#324: How ESOPs Work: Trustees, Governance, Legal Structure, Employee Vesting, and More with Neil Brozen and David Solomon

Ep.10 [THEME FIVE]

In part two of our four-part ESOP series, we dive deep into the mechanical and legal relationship between you (the owner), the ESOP trust, the trustee, and the employees.

We cover the role of a trustee in depth as well as more technical nuances about the legal structure of the trust, how the trust is managed, and when and how employees get their shares.

In part one of this episode, Neil Brozen, a trustee who has been responsible for more than 300 ESOP transactions since 2005, talks about the role a trustee plays in an ESOP during the transaction as well as the ongoing management after the deal is done. Neil explains how the business owner gets to interview and select the trustee (the buyer) and what it’s like to negotiate the purchase of the business from the perspective of the trustee. Neil then shares the trustee’s involvement–and control–on an ongoing basis (which is much less involved than most people think), what rights the employees have, and why the company doesn’t turn into a “consensus-based” business after becoming an ESOP.

In part two, we have David Solomon, a corporate M&A and ESOP attorney, who has been working in the ESOP space for many years. David walks us through the technical and legal journey a business owner goes through in order to set up an ESOP, such as what goes into the legal document of the trust, how company stock is allocated to employees, the ongoing involvement of advisors to manage the ESOP trust, and the one very important differentiator between an ESOP sale and an M&A sale.

This episode is a deeper technical dive into ESOPs and answers questions many business owners have like, “who am I selling my company to and what will they do with my company?”; “what are the real benefits to my employees if I sell to an ESOP?”; and “what is it like to lead and what control do I have as a CEO after the transaction?”

// WATCH THE INTERVIEW ON YOUTUBE: Intentional Growth™ Podcast

What You Will Learn

Part 1

The role of a trustee during the transaction in an ESOP.
Why the trustee is the buyer that represents the ESOP and future employee shareholders.
The engagement between a trustee and seller (business owner).
What the process is like to pick a trustee.
Who makes up the board of advisors in an ESOP and how they are chosen.
The ongoing involvement of the trustee after the transaction.
How decisions get made on the board.
What happens if management and the board and the trustee don't agree.
What authority–and rights–employees have when a company is an ESOP.
Why a trustee is needed even though they have a fairly passive role.
What happens if a company that is an ESOP becomes stagnant and whose job it is to step up and fix the problems.
What happens if an out-of-the-blue offer comes and someone wants to buy the ESOP.

Part 2

Role of legal counsel on both the buy and sell side of an ESOP transaction
The similarities of managing an ESOP and managing a company benefit plan
How the employees get their shares of the ESOP (cliff vs gradual) and the flexibility you have depending on your industry and type of work force.
How employees get shares if they don’t have to use any of their own money
When and how employees get their equity when they leave
The correlation between annual compensation and vesting
What a repurchase liability is
Role of ERISA, the DOL, and legal counsel on an ongoing basis
The facts - and myths - around ESOPs “needing to sell” because they have too many people that need to be bought out.
Why it’s a good idea to work with a business lawyer that understands business financials.
The difference between a business lawyer’s role on the buy side vs. the sale side.
The insides of the legal work and oversight of an ESOP trust.
What someone can expect in ongoing costs and time when managing an ESOP on an annual basis

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

Bio:

David Solomon:

Upon joining Levenfeld Pearlstein in 2009, David founded and currently serves as the head of the firm’s Employee Stock Ownership Plan (ESOP) practice, which serves clients who are involved in various types of transactions involving ESOPs. In addition to working on ESOP transactions and advising ESOP companies, he lectures frequently on ESOPs and has published articles in various publications about how ESOPs are an effective business succession strategy. David is also a member of the board of directors of two ESOP-owned companies and was a former member of the board of directors of the National Center For Employee Ownership (NCEO) and formerly served as the executive vice president of the Illinois Chapter of the ESOP Association.

Neil M. Brozen:

Neil co-founded Ventura with Mary Wertz in July of 2016 after providing ESOP trustee services for two institutional trustees from 2005 through April of 2016. The key to Neil’s success in providing ESOP trustee services is his dedication to providing outstanding service, his intentional and sincere building of relationships as well as his common-sense approach to problem solving. He has been a CPA since 1981.

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 EOeX 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.

Interview Quotes:

03:14 - “Everybody always talks about ESOPs being complicated and complex but, hopefully through Neil and David’s segments, you’ll realize that it’s really only building a good company that has good, healthy cash flow, good financials and strategies, and good governance.” - Ryan

12:00 - “[Being a trustee] essentially means I’m looking out on behalf of other people’s interests.” - Neil

12:38 - “ESOP companies get sold, just like any other business, for a lot of different reasons. And that is the second major category of transactions that we do. And transactions are essentially a limited term engagement with a specific purpose.” - Neil

20:34 - “In an ESOP transaction, the seller typically puts out the first offer.” - Neil

28:34 - “You’ve got a businessowner who hasn’t worked for anyone for a number of years and they fear a loss of control–which is absolutely not true, but that’s what they fear. And that might be why they have an internal trustee, because the internal trustee works for them.” - Steve

56:29 - “When you’re thinking of doing this journey called an ESOP, you’re not just selling your company, you’re also creating a new benefit plan for your employees.” - David

01:06:14 - “Most companies have a some sort of retirement plan… So that’s pretty common this day and age. And it could look like a 401(k) plan or a simple IRA. [It’s] some sort of employer funded retirement benefit is relatively normal these days.” - David

01:08:42 - “The ESOP is an acronym for Employee Stock Ownership Plan. The main investment in an ESOP is stock in the company and these companies are mostly (but not always) privately held businesses where you can’t go on the street corner and buy and sell the stock.” - David

01:10:41 - “The stock inside the ESOP is owned by the trust, not by the individual employees.” - David