The Berman Buzz

EP12 - Underwriting the ESOP loan with Doug Dell from KeyBank


[0:11] Welcome back this is the ESOP guy we are on a journey to an ESOP so if you're just tuning in for today and your this is your first podcast welcome to the podcast. We're happy to have you here this is a resource that we've provided for folks that are thinking that they might want to use an employee stock ownership plan as part of their transition of their business it could be a succession planning tool could be their exit. There's a lot of ways to use ESOP so the podcast is really dedicated. And we call it the journey to an ESOP because it's dedicated to the very first steps that you go through all the way up to what I would call as the ESOP close there's a lot of things to talk about when it comes to Aesop's there's a lot of things, post ESOP that you can you can talk about so we just focus really primarily on that part of it. [0:56] If you have an interest in this podcast you can go to our website at journey to an ESOP.com you'll find. All the episodes this is we're actually in season 3 we're also doing this as YouTube as well so you can go and Google and YouTube ESOP guy and you will find, all the episodes for the videos that we've done so so we get to do a lot of different things you know with media so excited about today's topic as we get into it we're going to this is going to be called underwriting the ESOP loan. And the main question that we're looking to answer in this as, what happens at the ESOP closing what what's my liquidity event or in other words how many get my money out of this company and so, this is this is one of those topics that I would say is probably ranks up there as one of the most important topics is probably second to, hey what's the company worth on a purchase price. And so we wanted we want to do it justice and we want to give definitely the time that it needs and partly to what's fun about the the podcast is you get to do you get to talk to a lot of different folks, about esops and so being able to bring in experts at, the different topic topic is really one of the main drivers of value in this in this podcast so today's expert is Douglas Del are Doug Del with KeyBank he's out of Colorado, he heads up the ESOP advisory for the for the entire Bank Doug welcome to the podcast. [2:26] Thanks belts great catch up with you great now you got like Doug or Douglas I'm not sure that's always like okay great so, one of the things that we do on the podcast Doug just to kind of get rolling as we kind of use a lot of like movie topics as analogies or metaphors or or just really just to have fun with it, um so one of my first questions for you just really just to get started is of these three movies what would be your favorite this will tell us a lot about who you are Gladiator. [2:57] Braveheart or the entire Jason Bourne series so which of those would be what you would call your favorite. [3:04] And all good ones but that I had say Braveheart is probably in my top five of all time so yeah that's that's a stand-up for me it's just excellent when you characters great action, you know like I guess right now unfortunately it's almost timely with the Freedom Fighters and everything is going on in the world yeah, I like I that's probably my favorite too, and the thing I like about Braveheart its historical based is you know it's not all probably true of course not but but it's historically based but all those are great great action movies. [3:37] So with the Braveheart thing is you go into kind of like you a little bit and tells us a little bit about yourself tell us a little bit more about on the ESOP side like how did you get started in Aesop's and then obviously gravitate or migrate then to KeyBank being you know your current place that you're you're you're doing ESOP financing for. [3:57] Sure I start my career in banking so I work for 13 years in banking out of college. But then decided to be a sea of thought I joined one of my clients and it turns out that that client was an ESOP company. It was a minority of Visa smaller percentage but from that experience I got my taste of employee ownership and I learned how to work with trustees I did the valuation, projections At the trustees valuation service did I was even kind of the ESOP communication guy within the company is trying to build up the benefits and motivate people so. That was my first taste of I actually that company was actually sold which was a great event for for the employees. But I then was went to work for the the investment banking firm that was doing that company's annual valuation so it was especially the ESOP forearm and I've got a credit evaluation was doing that work and helping too, feasibility studies. [4:56] So you know that was where I really kind of got engaged in the ESOP Community went all the conferences and just learn what a close-knit community it is and how helpful people are in it and really what esops do for employees so, you know I've been a proponent of Aesop's ever since. Let's get this and get back into banking that was 17 years ago Key Bank called and banking was always in my blood so, I did that but I kept my ties to the ESOP community and I kept lending to the ESOP companies now that I had a balance sheet to lend with. And then over time over the 17 years kind of been became known as the ESOP value within KeyBank and so got a lot of calls from from our Bankers across the country and. Last year it just got to be where the calls were coming in hot and heavy and then I went to our Executives and said I think we have a line of business here and they said yeah go do it so now I'm working full-time helping, employees are helping companies convert to employee ownership sounds like you love it. [5:56] Idea I'm having a lot of fun that's awesome so that's something we have in common so I started as a banker. And then got into the I'm a CPA firm now my partner firm but now I do all evaluation feasibility work like you were doing but very interesting kind of. Background I think that helps you a lot when you're looking at transactions because. You know experienced out what this thing should look like so when people come to you and they say hey this is the deal I've got its got to give you a lot of good. Insight into evaluating the deal and seeing how the bank might want to go forward on it. Yeah you know really I've been kind of on three sides of the table so to speak you know from the company side evaluation side and then the banking side yeah. [6:40] I think that like a lot of people that are experienced in Aesop's they have a lot of the same stories they've done different things and they pull all that together and add a lot of value to to their clients so. [6:51] So KeyBank as we talk about Key Bank a little bit so people get a little bit more familiar with with your bank what so really two parts to the question. You know what markets is KeyBank serve and then within those markets how do you how do you really have helped the local Banker that works for KeyBank they may not be an expert like you are an ESOP. [7:12] And I'm going to show off yeah I think you may even have a chart to put up but you'll keep Bank aware, Super Regional Bank or the 13th largest bank in the country right now here's our here's our here's our map so everything's good so we're out we're headquartered in Cleveland Ohio and as you can see we're big in the midwest the hiyo Indiana Michigan, we actually acquired a bank probably actually 30 40 years ago, we were Society back we acquired Key Bank which was based in Albany New York so that had a great presence that you can see in New England they aren't true New York City. Then several years ago we purchased a bank called First Niagara which gave us that Pennsylvania area Okay so fill that in. But that KeyBank acquisition years ago also included the Pacific Northwest so wow you won't Bend Oregon and Washington and the biggest bank in Alaska I understand. And also where I'm located in the in the Rockies with Colorado Utah and Idaho. So when I look at that I kind of I kind of look it as the frost build especially with Alaska up there you ever get to go to Alaska. [8:23] Hi you know I am waiting for that call from the Alaskan Market president to say they have an ESOP up there and I will go in a second I love it, I love it maybe you can I go hunt. You know whatever moose or something like that but but that's pretty cool that's so when you guys have looks like pretty much when you have a red colored State here. [8:44] In a company's there that's a pretty good fit for you as far as doing an ESOP deals that yeah that's yeah that's we are you know will the Middle Market lenders and we still feel this important for us to be connected to our clients you know mid be in the communities where they are and where we are so most of our he stopped lending has done in those red States, we have a presence you know if it's say you know if it's a much larger company you know if it's on what we call a corporate size company with, Eva da call it of north of 20 million, we do have proper Bankers that I work with who aren't tied to the geography but instead they're more Specialists and Industry so yeah you know if there's a good enough big enough size ESOP company we can do it across country. [9:27] Yeah I think good. As they say in the second part of your question was how do I work with our local Bankers which is it's a great question so I'm I'm a product specials so I don't actually keep the loans in my portfolio they stay in the portfolio of the areas where the company is located which is great we always want to have that. Got local touch with our clients the local Bankers are the day-to-day contact so I'm here to provide, damn with the expertise and end with our clients with the expertise but. You will get deals two ways one is deals will come to us from advisors like yourself who have clients that are looking for a financing so if that happens I will contact the local market it will work the deal together, but if it's one of our own clients and relationship manager comes to me and says hey we have our client in in Cleveland that wants to go ESOP, I'll come in and help them through the decision and help them through the closing awesome. So I'm going to I'm going to pull off the screen now but I think that's real helpful for people to see you know where you are and just the idea behind how you how you work directly on your team so you're one person. The ESOP guy for KeyBank other issues you know in that like how do you like if there's a lot of things happening. [10:44] Yeah it's well hopefully we'll be growing because it's been successful but I do have a commercial analysts that reports to my team he's based in New York so we kind of have a couple of areas of company country covered there. You also really I hope to to have some business development folks regionally but we're just six months into this right now so we're up and running yeah so that's fairly new and I don't know like as far as what you're seeing like are you seeing a lot of trends, towards you know more and more deals because you've been like full-time six for the last six months. I will tell you kind of from my perspective I have seen a lot I've seen just a lot of people. [11:25] Coming it just is some of it's just I got a question about an ESOP you know and I'm not sure if I'm going to do it right now. Other ones are like hey I've been researching esops I'm ready to go so I'd say 20 22 for me that's been very active, probably one a week at least you know so what are you guys seeing. Yeah well you know I we started full-time at this in June of last year and we were extremely busy I think there was a lot of concern last year that the tax policies would be changing and people were accelerating their decisions to get out, I also think people will business owners were tired they just got through covid so for so really busy last year got a lot of closings done it hasn't let up especially in the inquiries yeah that's good I think the ESOP structure you know now that it's with some 40 years old yeah it's really come into its own and it's been professionalized and it's now more of a viable option that people know of. I think that's part of it part of it people are starting to get the word out and I think they're doing that all over the country so. [12:27] So I know like if you're not in the market then it's about 20 million Andy but of what's a range of the deal that you would do where you guys have blenders in the market. [12:37] Yeah so you know my I'm really in a middle Market practice of what we call a commercial banking so for us the. Hello it's kind of about a 5 million dollar deal and then you will go up to 100 million or more, KeyBank has a capability to lead a trance a syndicated transaction and we did several of those last year where you will bring in two three four Banks depending on the size of. Dll that allows having a number of banks allows. That customer to have plenty of what we call dry powder so when it comes to refinancing their seller debt down the road or Acquisitions you know having a good bank group for those large transactions is really important in so for sure, when you say 5 when you say 5 million you mean Enterprise Value. No that's that's that's the loan amount that we're looking at okay that's just a loan amount okay got it so but we're happy with with any client that wants to go to be employee-owned you know we believed in the concept and what it does for. The employees and the community so you know we're not so much tied to two minimums as is it the right fit for for this particular company but you know ESOP sir they're complicated and they can be expensive to install so you have to have some size to make them work so yeah we we kind of look at 3 million dollar even a size as being a. [14:00] Nice quality or a nice company qualify for an ESOP yeah. Three million dollars again that's the ibadah right it doesn't even yeah okay yeah so. When you're how do your Bankers going into that whole local Banker type of thing there are they pretty much approached by the, client are they actually bringing this up as an idea how do you guys work that out. Yeah you know what I've been doing is providing education to our 26 markets we have 26 states are Marcus that we're in so you know I'm meeting with our are Bankers just, give them some high-level education on what employee ownership is and how the structure works so as that takes hold we're seeing more and more of our clients from our own portfolios have an interest. [14:53] Yeah I mean that's awesome. [14:55] We also have a what we call a wealth advisory service or business advisory service that will work in partnership with that the talk about succession planning in general so you know maybe esops is not the right, white then you for a particular company you know maybe it's a third-party sale or search for the week that but you know what we want to do is just recommend the product that's right, situation that makes sense do you guys do on the wealth advisory do the 1042 transaction. [15:24] We we don't actually make a market in the replacement bonds these up ons okay we'll partner with I'll go ahead and say at UBS is a great partner twice there they'll provide the bonds, we will provide the the loan strategy behind those bonds to the kind of monetize that 10:42 so we do that and it makes it kind of seamless for our Commercial Banking clients will finance attraction the transaction then we'll also finance that 10:42 piece for the individual sellers that's great I didn't know I didn't know you do that UBS was actually on our podcast. With a while ago but it was it was interesting it was an interesting thing we went deep diving into the 1042 which is obviously not we're going to do today but. But it's really helpful to kind of know where that fits sometimes with what banks do and what they don't do so that's interesting that you guys do this. The financing part part of the 1042. [16:18] You know what thank you know the one thing I love about Aesop's of being a banker is were able to use the whole bank so we do arm use our balance sheet to do the commercial financing we use our our private bank to do the 1040 tooth and dancing but you know we're also advising on wealth management so we have highly qualified investment bankers best management Bankers who will helped up the sellers with the proceeds of the sale and manage their Newfound wealth. [16:44] Yeah and even the employees you know we again like to do business in the cities where we have branch locations because we can take care of the the ESOP companies employees in with an ESOP culture that's that's important, yeah yeah provide Financial education we can provide Financial Wellness tools budgeting tools and ultimately those employees they're going to have a rollover retirement fund that you know will be rolled over to an IRA so just pray business for the bank in general, some of them are going to be millionaires and we know that because that's happened so so having a mature yeah mature ESOP company go through that, some of these companies sell and then everybody gets a liquidity event and moves into the retirement account so it's I think that's a great structure to be able to help in all those different ways. [17:28] And so just going kind of through the ESOP process and you talked a little bit about in your own experience. What we do is we start with evaluation modeling and feasibility and then we kind of move a client through if those things check out we then we move them forward to kind of get to the next step and it's only if it really works those two pieces what I do normally is I kind of want to talk to the bank, earlier in the process in the reason I do that is because I'm really focused. In the in an ESOP transaction not not solely on just the transaction of course that needs to be done really well. But I'm focused on the overall sustainability of the company and part of that is the banking relationship needs to be a good relationship and. In some cases the clients not going to stay with the incumbent because they're not going to the bank is simply not going to be able to do ESOP financing. [18:22] So one of the things I like to do I do it early what are you think for yourself I mean you being doing this for so long is a the best part are the preferential stage that you guys would come in to really evaluate the transaction and also the financing piece of. Yeah but I mean if we can come and first introduced the idea to the client you so that's that's obviously you know the best thing for us because then. You know what we'll do is bring in a group of advisors you know including a folks like yourselves who do the feasibility study and the tax planning and so forth. But you know will bring an advisors that we know work well together and that we know will execute the transaction well make sure that that we're within department of labor standards so forth so you know if we can if we can hear these that I did our clients that's great and you know we hope that the relationship is strong enough well there use the use our services are Commercial Banking and but you know more often not with all the advisors across the country is just like you said Dave, Dave what their clients through the decision process they've been cited to go ESOP they've done a piece ability study you know hopefully that advisor knows KeyBank well enough to call us and say Hey you know we're putting together this cap structure. [19:35] What do you think and we're able to heal you can kind of insert some of our thinking into into the advisors work, yeah but they'll you know if it's somebody that we don't know a plan we don't know they'll bring that feasibility study to us maybe what we call a Sam a confidential information memo to get to understand the deal and we'll do our due diligence in produce a term sheet based on that and. You know there's a lot of negotiation that goes back and forth on that term sheet but when it when it works and they like us will move forward yeah for sure or you know you may not want to do the deal too I mean right might not fit into. What you're okay with so I don't know if that happens a lot but. Certainly it sounds like where you guys and this is just something I mean as an old Banker I was like talking a lot of my friends when I first started doing a lot of ESOP deals. [20:25] It was like you guys you guys are needing to be the advisors and tell people about the ESOP because if you don't somebody else is going to do it and then you're going to be stuck. Bidding on your own client and it's interesting I have a friend of mine who's a banker he called me his last week and he has. Same the same and I went to his whole bank and I made a presentation so they would understand esops but they still there now in the same position they're they're competing for their own client to keep the client and they could have been kind of worn the. In the advisor seat but they're really not so I think that's great that you're doing that and partly I think partly is just because you know your people will be their careers your Bankers will have better careers being more in the advisory roles opposed to, um you know differentiating yourself in that way so yeah. So when you're thinking about now looking at the deal and you're going through the underwriting part of it and what we mean by that is just you're getting your bank up to speed on the credit making sure that it's going to work what kind of structure you're going to put together. What's your normal process of doing underwriting what sort of things are you really focused in on when you're when you're underwriting specifically an ESOP deal. [21:35] Yeah well you know first all the underwriting is it's not dissimilar to any kind of Commercial Banking you know it's really what we're focusing on is what's the sustainable cash flow of this company more important than anything and, that's an ESOP says how strong is the management team you know if you've got an owner you're selling is he going to be staying with the company is there going to be a transition period do we have succession management you know it's I've always said it's management who pays us back it's not it's not assets or collateral so, that's the most important thing is this does this management team you know are they experience with that you know now, we're going to be a leverage company maybe we haven't had that before and you know that's a different management problem to be able to. To handle that so you know we want to really focus on management but other than that it's kind of standard Commercial Banking you know do we have their concentrations of clients that we need to understand what's the business model lesser competitive Advantage Tina what's the competition like. [22:44] You know those things that we're going to ask it in every type of a commercial deal, one thing that's important with the ESOP so as we don't want to over levers the company know they're going to be taking on on debt that's call it non-productive Dad it's not going to be producing revenue for them. So we want to make sure that this company still has. Enough dry powder that that we have lines of credit for working capital for them to operate it continue their growth do they need to do Capital expenditures human capital acquisitions, are they acquisitive so we want to understand the projections we want to understand what their strategies are going forward and in just make sure we we've got enough Capital to do everything they want to do without them just being focused on repaying the ESOP it. [23:27] For sure so go so going into the structure are you because because 100% ESOP deal. [23:37] Basically just means I sold 100 of my stock immediately that was the transaction versus a partially stop sale which is like I could sell some portion or percentage of my company less than 100% obviously if I sell a smaller amount. It's a little easier I'm not really over leveraging in a sense when you talk about over leveraging. What are some ways that you when you're looking at that because 100% deals pretty common and you know we all know that actually because the tax advantages are so good people yeah yeah. So so we're going to we're going to be facing the the difficulty of now we're ploughing a bunch of debt. On the company in form of senior debt which is what you do and seller notes. So how do you get like just in general comfortable with that much debt going on the balance sheet immediately after the transaction yeah yeah great question you know one of the things that you know a bank that's the ESOP Savvy will do is. Just understand that that seller debt portion of it that's really the down payment if you were thinking of a day by out you know that's that's the down payment that's the equity so that seller dad has to be structured so that it looks as much like Equity as it can. [24:55] So you know there's there's a there's four or five different attributes that will make sure are in place one it's its unsecured debt. It's also. There's what we call no rights or remedies so that the seller debt holder can't call it the fault in front of the bank or put the company in the bankruptcy. [25:15] We will allow interest payment on the debt, and we can talk more about that structure but there's no scheduled to principal payments on the debt, otherwise it would look too much like that and not Equity so it and the maturity of that seller debt is actually beyond the maturity of the senior debt to so those are how you structure that seller debt so that, you know our Regulators even say okay we understand that that's that's not over leverage that's that's the equity in the company so that's that's really important for a bank to understand, yeah then you know it's this is back to kind of basic commercial lending how much senior debt will you put on you know kind of a magic line for banks with some regulatory reasons is you know three times three times your ebitda is it's a real number so you can probably expect to be blow a door below three times for the senior debt and in that really depends on like we were saying before what kind of cash flow needs does this company have going forward, if you're too close to three you know they may not have the ability to go out and borrow for for their Capital expenditures or other things if you're a contractor and you don't have that visibility that may be a stable manufactured as to the Future three four five years down the road you're going to have a lesser amount of senior debt and pay it back quicker than you will maybe if you're that stable. [26:45] Yep yep what you hope is you know even in the case of a contractor with maybe Lester debt you pay that down quickly. [26:52] That allows us to come in and refinance that seller debt more quickly and in really deliver the transaction and get the bar get the solar disk cache. Yeah so you're and you're typically going to come in at well I'm going to ask you a question I kind of already know the answer but typically an amortization on that first tranche of debt. At what you know it all depends you know it, but kind of what we see most is a kind of a five-year commitment with either a 5 or a 7 year amortization so if you have a seven year amortization you'll have a little balloon payment identified and will refinance it at that point if we haven't already. [27:32] So that you know that kind of five-year term 7 year amortization is really common. You know you'll find some cases where there is some collateral that maybe others don't have it there are some real estate as collateral. That may allow us to go out and do 15-20 years, sure there's different circumstances but you know this is the company is a service company and you're landing on receivables you're going to have a shorter a ation then you know if there's equipment or long-term asset yeah some some kind of long-term asset to attach to and you haven't mentioned this but I will I was going to kind of throw into the mix you know again we're talking about as like as a bank I'm not, I don't want to take the I've still a bank I don't have the equity side up side of the transaction so I'm maxing out on my interest rate and my fees. So I need to appropriately structure the risk side so with with the five-year 27-year am schedule then the other. I guess mechanisms you guys would use as some kind of like debt recapture and so, talk about that a little bit in terms of formulaically is that pretty standard like this is always 50% of cash flow every year or how does that get decided. [28:47] Yeah it's some of it depends on the amortization that we're able to put together I myself if we have a 5 or 7 year amortization, I think that's plenty but you know for some reason we've gone out to a 10 year amortization. You know we will be might see that then we might say yeah let's have an excess cash flow recapture which essentially says hey there's some percentage of your cash flow over and above your debt service requirements. [29:12] And your Capital expenditures. That's free and then we want to capture some of that to repay the debt sooner so it's common personally I always think. Hey at the company is doing really well and there's excess cash flow I'd rather not be paid back I'd rather God that's true. If a company is not going well they're not going to have excess Castle anyway so you know I try to set that a ization that's comfortable for both the company and the bank and be happy with that, that's a good that's a good way to do it I think there's a sense of control that Banks might feel like they have when they have the debt recapture. Where they're they're able to go ahead and pay it down it's kind of this weird push-and-pull because they they want to get paid back but then they also want to re lend money to you know the client as long as everything's good you know so it says, you know this weird balance between the two things you know it actuality if you're a hundred percent. ESOP you know you're an S corporation you don't have to make distributions anymore for taxes you have this free cash flow that is available to repay your debt so. You know if you don't have other uses for it you know we often will see the client just pay down that debt as quickly as they can, again so they can refinance their seller debt that be done with the transaction yeah yeah I'm modeling one right now in typically because it's hard to know exactly after the five years we do the seller note model. [30:37] And. This company in this company we're going to accumulate a lot of cash and because we're only doing of the purchase price we're only doing a 20% senior debt know. [30:47] And there's just a lot of cash left over and so you know you can kind of like say well we either use that money to pay down the debt quicker. [30:55] To me that's that makes a lot of sense just so you have a lot of options that at some point getting to this you know getting through that so you can get to the seller know, and the goal here is for the company is we want to get the company as soon as we can to a debt-free situation because because this is a lot of ways like you had said it's not. [31:16] It's not created debt for Revenue it's created to change don't change out the ownership and so we Finance people it's like we just want to get through that phase. Accumulate then we can really accumulate while we are accumulating value for the shareholders the participants as we go because as soon as we pay down debt we are doing that but. Ultimately that we want that we want the value the be there for the participants you know and getting through that. So so complicated wise and this probably doesn't affect you guys as much but when you when you evaluate a transaction that has warrants attached to the seller note. Are your do you have any other concerns at that point because that's really past your your payment anyways yeah that's good question I. Wasting warns now more often than not attached to seller debts and I actually like them because you know the alternative is a higher interest rate on the seller debt and so that puts more pressure on the company. To be able to, that man is that cash flow so you know if you putting warrants on to the end of the transaction you know typically are seeing a very low interest rate on the seller debt which is good for the company. [32:25] And you know if those warrants are gaining value that means the company is growing in game value so everybody is winning yeah employees our wedding that the company's wedding the owner now is the selling owner is now participating in the growth of the company to so, you know I think I think they're great you know certainly you know I think the Department of Labor you know they have their issues with them that yeah they do for the health of the company I think that's the way to go. I had done this presentation to a bunch of bonding people a couple weeks ago and I asked a question in the middle of presentation I like how many of you guys like warrants. [33:01] And of course nobody raised their hand and I was kind of like like I get it right because because all they see is this big obligation coming down the road. And and I just said this kind of similar like look guys I get that that that's an obligation and it could be. Worth x amount but we know if it's going to be worth x amount then the company is doing well. It's right and secondly you're picking up the company has more cash flow in the beginning so they're building their rebuilding their balance sheet a lot faster with a lower interest payment to the seller, on the seller financing so you know so I'm trying to like get them come from bonding companies in my opinion are not yet to that point where they really get esops but they're being asked about them all the time that's why I got asked to talk to these guys so, I thought that was interesting, Bonnie Company still struggle with it just the balance sheet treatment of the ESOP so yeah it's perfect on that worth yeah they still struggle with that and, subordinated debt and like okay I guess I get it but it's still negative because we have seen your dad on there and unearned ESOP shares and. [34:05] Backed up to Warren see this selfishly as a banker you know there's another transaction for me I've been paid off from the original transaction. Now you know by six years later let's refinance those warrants it's it's in the best interest of the company to take care of them sooner rather than later because they're going to keep your own yeah. That's a great I didn't think about that like again you're you're in that position of you you know you want to do you want to do more business with the company but you are for the parameters are there so yeah you can get through all that debt and if it's worth more than you are at you already have the ibadah. Probably don't lend to so that's pretty interesting. [34:41] So getting into like you're like normal landscape when you talk about Banks you know I know in general banking is a very competitive industry we kind of all know that. [34:52] What are you seeing kind of you know in terms of esab deals do you feel like it's really super competitive and and then if it is like what are what are banks you know competing on when it get down to the is it interest rate fee structure, what do you seeing like when you win a Super competitive deal what do you guys got to do yeah it's it's an interesting landscape it's your thoughts are still kind of specialty dips lending so there's there's, you know not a lot of banks have but it's a growing number of banks so you know we all kind of know each other and we all can understand you know what with each Bank strengths are and so forth, but you know it's a strong group of Banks and competitions took place where. [35:35] Interest rates and origination fees of all kind of fallen into, normal range so you're right we don't see a lot of competition on price it's everybody's everybody's there it's what you mentioned at the outset how much debt how much gas can we get up front in the sale you know that's a big piece of negotiations what is that leverage level that allows the seller to be satisfied but yet doesn't, doesn't overlap with the company so that's that's the biggest piece you know there's also brought it up again Leverett the cash flow recapture. Is that a piece or is that not sure yeah what how much flexibility is there and is there a lot of commitment to the second tranche. In terms of hey we will do it in we feel good about it is there any kind of like. [36:26] Commitment or formulaic commitment like a guidance commitment to that second tranche. You know that that's always a topic that comes up because that seller wants some certainty that you know winter we refinance you know just because we're mindful of how The Regulators look at this and we really want that. [36:45] The ESOP seller debt to look like Equity when we go to Regulators so there's a balance there you know we will we will say hey. You know here's the leverage level that we're comfortable at so you know if your you started two and a half times and pay down to one and a half times you know let's take it back up to two and a half time so we give them some Road, road map of how you how you do this refinancing but, it's always hard to predict because hopefully that ibadah is growing and is growing quick and you know that increases the leverage that we can put on company and so we always want to do this quicker than the later yeah what kind of guy that's a good segue into the next question about you know we started off, in January in the market the everybody knows like stock market has a lot a lot of volatility, yeah all kinds of weird news you know you've got the you know of course the war and all that's happening over in Ukraine and then you've got. You know all the you know just the uncertainty related to interest rates with you know the FED I mean I guess it's more certain they're going to keep raising rates but. What do you kind of what's your what's your take on the economy going forward. You guys are you are you not as concerned about the volatility or are you thinking you know it's getting a little bit more like recession time. [38:04] Yeah I anticipated you might ask that so I and I did call up our Economist okay good to know one thing I found this interesting about this economy is you know from our ESOP clients, most of come back stronger from the covid break in 2020 than they were before I think there's a lot of pent-up demand and you know our companies have really benefited from that so you know our companies are in a strong place right now. [38:29] Yeah we know we are we are seeing interest-rate increases we expect that the FED is going to raise by 50 basis points, half percent in May yeah 50 basis points in June and maybe 25 after that so we've got you know what a quarter percent already baked into what everybody's expecting but. What I've noticed is that our clients you know over this inflationary period have been able to raise prices they've got pricing power and I think they have more confidence that as rates continue to rise they'll be able to. [39:04] Follow with price increases and maintain the profitability so you know I think, you know I think it's important for the FED to do this to get inflation under control but I think they're not going to break the economy you know if they do it in measured amounts yeah yeah I think it's yeah it's responsible and. [39:20] You know you can't let inflation go at the pace it's going because we're having we're going to have some major issues in this country so I think it's the responsible thing to do. Yeah our folks don't see a recession in 2022, but you know I noticed that chase just made an announcement yesterday where they're adding substantial amount to the reserves because of now uncertainties with the reward inflation so yeah you know you starting to hear the recession the recession rumbles yes you are so, you know I my plan in this ESOP thing podcast is definitely to do a little more work on. Recession proofing your business setting it's going to be an important topic just because we are hearing Rumblings if it's not in 2022 I think we need to know it's coming eventually there's no way that we can't have cycle in Corrections and that's just part of the way that economic Cycles work so, so we kind of have we're getting kind of that place where it kind of wanted to get to the end of this a little bit of course we I would love to talk all day I guess to sum everything up from your perspective thinking about a company that's listening to this podcast what would be advice you would want to give them just from the perspective and the expertise that you have as far as the ESOP process and going through what would be a good thing for them um so just kind of an anything in general that you think would be helpful for them yeah you know I think I have more of a global view as we said I've kind of said on different. [40:48] Sides of the table so for me it's you know the the the owner who is considering selling to an ESOP you know what's most important thing for him or her you know. [41:02] I don't think it should be that the tax breaks yeah I think you know what's important about. [41:09] Successful ESOP is that the company culture and the management and employees have all bought into just let this, just put a benefit it is to be employee-owned yeah no you're you're you're leaving a legacy for yourself you know that's important to many baby boomers who can already been successful they don't want to see their companies you know maybe be sold to private equity and then maybe dismantled or removed. They care about the communities they care about the fact that when. [41:42] When employees and management Reliance for employee ownership you're going to be a more profitable company you're going to grow, and you're providing a benefit now to the employees for the retirement plan but you're also going to see more growth in your warrants that we talked about ultimately. [41:57] Even though you may not get as much cash upfront with an ESOP as a third-party sale. With a tax benefits with those warrants you're probably going to come out better I think so yeah yeah given all of this. Benefit then to your employees into your community so you know to me that's what it's all about it's it's, you know let's make this this structure successful yeah I would I would basically summarize what you said but which was really good is it the best thing about an ESOP for me is if it's done right. Is that it's a win-win-win and you know you win as the selling shareholder the employees when the community wins I think your customers win. Everybody wins and ultimately you know you could be proud of that because I think a lot of times. It's not just about the money it's about something holistic so esops are very very unique in that they do. Help everybody and so that's one of things I that's why I do it that's why I'm an ESOP guy I love doing it so I think alike yeah so so wonderful so Doug thank you for your time today I was, really great having you on the on the podcast and look forward to Future discussions as we as we go on you know. So and I think your advice was very helpful for people my pleasure thanks so much for having me you're welcome so thank you guys for listening and we will see you on our next step on this journey to an ESOP.

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