#323: How ESOPs Work: The Transaction with Dave Diehl and Steve Storkan

Ep.#9 [THEME FIVE]

Today we’re kicking off a new four-part miniseries on ESOPs to support Employee Ownership Month.

Why are we spending four episodes diving into ESOPs?

After over 400 Intentional Growth™ training sessions with entrepreneurs, ESOPs have repeatedly been a hot topic people are hungry for more in-depth details about. We end up answering the same questions over and over (which we love!), so we wanted to capture the answers to the most frequently asked questions around ESOPs–with the right experts–in a fun miniseries that can act as an ESOP 101 and 201 for all the people who want to know more.

In this ESOP miniseries, Ryan has a co-host, Steve Storkan, the executive director of The Employee Ownership Exchange Network (EOX). EOX is a national organization that works to expand employee ownership across the U.S. by creating and supporting a network of non-profit state centers for employee ownership.

Today Ryan and Steve interview Dave Diehl, the CEO of Prairie Capital Advisors, about the ins and outs of the transaction and what it takes to turn into an ESOP.

This episode lays the groundwork for the next three episodes. Dave covers how ESOPs are valued, the process of selling to an ESOP, the unique tax breaks and how they work, the deal structure, when and how the seller (owner) gets their money, the role of the trustee, and how employees can begin to earn equity in the company they work for.

Our goal in this episode is to give you the foundation–and context–you need to level up your understanding on how ESOPs work, what it’s like to run a company once it is an ESOP, and introduce the different topics we’ll be diving into in the next few weeks.

Enjoy!

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What You Will Learn

The typical criteria needed to make sense for a business to become an ESOP.
What the process looks like–and which advisors are needed–to sell your company to an ESOP.
Why the seller gives the first offer in the negotiation process (usually this is the opposite when selling to a third party).
Typical ways an ESOP sale is structured (cash up front, seller’s note, warrants, etc.)
Why the crown jewel to an ESOP is to also be an S-Corp.
Why the company doesn’t pay federal or state income taxes when it turns into an ESOP.
The similarities of an ESOP to a 401(k).
The role of a trustee in the transaction and how to spot a good or bad one.
Why you get to interview and pick the trustee.
The characteristics and attributes of a strong ESOP.
How a business owner should start with an ESOP.
The business owners get to interview their buyer (the trustee).
What a warrant is and why it is similar to the “second bite of the apple” strategy many people talk about when selling to a private equity firm.
The employees are not equity holders of the company, the ESOP trust is, and how employees get their shares of the company.
Why Steve and Dave are so passionate about ESOPs.
The role ESOPs are playing in helping reduce inequality and the growing wage gap.

// USE YOUR FINANCIALS TO CLARIFY A PATH TOWARDS A MORE VALUABLE BUSINESS: Intentional Growth Financial Assessment

Bio:

Steve Storkan:

As executive director of the Employee Ownership Expansion Network (EOeX) (www.eoex.org), it is Steve’s job to implement the mission of the EOeX of significantly expanding employee ownership through establishing and supporting independent non-profit State Centers for Employee Ownership. It is the goal of the EOX to have 70 percent of the U.S. population living in a state that has a state center by 2025, which they hope will create one million or more new employee owners.

Dave Diehl:

David Diehl joined Prairie Capital Advisors in 1999 and is a shareholder in the firm. He is also a member of Prairie’s board of directors. Dave provides closely-held businesses with a complete understanding of the best available options for their ownership transition needs. He expertly executes mergers and acquisitions (M&A), management buyouts (MBOs), employee stock ownership plans (ESOPs), estate planning, and other corporate finance transactions. Dave serves as a trusted advisor to a diverse range of clients nationwide delivering highly strategic consultation.

With extensive end-to-end management experience and a focus on his clients’ success, Dave helps ensure an exceptional ownership transition experience. Dave is also a CFA charter holder and is on the board of directors of a company that manufactures plastic parts. In addition, he is a frequent speaker in forums around the country on topics including ownership transition, valuation, capital management, and the sale of businesses. Dave is also a past chair of the Advisory Committee on Valuation with The ESOP Association.

Interview Quotes:

11:50 - “I do feel like there is a movement. We talk about the employee/owenership movement and I’m hoping the time is right. The opportunity is here.” - Steve

12:26 - “When you give people equity in the company in which they work, you can’t help but better their lives.” - Steve

18:46 - “When he was able to see what they could do, and he let go and gave them the reins, the changes that they made were incremental but they all just love what they do.” - Steve

24:00 - “Don’t let the noise get in the way of what’s real.” - Steve

29:12 - “And ESOP effectively is a tax-advantaged, management buyout that has certain areas that are sponsored by the government.” - Dave

29:22 - “What an ESOP does is, an owner will sell stock into a trust that every employee (who meets the requirements) is a beneficial owner within that trust.” - Dave

29:51 - “In the greatest case, if it’s an 100% ESOP owned company and it is an S-corporation, there are no taxes paid.” - Dave

31:00 - “This helps to spread the wealth more broadly.” - Dave

38:52 - “I think there is some connection between payroll and the value of the company.” - Steve

56:18 - “The crown jewel to an ESOP is to be a 100% ESOP owned company that is an S-coroporation.” - Dave