right now, because that
Damon Pistulka 06:00
would be good, because when you’re looking at it, what were some of the things that they were explaining to you that really looked beneficial?
Patti Plough 06:07
Well, all of them, so I’m going to go, I’m going to go over them. I was sold that day. I wanted to do an Aesop that day, because, number one, there were some in the company that wanted to stay on and stay in control and they weren’t ready to retire. So benefit number one, if you’re not ready to retire with an ESOP, you can stay on and stay in control of your company, or stay in whatever position you want, whether it’s day to day as the CEO, or if you want to just be on the board making your same salary, even if you sell 100% of your shares to the E stop. Yeah, so that was very attractive, that that met one of our goals. Number two, you’re guaranteed fair market value for your shares. And the reason you’re guaranteed fair market value for your shares is because there’s a trustee involved, because an ESOP is a trust, and the trustee cannot is regulated or audited by the government, and they cannot pay more than fair market value for your shares, so but they can pay up to fair market value. So you’re guaranteed fair market value for your shares, and you do not need to find a buyer. You’ve got a buyer, your employees. And the next benefit I’m going to address is for your employees. This is free to your employees. It’s like a free gift. They don’t have to buy in, they don’t have to pay there’s a retirement fund set up for them that grows over time, similar to a 401, K, yeah. And, but it, it is. There is no pension plan out there that I know of that can compete with an ESOP. There are beggars in grocery stores and and don’t get me wrong, you have to stay at your place of employment in order to garner these benefits. So it’s not like you can be there for a couple years and you’re going to have this windfall, but there are baggers at grocery stores that are ESOPs. Publix is the biggest ESOP in America today, that have over a million dollars in their retirement fund, and managers with four to 5 million in their retirement fund. So it’s truly a transfer of wealth to the employees that don’t have to pay for it. It doesn’t cost them anything. And remember when I said, for the shareholder, the shareholder is getting fair market value for their shares, so it’s not coming out of their pocket. Okay? So that’s that’s benefit number three is a windfall retirement plan for the people that helped you build your company. Benefit number four is for the company. When your company becomes an ESOP, it becomes a tax free entity, both state and federal, because we help you transition to a C Corp, or, excuse me, an S corporation. And the way S corporations work is with the pass through, and then the shareholders pay the taxes on their personal taxes. There’s distributions from the company. Well, when the pass through happens, the ESOP is a tax free entity. The ESOP is a retirement fund which is tax free, which creates a tax free environment for the entire company. So that’s benefit number four, benefit number five, and this is a shareholder benefit again, is that you can defer your capital gains. Uh, indefinitely through what’s called a 1042 exchange. And that 1042 exchange, you’ll have to invest no more than 15 to 20% in us, stocks and bonds, and we help you do that. And even when your heirs go to take that money out after your passing, because of the step up in basis, they don’t have to pay the capital gains. So literally, you can set up an inheritance fund for your heirs through this 1042 exchange, and you can defer capital gains indefinitely. That’s benefit number five benefit. Number six is for multiple shareholders, like I had, we all decided to sell 100% to the ESOP because you get the most benefit doing that. But you can, like, say, for instance, if I only wanted to sell 30% to the ESOP, through the ESOP and my partners all wanted to sell 100% we could have done that. Okay, so there’s flexibility there. And benefit number seven, I saved for last. So when I said that the company is that what happens is the trustee buys you out on paper or the company on behalf of the company. And so the company is buying the shareholders out on behalf of the employees. And so there’s not going to be a third party coming with a check at closing, and the owners will have to do a portion of owner financing, because banks don’t loan more than two and a half to three turns of EBITDA, or two to two to three turns of EBITDA, let’s say and so you will have to do. You will have to hold an owner note. And I’ll give you an example. Say your company is worth $5 million and you have an EBITDA of a million dollars, what you could expect to realize at closing is up to two, let’s say, two and a half million in cash, and then you’ll hold an owner note for the the additional 2 million, which you will be paid interest on while the bank loan, until the bank loan is paid. And then that takes, on average, around three years, give or take, six months on either side, and then the company goes back to the credit union or credit market, excuse me, and gets a loan for the remaining balance. So really, you’re only holding a note for, on average, three years, maybe a little longer. And because you did that, and because you sold to your employees, you’ll be given warrants in exchange for that, even if it’s that short of a time period of, you know, three years, you’ll be given warrants equal to about 30, 35% in synthetic equity. And that’s synthetic equity in the new company, the company that no longer pays corporate tax, and so that company, the day it closes will be larger than when you sold it initially, because of the corporate tax not Coming to anymore. So and you can hold that note for and watch it grow, if you want, or as soon as that owner note is paid off, you can, you can cash that in. But what’s even better is you can share that with key employees. So those employees you and it’s called a management incentive plan. So typically what we see is an owner will put like, 20% in their bucket, and then they’ll put 10% in the management incentive bucket, and they’ll name key employees that they can that the people that have helped them grow their business that they cannot afford to lose. Yeah, and I can tell you, it can be life changing for those people, because in a minimum of three, maybe five years, they could be receiving a check for a million dollars. Let’s say yeah, excuse me for helping grow the company that can be transformational, yeah? In addition, they’re part of the retirement fund that I mentioned earlier, yeah. So those are the benefits, and you can see why I was sold when he went through those benefits. But my partners reminded me that. But you know, we’re getting 30% over fair market value. Esaps only paid fair market value, so it’s kind of a non starter. Well, one week later, the the PE firm lowered their offer down to fair market value, and the rest is history. We went the ESOP route. Yeah,
Damon Pistulka 15:20
that that’s something I’m glad we’re allowed. You were able to our story and work through it. I wanted to say real quick, James kunkel’s here saying hello. Thanks so much for stopping by today. James, hello. We’ve got, this is awesome. We’ve got Patty plow here today from Excel legacy group. She is an ESOP evangelist talking about protecting your biggest business legacy with an ESOP and she just went through how the benefits as she was considering it, leaving her her company and they and selling her company with her partners was involved in the health insurance, or not health insurance, but health care for large corporations to help them manage overall health care costs. That this the thing that I really think is interesting, and I’ve had had a family member that sold a sizable company in with an ESOP as well, and is the, I mean, the companies that get sold into an ESOP tend to continue to do pretty well. I mean, that’s the really cool part about it. You mentioned Publix. You met your company and others, they they just tend to do pretty well because the people are highly motivated to keep you know, do their best and stay engaged and do the do the right things.
Patti Plough 16:38
There’s actually statistics out there, including covid, that ESOPs fare better in downturn economies. Yeah, yep.
Damon Pistulka 16:47
So what do you think when you’re talking to people about ESOPs? What are some of the the most common questions that they have?
Patti Plough 16:58
Well, they The reason I started doing what I’m doing is what I realized is that there’s not enough education out there about the benefits. None of us knew what the benefits were, and I don’t think anyone I talked to knew what the benefits were, and that’s why I started doing what I’m doing. But so just going through the benefits, because they they really don’t understand it. It’s like starting from from square one, yes,
Damon Pistulka 17:29
yes. So what were some of the things that as you were going through it, were you go, ah, that’s not so good, but it won’t be so bad. So it’s not like, it’s not a benefit, but it’s kind of a negative.
Patti Plough 17:45
Well, the the the seller financing, you know, you had to do seller financing. If I had to look at one a negative that people might find as a negative, it would be that, but you’re getting, you’re selling, you’re being able to sell your company a second time with that second bite of the apple and share the wealth with key people. So to me, that benefit trumps the negative. Yeah. Now the only thing I will say is that companies that are over a 10x multiple, they’re going to have to make several trips to the credit market because of the EBITDA multiple. So it, it all depends on the business owner. With those companies, technology companies are an example, yeah. So yeah, point
Damon Pistulka 18:40
because they would have, they would their, their seller financing would be much, much higher
Patti Plough 18:46
as it’d be longer, yeah, they’d have to make several trips, you know, each time, taking two to two and a half turns, three turns of EBITDA, and until they got to the, You know, their purchase price off
Damon Pistulka 19:00
the table? Yep, the seller financing. Now that’s one thing you mentioned. You know, it is common for some sort of seller financing in a PE deal or want you to roll into port. I think that’s that, I think is, yes, it’s a negative. You may not get quite as much cash, but you’re going to leave some in there anyway, in some sort, one way or the other, right with them. So I think a good and also, as you said that when we talked prior to this, those warrants that you get for that 30 or so percent after because you did that far offset any of the the negative to a seller financing, if you know, if you know the company, you like the you know, you believe in your company, and those kind of things, it’s, it’s a good investment for the long term. I believe so
Patti Plough 19:51
I can, I can say, with, with just our book of business, this isn’t a national average. This is just our book of business. Business in the last 14 years of doing close to 230 ESOPs, and that’s not me. I joined the team. Yeah, if you hold those warrants to year eight, they’ll be worth 75% more on average, than they were the day that you sold your company, 75% more than the initial buyout on your entire company. Mm, hmm.
Damon Pistulka 20:33
No, you’re 30% 3035. Whatever that is, is usually higher than the entire value of the company. You hold it eight years,
Patti Plough 20:42
you’ll you’ll break you’ll get as much as you did the first round, if you do it sooner. But on average, it’s 75% more year eight. And that was a statistic that was done in 2023
Damon Pistulka 20:58
Wow. So not only are you, you know you’re getting paid for the company, but you’re, you’re getting paid again, yep, basically, plus, if you with that, that warrants that you hold for later. So yeah, that’s incredible. And
Patti Plough 21:15
you get to stay in control of your company, and nothing changes. Nothing changes whatsoever you’re you’re not answering to someone else. So basically, your company does not change other than it now has a retirement fund that allocates shares annually to your employees. Yeah,
Damon Pistulka 21:36
yeah. Now you you bring that up, that you can stay with your company, if you’re one. So say, I’m, I am ready to exit, and I am, say I’m the CEO. How does that work? Do you have to have a transition team in place to do that or to do before you would do the ESOP? So you go, Okay, this is one of the preparation steps is, I’m the CEO now, but I’ve got another person that’s in the company doing that, and I’m rolling out to be able to sell it to the ESOP. Yes,
Patti Plough 22:10
you have to have a leadership team in place. Okay, we actually had a leadership team in place. I put a leadership team in place just simply because of of my age, yep, at the time and and I had done that two years before I heard about the ESOP. So basically what happens is the trustee with their valuation firm came in and met the leadership team, because they would be the ones that are making the offer of purchase the purchase price offer, and they had to ensure that the leadership team could run the company without the president or CEO. So if you are considering an exit, and you do want to leave or just be be on the board, I would have a leadership team in place, because that will be something that’ll be priority,
Damon Pistulka 23:04
yeah, and that’s something that we talk about a lot with clients that are preparing to sell. I mean, whether you’re selling to an ESOP like this, or selling out to the general market, the more of the better leadership team you have in place, the more valuable it is to the next person. But it’s interesting that that is one of the key things in an E, because you have to have that if you’re not staying, your team has to be there. And I’m assuming it has to been in place a while. So this is something like you said a couple years ahead. You were ready to go,
Patti Plough 23:35
yes and and actually, one of the ESOPs that I did a couple years ago, the owner had wanted to do an ESOP prior to coming with us, but was told that she didn’t have a leadership team in place, so she had to put the ESOP on hold for a couple of years, build your leadership team, and then she came to us and asked us to help her. That’s
Damon Pistulka 24:01
awesome. That’s awesome because, you know, as it is so important, and that’s one of the things that I think some business owners that that are getting ready to exit, or want to exit the next people always say it, I don’t know if it said, you I want to exit next five years, right? I think that’s just a something that’s born into us or, yeah, but you know, five years gets eaten up fairly fast when you have to do the preparation work for one of these things. And it really isn’t something that that you can skip over some of these steps, that’s for sure.
Patti Plough 24:35
That’s very true. Yeah,
Damon Pistulka 24:37
yeah. So let’s hear some of the some of the good stories that you have to tell about people that you’ve helped doing this that you can talk about,
Patti Plough 24:47
well, I can talk about this is this is very special to me. The one I just mentioned that, you know, didn’t have a leadership team in place. One thing that I did not know about so. Aesop’s can be sold to third parties after they’re an ESOP. In fact, Clif Bar was sold to a third party. Is is an example. But this client, and I didn’t know this until the very end, because I talked to her after the Aesop was completed, and she said I was talking to her about the retirement she said, Oh, no, I’m not. I’m not doing a retirement fund. I’m not doing it for that. She said, when I was young, I was involved in an ESOP, and when they sold the company, I was handed a check for $500,000 I started this company, and I have 125 minority workers, and over the next five years, I am going to grow the company exponentially, and I’m going to sell it, and I’m going to pay it forward and hand them each a check like it was handed to me and changed their lives. Wow,
Damon Pistulka 26:01
yeah, that’s pretty cool. Yeah,
Patti Plough 26:05
yeah, that that is a definite standout for me. Yeah, yeah. And, and another story, we had a client that had tried to sell his business, you know, hired a broker, etc, and because he had high client concentration, he was told that, you know, he couldn’t get, you know, as much as he was hoping. And so he came to us, and I can tell you that, yes, it still affects an ESOP if there’s a high client concentration, but not as much as a third party sale. And he was extremely happy with the dollar amount that the trustee offered to buy his business. That’s
Damon Pistulka 26:59
a good point, because customer concentration in the investment world is a huge thing. It is. It’s a huge thing. And you look at some of these, well, you’re in you’re in Wisconsin, or you get into the around in the automotive areas, or some of the more industrial areas where, or where I’m at here in the aerospace world, you know they you can have very large companies with one customer
Patti Plough 27:27
or two. I know tier tier
Damon Pistulka 27:30
if they’re doing tier one supply to an automotive or an aerospace or just name some other big industry, a tier one supplier or tier two supplier can be huge and have one or two or three customers?
Patti Plough 27:44
Yep, we just, we just ran into one with one client, yeah, and he’s most likely going to go the East opera because he’ll get a better valuation. Yes, yes, even though it is affected. Yes, it’s affected. He has contracts in place, yeah. And so that is very helpful as well. Yeah. And I have to apologize. I have been under the weather with a cold. I’m actually, I don’t know what it is. I’m going to the doctor tomorrow because I’m hanging on. That’s why I keep muting myself. That’s
Damon Pistulka 28:22
alright. We’re good. So, so let’s, let’s do this, this. I mean, this is such a great conversation, Patty, and I know you’re not. Thank you for showing up today. We can, we can, we can start winding down here so you can get off and do this, and we’ll have you back again, because we’ll, this is awesome. Thank you. So you, you brought up a huge thing, client concentration, and how that turns people away. And I think another thing that, that we, we find too, and I’ve seen, and honestly, this is where, where my like, I said, I had a family member that did this is when owner involvement in a business, if you’re not ready to retire, and owner involvement and you just say, I’m I could work for another however long I wanted, but it’s my ends not in sight. If I try to sell the day to a private equity firm and the owner is part of it, they that is much different than if you do that to an ESOP from a value standpoint, exactly? Do you get people that come to you because of that?
Patti Plough 29:30
Yes, that want to stay on and they don’t want to, they don’t want to answer to somebody else that owns a majority of the company. Now they and they can stay in control of their company, stay on, and nothing changes, other than the retirement fund, yeah, and allocating shares and watching them grow
Damon Pistulka 29:50
well. And the other thing too that I’ve seen in this this same situation, is you can take some money off the table, right? Because it could be. That you have a large, extremely large amount of your your total assets are in this business, which is normal, right? When you get to a point in your life and you say, Listen, I I’m ready if I can get some out of this now, that is awesome. I want to work in the company for a while longer. I believe in this company for the long term, and I can help the employees and all the benefits you give. I think it’s a great way to help. It’s a great option if you’re looking and trying to do this out in the normal marketplace, and you go, the values are so low because I’m involved. I’ve got other partners that are involved in this business, but an ESOP could be a way to get fair market value, or very close to fair market value, whereas others could be 30 to 50% right decrease or deduction and still get even, you know, fair market value, plus, when you consider the warrants and everything else that happened from it absolutely, I Just think there’s some there’s some real benefits, and you hit the client concentration. But I also want to talk about owner dependency, because that’s when you look at it. There’s once you get past, are we in the, in the ballpark, price range, customer concentration and owner dependency are the two things that really throw things off the off the rails,
Patti Plough 31:20
absolutely, yeah.
Damon Pistulka 31:22
So that’s, it’s, it’s just a very interesting option. Now, I was wondering this, do you see sometimes that that companies that are owned by investors going to ESOPs? Yeah,
Patti Plough 31:37
they can, and the owners would be paid off, paid out. Yep, I’m actually working with one right now.
Damon Pistulka 31:44
Okay? Because I Yes, that’s that was an interesting thought about this. Because sometimes you know when the when the management team, they really want to go forward, and the investors are at their their horizon, their time, and they need to get out. And if it’s not a good time for the market or not really, I mean, this could give them some options too. That could help.
Patti Plough 32:09
Yeah, absolutely. Good, good.
Damon Pistulka 32:12
Well, Patty, it’s been so incredible talking to you. You want to do, though, is, I want to say, if someone wants to talk to you about an ESOP. What’s the best way to get a hold of you?
Patti Plough 32:24
They can email me at Patty at, and it’s patty with an i yep at Excel legacy group.com, or my phone number is 4147502, 47502901,
Damon Pistulka 32:44
all right, well, I just want to thank you for being here Patty it was awesome having you talk with us about ESOPs and how you can protect your business legacy with an ESOP and again with us today, we had Patty plow from Excel legacy group, someone who personally went through an ESOP with her company. She was getting approached by PE groups and decided that the ESOP was right for them. Very believed in it. So much after it was all done, that she got in, got into helping others, you know, sell their companies with ESOPs. I’m getting tongue tied here, but it’s, it’s cool. It’s really cool. So I just want to thank you for being here today, Patty, I want to thank James for stopping by. And we had DeVonish stopping by. Sean, thanks so much for being here. Sean said something again, enjoying the informative talk on ESOPs. We had Lincoln here and then, and then had a couple other comments here from people, it’s not showing up who they are. Definitely need that leadership team in place. Yep. And then great point on owner dependency. A lot of deals fall apart due to excessive owner dependency. And just, it’s so nice to have you on today, Patty, you’re showing us some options for people that you know, these, these things we talked about, where an ESOP might be the best way for them to exit Absolutely. Yeah, thanks again. Well, Patty, hang out just for a minute. We’ll finish up offline. I want to thank everyone for stopping by today. If you got in late and started this with us. Go back to the beginning. Listen to Patty. She started off explaining her story and how she found ESOPs and the benefits of them. She went through the seven benefits. And I’m going to tell you, you need to listen to that. And thanks everyone. Hang out Patty, and we’ll finish up offline. Sounds
Patti Plough 34:38
great. Thank you. Bye.
