229: The Magic and Benefits of an ESOP and What it Can Do For Your Business with Patti Plough

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Dave Lukas Chats with Patti Plough

229: The Magic and Benefits of an ESOP and What it Can Do For Your Business with Patti Plough

This week’s Misfit Entrepreneur is Patti Plough. Patti is a serial entrepreneur and the President and CEO of Excel Legacy Group. The company works in conjunction with leaders in the ESOP advisory industry. They specialize in tailored solutions to help their clients achieve their ESOP goals. Their unique approach focuses on the goals and strategic priorities of each selling shareholder in addition to the creation of an employee-owned business.

For those of you that are not familiar with an ESOP. It is an employee stock ownership plan. The plan gives workers stock in the company as part of their compensation and they get to share in the benefits of being an owner in the company.

There are a lot of benefits to both the employees and owners of a business and this is one subject that I think every entrepreneur should know about and Patti is the go-to expert in the space.

https://ExcelLegacyGroup.com/

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Show Notes

Patti’s background is in nursing and she spent the first 15 years of her career as a bedside nurse before becoming an entrepreneur. She then had what she calls a “divine appointment.” She was contacted by the company she was working for to do an insurance screening on a VIP for a big railroad. When she got there, the gentleman asked her if the company did wellness programs. She checked into it and her company did not.

She had to find a wellness company and found the one and only around. She contacted them and found out the owner had just lost his only client to budget cuts. She decided to partner with them and bring the service to VIP. From there, she kept going and built the company into a multi-million business in the corporate wellness space and after many years, turned the company into an ESOP.

She created other businesses along the way using the same attitude and persistence.

At the 8 min mark, Patti tells the story of how they went from potentially selling their business to private equity to choosing to do an ESOP.

Patti’s biggest concern was what would happen to her employees if they sold.
Patti and her partners would come out favorably in a transaction, but there was uncertainty about the fate of the employees.
While meeting with a financial professional to discuss the transaction, the concept of the ESOP was brought up and discussed.
It was like a light bulb went off.

Take us through the entire concept of ESOP and the benefits to the employees and owners in choosing this route…

The benefits to the employees including them keeping their jobs, ownership in the company, etc.
The benefits to the owners are that they can get fair market value for the company.
ESOP is like a retirement program for the employees, but they are now owners and get shares. They can cash those shares in after a vesting period.
The employee can retire and cash in their shares.
The owners can still be active in the business.
As the company grows the value of the shares grow.
It also gives the ability for tax deferral as it functions like a 401k type plan.
The ESOP is free to employees and as the shares accumulate in value and that is the retirement fund.
Owners realize the value by the company buying the shareholders out over time.
There is benefit to selling 100% of the shares as it allows the company to become a tax free entity, like a 501c3
The savings in corporate taxes helps produce enough revenue to pay the owners out over time.
Leveraged ESOP allow owners to sell their shares over time to the corporation over a period of time (typically 5-10 years)

At the 21 min mark, Patti talks more about the tax side of things.

Other things we should know? Any risks?

There is an opportunity to get a second bite at the apple and sell shares twice.
The reason Patti is so passionate about the ESOP is that she feels there is no risks and only benefits to the program.
It is important to make sure you systems and process are well honed in and the company is not dependent on the president or CEO. It helps valuation.

Talk to us about how you roll out an ESOP to an organization…

First, you do a very high level valuation.
Then, take time to discuss and understand the structure possibilities and vesting schedules.
Decide how the owners will get paid for their shares
Decide how you will do payout while keeping the company healthy.
Make sure the employees can benefit in the best way possible.
You will them select a trustee and do financial due diligence and valuation. This is typically done behind the scenes and worked through before announcing anything to employees.
You will then finalize with the trustee to agree on a number an finalize the ESOP.
Lastly, you announce, rollout to employees, and celebrate!

What have you learned about how to build a great business?

It’s the people that see your vision, believe in your vision and help you to build and grow that vision.
The credit goes to them.
You have to operationalize and do all those things, but your business will only be as good as the people you have in it. Take care of them.

Advice for someone starting out today in a new business?

Do NOT give up. Never, ever give up. It took 15 years for Helix to grow and become what it is today.
Never give up on your vision and dream.
Push forward.
Passion and persistence. Things don’t typically happen as quickly as you anticipate.

Best Quote

What have you learned about how to build a great business?
It’s the people that see your vision, believe in your vision and help you to build and grow that vision.

Always listen to your first witness, follow your gut.

Surround yourself with people that are more success than yourself and learn from them. True mentors.

Passion and persistence. Stay committed to your dream. Do not give up.

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