ESOP Boot Camp, Part 9: Life After the ESOP Transaction

What actually happens after the ESOP transaction closes?

In Part 9 of the ESOP Boot Camp series, Trevor Gilmore and Ben Spadt walk through what life looks like after an ESOP is implemented — from the employee rollout to the annual compliance cycle, board evolution, and management’s new strategic focus.

This episode explains how companies transition from transaction execution to long-term ownership execution. The discussion covers how employee ownership is introduced and communicated, what recurring annual responsibilities look like, how boards often professionalize post-transaction, and how management’s focus shifts toward long-term value creation under an ESOP structure.

Topics covered include:

• The employee rollout and ownership messaging
• Building excitement and engagement around employee ownership
• Annual ESOP lifecycle requirements (valuation, compliance, Form 5500)
• Independent annual appraisals and trustee approval
• Board evolution and adding independent directors
• Governance changes following a minority or control ESOP
• Management’s new focus: education, scaling, and long-term ROI
• Strategic growth under an ESOP structure

This episode is designed for owners, CEOs, CFOs, and board members who want to understand how governance, compliance, and strategy evolve after an ESOP transaction closes.

Transcript

0:03

Hi everyone. Welcome to the official ESOP Radio. Episode nine of the ESOP Boot Camp. Today we're talking about life after the Esop transaction. Will cover four things one. The employee rollout. Two. The annual life cycle. Three. The board's new focus. And four management's new focus. All right, Trevor. Let's kick it off with number one the employee rollout. Thanks, Ben. And hi, everyone. What is the employee rollout? We've gotten to this point now where the Esop has bought stock. Whether it's 5% of the company, 30%, 49 or 100%. The Esop now is a shareholder of the company. And now the exciting announcement to all the employees that, hey, guess what? You are all owners by way of this Esop. Very exciting. I've done so many employee roll outs for our clients over the years. It's very important. The messaging is very important. We spend time with you to develop how you want to convey why you decided to go down this Esop path, what it means for the company, the future, and so on. Usually it's a combination of in-person events. Those are typically the most effective getting everyone together. If you're a large company with people you know, spread out, then a combination of in-person plus zoom teams meeting that is really effective as well. So we cover such things as what these are means to the employees, getting them jazzed, getting them excited that now they have skin in the game, and also showing them what that runway looks like to build Esop wealth. So in a nutshell, employee roll out and very exciting. And it's all about messaging and conveying what the future of the company looks like. And as an employee, I'd want to know that because why do I want to stay here when I could possibly go somewhere else? And the answer is, I have skin in the game now, and I'm an owner, and I'm going to work harder, smarter, because I want that Esop value to be meaningful over the long term. All right then let's go to talk about topic number two. Annual life cycle of an Esop. Sure. So after we have rolled it out to the employees and everybody's aware of what's happening, what are the company's responsibilities year over year. And then what are other individuals responsibilities. So every single year, because it's a qualified retirement plan, there will be statements issued to the employees and there will be some compliance filings necessary for an Esop. And TPA firms like us handle the form 5500. You have one for your four okay as well if you've got one of those in place. And so things like that all happen behind the scenes by a TPA firm like us. Additionally, because that stock isn't traded on any stock exchange, an annual valuation will have to occur and the appraiser handles this and a trustee will accept and set the value based on the appraiser report. And those two things happen every single year. And the appraisal needs to be an independent third party. And so that's why a an outside appraiser is tired. And then a CPA firm will handle the statements in the compliance filings. So as far as those responsibilities, that's pretty cut and dried. But as far as number three is concerned, the board's new focus. You want to shed some light there it opinion of the site acquired a minority or controlling stake. There is likely going to be changes to the board. And it all depends on where we started off in terms of your board. Do you have independent members on there now? Is it professionalized? You know, what is it? Governance. And this is all part of the negotiation. But let's assume a control sell and the trustee negotiated the addition of independent members. So you close the transaction and guess what. Now you have time. Usually there's time codified in the negotiation to professionalize the board. So you can't do it you know, on day one. So first first the board needs to go out and identify qualified independent board members. Often you're going to be looking for people who fill a gap. Like maybe you're an industry expert, you're the CEO and you know that industry expertise. Maybe there's a finance gap, maybe not. Maybe there's a strategic gap, you know, maybe not. And maybe there's a technology and eye gap, you know, to the board is going to assess what types of independent members would benefit us. So you go out, find those members, agree with the trustee that these independent members would be a great fit for the board. And then after that, you need to professionalize the boards. Perhaps there's additional committees. Compensation committee. That's a common one, nominating committee if there's not, you know, and so on. And the bylaws get updated and all that good stuff there. So right after the transaction, that is a big focus is scaling the board for the future. As an Esau company, it doesn't mean you need to go, you know, full on bureaucracy, you know, and so on. No, it's scaling up and setting up the company for future success. So it's time well spent. Some of it might be painful to take a step back and put that time and energy into professionalizing the board. But in the end, once you have it all set up and you got a high performing board, guess what? The board's role is to ensure that management, so CEO, etc. are successful. So good board members are going to have that focus. They're not there to independently run the company at all. Guess what. Management runs a company. The board oversees management. So that's in a nutshell. And then let's talk about management's new focus after the Esop transaction. Yeah Trevor. And I think your point about a strong board is very important here because once that board has been determined, management is free to go about their business and focus on the company. And so it kind of piggyback with the employee rollout is motivating those employees and educating them into what does the Esop mean for you? Yeah, I'm an owner, but what does that mean? You know, how can we create wealth or a meaningful account balance over time? Second would be scaling the business for future growth and success. As we've indicated in the past, you know, there may be tax savings and other efficiencies that are recognized because of the Esop being put in place. And because of that, we may have capital to invest elsewhere to help that business become more successful. Plus, when everybody's rowing in the same direction, the boat moves faster and can cover more ground. And so by having those employees buying in, we had in a previous episode, someone talk about fuel savings due to everybody understanding that if I save a little bit of money now here, it'll help me out in my Esop account and then finally ensuring that the firm's working with the right partners to make this all happen. So whether it be your Esop advisor, the a trustee that you're using, or even, you know, when you when you're talking about outside the organization, just regular organizational decision making and making sure that those partners are the right ones. Trevor, do you have anything to add to that? Management's focus, as you pointed out, is scaling the business for the future now. And the focus is long term. What is our one, three, five year strategy in conjunction with the Esop? How do we get ROI from the Esop? So it's a fun place to be and it's a fun challenge to execute upon. And in a nutshell, things do change with an Esop. We're not going to try to tell you otherwise, but Nissar does not mean that our company becomes a bureaucratic operation. Instead, there's a more strategic focus on operations and growth under the lens of being in this company. It's not as exhaustive as being a public company. Think, you know, quarterly earnings calls, you know, and and so on and so forth. Not at all. You're so a private company owned by these. But there's more intentional strategy going in with any small company than a small company with no real operating board and maybe one shareholder. So think, focus and attention. All high performance. Thanks for joining us today. Since 1974, Menke has been a full service Esop advisor. We've done thousands of Esops as an Esop ourselves. We are Esop native. Connect with us on LinkedIn Esop radio page, Menke page. Also check out Menke.com where we have client case studies and a wealth of Esop information. Reach out to us if you want to learn more about our ESOP Fit analysis. Have an awesome day everyone and join us for episode ten! What employees actually experience in an Esop? And by the way, I'm Trevor Gilmore, CEO of Menke. And I'm Ben Spadt investment banking with Menke.