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- [00:00]
Will Smith
You've probably heard of ESOPs but don't really understand how they work. You may know that they have something to do with employee ownership, which, if you're listening to this podcast because you want to be the owner of your business, may not be all that appealing. But I encourage you to keep an open mind. Today's guest, Chris Fredericks has built an ESOP Holdco Empowered Ventures has five operating companies, 300 employees and north of 120 million in revenue. In addition to the great story of how he got here, Chris provides an excellent Primer on what ESOPs Employee Stock Ownership plans actually are, and not only that, but why they could be a model searchers explore. There are significant tax benefits, culture benefits if done well, and exit benefits. That is, if you already own a business, exiting to an ESOP that you create is a real option. In fact, it was how Chris was first exposed to ESOPs. The owner of the business that Chris would go on to lead wanted to exit, but he didn't want to sell to a strategic or private equity and there just weren't other viable buyers. An ESOP was the answer. The seller had his exit and liquidity event and the employees, including Chris, became owners. Chris was president and this ESOP business became so profitable that it served as the foundation for what is today a holdco with north of $120 million in revenue. There is a lot to model here. See if you agree. Here is Chris Fredericks, CEO and employee owner of Empowered Ventures. Buying a business that requires licenses to operate or is in a heavily regulated industry can be daunting, but for searchers with the right background, it can also be a great opportunity. Attorneys Bill Barlo and James David Williams return for an office hours today, Thursday, April 17th all about the legal questions related to this topic. They'll cover how licensing and regulatory issues are typically handled in deals and how to structure your offers. With that in mind. That is today, Thursday, April 17th at noon Eastern. Register at the link in today's show notes or on the acquiring minds homepage. Acquiringminds co. Also less than one month left before M&A Launchpad's spring show, M&A Launchpad is a one day event that brings together business buyers, owners and investors panels on the entire cycle of acquisition entrepreneurship from acquiring to growing to exiting and investing. Walker Deibel, author of Buy Then Build is one of the keynotes and 30 other experts will be on hand sharing their expertise. M and a LodgePad is a single day Saturday, May 3rd in Houston. Get a 200 discount off your ticket with the code Acquiring minds, go to malaunchpad.com and use the code acquiring minds all one word or use the link in the Show Notes. Welcome to Acquiring Minds, a podcast about buying businesses. My name is Will Smith. Acquiring an existing business is an awesome opportunity for many entrepreneurs and on this podcast I talk to the people who do it. The team at Aspen HR recently published a short white paper targeted at searchers Entitled A New CEO's Guide to Human Resources. It lays out the key items you should be thinking about as you transition into CEO and owner of the business you bought. The link to download it is in the Show Notes. Aspen is a professional employer organization, or peo, run by a searcher for searchers. Search fund veteran Mark Sinatra runs the company which provides HR compliance, flawless payroll, Fortune 500 caliber benefits and HR due diligence support for your acquisition, all for a fraction of the cost. Go to aspenhr.com or contact Mark directly@markspenhr.com Chris Fredericks welcome to Acquiring Minds.
- [04:37]
Chris Fredericks
Thanks for having me on, Will.
- [04:40]
Will Smith
I've been looking forward to our conversation here, Chris. It's going to be especially interesting and educational. You are the founder and CEO of Empowered Ventures, A Holdco and a Holdco structured as an ESOP or employee stock ownership plan. Now we hear about ESOPs in passing on Acquiring Minds, but I don't think I've ever deep dived on the topic, let alone an ESOP hold company. Let's get into it. Where does this story begin, Chris?
- [05:13]
Chris Fredericks
I mean I could, we could probably start in my childhood in a sense. I grew up in a family construction company. My dad and his seven siblings built and ran, you know, a regional successful construction, you know, firm. My dad was the commercial roofing, you know, leader. And I ended up, you know, working on roofs as part of that, you know, in high school and stuff. And I developed kind of an appreciation and understanding of entrepreneurialism and family business. And I think that influenced me in a lot of ways that I'm still, you know, uncovering now but ultimately led to, you know, an interest in being in small business and private companies and stuff.
- [05:58]
Will Smith
But it also, did it not also give you an insight into family business and perhaps, perhaps the complications there?
- [06:07]
Chris Fredericks
It did lots. There is all the typical stuff, you know, a lot of appreciation and love for and great memories of family business and definitely some of the common hardships. There are multiple brothers in the business. One brother was chosen over another brother at one point to lead the company. All this stuff and I learned a lot from that as well that, you know, I ended up choosing to kind of steer clear of going into the family business even though two of my brothers did and, or my two brothers did and many of my cousins ended up in the business as well. And I think that's awesome and great. I'm very proud of the company. But I'm glad that that wasn't my path for a variety of reasons. And yeah, so that's really where for me, you know, the story begins. I think one key insight that I realized with reflection eventually was I was really proud to work with these blue collar folks and I got this really deep sense of gratitude. These were folks that actually were proud to work for this company and the company did treat them really well as employees. For example, you know, during the Great Recession of 08 09, no one was laid off. And this is in a business that definitely had some challenges and eventually they actually provided 100% health care for all the employees. And this is a non union, you know, construction shop. So there was, they were, they were really ahead of their time. They cared about their people still do. So it's a business I'm proud of. I also kind of came out of that with a really conflicting sense of like I grew up pretty well off middle, upper middle class because of the effort of all these, you know, blue collar folks. And they were, you know, even though they were, had 100% healthcare covered and everything, they were typically, you know, kind of living to paycheck to paycheck. And I would say a little bit of guilt was there for me of like I'm, I'm really doing well because of the efforts of all these people and they're not maybe fully benefiting from the fruits of their labor. So I think that was a thread that eventually I uncovered that for sure has influenced how I think about things today.
- [08:16]
Will Smith
Great, great context, Chris. So instead of going into the family business, what path did you choose?
- [08:22]
Chris Fredericks
I just did the typical CPA accounting path. Initially went to IU Bloomington, got an accounting degree. That's what a career counselor said I should do because I had the personality of an accountant apparent. So I did it.
- [08:37]
Will Smith
Prove them wrong, Chris.
- [08:38]
Chris Fredericks
Yeah, right. It resonated when I went into my first accounting class. You know, the professor actually said 90 of you are going to hate this class. That means you shouldn't go into accounting. Ten of you are going to enjoy it. You're probably the accountants. And I, I did enjoy my first accounting class. So I ended, ended up in public accounting. I enjoyed it four years, good foundation for kind of you know, a career in my, in my opinion. But pretty quickly realized it's probably not the career I wanted to build. And I did start to get the itch of like entrepreneurialism. I, I even started looking at, you know, franchises, you know, could I buy a really small business? I was young, I had no idea what I was doing. This is, you know, mid early 2000s. So I just, there wasn't this community around ETA and stuff so I didn't find other people with that kind of mindset. So I ended up just taking a mid level accounting role in a small, a privately owned company that I thought would be a good, you know, step into the private, you know, the business world and get my hands dirty really.
- [09:43]
Will Smith
And this was tvf.
- [09:44]
Chris Fredericks
Tvf, a fabric distribution business based in Carmel, Indiana. Started in the 70s. And like I said it was. A recruiter just called me and said hey, I've got a role that you might be interested in. And I ended up taking it.
- [09:57]
Will Smith
Great. And sorry, this is what year?
- [10:02]
Chris Fredericks
So this would have been 2005.
- [10:04]
Will Smith
2005. So you were what, mid, early 20s still?
- [10:07]
Chris Fredericks
Yeah, I was probably 20. Yeah. Six. Yep, yep.
- [10:11]
Will Smith
Okay, great. Okay, well TVF is spoiler for the audience. Still a business that you are in. It was the foundation of the Holdco. So going back to 2005 here is, is, is relevant. So let start, start connecting the dots for us. What, what, what happens at tvf.
- [10:31]
Chris Fredericks
My career progressed really quickly at tvf so I was hired in this assistant controller, my boss, the controller of the company, he quit within a year. So pretty immediately they gave me the chance to just step into his shoes and work directly with the owner, which I hadn't been to that point in that first year. And I took, I kind of took that chance and ran with it. I just poured myself into the role, tried to improve everything I could in an accounting sense. I just like made the month end close as efficient and short as possible. I started providing insights to the owner into the numbers that maybe he hadn't wasn't seeing before. And I just really took a run at it, so to speak and it worked really well. So the business owner and founder, his name is Dick Hansel, he definitely started viewing me as, let's say a high potential person pretty quickly and started giving me even more interesting work to do special projects. He had a side business completely separate from the textile company that had grown to be over 100 million in revenue. A scrap metal division.
- [11:41]
Will Smith
Nice side business.
- [11:42]
Chris Fredericks
Yeah, side business. Right. And it, it was needing attention. Um, so it was, there was a founder of that kind of division and they needed support in terms of systems accounting, et cetera. So I stepped in and kind of shifted my attention to 100% to the scrap metal business for a good two year period to kind of solidify that a lot, a lot of stuff happened. Long story short, we ended up needing to divest that company. So in 2008 we, I worked with the founder to divest the scrap metal business. And then my. At that point he actually promoted me to CFO and I and we started talking TV of TVF. So now it's just TVF again. Yep.
- [12:30]
Will Smith
And Chris, $100 million scrap metal business. So was that larger in size than TVF or was TVF itself over 100.
- [12:38]
Chris Fredericks
Million at that point? It was probably about more than double TV in terms of revenue. Being a scrap metal company, it's a, it was a thin margin business. This was a lot of brokerage. Not, not as much, you know, a large physical operation other than some processing, but there was a lot of brokerage happening. So it was a thin margin, very large volume kind of business. Yeah.
- [13:00]
Will Smith
Okay, so TVF was 50ish million, but, but much higher margin.
- [13:05]
Chris Fredericks
Much. Yeah, less than that. Significantly less than that at that point.
- [13:07]
Will Smith
Significantly less than 50 million. Okay. And TVF is a textile business. What does TVF do exactly?
- [13:13]
Chris Fredericks
Yeah, TVF is an importer, distributor mostly of textiles and a converter. So they'll work with, you know, some US plants to kind of finish textiles. But the vast majority of the products that TVF sells are imported finished goods, rolls of fabric that go into dozens of industries. So anything from medical to performance apparel, tarp, like heavy duty tarp material for trucks and trailers, bag fabrics, all the nylons and polyesters that go into, you know, bags and gear, outdoor gear. So a very large variety of, of products and end. In end user industries that TVF is dealing in. And all the customers then are like small manufacturers of. Throughout the United States, essentially.
- [14:06]
Will Smith
Great. So these small manufacturers who are the producer of the end consumer product or consumer or. Yeah, end consumer product get their, their roles, their textiles, their roles, their raw rolls from, from you guys and you guys will have basically distributed them or added value to them in some way. Used with the word finishing, I think.
- [14:27]
Chris Fredericks
Converting and finishing and that's a chunk of the business at times. So. But a lot of it also is just bringing them in fully finished, ready to sell. And so it's, it's a, it's a pretty pure distribution type business in many ways.
- [14:39]
Will Smith
Okay, great, thank you. Carry on with the plot. So we're back at TVS has divested itself of the scrap metal business and you're back at TVF focused on that exclusively.
- [14:49]
Chris Fredericks
I'm at TVF and I've become promoted, I've been promoted, promoted to CFO at this point. And Dick Hansel's major project at that point, that was increasingly an issue and a concern was what, what is he going to do with the business? He was definitely getting up in age at that point, had some health issues, starting to come in, come into play, didn't have family in the business and he had a few failed attempts to kind of do an ownership type buyout or bring, you know, or management buyout and bring managers into the ownership structure. And those, those fell apart. So he was feeling really gun shy about what to do with the business. He, he did not want to sell it to the competition or strategic. He really didn't want to sell to a financial buyer, private equity or whatever. Just he didn't, he wanted this business that was his life's work to continue largely as is, but just didn't feel like he had a clear option. So he actually helped, asked me to help him figure out kind of his succession plan essentially. And we started exploring, you know, whether I could potentially, you know, be a buyer in the business. For a variety of reasons, it just, it wasn't going to pencil and work. I was, it was, I was green. I was 32, 33 years old at this point and I don't think I was really ready to take on something like that. I didn't have an, a group of investors that would back me. So we started looking at other options and kind of stumbled across esop. So our accounting firm was actually an ESOP accountant. ESOP owned accounting firm had an ESOP practice as well. So that was something they were always, you know, top of mind for them is to, to look for opportunities for companies to become ESOPs and they recommended it. And after investigating it, I, I learned a lot about it in a short period of time and was really excited about it as the potential solution for Dick and recommended it. And luckily he went, he went for that path. So for over about.
- [16:51]
Will Smith
Let me, let me stop you there, Chris. So give us the definition please of an ESOP and let's start there.
- [16:58]
Chris Fredericks
Great. So an ESOP is as you said, an employee stock ownership plan. It's actually a, an ERISA sponsored retirement plan, like very much like a 401k. It functions with almost all the same types of Rules and regulations. But it purchases the corporate stock, company stock, and holds it in a trust. And then the stock is allocated to all the employees over a period of time, slowly as a benefit to the employees. So essentially a separate trust is set up to purchase the stock from the business owner. And again, it just kind of sits in suspense. And then over time, a, a, a small percentage annually gets allocated to everyone's accounts.
- [17:48]
Will Smith
And those allocations are worth what? How does the do, do I as an employee in an ESOP actually see Cold hard cash?
- [17:57]
Chris Fredericks
Yeah, eventually once folks leave, so retire or leave the business, their account becomes available to them to be paid in cash. So the fund, the stock is purchased back from the employee at that point during the, the years where they are employees, they receive an annual statement that shows, you know, last year's total number of shares, the additional shares allocated that year, and then share price. And the share price is determined annually by an independent valuation firm. And that's typical kind of valuation work that goes into that. So DCFS and you know, comps to comparable, you know, businesses and things kind of all go together to determine the annual value of the company and then divided by total shares and it's a share price that shows up on the statement. So in ESOP world, you know, employees typically get very excited to hear about what's the new share price. You know, it's always a big reveal and a big, you know, hopefully a celebration when it goes up. But that's, you know, those statements then come out shortly after and they see, you know, how their account grows over time.
- [19:05]
Will Smith
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- [20:26]
Chris Fredericks
Absolutely.
- [20:26]
Will Smith
And the again, you can't. You as an employee in an ESOP cannot. And by the way, the language is ESOP owned company. Is that how you say it?
- [20:36]
Chris Fredericks
Or just any sort an ESOP or an ESOP employee owned company is going to. In the US especially the vast majority of employee owned companies are ESOPs. There are other forms of employee ownership like co ops and some other other things, but ESOP is the, the predominant player in the U.S. okay, great.
- [20:54]
Will Smith
So, so if I'm an employee in an ESOP and I see that my shares in the business are worth X, I can only monetize that at my exit of the company, either taking another job or retiring.
- [21:07]
Chris Fredericks
Yes. And to be clear, this is a benefit, not something they buy, which is sometimes a misconception. Even when people join our company, they're not required to put money in to purchase these shares. These are allocated as a, as their retirement benefit. Usually instead of a 401k match or you know, you know, a company sponsored, you know, 401k contribution.
- [21:30]
Will Smith
Ah, right, that I, that part I didn't realize. But we'll get there in a second. And, and so one thing to be really clear on, you just said it, this is a benefit. This is not some sort of, what's the word, altruistic, charity, socialisty thing.
- [21:51]
Chris Fredericks
Right.
- [21:52]
Will Smith
This is really a, of structuring a benefit for employees. Like you said, like you might, you might compare it to a 401k plan that is much more tightly directly tied to performance and value of the overall enterprise. And so I guess that begs the question again, keeping the 401k to the side for the minute. For a minute, why is this different than traditional Silicon Valley style direct stock ownership?
- [22:19]
Chris Fredericks
Yeah, different. Yeah, it's different in that it's usually it's more more widely shared. So in, you know, Silicon Valley type stock option plans, it's not always all the, you know, employees that are necessarily getting that, that opportunity. Sometimes it is. And really the difference, I would say is that the stock options are a fit when the intent is to significantly grow a business. And it's a bet on significant growth versus a real amount of value that's guaranteed essentially or you know, allocated over steadily over time. ESOPs are almost always a great fit for companies that have a long history of steady performance, are likely to continue to grow steadily into the future, but not necessarily a big bet on, on, you know, massive growth per se. And that's why it's almost like a barbell approach. It seems like in the way employee shares get allocated in the world, it's kind of the, you know, the venture style, high growth, high risk, you know, on the one end and then on the far end kind of a steady, you know, slow growth approach is a Good fit for ESOPs.
- [23:34]
Will Smith
Yeah. Which also notably maps to the styles of investment in these two categories. Venture capital, which is, you know, 20 bets, 19 go to zero or are singles and the one is the one that carries the fund. And then on the other end of the spectrum, private equity, our space which is investing in proven companies that are more steady and have already have inherent value that can be borrowed against for example to do an lbo. So, so this feels like a similar kind of two counterparts stock options on the, on the, on the risk on businesses versus ESOPs on the tried and true businesses.
- [24:14]
Chris Fredericks
That's a great way to put it.
- [24:16]
Will Smith
Great. The. Okay, now returning to the 401k bit. So the argument is also that the business will outperform the stock market because wouldn't I as a, as an employee considering participating or getting hired by any upper. I would have to say to myself, I think the value, basically I think the value of my share in the ESOP is going to be worth more than whatever a 401k invested in the S&P 500 is after my tenure at this business.
- [24:47]
Chris Fredericks
Yeah, it's a little bit of that. Yes. It's not just that. So a typical 401k benefit in most companies is, you know, I would say is probably in that 4 to 6% range. Company contribution, an ESOP is definitely going to be higher than that on average. So the average ESOP is probably in the 10 to 12% range and many ESOPs, including ours actually have a much higher benefit level than even the 10 to 12%.
- [25:19]
Will Smith
So and sorry Chris, what are, what is this percentage of the.
- [25:22]
Chris Fredericks
The benefit level? Right. So using the 400k as an example, it's 4 to 6% of salary is that let's say the annual contribution the company makes. Esop, the equivalent concept is a percentage of salary that essentially goes to comp. Gets allocated as company stock. And so it's the same benefit level percentage concept in both cases. And it's you know, double, triple or many multiples of the common. 4 to 6% is what's going to, what's going to be seen in most ESOP companies.
- [25:55]
Will Smith
So salary, my salary is 100 grand. In a traditional 401k style benefit plan, company contributes 5% $5,000 into my 401k versus an ESOP land. The convention, I'm going to press on that, but the convention is much more than 5%, 10% or above. So the end of a year I'm getting $10,000 or likely more of, of company stock.
- [26:22]
Chris Fredericks
Yeah. Yep. Or even if the stock performs equal to, let's say S P500, you're still coming out way ahead because you're starting with a higher, you know, just allocation of, of value. Yeah. Throughout the years.
- [26:37]
Will Smith
And so why is it so much more generous this, this benefit percentage in ESOP land?
- [26:43]
Chris Fredericks
Because. And it's, you know, because it is actually own the company. Well, because there's no other owners or, or the ESOP owns, you know, a portion of the company, a significant portion of the company. So in our case, you know, we have no investors, we have no owners other than the esop. So all the real equity value is ultimately going to funnel through this benefit and go to the employee owners as they, when they leave the company.
- [27:12]
Will Smith
Sorry, but I don't understand still why it's necessarily therefore higher the benefit at 10% or more a year versus 5% in 401k land. I miss that.
- [27:23]
Chris Fredericks
Yeah, it's so can trying to connect the dots. So in a 401k, there's, you know, the business owner, not the employees, not the esop, just a typical owner is going to decide how much of their budget they want to assign to this, this benefit. And then the profits of the company then ultimately go to the owner in whatever form, distributions, what salary, whatever. In an esop, the profits that are ultimately left over. So there is no cash benefit in an esop. So on an annual basis you're not receiving cash, you're receiving shares. So from an annual, on an annual basis, the cost of the benefit is actually zero on the income statement. The benefit itself is the equity of the company. So it's the, the value though annually of the number of shares you do receive in your account times the share price of that year typically is going to work out to be a much, much higher benefit than this 401k. It's just an entirely different value because it's really taken equity and spreading it out as an allocation over time.
- [28:33]
Will Smith
Yeah. Whereas in a 401k, that benefit value is being taken right from the profits of the company, which is essentially right from the pocket of the owners of the company. And it's sort of zero sum that in that way.
- [28:46]
Chris Fredericks
Correct.
- [28:47]
Will Smith
Okay, let's leave it there. We're Going to return to the topic and, and continue to unpack ESOPs later in the conversation. But just so, so tie this back now to the plot. What, what exact problem? We understand that your boss at the time, Dick Hansel, was having a heart figuring out his succession, having a hard time figuring out how to sell, how to, how to manufacture his own exit from this business in a way that he, you know, he wanted, didn't want to sell it to strategic, didn't want to sell to private equity. The ESOP provided the solution. How was it the solution? Spell that out. All the, all the, you know, what, what boxes was it checking there?
- [29:26]
Chris Fredericks
Yeah. Specific to Dick, there was really two big things. One is he, he wanted to have a sense that the, the current leadership and his current approach to kind of this business would have a, would essentially continue with some, some changes of course, but that, no, no, a buyer that he, he doesn't know isn't going to come in and kind of bring a new vision to the company. That was one big one. He just would have, he would have had a hard time finding an outside buyer that he could trust with, with his, you know, life's work. The other piece that's highly related and isn't, still isn't kind of in the realm of charity at all in Dick's mind is he wanted to have some amount of control going forward while any seller notes or you know, remaining consideration gets paid out. And with an ESOP sale, it's actually very easy to ensure that the selling owner maintains a level of control either for a while, a long time or however long, you know, makes sense for the business. And that's, that's something that is really easy to accomplish with esop. So that's why Dick actually in particular was very happy with that outcome.
- [30:43]
Will Smith
And what are the mechanics of him retaining control even post conversion to an.
- [30:48]
Chris Fredericks
ESOP he was able to negotiate with? So in an esop, there's a trustee that's hired to actually negotiate the sale with the business owner. So it's a true arms length transaction. And as part of that, Dick was able to negotiate a level of control in terms of a board seat. And if let's say any kind of default happens on his seller, note an ability to, to, you know, take take control of the board essentially. So just ways that he was able to kind of structure into the terms themselves that he's still ultimately going to have the say as long as he's owed any money from the sale.
- [31:32]
Will Smith
And just to be clear, you say it's arm's length. You hire a trustee but of course he's who, who represents the trust in in now the ESOP on the other side of the table but he's doing the hiring of that trustee.
- [31:43]
Chris Fredericks
That is the really weird part about ESOPs. When they get formed the business owner pays for everything in terms of the transaction costs on both sides and hire has to hire a trustee that then they have to negotiate with. So it can be an odd process to go through but there are trustees and there are evaluation advisor or M and A advisors that specialize in ESOPs and have built a lot of best practices around all of this that make it, you know, an efficient and effective process. But it is an odd, you know, process for a business owner to go through for sure.
- [32:18]
Will Smith
Another key feature of ESOPs that I think might be relevant here which you had explained to me in the pre call, the ESOP component of an esop isn't necessarily 100% of the of the equity of the stock. In fact you, you I guess when you set it up determine that is that relevant here because he retained, you know, he only converted 80% of the of the stock to an ESOP or something. Talk us through that.
- [32:42]
Chris Fredericks
Yeah, some ESOPs will do it in tranches. They may even start with a minority 30% sale, then over time do another tranche and then eventually get to 100. Some stay a minority for forever. ESOP percentage in our case we went straight to 100% with the sale and that was largely driven by Dick's desire to transition fairly quickly. So we, we did a 100% sale. It was funded with largely a seller note because we already had full. You utilized a working capital line of credit to the point that additional bank leverage probably wasn't going to be provide enough liquidity. So Dick was comfortable selling on with a a seller note on the transaction. And then you know, it took us 4 years to pay off this 8 year seller note and that's to that highlights something that I forgot to bring up earlier as far as why ESOPs can be a useful solution. We became a 100 owned S Corp ESOP and that means we became a 100 tax deferred entity as soon as this transaction happened. The business is became owned by a tax deferred retirement plan. So there's no need at that point going forward for us to do any sort of tax distributions that are related to corporate profits. So that additional, let's say 40% of cash flow from not paying taxes was provided funding to pay off the seller note really quickly.
- [34:24]
Will Smith
Over those four years, this preferential tax treatment of an esop. Let's return to that because that is a, a key benefit and one that I think offsets what will be perceived as a downside of ESOPs. So, so to be clear, where does the money come from to buy Dick out? He seller financed the whole thing. He seller financed the whole thing.
- [34:50]
Chris Fredericks
Correct.
- [34:50]
Will Smith
Over with an eight year amortized loan over eight years. So he was going to get his, his payout over eight years. And, but you all actually paid him down in four. And, and, and the reason was in this case because you had this new cash flow because you weren't paying taxes because you had this better tax treatment. So you had basically the business immediately became more profitable profits that paid Dick off faster down. Dick's selling out faster. Fascinating. Okay, and in general is, does it have to work like that? Because otherwise where does the cash, if I sell to my employees or to convert to an ESOP and effectively sell to the employees, where else would the cash come from if I'm not financing the whole thing?
- [35:35]
Chris Fredericks
Yeah, a business that doesn't have much debt at the time of an ESOP sale can find senior lenders that are happy to lend to ESOPs because the senior lenders that understand how ESOPs work also see this tax benefit as, you know, good for them. And further, even in the case of someone like, like in our situation, there are now there's a growing number of investors and even some private equity firms that will provide mezzanine level financing to ESOP transactions as a way to take out a chunk or all of the seller debt portion. So there are, there are liquidity, there's lenders essentially that do like ESOPs a lot and focus on the space that can participate in the initial transaction to create liquidity for sellers.
- [36:26]
Will Smith
Define mezzanine for the audience please.
- [36:29]
Chris Fredericks
Mezzanine meaning, you know, subordinated debt to senior. So yeah, great.
- [36:36]
Will Smith
And the, and, and so could you just walk us through a hypothetical of what you just described?
- [36:42]
Chris Fredericks
Yeah. So say a business has 2 million in cash flow and is valued at five times. So it's going to transact for 10 million to sell 100% to an ESOP. And let's say this business has no debt. Maybe it'd be pretty easy to find a senior lender if it's a solid business to do a two times, you know, amount of debt on that. So that's, let's say a four million dollar loan that could go to fund the actual transaction and be cash that funnels through to the Seller as part of the sale. And then a mezzanine lender might add another two times on that, so another 4 million of cash that could go to the seller and then maybe there's still a $2 million seller note sitting at the end of the transaction.
- [37:29]
Will Smith
Great, Very helpful. Thank you. Okay, this is fantastic, Chris. All right, so, so what year is it now when you convert to an ESOP?
- [37:37]
Chris Fredericks
2010.
- [37:38]
Will Smith
2010. Okay. Right here we are in 2025. So that was 15 years ago. We're not. And the story doesn't maybe accelerate until closer to now than in those early years. But, but do give us a little bit of the, of the story from, you know, in the, in the teens. I know there were some hard times and, and you were named CEO. Did we, did we?
- [38:03]
Chris Fredericks
Yes, we didn't mention that. Yeah. So as, as part of the transaction, I also became president of the company. Yeah. Which was exciting for me as 33 year old, you know, accountant. It was, it was really fun and exciting.
- [38:16]
Will Smith
Yeah. Great. So maybe give us a, give us a window into that time of TVF's life in your own.
- [38:23]
Chris Fredericks
Yeah. So from 2010 to 2020, let's say TVF was, that was the ESOP. Still, the ESOP owned TVF and the business was TVF. And we had a great, you know, decade mostly. There were some, some really challenging moments throughout, of course, but the business essentially doubled its revenue over that 10 year period and tripled its profitability. And that created some phenomenal outcomes, you know, in a number of ways, obviously strengthening the balance sheet and creating a lot of cash flow and assets for us to figure out what we wanted to do with eventually, which led ultimately to empowered ventures, but also just created really incredible outcomes for our employee owners. You can imagine that that level of growth translated into the share price was pretty phenomenal. And by the end of that 10 year period, folks were looking at ESOP account values that were, let's say, four times their annual compensation, which, wow, pretty, pretty incredible. Just that, that ten year period. And that also enabled a pretty significant culture shift to take place within tvf. It was always a business where people were proud to work there and worked really hard. It became a business where the pride of ownership, of employee ownership became just really high. The level of engagement, the belief in what we're doing, the belief in employee ownership, the culture shift was phenomenal and a lot of fun to be part of.
- [40:05]
Will Smith
Well, say, say more about that, Chris, because in theory, again, just traditional stock options or just holding equity in a business should do this have the same effect as you pointed out earlier. You know, two caveats to that would be in startup land, it's, it's basically people treat it as a lottery ticket. It's not really. I mean, it probably incentivizes some people, but these days it's. And it's almost expected. You go to a startup and it's like, well, how much equity am I getting? Or what are my stock options look like? And, but, but it's a lottery ticket. So the chances that are. Are worth something are far less than 50. 50. Frankly, I believe that's right. Somebody will correct me if I'm wrong first. Second, not everybody has equity and certainly in small businesses, usually just ownership and maybe management has equity. Not, not all the way down the hierarchy. So, so it, so, so I'm a little skeptical that equity can be the motivator that it is in theory. But it sounds like in the case of an esop, or at least the case of, in the case of TVF as esop, it worked beautifully. So ple. You've already said it, but maybe elaborate.
- [41:19]
Chris Fredericks
Yeah, and I think people should be skeptical about for the reason you're saying that just giving someone equity, even in ESOP changes the culture. There are many ESOP companies where the culture is not different than what it would be without the esop. And, and it's a common topic in ESOP kind of community that there are important levers to pull to make it real that just providing this benefit does not change and can actually be counterproductive in many ways if, if things aren't done, you know, other things aren't done to support this. So really it's things like, you know, embracing more democratic sharing of information, not democratic decision making, meaning we're not going to vote on everything. That's not a, a thing that most ESOPs do. But are we being more transparent? Are we involving everyone in a way in the direction of the company, giving them a real voice in the business? So some folks may have heard of Great Game of Business as a book. That's an example of a really powerful way to kind of bring voice to, you know, the employees. It's some, it's a, it's something that can be done even if you don't have an esop. But ESOP companies take this generally, ESOP companies that want to have a different, truly empowered sort of culture, they take this to a next level. And that's something we started early on, right away, we, we immediately started sharing information that we weren't sharing before. Things like financial literacy, business literacy becomes a topic in esops. We started educating on how the P L works. Like there's a journey of a dollar that we, we talk about. Like, okay, yeah, we, we bring a dollar in, but you know, half of it goes to the cost of goods that's out the door, you know, and then this much goes out for salaries and comp. And that's out the door and you just work it down and show everybody that we're doing great. But this tiny percentage is all that's left over. So what are we going to do to make that higher? So there's a lot of work that can be done to really make this real. But it takes time and it takes effort.
- [43:26]
Will Smith
And it sounds like it's very much related to information sharing, be that transparency or educ. Explicit education.
- [43:33]
Chris Fredericks
Absolutely. Yep.
- [43:36]
Will Smith
You know that one of the most common levers to pull in a target acquisition is technology updating the systems of a business that may still be running off a spreadsheet or even pen and paper. But tech is complicated with tons of solutions out there. So choosing the right cloud platform, CRM, telephony, compliance and cybersecurity, not to mention implementing all that is a job in itself. Acquiring minds Guest Nick Akers knows this firsthand. As a former searcher who now owns Enzo Technologies, Nick has seen the tech challenges searchers face when acquiring businesses. His team at Enzo regularly works with searchers and their acquisitions, offering a complimentary IT audit of the target company. Nick takes a personal interest in all their searcher clients. Drawing from his own experience in the search phase. Enzo dates back to 1989. So this is a company that has managed the tech for hundreds of small businesses over decades. And one last thing, no long term contracts with Inzo, a big differentiator. Check out inzotechnologies.com I N Z O or email Nick directly@nicknzotechnologies.com and don't forget to tell them you're a searcher now. Of course. All sounds good in theory. The reason? One of the key reasons there are probably many. But first that comes to mind in traditional organizations that there isn't that level of. Of sharing is Owner doesn't want employees to know that he's making a few million dollars a year that that would create resentment. Is that just something you live with in Aesop land? Or in fact, does president, for example, earn less? Is there. Is there also kind of. Is there a tighter band of salaries and earnings that occurs either expl. Or. Or organically?
- [45:41]
Chris Fredericks
Yeah, it's A great question. I think ESOPs writ large and true in our case, you know, the executives of the business, the leaders of the business are going to not make as much money as if they owned the company themselves. That's just true because it's this benefit truly is the equity that everybody is sharing in. But there are, there are ways that most ESOPs view the leadership of the company as needing to have upside that is equivalent to their role. So a lot of times professional studies are utilized to do compensation studies to identify what's a market compensation package for this size of a company for a CEO role. If someone were to go hire a CEO for their business, how would they, how would they target a compensation, you know, outcome for that person? It's very much the same approach. It could also be thought of as like public company light. So public companies, the CEOs, they don't own the majority of the business. They have some sort of upside if it's stock options or their synthetic stock plans that are utilized, sometimes where some amount of shares are synthetically, you know, given to an executive and then maybe vest over time as a way to create a cash compensation upside. So there's lots of ways to structure it, but executives are generally given upside to ensure that there's direct alignment between the esop, growing the ESOP value and the compensation of the executive.
- [47:19]
Will Smith
Great. And that sounds good, but just to, to tease out something you said at the top, that executive's not likely to earn as much as an owner because for the simple reason that an owner, let's say that's a single owner, owns 100% of the equity. So all of the value of the organization is on their balance sheet. That by very, very nature of an ESOP is not going to be the case here. So that enormous pop, the $8 million let's call it, or you know, that use, or the, excuse me, the eight year, whatever, whatever Dan's liquidity event was, would not happen.
- [47:57]
Chris Fredericks
Yeah. Exceptionally one way. Yeah, one way to think about it would be the difference between in the ETA world, you know, being the end being the person that buys 100 of a company versus the one that brings in a meaningful group of investors. If investors are going to be the 75 or 80 owner and you're going to be the, the person that leads the company and you have a much a smaller tranche with upside, it's going to be something more akin to that as an ESOP versus the other.
- [48:28]
Will Smith
Well, but independent sponsors under that kind of traditional private equity framework often do a lot better than an SBA owner who owns 100%.
- [48:36]
Chris Fredericks
So that's exactly okay.
- [48:39]
Will Smith
So levers to pull to make an ESOP a success. I'm sure there are many and people can do their homework but key among them would be trans transparency and education. So you great. So you really got buy in. The organization really understood people understood how the business worked and it really motivated them. So it did what it was supposed to do. In theory, in practice, fantastic. Anything Chris? This is not related to the esop. I don't think anything to say about your difficult moments. You've had some fetal position moments. Bit of an aside, but the hardship of small business is also a theme of this podcast. So I invite you to share anything if there if you think there's a story there.
- [49:26]
Chris Fredericks
Yeah, it's definitely not been an easy enough and just straight up, you know, outcome. For me personally, becoming the 33 year old leader of this, you know, 40, 40 year old business involved a lot of growth that I needed to go go through. In the first couple of years. For example, we, we really wanted to grow a new program and focus on a new industry and to do that we hired an outside executive that had experience in that industry. And I made a series, I would say of in hindsight, obvious mistakes that ended up being extremely stressful and for a couple years really was a setback for the company and for me, but ultimately extremely important learning, specifically, you know, hiring someone that's a good fit for the culture. I brought, I brought in someone to lead this new program that was a terrible fit for our culture and it brought tremendous stress to everyone that, you know, was trying to support that person and building this new program. And then I made the second mistake which was not trusting my intuition. As soon as I had a sense this was a terrible fit. I tried to make it work for another year and it just continued to deteriorate and truly drove me to therapy and to getting a business coach because I, I realized I was trying to manage all this on my own, that everything I felt like it was all on my shoulders and I wasn't as transparent as we were becoming. With some numbers and some things throughout the business, I wasn't sharing the responsibility. I was owning it too much almost and just learning over taking me a long time to open up and realize I have support. That was my first moment of like I have a board of directors that they're there to help me succeed. I have co workers that also are owners like I can support, I can trust them to help me figure this out. I don't have to figure it all out on my own. That was a brutal moment and truly one of those like, am I going to get through this? Can I, Am I capable of this? And I, I think about that often still today.
- [51:42]
Will Smith
And it was triggered by this bad.
- [51:45]
Chris Fredericks
Hire, just a bad hire, an executive who never should have been part of our company and then trying to make it work and not, not making the quick decision to just cut bait. That was the main, main issue with that. Yeah.
- [52:01]
Will Smith
Yeah. Well, the cliche higher, slow fire fast. You, you know that you can kind of in what the, what is meant by that cliche is that you can tell pretty quickly if somebody's not going to work. But I will say though that a new hire, particularly an executive hire, is, is we could abstract that and call it an investment. It's an investment that you've made. And it is hard in all life and business to know when to cut bait on a bad investment because sometimes investments take a while to turn around. Do you feel like you, you have learned something?
- [52:37]
Chris Fredericks
I think it's a great point. I mean the sunk cost issue is, is very much part of this. It ended up being a successful program for the company. Once we let that person go, we hired, we appointed someone from inside the company to continue to lead it. So it's not that it was ultimately a bad outcome even, but the learning for me was real. Like I, I agree there's no need to necessarily Monday morning quarterback and say I should have done it differently. I wasn't capable of doing it differently. So it was. But what would I do differently going forward? The values alignment wasn't there like how to treat people. We were trying to build a company where we treat each other with a high level of dignity and kindness while holding each other accountable to results. The person we brought in, frankly was not a person who treats other people with kindness and dignity. So as a culture, you know, learning about how to make sure you're not sacrificing any element of your culture for theoretical financial upside was the main lesson for me.
- [53:48]
Will Smith
Ah, great. And Chris, I actually the. Let's tie together some points there. The dignity, a word that I've heard you use a couple times use it in the pre call your the context that you gave for your whole career of being the child in a family of prosperous small business family where they're blue collar people doing the work, doing the actual service delivery and feeling some sort of tension with that. And then of course the esop in enabling in your case all of the all of your employees to, to benefit more fully financially from this enterprise. Tie it all together there, please.
- [54:35]
Chris Fredericks
I don't know when this started, but I've always had some sense of the importance of work in, in our lives. Right. I mean early on I had that sense of that maybe as part of the construction company family, you know, experience. But it seems to me that work is where a lot of people go to find some purpose and meaning. And we spend, that's a cliche, but we spend so much time at work. It's almost a tragedy to me that there are still so many people out there that dread their work experience. And dread, you know, can be on the one spectrum as, you know, as awful as child labor or you know, whatever in third world countries like versus just, you know, in, in a prosperous country like ours, you know, being able to go to work, haven't needing to go to work and it not going to be a job that has a lot of drudgery and your manager doesn't really care about you as a person. You know, there's just that sense of then on the positive side though, everyone I think has stories of like a manager or a boss. Not I'm not talking about employee ownership at all. Just in the world of work where it's like life changing almost to have a boss that treats you with that level of dignity and kindness and care for you. It's like all other than parents and teachers. It's the boss that's the third person that's referenced as like a mentor. Someone who really transformed my life. And as I, as I got a taste and a sense of the power of, of that in the workplace that became almost like. I don't know if addiction's too strong, but I love it when people in our company or in any company like they come alive at work because they feel like their voice matters and they're cared about and it enables thriving in the workplace that I'm just really passionate about.
- [56:34]
Will Smith
Of course being an ESOP is, is core to this. In your case, one might argue that you could set such a culture without actually having it be baked into the, into the capital stack.
- [56:48]
Chris Fredericks
Absolutely. I don't think you have to have an employee owned company to create. I mean there are many, many stories I think of, of businesses that have created, created phenomenal cultures without employee ownership at all. And it's largely in my, I believe based on these types of principles of how to think about people and dignity at work.
- [57:08]
Will Smith
Great Chris. Okay, so I think we're moving into kind of the, the second or final chapter, at least for today's conversation of the advent of the holdco. So I guess what take us up to 2020.
- [57:23]
Chris Fredericks
Yeah, so 2019 is we were really starting to think about what we wanted, where we wanted to go from here. The business had, had grown significantly. We had amassed a, a balance sheet that you know, was building assets, let's say, that would need to be invested and deployed. We had grown through acquisition a little bit at the text at tvf we had had accomplished a small add on of a competitor. That was a successful transaction and we, we had an appetite to keep growing. So we explored, you know, some options and ultimately the idea of a diversified Holdco kind of came to mind. You know, the, from Twitter.
- [58:05]
Will Smith
Not because it was cool.
- [58:06]
Chris Fredericks
No, it was a little too early for that. Yeah, I was excited to come across all the, yeah the Twitter and everything, you know, a few years later. Um, and it has been so helpful for me. But it was the cliche Berkshire Hathaway, you know, like, well that's a pretty cool kind of model and you know, came to mind and it's a textile company that became a Holdco. So.
- [58:30]
Will Smith
That's right, that's right.
- [58:31]
Chris Fredericks
For what it's worth. So yeah, I recommended it as a path to our board and, and our leadership team talked about it and we got excited about it. For me personally it was also exciting because my favorite experiences to that point were kind of the creation of the ESOP at the beginning like that, that process of bringing this as a solution for a business owner and for the employees. It was the most rewarding experience professionally for me. So repeating that became something I craved and also we thought it would be great for the business because not only are we going to invest and deploy these assets, our assets and grow them through this path, hopefully it would bring diversification which ESOPs. While I'm a huge fan of them, I do think one of the downsides can be a successful esop. You know, last many years and then maybe it gets to the end of a run, a nice run, some folks start retiring. Does the business falter or even run into a huge problem? And now all these folks who've banked their retirement on this ESOP account, it's concentrated and you know, I think I like the idea of diversified ESOP as a way to mitigate that.
- [59:51]
Will Smith
Yeah, very important point that, that it is, it's totally con. It's basically your entire benefit plan, your entire retirement plan is in, is basically stock in a single company in a Small fragile compared to public markets. Small fragile company at that.
- [60:10]
Chris Fredericks
Yep.
- [60:11]
Will Smith
You said your. It had been the most gratifying thing in your career. The, to make the ESOP at this point, your career, 2020, looking back. And you wanted to do that again. So. Meaning what a big strategic shift that was an enormous needle mover is what you mean, because you're not doing ESOP over again. You're. You're talking about doing a whole.
- [60:29]
Chris Fredericks
Right. What did you mean by bringing repeating ownership to companies? Yeah, so we launched, essentially launched as a Holdco at that point in 2020. And for me, the idea of finding additional companies where a business owner needs to sell and helping them bring employee ownership to their population. In our case, not by creating a new esop. In our case, it's their, their employees when we acquire a company, join our existing esop. But it's still an employee ownership outcome. And that's really the, the gratification for me is solving that employ that seller's need to sell and bringing employee ownership to their population.
- [61:08]
Will Smith
Gotcha. Okay, so this is fascinating, Chris. And I also think this is where I mean, this is just going to be really, for people who are a little bit further along in their journey, who are listening, a very interesting model. So TVF is an esop. You are sitting on a lot of assets. After a great decade run, you're figuring out what to do. You decide you need to kind of be. Become a capital allocator of those assets and realize that as as much stock appreciation as there's been or valuation appreciation as there's been a tvf, you need to diversify that to, to, to protect everybody's nest egg. So you decide to build a Hold Co. So TVF becomes the foundational opco of a holdco. Which by the way, as an aside to the, to the listener with the how cool and desirable Hold Cos are these days, it is putting the cart before the horse. Typically the way Hold Cos evolve is out of an OpCo. So there's a profitable operating company already. And then it's probably a similar trajectory to what you went through, Chris, where there's a profitable operating company and the decision is made what, what makes sense to do with all this cash that's coming home? Oh, let's do a Hold Co structure, diversify into other businesses. Therefore you create a Holdco one level higher. But so, so the holdco actually springs out of the foundational, very profitable opco and then that holdco entity then goes and buys the other opcos. Whereas on Twitter what it is, is I'm going to start a Holdco, an empty, an empty vessel and put opcos into it. Not to be too, too sarcastic with people, but I, I think it's important to keep in mind. Okay, so. And then, and then finally the, the ESOP move that you'd made in 2010 was so gratifying for you in that moment. You'd seen it work so well for another decade. I mean really a, A, a tested model here you, it, it wasn't just going to be a Holdco. It was going to be a Holdco where you acquire other businesses using the similar, a similar ESOP buyout of the seller that you had for tvf. And then all of those acquired employees become ESOP employees. And not in, not each of those OPCOs wasn't going to be its own ESOP. In fact, you made the Holdco itself an. I don't. Maybe you touched on that, but say more about that. I'm, I'm remembering this from the old, from the, from the pre.
- [63:53]
Chris Fredericks
Call. Yeah. So mechanically all we did was take this TVF ESOP trust which owns the shares, and we, we renamed it the Empowered Ventures ESOP Trust and we wedged a holding company above. Into the ownership structure above the opco, exactly as you suggested. So Empowered Ventures was a newly formed corporation wedged in between. And now any new companies that we buy or assets, we also have purchased some real estate, a little bit of real estate, you know, becomes a subsidiary of the Empowered Ventures holding company. And any of the companies that are underneath Empowered Ventures, the employees, all are just equal, not equal in percentage, but equal in terms of they are full. They have the full right of employee ownership in the holding company esop. When they come into the plan, to be specific, they will start accruing shares over time. So they start with zero and then every year they'll get an allocation. Everyone that's already been here for a long time has already built up shares. So that's how that, how that will work.
- [65:02]
Will Smith
Give us a picture of what is the E. What does the HOLD co look like today? How many OPCOs in it, how size to the extent you can share.
- [65:08]
Chris Fredericks
Yeah. So We've, we've acquired 4 more businesses over the. Since 2020. So now we're up to 5 total businesses. We, we're well above 100 million in total revenue. So we've grown the overall enterprise, let's say from 2010 to where we're at today. So the initial, you know, company TVF to where we're at Today we're, we're roughly four times you know, revenue from where we were back then. And we're around 300 people. So we're not, we're not huge by any means in terms of number of people. But yeah, we've added four companies. The first was a pre precision machine shop near Cleveland, Ohio called Firstar Precision. Great business, great kind of business owner that selected us for the right reasons and it's been a lot of fun. We've, we're, I would say we're still very much in this learning phase. You know, we're four or five years in. This is a long term thing for us. You know, I think the value creation that's going to come from these acquisitions is going to take place steadily over time. But we're, we love all the businesses we've acquired, mostly manufacturing and trades companies. Construction, that's our, that's really our focus. Even though diversification writ large is our goal, it's still within, let's say two pillars, manufacturing and B2B kind of industrials and then construction and trades is our comfort zone for now. But we're pretty pleased, you know, with the growth that we've achieved so far these first four or five years. But M and A is hard work. It's been quite a journey and a lot of learning for sure.
- [66:50]
Will Smith
And so just to revisit the size of the hold could today, 5 total businesses, over 100 million in revenue. Over 200 million in revenue.
- [66:58]
Chris Fredericks
No, no, we're, we're saying the 120, 150 million range, let's say at this point.
- [67:03]
Will Smith
Okay, great. And is TVF the largest of the businesses?
- [67:07]
Chris Fredericks
TF is still the largest of our companies, but it's, it's, we've made so much progress. It's not the, let's say the majority or it's, it's increasingly not the majority of our overall revenue.
- [67:19]
Will Smith
Yeah, coming down below toward and maybe below 50.
- [67:22]
Chris Fredericks
Below 50 soon. Yeah.
- [67:25]
Will Smith
And what of the, of the four other, of the four acquisitions, the four other OPCOs that you've acquired, what is the range of revenue sizes there and EBITDA sizes there?
- [67:37]
Chris Fredericks
Yeah, they fall within basically our target criteria that we, we generally are shooting for, you know, 2 million EBITDA up to 5, 6, 7 million EBITDA in our range. The first couple businesses that we acquired were more in the one to two, you know, kind of range. And then we've kind of moved upstream a little bit and that's intentional. So we're definitely excited to, you know, be Bringing on new companies that are 2, 3, 4 million versus below that. It's, that's been a shift in our, in our strategy over the last couple years. And then revenue, yeah revenue wise we're talking about businesses between 7 and 30 million, you know, pretty, pretty wide range.
- [68:24]
Will Smith
And this shift in your strategy to buy larger EBITDA businesses is that for the obvious discovery that larger is easier.
- [68:31]
Chris Fredericks
It's, it's not necessary easier in a certain sense. I mean all the businesses are great businesses that have common challenges for the size that we're talking about. But I think the main difference between buying a 1 million EBITDA company versus a 3 is when you, you the, the necessary investments are less of a burden on the financials. If you hire two key executives of a 3 million dollar EBITDA company, that's not the same percentage of your budget as a 1 million. So it's, it's really an ability to move a little faster and have less volatility ultimately and, and kind of the budget is m the main experience in our case. Even if we, we're still talking about businesses that when we, when they join us there's still, there's a lot of growth and foundation building that's going to need to take place for the business to be ready to get to the next level. We think think starting with a little bit heftier, you know, business is just a probably ultimately the better foundation for that.
- [69:39]
Will Smith
So can you kind of very brief version of the story of, of one of these acquisitions and how the whole ESOP and particularly how the ESOP element played and how employees took to, how the seller took to it. Walk us through another. Have you applying this framework that you, you so fell in love with outside of tvf.
- [70:02]
Chris Fredericks
Yeah. I'll tell the story of our third diversifying acquisition which is Banor Benor Plumbing, Heating and Air Conditioning. It's based in Burlington, Vermont area. And Bonor came on our radar kind of through a broker, but not they weren't fully on market let's say and the business owner really, really cared about what's, what would happen to the company, you know, after, after a transaction. And also common to pretty much all of our situations, he didn't have his succession planning fully figured out. And so we are, we have been in our increasingly, you know, continuously comfortable with working with a business owner over a period of time to help them navigate the actual succession process as long as they're willing to commit, you know, to a meaningful time frame. So we, we ended up talking with Benor Brad Bonor, the owner, former owner, and he loved our model, the employee ownership model, our partnership model through this succession planning process and also our, our hands off operating model. So we're, we, we view ourselves more as stewards of companies than operators. And that's how we build our playbook is how do we steward effectively. All these things really appealed to Brad. So, you know, almost about a year ago In April of 2024, we acquired Bono and the employees were not aware of what was happening. It's pretty common, you know, we don't, it's. We experience what a lot of buyers experience, which is no one knows what's going on yet. We went in and partner with, you know, supported Brad in making an announcement to the company on the day of the transaction. And we were met with. What's common for us is a lot of skepticism. It's not an immediate, oh yeah, you know, we're employee owned. It's, I have no idea what this actually means. It sounds too good to be true. You know, there's got to be a catch. That's the common, a lot of things, you know, skepticism. But what we've experienced and our, and part of our differentiation, we feel like as a buyer is the employees are more open minded about it. They're definitely like intrigued on average and they want to see it through and see what's going on. We've never had any key employees leave any of our companies in the first year, which has been a really nice, you know, maybe it's a little bit of luck, but we feel like the employee ownership piece has helped that a lot. Um, so what we typically do then is follow up that initial announcement with some information for them to read, share with their families, their spouse, kind of try to understand what's going on. A lot of them will go and check out our website and my podcast, which we might talk about later. But we try to help them kind of gather as much information as they can and gather their questions. And then we come back a few weeks later and we do a really in depth presentation. We call it a what's in it for me presentation. And we go into all the mechanics of what's going on, how this really works. We share a little bit about what's possible. Like we show like here's, here's how your account value could look over time if we all continue to make this successful. And it, if it hits certain targets and things like it's pretty eye popping numbers if someone stays for 10, 20 years. And that, that we find really helps People get a better understanding of what they're part of and, but ultimately it still takes time. Like they want to see that first statement which typically shouldn't take more than a year. They want to see it as a real number and it has a dollar sign in front of it. And two, three, four years in is when we find that people really settle in and say yeah, this is real and I'm really happy to be part of this.
- [74:09]
Will Smith
Thank you for that. Chris, your point about. Let's talk about the empowered ventures being a vessel, a steward of these hold cos and you don't get very involved operationally of course. Classic Warren Buffett. Lots of decentralization. But so much of the TVF success was about culture. Do you try to change the culture of these businesses and how, how so if you're not involved operationally or is that something that you basically pre screen for? You don't, you don't buy a business where you feel like there the culture needs a lot of work.
- [74:46]
Chris Fredericks
Yeah, it's all, it's all definitely work in process. So this is not, we're still ironing all this out and I think finding a, a really good way in our operating model. It's really a couple different things. So very important who we pick as the leader of the business. I mean that's, that's the leverage point of any company ultimately. So hiring, identifying the right person who's going to kind of foster the, the culture that is positive and consistent with an employee ownership culture. So to answer the, the question like in terms of do are we wanting to change the culture? Yes, we want to evolve the culture to and embody and embrace the employee ownership component which so there does need to be some amount of additional information sharing and you know, just kind of following some of these playbook elements of employee owned companies that have, have been successful to, to create an ownership sense in the, in the population. But we don't want to change the culture in the sense of what are the, the what's the secret sauce that's made this company successful? Things like you know, how did, how's, what's the relationship like between the company and the customers? Like we don't want to try to change things that are super important to how each business operates your role now.
- [76:15]
Will Smith
Chris, as president of a Holdco, I'm reminded of the book the Outsiders which, which we talked about which we touched on in the pre call which is for people who don't know a book about profiles. A handful of CEOs who are overlooked by the business press, the mainstream business press, they're known, but they're not the rock stars that we often hear about and yet delivered outsized returns. And so what were their secrets? Really fascinating number of case studies, but the key theme of that book is that the CEOs that deliver the best returns for shareholders saw themselves as capital allocators, saw themselves as frankly investors, you know, intelligently deploying the financial resources of the company. Is that how you see yourself now?
- [77:06]
Chris Fredericks
Yes and no. I mean, I think that was one of, that is one of the big learnings of these last four years is small businesses aren't giant large public companies that are just, you know, you're just allocating capital. They are mess. It's the classic, they're messy. They, they do need support, a lot of support. It's hard work. Our leaders are, I love, our leaders are awesome people and have like absolute best intentions for their companies and they are charged with something extremely difficult. And so I think my respect for them and my appreciation for them has only grown in that they, I need, we need to make sure we're supporting them in that effort because there's, there's too much in small business to handle. It's back to my initial lesson with tvf. I don't want them to feel like they're all on their own in this effort either. So that's where the stewarding has kind of evolved from let's say a capital allocator, hands off concept at the beginning of being a holdco, to still not hands on, but very engaged and supportive while staying in the back seat from a day to day perspective. I think that's how we're continuing to kind of find what that right balance is to support our leaders effectively.
- [78:27]
Will Smith
Let's, we're starting to wrap up here, Chris. Let's return now to just some of the ethereum practice of ESOPs. Generally. I get the sense from the way, I mean you said it explicitly that these are long term. You're building a long term holdco here and your acquisitions are, you know, are long term, kind of patient compounding capital allocation moves. Is that intrinsic to ESOPs? The kind of the, the long termism of it or just the way that.
- [79:02]
Chris Fredericks
You'Ve structured and powered Most ESOPs have an intention to perpetually be ESOPs. Yes, but ESOPs sell as well. So in the, in the country, roughly 250 to 300 new ESOPs get created every year, which is not a huge number and there are only about 6,500 ESOPs in the country. And about the same number of ESOPs 250 to 300 sell every year as well. And usually SOPs that sell, they've reached some sort of end, natural end point. Maybe they've outgrown, you know, their ability to be a small, you know, player and being in an industry that being a big player is important. So they, they do need for competitive reasons to join up with another firm or, you know, they're an ESOP company that has kind of gotten to the end of a, of a leadership, you know, group their, their term and there's maybe the succession planning hasn't been strong and so they need to sell just for, for succession planning reasons. And there are other reasons. ESOPs that are very successful create a large need for future cash outflows to pay off all these employee owners. And if they don't do a phenomenal job of planning for the, all those cash outflows, they can actually have a cash crunch around all the payoffs that need to happen. So there are a lot of reasons ESOPs sell, but most do intend to stay ESOPs perpetually is what I've found.
- [80:32]
Will Smith
And an ESOP selling would simply mean that all of the, on the statement of all the employees and what their, their allocation of the employee equity is in aggregate is total equity of the business and, and some other entity comes along and acquires it. Just like there's really nothing special about buying an ESOP versus buying any other business.
- [80:53]
Chris Fredericks
Not really. Yeah, the negotiation is with the trustee and the, and the leadership team. Some ESOPs do have a provision in the plan where selling the company basically is the one thing that the employees all get to vote on. That's the, a wrinkle that can be interesting to hear about how that plays out in ESOP sales and, and this.
- [81:17]
Will Smith
It would be an important moment to reiterate what you said earlier, which is that it's, it's a, it's financially democratic in esop. It is not, it is not governance.
- [81:30]
Chris Fredericks
Democratic generally best practices. It's kind of a professional governance model with a board and a leadership team. There are a few ESOPs out there that have embraced more highly democratic forms of governance, but it's, it's pretty rare.
- [81:44]
Will Smith
I loved how you called out to me how ESOPs could be relevant to our community of searchers and independent sponsors. Speak to that explicitly now, please.
- [81:54]
Chris Fredericks
Yeah, I've thought of a few ways. One way is that they, they probably come across ESOPs that occasionally in their searches for, you know, companies to, to maybe acquire and just understanding their Reasons why an ESOP may sell at Sometimes I think could could come into play because there are some cases where maybe buying a majority position of an ESOP company but continuing the ESOP in a minority position could actually be a great foundation for taking an employee owned company to the next level to again where maybe one of the downsides of ESOPs there like everything, there are downsides, upsides and downsides. One of the other downsides for some ESOP companies is they can get a little conservative. So this very protective mindset we've built this esop but we don't want to put it at risk. So leadership can become a little bit conservative and that's not great for longevity. So maybe an entrepreneurial person could come across an ESOP that has stagnated and make a play to buy a minority or majority stake, keep the ESOP in place because the culture is really, can be really helpful in leadership and maybe take it to the next level. So I think that's definitely a possibility out that could come across. The other flip side to it is ESOPs can be a really useful exit option to at least consider. I, I definitely don't think they're the right ESOP or the right exit option in all cases, but at least knowing how that would could work. Why what the pros and cons of an ESOP exit might be I think are at least, you know, worth considering. There are tax benefits to ESOP transactions for the seller if done properly that can defer the gains, you know, indefinitely. Similar like it's a 1042. It's very similar to the real estate, you know, deferral process. So there's definitely reasons to at least consider, you know, any SOP sale in my opinion, if, when an exit is going to be accomplished and you're speaking.
- [84:06]
Will Smith
Now to those searchers and sponsors who are already in their businesses who have already acquired and now are thinking how might I exit this business at some point?
- [84:15]
Chris Fredericks
Yep, yep. I think it's an ESOP sale is not going to be highly competitive in an industry that has extremely high multiples. But if an esop, if a business is going to sell for, you know, four to six times, an ESOP sale is probably going to be competitive structure. There's ways to structure it to make it competitive if it's in that kind of common range. So it could very, very much be at least worth including in the, the, you know, options in my opinion.
- [84:46]
Will Smith
And this, this is an important point, arguably a downside of ESOPs that when the entity valuation the stock Price, the stock value everybody has a piece of is set by a valuation firm, by a third party and based on comps as you said, and analysis. But so often, or almost always when, when there's a phenomenal exit, it's because there's been some sort of auction process or there's just multiple parties who want to get their hands on this business and it's for whatever reason and it's bid up. So that is something that, that sort of premium would not be an eventuality that an ESOP could enjoy because you're getting this sort of quote unquote objective market value of the business, which is, which is never going to see some outsized valuation.
- [85:39]
Chris Fredericks
True. Yeah. ESOPs are probably not the right exit option for absolute top dollar. I would say that there are investment banks that specialize in ESOPs and including them as an option in a, a full spectrum, you know, process and just seeing how competitive it can be. And then that tax benefit can be an offsetting or additional, you know, non traditional factor in consideration. Ultimately that could make it equal in net value alt over time. So it just really depends on the situation. But yeah, a really high multiple sale of a business based on a strategic premium is probably going to be be higher than any SOP outcome for sure.
- [86:24]
Will Smith
Yeah. And the tax benefit you just referred to now was the seller selling his business or her business to an ESOP.
- [86:31]
Chris Fredericks
Correct.
- [86:32]
Will Smith
Let's return to the other tax benefit of ESOPs which I said we would get back to. This is important. So the becomes chapter S entity.
- [86:45]
Chris Fredericks
Yeah. If, if you choose so ESOPs can be either an S or a C Corp. If the, if you choose to have it be an S corp and if it owns 100% then it is a 100% tax deferred entity essentially.
- [86:59]
Will Smith
And so what that means is of the earnings that it's, of the cash that it's generating every year, fully 40% that would otherwise go to taxes can be reinvested in the business. Yep. So this is huge. It's like having, I mean it is having 40% more capital to reinvest in the business every year, which presumably if you have a great outlet for that cash, a great place to put that cash and have, and reliably grow the business, you, you will dramatically accelerate the growth of that business. So, so while there are maybe there, there may be ESOPs dampen some of the financial realization in certain ways, the overall entity is likely to compound much faster because it's got 40% more earnings to play with in reinvest Every year. Do I have that right?
- [87:52]
Chris Fredericks
Absolutely. Yeah. I think of it as almost our form of float. You know, it's, it's like an insurance company and that, that cash that's sitting there that you can reinvest, it's our, it's our version of that. And of course you have to do well with that, you know, for it to really matter in the long run. But yeah, it's a structural advantage from a capital perspective that has been very meaningful for us and I know for a lot of ESOPs out there.
- [88:17]
Will Smith
And does it not automatically increase the valuation by 40% of the business? Because now you is 40% higher?
- [88:25]
Chris Fredericks
It's a great question.
- [88:26]
Will Smith
Is my math right? You know, it's whatever, it's 40% over, say, whatever the math is there. I might be getting my ratios wrong.
- [88:32]
Chris Fredericks
But yeah, no, it's, it doesn't. Because valuation advisors will do a capital neutral valuation. They'll basically turn it. They'll presume it's a C corp, and they'll kind of adjust everything to assume that this is actually a C corp.
- [88:49]
Will Smith
I see. Okay. Any other downsides?
- [88:53]
Chris Fredericks
Yeah, downsides. It's that it is more of that professional governance. It's. I don't have total control of Empowered Ventures. I report to a board of directors. So, you know, it just, it does mean a more collaborative leadership approach and, and a lot and a lack of control for the CEO, even though I do run the business day to day. That's just one factor I think that's important to note.
- [89:16]
Will Smith
Oh, wait, I'm sorry, Chris. Why, why is that? Because you don't own 51% of the business. Where is it? Okay, but again, in most businesses of any size, few people, it's quite rare that anybody does own 51%. That would only be in a very small business, SBA style acquisition. Okay.
- [89:34]
Chris Fredericks
Correct. Correct.
- [89:35]
Will Smith
Okay, but, but there, there is a sense though, that, and maybe you were about to say this if I'm taking the words out of your mouth. It's not explicitly a democracy, but there is sort of a democratic tone to things. So. So while it's not baked into, it's not, it's not codified in governance rules. There's an expectation in the culture that kind of happens in the culture that, yeah, it's a collaborative, it's collaborative decision making. Say more.
- [90:05]
Chris Fredericks
Yeah, if you, if done well and if, you know, in our case, if you create this culture where people feel really invested and engaged and feel this sense of ownership, the, the double sided, you know, sword to the the other side to that is if there are moments when they aren't feeling like their voice is being heard or they're being taken seriously, you know, you're, you're inviting a level of accountability for management and leadership that doesn't always exist if, if employees just kind of know they're quote unquote, just employees. So it does require leadership that is comfortable with that ambiguity of being, having a sense of accountability to everyone else in the business and decisions are never certain. And so you're making decisions knowing you have to explain yourself to everyone to some degree. And that's not a comfortable thing for all leaders probably.
- [91:02]
Will Smith
Yeah. You know, again, however, that, that's not intrinsic to ESOPs. And so even if you, it's sort of intrinsic to any culture where you have made employees feel like they're really part of things, that's really, if you're able to even achieve that and have employees feel really invested in, in the organization, they're going to. A consequence of that is that they're going to feel like they, they should have a voice. So it's actually, this is separate from commentary on ESOPs and more just about having a really bought in culture.
- [91:36]
Chris Fredericks
I think it's true. I do think it takes it to another level where employees are literally able to say, hey, I'm, I am an owner of this business. I have a voice like there. It does kind of edge it up even further. But I enjoy that. I think it is good to feel like I'm accountable to everyone as a steward of this business. But it's uncomfortable. So I think it's just the, there's a truth in the discomfort of, of that, that just, you know, any leader would have to kind of be, be okay with.
- [92:10]
Will Smith
Yeah. Costs of an esop.
- [92:13]
Chris Fredericks
Mm. There are some ongoing annual costs that other companies don't have to necessarily incur. Paying the trustee on annual basis, getting this annual valuation. Those are the two, you know, main ones. Plus ESOPs do need to be audited just to kind of meet, meet the regulations and stuff. So on the whole, you know, depending on the size of the business, you're talking about an annual 100 to maybe $150,000 minimum, you know, additional cost that a business would need to incur. It's pretty commonly thought that a business needs to be at least a million in annual EBITDA to even consider, you know, being an esop. So yeah, there, there, there's definitely some additional cost in being an ESOP company.
- [93:00]
Will Smith
Great. Chris, before we have you plug your podcast, is There anything that we, is there anything that we didn't get on about your story or about ESOPs broadly that you want to share?
- [93:10]
Chris Fredericks
Not really. I mean I'm, I'm very happy to be a resource if anybody just wants to talk ESOPs once done runs across an ESOP situation, you know, anything that they want to discuss. I, you know, ESOP stuff is, is a weird and nuanced topic for sure and I'm happy to be a resource for folks. I do think there's one really interest. I've never heard of someone doing this, but in the ETA space I think there's an intriguing idea that if I were starting from scratch now is what I would think about doing which is to combine this. So you, you had a guest on at one point who mentioned using their 401k funds to buy the company. In theory someone could do that and also create an ESOP at the same time, let's say or buy an existing ESOP. And so you know, let's say you use your 401k funds to buy 40% of the company and 60% in ESOP. That could be 100 tax deferred entity still at that point. So there is this just back to that mechanics of the, of the float with the tax savings. You know, it's theoretically possible to actually create an entity that continues to have that and isn't a 100 ESOP, which I just think is, is an intriguing idea.
- [94:29]
Will Smith
Well, we can deep dive into that another day. I think I might have missed a detail or two there, but good food for thought and your personality as an accountant showing there, thinking about finishing on a technical topic.
- [94:46]
Chris Fredericks
Yeah.
- [94:48]
Will Smith
What is your podcast all about, Chris?
- [94:50]
Chris Fredericks
Empowered Owners is our, our little podcast. It's, it's really for our employee owners, but it's kind of like an insight into our world that other folks outside have taken a look at. But again it's more for our employees. We highlight our employee owners. It's a really fun way I think for leaders to kind of create a culture among in a company that has like dispersed. We have companies all over, you know, locations all over. So having a place to showcase internally for our, our employees like to each other. It's been a fun way to, to go about doing that. So empowered owners, the guests are not.
- [95:31]
Will Smith
Are not empowered venture owner employees.
- [95:34]
Chris Fredericks
They are, they're employees from and our leaders are, you know it's almost entirely been internal, you know, guests at this point there. It's possible we would do outside guests as well, but the target is to really help our, our, our employee owners feel connected and understand and know each other. So that's, that's the primary purpose of.
- [95:56]
Will Smith
The podcast and employee owners. Is this the parlance in Aesop land? What, what employees are called? Employers?
- [96:04]
Chris Fredericks
Employee owners. Worker owners. Yeah, that's generally the two. Yeah.
- [96:08]
Will Smith
And I've always thought that one great use case of a podcast is, is simply internal, internal guests and then in the audience is just the people within an organization. I'm sure such a thing exists, but I've never actually run across it as good an idea as it seems. Has it, has it worked? Do you think people listen? What do you think? How would you.
- [96:33]
Chris Fredericks
It's worked, it's worked. It's the smallest TAM in the world. We only have 300 employees, so our total addressable market is tiny. But yeah, I think we're getting about something along the lines of a third of our folks are, are tuning in consistently, which I think is pretty good. And it has served a purpose for external folks that I wondered if it might. So for example, one of the business owners that chose us like listened to a bunch of episodes and actually mentioned some things that were in the episodes as part of his reasons for ultimately getting comfortable with us. So it's that window into the business the outsiders actually can benefit from as well. If, even if it's an internal focused podcast in our experience.
- [97:19]
Will Smith
Yeah, no, it seems like like a great, like it has a lot of, of great benefits. And like I said, I'm surprised it's not more widely done. Although again, maybe it is. I just don't realize it. Chris Fredericks. Thank you. You're really gifted at explaining this stuff. Very, very clear. Your 15 years of being a CEO and communicating to an organization, or maybe just your natural talent, but this was super clear. Great insight into how ESOPs work. Fascinating what you've built at TVF and now empowered. So thanks for sharing it with us. Audience. Here you have a. An ESOP expert and evangelist who's willing to talk to you. So respect his time. But if, but if you have specific questions, reach out out to him. Chris Fredericks, thank you very much sir.
- [98:09]
Chris Fredericks
Thank you. Will appreciate it.
- [98:11]
Will Smith
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