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Podcast: ESOPs Work for Both the Buy-Side and the Sell-Side – Find Out How. An Interview with Daniel Goldstein

By Ryan Tansom
Published: October 4, 2018 | Last updated: October 4, 2018
Key Takeaways

ESOPs are an underutilized tool in the M&A market. However, they not only get you fair market value for your business, but they also help you protect your legacy.

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About the Host

Ryan is an entrepreneur, podcast host of the show Life After Business and the co-owner of Solidity Financial. Having personally experienced the hazards of selling a business, he joined up with his friend Brandon Wood to educate others on the process. Through their business (Solidity Financial), they provide a platform for entrepreneurs called Growth and Exit Planning that helps in exit planning, value building and financial management.

About the Guest

Daniel Goldstein is President and CEO of Folience. He has 25 years of executive leadership experience that spans five continents and an irresistible wanderlust that’s carried him to more than 50 countries. It’s a spirit for exploration that’s essential as Daniel shares Folience with the world in his role as chief ambassador and educator.

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Daniel also guides investment strategy, which includes acquiring, integrating and advising each of the brands in the Folience portfolio.

If you listen, you will learn:

  • Daniel’s banking background.
  • Folience’s history and movement to ESOP.
  • ESOPs are not socialist.
  • How company boards operate in an ESOP.
  • What does a trustee do for the board?
  • The legal side of an ESOP.
  • Folience’s goals for their partners.
  • What does Folience do for their companies?
  • How Folience is different from a private equity firm.
  • How watching company demographics can cultivate new talent.
  • When owners and employee owners get their payouts from the company.
  • E stands for “engagement.”
  • Why ESOPs have to pay fair market value and what that entails.
  • What Folience looks for in a possible company partnership.
  • Folience’s success to date.
  • Daniel’s final thoughts.

Full Transcript

Daniel Goldstein: There is nothing socialistic about ESOPs, it is capitalism in its purest form, but it's a better form of capitalism, so this gets into sort of a little bit of history and philosophy that since the beginning of the industrial revolution, it's the one percent elite that own the means of production and the rest of us tend to be rented labor.

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Announcer: Welcome to Life After Business, the podcast where your host, Ryan Tansom, brings you all the information you need to exit your company and explore what life can be like on the other side.

Ryan Tansom: Welcome back to Life After Business, the podcast. Thanks everybody for tuning back in. This is episode 113 and today on the show we have Daniel Goldstein who is the president and CEO of Folience and he is here to share with us the crazy journey that he's been on along with what they're doing at Folience and how employee ownership and the ESOP that they have of a company that's been around for 150 years or so, and what they're doing to help spread the word of employee ownership. Daniel has a cool background that he came from working with a lot of really, really wealthy families and family offices. He came from the banking side. He's seen a whole spectrum of how to create wealth to invest in companies, and he's on the show today to describe and compare the other ways of making money in private equity and family offices and holding company to an ESOP. What that means to you, the business owner who could potentially sell to an ESOP and how to make that company last for all long time and what the things mean to you, your employees, to the longevity of your culture, to the finances, to all these different things that just absolutely a blast talking to him. So if you're interested in learning how to get fair market value for your business, create a culture that lasts and to literally help a lot of people through your exit. This is an absolute must listen to. So without further ado, here's my episode with Daniel.

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Announcer: This episode of Life After Business is sponsored by GEXP Collaborative. Their proven process gives you clarity on all of your exit options and how those options impact your financial success, timing and future happiness. Sell your company on your timeframe to the buyer of your choice at the price you want.

Ryan Tansom: Morning Dan, how you doing?

Daniel Goldstein: Good morning. Doing great.

Ryan Tansom: Super, uh, uh, happy to have you on the show. I am really excited because you have a very unique background business model and we got introduced to each other via Diane from the Alliance of M&A Advisors and she put us in touch and I gotta laugh… when I reached out to you. You were very, you and I had this whole conversation about saying no and that's one of the things that I've been trying to do in your of… I don't even remember how you did it, but it was, it was amazing and I have to take some, take some lessons about how you're screening people that are reaching out to you. But after we had the phone call, um, our 15 minute call ended up I think was what an hour realizing that, uh, we have got a lot of commonalities on how we're looking at this whole industry of M&A and business owners. And so for the listeners that we're not in a involved in all that, why don't you, give us a background of, you know, how did you get to where you are today?

Daniel Goldstein: Absolutely. And just commenting on the first, uh, um, there, there are a lot of people out there that do pay to play and I don't participate in that. And so I was really impressed with what you're doing because it's not a pay to play model. It's like you actually care about getting good content out to people and you're not charging me. And uh, so that's why I was very willing to participate in this.

Ryan Tansom: I think it was just too funny because like, I mean, you and I retired because, you know, there's Tim Ferris and all these people out there that are kind of like everybody's trying to figure out how to say no. And it was just absolutely hilarious. You're like, what are you selling me? No, I literally just want to chat? And by the way, I have got some amazing billboard spots that I can sell it. Why don't you give the listeners a background because your journey into what you're doing right now and what you're doing with your business is just so intriguing. So I know it's probably a long story, but some of the cliff notes that kind of make some logical step to where you got.

Daniel Goldstein: So first of all, it's great when you look backwards because it makes a lot of sense. Of course, while you're going through the journey, you don't have much of an idea. You have a direction. I never could have foreseen any of us, but. So after college I worked for a bank. I worked in the public sector for three different governors and their executive budget offices. Went back to an MBA and another master's degree and then spent pretty much the next 20 years working in the world of family business, family office, family foundation. And that's for very wealthy families. I've been very successful. Uh, so I started in Kansas City working on the Kauffman Foundation. Mr. Kauffman had built a business from zero to several billion dollars in the pharmaceutical industry, was the owner of the Kansas City royals baseball team. And in 1993 on his passing, he had left 1.25 billion to his foundation, which has since grown considerably.

Daniel Goldstein: So after Mr Kauffman passed, he left one point two 5 billion to his foundation and has since grown to almost double that. Um, and I worked on investing the assets of the foundation as well as writing curriculum around entrepreneurship and venture capital and stayed there for a couple of years. And then a very long story short, ended up living in Italy for the next about 18 years. And for most of that time was working for one family that had been very successful in the industries around heavy trucks both as importer but also use of trucks. So logistics, warehousing, transportation, and also were direct real estate investors. And so I helped set up their family office took care of investing their liquid wealth. Took care of several of the family businesses, managing real estate across Europe and the United States. They were a family that was very active in enjoying yachts and so managed yachts and then set up a not-for-profit foundation for them and ran that for many years.

Daniel Goldstein: In 2014, came back to the U.S., uh, had a year stint with a, a wealth management boutique firm that had brought me in for succession planning, but turned out, had very different ideas of succession. And so, um, in 2016, I was back in Italy towards the beginning of the year and received an email from a friend of mine in London who had very randomly run into a guy from Iowa who had family in London who had told her a story and she said, you should get in touch with them and hear the story. And so that's how I, uh, got introduced to what we're about to talk about.

Ryan Tansom: Well, and that it's such an interesting journey, too, because of the exposure. And that's why I think it'd be fun to talk about what you're doing now because you had this big spectrum of investing in entrepreneurship and people on wealth and you know, you've seen the big spectrum of how you can do all this stuff and how to deploy capital and how, you know, in different liquidation events happen. So I think it's not just blinders on because you've only been doing this, right? I mean, you've, you've seen every nook and cranny of it. So let's, why don't you get, can just give a brief overview of kind of the structure of what you guys have got going on because I think there's a lot of different ways we can go with this.

Daniel Goldstein: Sure. So the company, uh, that I'm involved with traces its roots back to 1884 and that is 1884, not 1984. And that's because there is a newspaper started the year before which we still own and operate the Cedar Rapids Gazette newspaper. And over the years, uh, the family added to the newspapers with other newspapers. They got into broadcasting and started a television station, also got into radio broadcasting and fast forwarding from 1884 to 1986. There was a hostile takeover attempt and part of the family wanted to sell. Part did not. So the family started a partial ESOP, employee stock ownership plan, to give liquidity to buyout the part of the family, the minority of the family, shareholders that wanted out and leave the rest of the family and control. Now at that time, the partial ESOP had options to buy more shares of the company and so it was actually valued as a majority ESOP and without getting into the weeds that what's interesting is that in 1986 that actually made this, one of the more historic majority ESOPs, certainly in this region have not, you know, just overall in the country because ESOPs had only been…

Ryan Tansom: That was way early on.

Daniel Goldstein: And then going forward from there, uh, in 2012 the company tendered an offer to buy back the remainder of the family shares. And those were retired which made the partial ESOP. Now 100 percent owner of the company. So since 2012, the ESOP has been 100 percent owner, but something very odd happened, which is that typically the family would not really have any connection because they no longer have ownership, but because at the time the company had both a newspaper and the television station, the FCC required in order to maintain the broadcast license continuity of control. And that meant that even though the family had no ownership, they had to maintain control of the company. So they controlled the board and what was at the time a directed trustee. And that's very odd situation for a family with no ownership to have full control of the board and the trustee. And that lasted until, in 2015, the company sold their television station 62 years after it had been brought on the air.

Daniel Goldstein: And so very long hold time. We're not about flicking companies.

Ryan Tansom: That's a little bit longer than the seven year!

Daniel Goldstein: Yeah, that you see in private equity. And so it was at that time that it then became really a conflict of interest that you'd have a family controlling the board and trustee of a company in which they have no ownership and that's when I came into the picture I was brought in because looking at after 130 years of being a family owned family, controlled media, concentrated conglomerate if the company was going to be around for the next 130 years, which we humbly intend to do. So it wasn't going to be by just being concentrated in media. And so my predecessor was looking for somebody to come in and really build a new company and then to lead that company into diversifying, to add to the media holdings by bringing in other companies beyond media.

Ryan Tansom: So there's a lot that I want to dive into there, what your future strategy is and why you like this structure and model. But before we do that, Daniel, can you, can you explain to listeners and even for my benefit is there's a lot of confusion out there in east absent. We've had other people on on this show that a dove into some of the technical weeds in this, but like can you explain a little bit more the conflict of interest in the board and the trustee and all that because I think a lot of people say, well, you know, I don't know I was hot, especially entrepreneurs where it used to being in control, right? It's like I don't want to sell my company to my employees get. It's like, you know, it's socialism and everybody's going to have an opinion and so, but then how you structure the, the, the ESOP and then the board and the trustee all that can kind of put different dynamics on this situation. Right? So maybe kind of explain what the typical is and explain why that was so unique in how, how that structure was.

Daniel Goldstein: Sure. And are there are a couple things in there. So let me just quickly go to the one that could be the hot button for the people here. There is nothing socialistic about ESOPs. It is capitalism in its purest form, but it's a better form of capitalism. So this gets into sort of a little bit of history and philosophy that since the beginning of the industrial revolution, it's the one percent elite that owned the means of production and the rest of us tend to be rented labor. And that's a very unequal system. Within capitalism if you just changed the ownership and, and it's very capitalistic that if the employees are the owners of the company, then they get to invest their labor to earn equity in the company. That's the ultimate American Dream. And so then there's a better, uh, equality both in the income but in the wealth gap that you see in today's world, that the late night production worker, the forklift driver, the receptionist, they all get to earn equity in the business by investing their labor.

Daniel Goldstein: And that is pure capitalism. But so looking at the conflict of interest that, uh, that, that you talk about something that we believe in is having the best practice of governance because that really is going to be one of the most fundamental elements for allowing a company to be sustainable and profitable. And with that, it starts with having a good board and you can look, anyone can look on our website, Folience dot com and see who our board members are. We're very proud of the people that we've been able to attract to our board because of the great skill and the experience that they represent and what they bring to challenge our team and support our team. And then there's this weird dynamic with ESOPs that the board appoints the trustee and the trustee appoints the board and yes, that is circular. So it depends who comes first.

Daniel Goldstein: So in the example of a company that has a board that becomes an ESOP, the board would appoint the trustee. But so for example, in our history, we're already an ESOP and we already had a trustee, but we had to change our board because we had to go from that family board, which was then a conflict of interest once, uh, we didn't have that need for continuity to keep our broadcast license. And so we then came up with a slate of new board members that we submit to our trustee and our trustee accepted them as the new board, so it, it actually makes sense even though it's circular and something else that I'll point out, there are a lot of ESOPs that, uh, have internal trustees and I absolutely disagree with that. I think best practice is to have an external trustee, um, this isn't advertising just transparency, we use Great Bank as our trustee and we feel that a corporate trustee brings much greater resources, liability insurance just as an individual.

Daniel Goldstein: There's really no reason why you would want to take on that liability.

Ryan Tansom: Well what's the role of that trustee.

Daniel Goldstein: So the trustee's got two primary actions on that and I'm not an attorney and an ESOP attorney would say, uh, that

Ryan Tansom: We don't have an ESOP attorney on right now. This is just two guys having a conversation.

Daniel Goldstein: And so basically it boils down to this. They can either quit or they can fire the board. And so we always joke that while we have a great relationship with our trustee and we keep them up to speed on everything that we do, we never asked for their approval. So if I tell the trustee what we're doing and they don't quit, they don't fire my board, then what we can say is the trustee did not disapprove, and so you know that that's sort of a little flip of an answer, but it really is the case and so what the trustee is doing is they're making sure that you stay on the right side of the law.

Daniel Goldstein: ESOPs are allowed by Arissa and IRS and other legislation and there's a lot of regulatory scrutiny and the trustee is there to make sure that you don't get on the wrong side of that. That's their primary role and then they want to make sure that you have a good board in place and then our board is a fantastic board because they do three things and this is really important. The three things are they look at our strategy, they make sure that we have a good process and they make sure that the right people are following that process. They don't get into the weeds, they don't make investment decisions. They don't even approve or disapprove acquisitions. They make sure that we're there looking at the strategy that we're, we've got that good process and we have the right people following the process and so between the trustee and the board and then getting into the distributed leadership and the executive team and the different management structures and reporting and communication within the company that good process, good governance follows all the way through from trustee to board into the executive leadership and across the company.

Ryan Tansom: Well and what, what's super cool, but when you're totally nailing that whole structure that you just described, I think what's very interesting is a lot, you know, a lot of people that do the, the ESOPs, they're, they're doing it for the first time and then they're like, you know, it's a way of like liquid getting liquidity for the owner and you know, getting the employees involved. But there's, there's a lot of the owner pushing it or I think your guys' model, and this is where I'm super curious and because of your background of, you know, when you look at the big global picture of how to create wealth, right? I mean, you've got family offices where you came from, right? So you mean you took it from about 1.5 billion to three? I mean that's when you're talking about investing in sports teams and then real estates and companies. So you've got the family office kind of model. Then there's the, there's a lot of holding companies and I want to tie this back Daniel, to the, the, the lave investing labor because I think there's a lot of this unique parts of this were, you know, a holding company would be another. Okay. Another wealthy entrepreneur who is gobbling up other companies that are like companies. So there's a lot, there's some billionaires here in the twin cities that are the Pohlads and Cargills and all these people that are like, you know, that's what their families do, but it's all privately owned, which is significantly different than what you're doing. And I think there's. What I find that very unique about your situation is that you're kind of playing in the same space as those guys or companies versus a lot of the entrepreneurs who just do the ESOP and their small company just continues to Chug along. So can you do, does that Kinda make sense? Is that in the context and then how your guys' purpose and mission I think is so unique. So can you explain what the ultimate goal is and how that your, how your structure is different than some of those other family offices or holding companies?

Daniel Goldstein: Sure. And just one thing, I don't want to take any of the credit for that almost doubling in asset size and I played a minor role 20 years ago and so I don't want to take care of that.

Ryan Tansom: Well, I think, you know, and I wasn't trying to give you all the credit for that either is I think the reason I brought that up, I think Daniel's, you know, when you have so much money, it's all about deploying the money, which is what family offices do and these holding companies, right? They're deploying money and investing and purchasing assets, which then in turn the labor is rented labor, kind of like you said, I think there's this whole different unique dynamic of wealth, wealth distribution and how that even though the same things are happening, what your model is doing is the ripple effect is significantly different.

Daniel Goldstein: Yeah. And so in looking at what we're doing, so the first thing is that we're not buying at a discount. Our models that we go out, we find privately held closely held or family owned businesses and we're going to pay fair market value. We're not going to pay a premium. We're not strategic buyer and the Department of Labor, uh, actually prohibits ESOPs from paying a premium, although there's some range within what you would consider fair market value value to premium. But in general, we're not buying discount. We're paying fair market value, but we're looking for the business owner that says, sure, I want fair market value for my ownership, but I really care what happens to my employees, to the community in which the company is based and to the continuation of the brand or the legacy. And so for that owner, we offer a very different a future.

Daniel Goldstein: So the first thing is that we're patient capital and we're not going to buy a company and put it back up for sale and the three to five to seven year time period that a private equity investor has to put a company up for sale again because they need to get the IRR to their investors. So again, yes, we sold the television station 62 years after he brought it on air. And you know, that's not flipping a company. Uh, so as we bring the company through this transition of ownership, our platform is a platform for professional ownership and growth. And what that means is that when a company is in need of transition, they could be transitioned to a private equity owner who again, at some point, it could be in the shorter term or medium term. The companies can't be up for sale. Again, it could be a longer term capital with a management buyout or even creating their own ESOP. But again, there's a lot of cost and complexity that goes into that. And what happens is, even if you have a good underlying a company with continuity with the management that runs that company, if that management has to then focus their attention on becoming the owners, then they're gonna take their eye off underlying business and that introduces operational risk into the business and as they try to take on the skill of being the owner, it introduces compliance risk into that area which is not their expertise. And so if a company goes through a transition of ownership and that underlying company with their continuity of management joins the Folience platform, they can just continue on what they know best, which is profitably operating and growing that business and then Folience is going to take care of the distraction of all that ownership. And then they're going to bring in the shared services, which is going to supplement the management of the company.

Daniel Goldstein: So for example, if, uh, when we brought in Lifeline Emergency Vehicles, they really know how to make great ambulances. They don't need to be the experts on human resources, information, technology, audits, compliance, legal insurance, health benefits, et cetera. That's where Folience shared services team comes in and partners with them to help them become very proficient at that part of the business while they just focus on what they know best, making the ambulances and selling the ambulances and that's where there's a different structure and then of course we're huge proponents of employee ownership, so at the same time that we're doing all those, that transition takes closely held ownership and distributes across the employee-base of the company. Which again, great capitalism, great American Dream and there's a lot of research that shows that ESOPs do have a competitive advantage over other forms of companies, partly because of the tax structure and also largely because of that motivation that that factor that employees have direct line of sight that they are working for their own a company for their own ownership, for their own long-term financial benefit.

Ryan Tansom: Well, and so there's a couple of things there that I want to. I want to peel apart, too, which I think are super interesting because you know, you the model and this is where I was kind of alluding to where like the model of buying a company and then taking those shared services. So the platform business, whether it's a private equity or, or a holding company or a family office, they're all kind of trended there. It's all about leverage or resources. Right? So, but like what you, what you said, which is really interesting, Daniel, is that you're coming in there and you're taking the burden of ownership off because you're doing the backend administration and you know, ownership stuff, but they still become owners, right? So like they got the best sides of both worlds where like if a private equity firm goes in there by someone and then that key executive now is part owner than they are now concerned about the bottom line and squeezing the blood out of the turnip and instead of selling or managing the business. So they're like the, like you said, it's a total distraction, but they still get the benefits because of what your structure is.

Daniel Goldstein: Yeah. And profitability is first and foremost on everybody's mind, again, we're, we're, we're not a foundation or altruistic, whatever. If you don't have profitability, then nobody's going to do well. And so that, that is first and foremost on everybody's mind here. But I've had people ask, well, what do you Daniel personally make more money if you did this as a private equity investor? Sure, absolutely, but that's not the point. The point is that first of all, this is a long-term patient capital and you can't have long term patient capital if it's the ownership is held and just the hands of a small group or investor base that is interested in harvesting their return. And so again, I get people saying, well, what's your exit strategy? Well, besides the fact that any business needs to look at weathering economic volatility changes in technology and business cycles, etc., etc., we don't get into this with an exit strategy. We get into this with a growth and long-term patient capital holding strategy. And so we're leveraging our resources. We're able to leverage the shared services. We're able to leverage the fact that we own our own, a full service advertising agency, so any company that's going to join Folience gets to benefit from the fact that we have an in-house, a shared resource, which is to help them either rebrand or refresh their brand, work on their social media, their strategic marketing. Uh, they work with us on internal communication. So there's that. Then there are cohorts of people that work across business units. So for example, in the human resources area, there's a cohort of human resources professionals that are embedded in each of these business units and they work together and they can share best practice. They can solve problems that come up in any one business. And so typically in the lower mid-market level company, you may have one or two people that are working in HR, but they're an island. they don't have anyone that they can really work with within the company that understands the work that they're doing. In this case, that island gets to connect with the islands in all the other businesses that we have. It's not competitive. It's collaborative. They have a shared alignment that they're all working towards the same end, which is to be successful and grow the value of the overall, uh, ESOP. And so there's great incentive for them to work together on solving problems.

Ryan Tansom: Because they're getting it. They're investing their labor, which is like across multiple companies, too. and you know, one thing that you said that is, is very interesting and I think that ties in. I want to go back to when you were talking about how like when you're buying a company and the fair market value that you're paying and the legacy is like you're going in it not for an exit strategy. And I think what's very unique about the ESOP structure is because you have, and maybe you can expand on my basic explanation of this, but is because there is a built-in marketplace with your company, right? Because you know, you don't have, like you said, there's not concentrated in a couple people that have to liquidate at some point to their heirs or to someone. Where there's a built-in marketplace where people will divest of their shares individually. But the whole entity continues to grow because it's got an ongoing growing marketplace. Can you explain that? Maybe expand on that and how that's different than like a family officer at a holding company or a or a private equity firm?

Daniel Goldstein: Yeah, absolutely. So in my work on five continents with hundreds, thousands of different families, family offices there, there's one common theme statement that is universally accepted by all across time, across culture, that only four percent of family wealth makes it into the fourth generation. And that's because the first generation creates the wealth the second generation typically tries to hold onto or tries to grow the wealth and usually the third generation dissipates the wealth. And that can be through divorce spending, bad investment decisions, economic changes, business changes, all sorts of reasons, but it's also because if you think about the wealth as the family increases in population, so maybe there's a founding couple and the next generation they have two or three kids. The next generation, they each have two or three kids. That pyramid is growing exponentially. If capital isn't growing exponentially, then if those descendants are expecting to live off the same dividend, the math quickly gets to the point where, you know, it doesn't hold up.

Daniel Goldstein: Well, we don't have heirs in the sense that when somebody leaves an ESOP, their kids don't inherit anything. When, when you leave the ESOP, you get cashed out for the value that you've accrued and, and, and you're gone. And so that's where that internal marketplace of sorts happens. That there's no inheritance, there's no passing on of share or share value. Uh, when somebody leaves the company, they take the value that they've accrued and the company continues on without an increasing population. So they're the. That's part of the reason Why really ESOPs, in my opinion, are actually more patient capital than families because we don't have kids that we have to take care of.

Ryan Tansom: That sounds a lot easier, a lot less stressful, but, but I think, you know, there's a, there's something where, you know, and I don't know even how you would articulate or label it, but there's a lot of like, when do you want, what'd you call them? First generation ESOPs? Where the owner does it and then they eventually sell it to private equity or something like that and I think there's a lot of reasons that that gets forced in that situation versus you guys who have been around this long and so instead of having to pay, you know, having to take care of those kids, you guys have to accrue for the liabilities of that payout of your employees and maybe… because and that's where I'm assuming because of you have been around for so long, you've mastered the mathematics behind that because there was a little context and story is there was a very large and successful ESOP here that grew like crazy and it was actually in a– So some exposure that I'd had from our last family business in what happens is their executive team was just ridiculous. I think. I don't know what the numbers were like 30 to $60,000,000 that was going to have to be paid out to the executive team because there's a wave of retirees, so they literally had to sell to a private equity firm because that was the only way they're going to come up with that cash. So that's. Does that make sense? Because you, even though you're not taking care of kids, you've got a lot of, you know, a lot of stuff you've got to be paying attention to so you can live on for another 150 years. So how, how do you guys handle that?

Daniel Goldstein: Yeah. So two parts. The first part when you were talking about the national founder of ESOPs, so the, the, the initial ESOP when it comes from the founder is really a transformation from a family owned business to an ESOP, but with family control. And that's where governance is such a key point because oftentimes that initial transformation doesn't have a really full transformation to professional governance and so the family may have sold their ownership into an ESOP structure, but they still control the board and oftentimes actually hold that internal trustee position, which to me makes no sense. And so if you get beyond that and that's where Folience has been able to move from that family control to professional board and to fully professional partnerships. And so there's no longer any kind of nepotism. It's a meritocracy. We follow best practice. Our board is comprised of seven people and if you count the chairman of the board who had been CEO of the company as internal than it would be three internal, four external, um, if you count him as external because he's no longer really internal to the company, then it'd be five external, two internal.

Daniel Goldstein: And that's a far better ratio than when, when you have that first generation from founder family to first-generation ESOP, where it's often an internal board and internal trustee family still controls that, um, even though it's an ESOP structure. So that's the first part. The second part is that there are ESOPs that have been hugely successful and almost to their detriment and that sounds a little odd, but it's getting to the situation where you said that if you don't keep an eye on demographics, then if you have this aging within your population, especially of the executive team, then there's a disproportionate ratio of value which is held by this aging demographic that could all retire within a very short time period. And that's where everything becomes top heavy and not sustainable. And so successful ESOPs have to manage over the long-term their demographics and there are two reasons. One is so that you don't get top heavy and, and get the ratio wrong about where the concentration of value is within the ESOP. But the other one is quite frankly just ongoing sustainability. That comes from having good succession across the board of emerging leaders in the company because it's not just that that demographic will take a disproportionate amount of value out of the company. They'll also leave a gap in who's going to be leading the company going forward and so a good ESOP is going to manage both the demographics, but always look at succession. Who's going to be taking over key roles where are emerging leaders being identified and encouraged and grown and that's something that we take a very close look at a cross our ESOP for both those reasons. You don't want to get top heavy on the value and you want to make sure that if we're going to be around for another 130 years, that's by everybody having good succession plan. Having an emerging leaders, having a good a diversity of age of leadership across the businesses.

Ryan Tansom: It's so amazing because it's all this stuff that everybody should be doing, but no one actually does because they're all short sighted, but you're forced into doing all the right things and everybody is excited to do the right things. And just to clarify a point about the taking out the disproportionate amount of the value that's specifically as when that person retires, they, the ESOP has to pay out the shares, right? Because they cannot keep new, the, their shares invested in the company. It has to be a clean break, correct?

Daniel Goldstein: Okay. Yes. I know this gets a little bit into the weeds, but let me try getting again, without giving a lawyer answer, given I'm not a lawyer. Depending on how your plan is written, you either pay people out in a lump sum or over a multiple of years, some, uh, and there is a choice of when you leave, do you immediately go into whatever that payout status is or do you hold and you don't actually hold shares because you never hold shares, but do you hold that value and allow it to grow? Iit can go up or down depending on how the annual price goes and you can, once you start your payout, you can't stop it, but you can delay starting payout. And the only thing that forces you into the payout is then when you get to the mandatory, uh, again, I don't remember, I'm not an attorney on this, I'd have to go to my attorney or to imagine as it might be 70 and a half where you have to take the mandatory minimum distribution, but if you're below that age, you can delay going into payout status unless the plan dictates that you are mandatorily going to be paid out in a lump sum. There are other plans that actually segregate and can move the amount into cash, but um, so it depends on the individual plan.

Ryan Tansom: Well, so, but I think- what I think is so interesting is because it's like I was saying like it forces you into looking at the whole ecosystem and the whole entity together. right. And you, you said something earlier that — a meritocracy. And so my, one of my favorite people ever, Ray Dalio has got that all over in his book Principles but can, I don't know if that's where you were, you pulling from, but can you, can you give the listeners your definition of that and how that is impacting them, the big picture and kind of how that all ties together?

Daniel Goldstein: Sure. So in, in my experience of working with many different families, and again, again across many cultures and languages and continents, part of the reason why there is that three generations of shirtsleeves-to-shirtsleeves is because when you don't have meritocracy, when you don't have a professional best practice approach to governance and management, it can lead to ego and emotion being the ruling factors. And so some families have been extremely successful at mastering that and it's because they bring in professional a governance best practice standards. Many don't. And so I think that the reason why we're able to look at these things is because it's not my company. We all believe in stewardship and we're all employee-owners in this. We have a very good board. We have a professional external trustee and so were all challenging ourselves with great accountability and transparency to be making the best professional decisions and that means looking at those demographics, that means making sure that meritocracy, the good compensation guidelines are being brought into place that, uh, there are good audit procedures and business decisions being made. There's not a lot of the, the emotional, the ego, they're certainly not the entitlement that you can often see in family-owned businesses that this is our thing, so we're going to make a decision even if quite frankly, it's not the best decision for long-term. Now again, some families have been really successful at doing that and the family that owned and controlled our business did so into their fourth and fifth generation, which statistically is an outlier, given that four percent that makes sense of the fourth generation.

Ryan Tansom: What I think is so interesting, Daniel, because like now think about the cars. I don't know if you've seen Ray Dahlia, his TedTalk about his deal Principles, his book where they, he, he explains how to do this and even though he's not an ESOP and he runs the benefits the most because he owns the company, but when you think about the, again just the nature of the structure of the ESOP, if it not necessarily force it, but it immediately mechanically does this, where like, and so instead of like if you and I our operations and sales and we're sitting down having a conversation, instead of both of us going into survival mode of, okay, making sure we keep our jobs and we keep our pay because it's self survival. We're literally concerned about the whole instead of you and I, which therefore it forces you to not have an ego conversation. I mean it just, it's just very like a. The whole dynamics and the conversations have to be completely different than most than most companies.

Daniel Goldstein: They do. One thing that I will say though, Ryan, there's nothing mechanical about this and ESOPs that fail at this fail because it's not mechanical and so it actually takes considerable deliberate action because I like to say that the 'E' in ESOP, employee stock ownership plan, actually stands for engagement. And there is a lot of research that shows if you don't engage your employees, you lose the competitive advantage of ESOPs. And it takes a lot of work on culture and you know, people call that the soft skills. It's actually what determines whether or not you're successful in the long run. And so we have put a lot of time and effort into working with our employees to educate them and to empower them and engage them. And we came out with a program called the License to Act and every employee has an employee-owner card that says on the front Licensed to Act because as they're licensed to act as employee owners and on the back says, today I today I am the difference.

Daniel Goldstein: And The reason why is because every employee can make a difference. It's the employees of the front line who are working in production. They see where there's waste or how we can better allocate a better, uh, organize our production flow, the ones working with the customers, see how we can make a better experience for our customers. It's not going to come from me. It's not going to come from my leadership team and any business, whether they're an ESOP or not an ESOP, if they worked to engage their employees, they could actually get that same advantage. It's just that most companies, even if they're not family owned, they don't work to that level of engaging employees. And it's the difference between enabling– not enabling, creating an environment in which employees can be much more productive or spending a lot of time with supervisory top-down micromanagement which has been proven to not be successful.

Ryan Tansom: Well, and, and as people who actually care and you want them to be happy and then it trickles into how they interact with everybody. And I got to tell you a funny story. Daniel. I, uh, I got a friend that he owns a very successful recruiting company here in town. He was one of his recruiters was placing a very high level IT executive at a very large ESOP. He's sitting there talking to the two, you know, I dunno, it was like mid-level management at this multibillion dollar holding company. And they're like, well, like, so if we just use this person for three months, uh, you know, and we just pay per hour. And then we. So they essentially found out that if they kept using this person for a certain amount of months, then they wouldn't have to pay the recruiting fee. And he was like, why is it that big of a deal to pay the 25 grand? And lo and behold, he goes, oh, they're an ESOP. So I'm sitting down in front of owners or negotiating down to the cent with me as a vendor because they literally benefited from finding every single nuanced way to save money.

Daniel Goldstein: And, and it's good when people are looking at how to really utilize resources. But it's also. So for example, the best approach to hiring people is that you're not hiring an employee, you're really looking to see whether or not this person is interested in becoming a co-owner in Folience and then the best ESOPs aren't just hiring employees, they're bringing in new co-owners and when you look at it that way it changes how you recruit, how you onboard and then how you keep that employee owner engaged to really be a good steward of the company. And so it's also short sighted. We believe that you have to build really good partnerships with external, uh, what, what would be called by other service providers we call partners, because in the long run you're going to make money by having great partners to really pay in the long run if you're just trying to nickel and time and chisel somebody to being a low-cost provider of services.

Ryan Tansom: I would agree with that wholeheartedly. I think he was just a funny example, but yeah, it's, you're in the people business. Honestly, I, that's like, you have to be all around and you know, if we were to kind of flip this switch for a second and circling back to one of the things that you said at the beginning, which is that you guys pay fair market value. So I want to kind of dive into that because I think it's very interesting and I, I also actually did not know that you're not allowed to pay a premium and I think that there's an interesting explanation you can give to the listeners on this. But if I'm an owner and I think, you know, like for example selling to you would be so much different than creating my own ESOP. Right? So there is, there would be created my own ESOP, I could sell to a private equity firm, I could sell to my internal man. I mean there's like a huge fan of options that are available. Well, what, what is, what I find interesting is that, you know, because the things that matter to owners and entrepreneurs like, okay, I can get max dollar but I'm gonna have to gut my company, leverage the company because I'm going to have to sell to private equity and we're gonna flip it, right. There's a lot of ramifications to that rep, that avenue and I might get what, 20 percent more or something like that versus okay, I'm going to sell to my internal team and then it's going to be a little bit less money, it's going to take a lot longer and we're not… So maybe kind of dive into like that why you pay fair market value, why are not allowed to pay a premium and how selling to you in that whole story about, you know, in united talked, I think it was Cammie, right? Who, what the ramifications are for the community and stuff. So maybe start with the whole purchasing and how that all, how that all works because it's super interesting.

Daniel Goldstein: Yeah, so, uh, the fair market value in the prohibited transaction for premium, I think that comes from…. There are advantages that come to the ESOP structure because of tax and the IRS wants to be sure that people aren't abusing that. And so, you know, the extreme example would be that if I have my own company and I'm going to sell it to the employees through an ESOP structure, if, if I give it a valuation which is unrealistic and I'm benefiting greatly and I'm saddling the employees with a huge amount of debt that they may not be able to get out of. And so the prohibited transaction comes in that the department of labor, the IRS, wants to make really sure that you are purchasing something for its fair market value. You're not overpaying for it because if you do, then probably it's not going to be sustainable. It's not to be successful. And really what you've done is you've taken advantage of tax law to get too much money to the seller. And so that that's where the fair market value, uh, issue comes in.

Ryan Tansom: Sorry to interrupt. Does that also apply, Daniel? That makes a ton of sense when you're an owner who's just kind of throwing the debt on the employees and kind of you're walking away into the sunset, but how about like when you're an ESOP and you're acquiring other companies because of that does. There's a lot of gray area, I'm assuming, but especially when we're in that fair market value, but you can technically probably overpay a little bit because you're not paying taxes on that debt that you're potentially acquiring. Right? So you could technically outbid someone if it was a competitive nature, couldn't could you not?

Daniel Goldstein: Well, and there are some ways… there's something called a 1042 exchange where you get a tax advantage as the seller and so you could actually outbid somebody by underpaid because the seller would actually net more from that and that. That gets a little bit into the weeds as well. Again, it's a matter of…. So a strategic buyer, think of somebody that makes widgets. Well, if they have another company that makes widgets and so they're just buying it to buy the distribution or client list or some talent or some machinery or something. Or maybe they're putting together a couple of which, uh, companies into platform deal and so they feel that they can pay a premium on that because by putting them all together, they're going to get more value out of that. That's where it becomes a little bit grayer. So, and even in that case, there'd probably be some ESOP valuation firms and attorneys out there that say, well, in that case was not a premium because you're actually getting the value out of the deal, but… They're, there just are some situations where somebody's going to come in and they're going to say hi, I see more value out of those, so I'm going to pay more for it. The prime example would be when we sold our television station, the ESOP valuation that goes comes through very rigorous valuation methodologies. The buyer paid us two times what our valuation was. Now I think that it would be very difficult for us as an ESOP had we gone out and offered a two times the value of a television for a television station or any company, probably our trustee and their valuation firm would would have a very hard time justifying that value. But on the other hand, if it's not a strategic buyer, again, we're not buying at a discount, so it's not that somebody's an owner says, well, I could get 20 percent more elsewhere.

Daniel Goldstein: If they could get 20 percent more, most sellers would look to get that 20 percent more. If it were talking about two percent more then do you really want to get that two percent more when again, you have no assurances that that the company is going to continue on with the same employees in the same community. Then there might be some differential, but we're not talking about a 20 percent difference. That goes to your question about the community. So for example, when Folience brought Lifeline Emergency vehicles into Folience, the community in which the company resides and has been there for it, had been there for 32 years. It's a fairly small rural community in 2000-2200 population at most. 180 employees in the company. If somebody else bought that business and moved it out of the community, the community would seriously suffer property values, tax bases, people needing to commute a very long time to get to other jobs to continue to support their families. And so it was a great alignment for the owner, for the employees, for the community that Folience came in and makes this long-term investment to continue operating the business in that community.

Ryan Tansom: Well, and it's. So here's the thing that I find the most intriguing about it, Daniel, is that if you're the owner, and this is where like I would, I know you said the difference between two and 20 percent, but you know, let's say I don't even know what the company is worth, but let's say it's 20 million bucks and you could potentially get another $4,000,000 by selling it to a private equity firm that's literally going to gut it and move it. All this like, I dunno man, there's a lot of people that said, okay, there's only so much incremental value that I'm gonna get out of that 4 million bucks and I'm going to have like literally two or three thousand people that hate me. Not going to be proud about what I did in everything you just work for is going to be destroyed, but you can get literally fair market value and everything stays the same, which I don't know where else could you get fair market value and have someone keep everything as is? I don't even know if that's possible because even if you sold it to another strategic competitor… every, like there's gotta be a way that someone harnesses the value out of the company and most of the time is by changing things. Unless there's internal management, which then therefore it's usually long and it's not fair market value. So I just. There's like a whole unique structure of what you got going on that they can check a lot of the boxes that you can't really do any anywhere else.

Daniel Goldstein: And, and the one thing that really supports that Ryan, is that when Lifeline Emergency Vehicles, a joint fall, land's not a single job, was lost. We don't buy companies and carve out a third, consolidated the back office and received the savings that way. As a matter of fact, there've been net gains have already. The company has shown growth and they're hiring more people so it keeps the employees employed. It keeps the company in the community and it already shows growth. And that's really what Folience looking to do. We're not buying broken companies and turning them around. we don't feel we're the right environment for taking that risk. We're not buying companies that don't have management continuity because that is really just another form of turnaround. We're looking for successful companies that for any number of reasons, need a transition of ownership. The owner is aging out. The owners wants to take some chips off the table that they were considering doing their own ESOP and this is a better way of getting that same end-goal of transforming to employee ownership. But we're looking for successful companies that are going to be even more successful going through their transition by being in our platform and being supported by our shared services and uh, the employee owners not only get ownership in that company but a little bit like a diversified mutual funds that they also have ownership in all the other companies that are within Folience because it's all consolidated into one stock.

Ryan Tansom: And what I find is so crazy, too, is, and I don't know, and, I know there's too many probably, 'it depends' ways to answer this, but um, let's take the forklift driver because I was a great, great person where, you know, they're probably making 15 to 20 bucks an hour and you know, without going into a ton of the weeds, it's almost physically impossible for them to save for retirement. I mean, with the, with the way that you know, their living expenses and etc. So that would probably save in five grand a year and a ROTH or something like that. Versus like, do you have any kind of ranges of like how different that person's outcome is working in a situation of an ESOP or like yourself versus literally working for FedEX or something like that?

Daniel Goldstein: Absolutely. So this was not a setup. You didn't know this, but something that we're really proud of is that. Let me start with a little bit of a story. So I was talking with somebody who was bringing a construction company ESOP and I asked about their 401(k) and they said, oh, we don't have a 401(k) why not? While they're construction workers, they wouldn't contribute as it. Oh no, no, no, no. So we are very proud that through our education of our employee base, we have a 93 percent contribution rate across manufacturing workers, office workers, 93 percent that contribute to our 401(k) and even better, we recently were told through are a third-party administrator that administers our 401(k) that we have 60 percent of our employees that are on track to retire with 70 percent income replacement going into retirement.

Ryan Tansom: Holy buckets.

Daniel Goldstein: And I have no problem just telling the world that that is what you can do with education, engaging employees, making sure that you have the right programs out there. Now any company could do that, but there is a certain advantage that I think the ESOP has also because part of contributing to that income replacement is what they're earning through their labor in equity value in the company and that gives an added advantage and so I know that Folience employee-owners are going to on average and actually in much greater numbers have a much better future and retirement than a lot of people working in other companies because of those numbers.

Ryan Tansom: Those are crazy numbers like and I don't even know what the general…. And I think a lot of people see it all over on all the different publications, but. So you have a 93 employee contribution rate. Most people are probably sitting at what, 10 to 20? And then you had 60 percent of employees on the way to 70 percent income replacement. It's probably six across the whole us. I mean like you're probably really get throws. You could probably eliminate your zeroes and that would be the average.

Daniel Goldstein: And I, I don't know the numbers, [Ryan interjects: but I know they're really horrible]. And there are a lot of companies that don't even have 401(k) is much less. Not only do we have the 401(k), we have a 401(k) with a match and it's just, it's a better deal and this is the capitalism. These people are working hard and they do work hard and they're providing for their future, for their retirement. They're going to have a better life when they finish having long careers of working. They get to enjoy that retirement.

Ryan Tansom: So with that, uh, so with that 401(k) then… and we don't have to go into this for the lack of time that we've got right now, but. So they're, they're getting additional benefits from the stock that the own of Folience, right? So, I mean it's the 401(k) that they're doing plus the growth and the shares that they have owned based on their labor and their salaries, correct? So it's kind of a combo approach?

Daniel Goldstein: Yeah. So, uh, they, they get their total compensation and there is no discounting total compensation. The compensation is competitive to non-ESOP companies in addition to all their total compensation. That includes their health and benefits and wellness credits and all that. The 401(k), because they're participating, they get a match to the 401(k) and they then earn not paying for it, just earn by working here their additional stock in the company that comes through the ESOP program. And so by the time they get to retirement, they've had their total compensation, they get their 401(k), they get their accrued match to the 401(k) and they get their accrued equity value in ESOP stock as well.

Ryan Tansom: Yeah, homerun.

Daniel Goldstein: Honestly, I would say any person that's out there looking for a job, look for ESOP companies. You're going to get a better deal. You're going to be an employee-owner and it's not just for Folience, any ESOP, go out and look for that. Just, it's a better deal.

Ryan Tansom: So Daniel, this has been an absolute blast. If there's…. Because we've talked about a lot of stuff, is there anything that you want to reiterate that we chatted about or something that we might have skipped over? What would you want to leave the listeners with?

Daniel Goldstein: Just that employee ownership is the way that you can invest your labor to earn ownership value in a company. Why wouldn't you look at that?

Ryan Tansom: And then how about from an owner's perspective that's looking at all their different options to what to do with their business?

Daniel Goldstein: That if you really care about what you've grown and the people that have helped you grow that, then look at if you need to transition ownership, there are different ways to go about it, but look at transitioning that into employee ownership. And I'm a big proponent of employee ownership. I participate in the national conferences. I just joined the board of trustees of the ESOP Association Foundation. I'm always happy to share a little bit of my time to help others understand and evaluate how they can journey into employee ownership.

Ryan Tansom: So they wanted to reach out to you, what would be the best contact way?

Daniel Goldstein: My email is Daniel at Folience dot com Folience is f as in frank, o l i e n c e and also take a look at our website which is falling on stock.

Ryan Tansom: And if you're planning on selling Daniel a billboard or paid ads, he is not going to pay to play.

Daniel Goldstein: I don't, but I'm happy to help others find out what is their best way and it doesn't have to have anything to do with benefiting Folience. I'm just a big believer in employee ownership.

Ryan Tansom: Daniel, thank you so much for coming on the show. I had a lot of fun.

Daniel Goldstein: Thank you Ryan. I have to and thanks for spreading the word and I think you're doing a great thing, uh, with, with these podcasts.

Ryan Tansom: I appreciate it very much.

Takeaways

Ryan Tansom: I hope you enjoyed that episode and I hope you enjoyed seeing the differences of what an ESOP could be like compared to a private equity compared to family offices compared to literally like how to make money, how to literally engineer your exit to accomplish the goals of your employees. How to make your company last, how to make the money that you deserve and how to keep a lot of the stuff the way you want it because there's a vision that's progressing and evolving as you transition out of it. I just think that one of the biggest takeaways you have to have as a listener and if you're an owner, that you're sitting there going, what are my options?

I just… you have to pay attention and go dive in to what it is like to potentially sell to an ESOP. It's too ridiculously advantageous from the numbers, the tax savings and saving your culture and it just checks so many boxes that I really suggest and I really encourage you to go do some research and to really understand this is a viable option for you. We have a ton of information on this particular situation on our website in GEXP. Under the ultimate guides. There's an ultimate guide to your best internal exit options and there's a big section on ESOPs and there's a bunch of other podcasts about it and one of our preferred partners does a bunch of free analysis on this and a bunch of intro one on one conversation, so if you're interested in that, reach out to me, reach out to the website in, just do some homework because it's totally worth your time. If you enjoyed the episode, go onto itunes, give me a rating. Otherwise I will see you next week.

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Written by Ryan Tansom

Ryan Tansom

Ryan runs industry-specific podcasts on his website which pertain to mergers and acquisitions, and all the life lessons he wish he had known then. He strives to bring this knowledge to his listeners in a way that is effective and engaging by providing new material each week from industry experts.

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