How M-Group Used Pre-Funding to Build an Orderly ESOP Transition

What does an ESOP transition look like when a company starts planning early?

In Episode 19 of ESOP Radio, Trevor Gilmore and Ben Spadt sit down with Jeff Bradley and Heather Hines of M-Group, a Bay Area urban planning firm that helps cities and counties shape long-term growth, land use, infrastructure, and livability 

Because urban planners think in decades, M-Group approached succession the same way. In this conversation, they share why employee ownership aligned with the firm’s values, how they used ESOP pre-funding to reduce stress on the business, and what they learned about employee communication along the way 

In this episode:

•  Why M-Group saw ESOPs as a fit for a people-driven professional services firm 
•  How pre-funding created a more orderly transition and reduced debt pressure 
•  What employees understood — and misunderstood — when the ESOP was introduced 
•  Why the process increased financial transparency inside the company 
•  How ESOP planning opened broader succession conversations across the firm 
•  Whether employee ownership is helping with client confidence and recruiting 

One of the clearest takeaways:
You cannot really start too early on succession planning.

Considering an ESOP? Request a confidential preliminary feasibility review at Menke.com.

Learn more:

• ESOP Radio: https://www.menke.com/esop-radio/
• ESOP Boot Camp: https://www.menke.com/esop-boot-camp/
• Confidential feasibility review: https://www.menke.com

Transcript

0:04

Hi everyone, welcome to ESOP Radio. We are excited to have him group join us today. They are based in Campbell, California, which is right close to San Jose down in the Silicon Valley. For those who, follow tech, they have offices around the Bay area. So basically from Silicon Valley up to the Wine Country M-Group is an urban planning firm. They work with some of the major cities in the San Francisco Bay area, helping them design smart growth plans that balance growth, livability, quality of life, and the environment. Important stuff. Jeff Bradley took the plunge into entrepreneurship in 2006 after a career in city planning, and Heather Hines joined the firm in 2010 with a similar background. Urban planners think decades ahead about land use, infrastructure and demographics. There are many similarities between the long term thinking that is baked into in groups, culture, and the long term focus needed for a successful business. I'm Trevor Gilmore, CEO of Menke and I'm Ben Spadt, investment banking with Menke And let's dive in then go ahead and kick it off. Absolutely. So just to set the stage here and for people who don't know who the Em group is, what does your firm actually do and what role do city planners play in shaping and developing communities. Sure, I'll take that. Ben. So we as you mentioned, we're an urban planning consulting firm. We are located in the Bay area, focused on the Bay area in Northern California. So we have offices in Campbell, Santa Rosa and Berkeley. We work almost exclusively for public clients, so we work supporting cities and counties throughout the Bay area. We do a range of service areas in collaboration with public jurisdictions, so we might come on board to help a community project manage a large development project that comes in for processing a mixed use lifestyle center that might come in and submit an application. We might help a jurisdiction manage that project. We do long range policy plans, urban design. So really helping a community with their visioning process. So whether that's where does a community want to be in 20 years as a whole community general plan to specific plans, which is looking at a specific area of the city and really diving in deeper to look at the vision for that. It could be a corridor plan with how does a community want an area that maybe has been auto dominated for years and years and wants to look at things to incorporate to transition to a more pedestrian friendly, alternative transportation friendly area? So we do those kind of policy plans. We also help with implementation. So a jurisdiction might adopt a policy plan. But then it comes down to how do we implement it? How do we make it really happen on the ground. So this might be developing regulations for when something comes in and wants to develop, making sure it's furthering that it might be programs we did a lot with during Covid with parklets that you saw throughout jurisdictions, to find outdoor spaces for people to gather, to eat, to kind of deal with, with the pandemic. So some of those kind of programs. And then another thing we do to help jurisdictions is the environmental review. So the state of California has very strict regulations about looking at the environmental analysis of a project. So we help with those kind of things too. So hopefully that gives you a picture of what we do and who we do it with and where we do it. Well, that's a great illustration. And, you know, Trevor alluded to the fact that this company has existed since 2000. And Jeff took the plunge, as it were, into entrepreneurship. So in that time span, is there any one project or series of projects that you feel really proud about or really excited about now that you've seen them sort of from inception to maybe implementation and, and sort of trying to execute on that long term goal. Yeah. Thanks, Ben. It's a great question. It kind of touches on some of the things Heather was talking about, where as a firm, we we do a lot of development we do for our clients cities and counties. And I'm really proud of some of the really large, complicated, controversial projects that cities have trusted us with throughout, throughout the whole Bay area, some of the largest projects that get built are managed by M-group planners working for the for the city by the client. So that's kind of a that's where like one type of project that requires a lot of trust on the part of our clients which would appreciate. And then on the other end, there's been some long range policy planning projects that Heather also mentioned, where we come in and work very closely with the city on, on their vision for where they want to be in five, ten, 20 years. And again, that requires a lot of confidence of of the city that they have the right team. And we've won awards for some of that work in the cities, like Menlo Park right here in Campbell, where the housing element, a general plan update in Sausalito and a very a very effective specific plan that we did for the city of Sunnyvale for the El Camino Real corridor. And so those types of projects are really make a lasting impact and gives us the ability to leverage that into to other projects with our other clients and show that we can do the full range of planning services. Absolutely. And executing that in your own backyard. I mean, you get to enjoy it as well and see that actually happen. So speaking of enjoying it as well, you know, at some point you had the idea to sell to the employees. And when did that become kind of a viable option or seemed like a path that was worth exploring? We've been thinking about it for a long time. The, the firm itself was founded by myself and Heather Bradley, my wife, who who stepped away at the end of last year with the along with the Esop coming into fruition. And we had both been in the public sector for ten years before we started the firm. But even before that, we had both worked for private planning firms on the Central Coast, and one of those firms was an Esop client, who has a similar firm profile as, so larger and even more well-established over time. But I've been keeping an eye on them ever since college, essentially, and after and witnessing their transition. So we always had in the back of our mind that an Esop would be a good fit for a professional planning firm, where the the staff itself is really the core of the business. It's not like it's not like their overhead or, you know, an expense. They really are the engine that makes the makes the business run in that type of environment. Any type of transition can be very disruptive. If you're if the original owners are looking to sell to a larger firm, or, or a private equity type of situation. And the Esop seemed to be most aligned with our values. And so as we started to approach, you know, retirement age, we realized that that's that's the way we wanted to make it happen. Yeah, absolutely. And, sometimes retirement age is a four letter word. But, if you have that proper planning in place, that's great. So, you know, you had this idea for a long time, and when you introduced it to the employees, was it well-received or was there a little pushback or questions? Yeah, there was I think there was mostly just kind of a little bit of confusion about what it meant because it, you know, it sounds really dramatic when you say, you know, we're going to sell the company to the employees. Everyone's going to become an employee owner. You know, that people people can run with that, in different directions of how that would play out in terms of the day to day business, because on the other hand, you know, we're still an S Corp, we still have a a management team and we still running on basic business principles. And so it took a lot of effort to explain what the Esop is, just functionally and factually what it does do and what it doesn't do. And I think people have have come, come to terms with it more. But we do find that maybe some of some of the younger planners who aren't so focused on their retirement yet tend to discount it a little bit, and people that are a little further along in their career can see the value of having something that supplements Social Security supplements, okay, retirement plans, supplements, whatever small pension they might have from working in the public sector in the past. All these things kind of build on each other. So I think over time it'll become more and more apparent to our our entire staff. What a great benefit it is, I would add, and this kind of just builds on something Jeff said. I think there was some confusion too, in terms of the Esop structure and overall succession planning. Like the day we closed on the Esop transaction, was there a change in the way the business ran, or who was in charge or who reported to who? And so some of that discussion with, with the firm and our leadership team and our employee now employee owners, was really trying to separate out also the Esop versus overall succession planning, right? Yeah. No, that makes sense because in a typical sale, you know, the owner might just leave you know, go retire, play golf, whatever. So that can lead to some uncertainty. That's absolutely right. And you had a little bit of a runway because you set up the plan first that you saw a plan first. But didn't really put any shares into it until years afterwards. And that led to maybe a little bit more of an orderly implementation. And then, you know, through that there were cash contributions made annually and without getting into too much of the weeds. But that money was then used to purchase the shares or provide a down payment, as it were. How did you arrive at that decision to set the plan up? First, put cash in the plan and then sell your shares later. And I think for us, been the critical factor is we like you said, we weren't going to go off and play golf on day one. Yeah. You know, we're in here. We're in here for a fairly long transition period. And we wanted to we wanted the firm to be able to operate as close to normally as possible, i.e. pre Esop. And we didn't want to have a debt burden that would be, you know, essentially change our change our culture, and, and increase our stress level as, as business managers. So we really saw the, the future aspect of planning early and the down payment as a way to get the debt down to what we felt was, was comfortable and not not overly stress inducing for the day to day operation of the business. That makes sense. And having that down payment is important. You know, down payment, for lack of a better word. But how did those years in between the set up and the actual transaction, were there any changes within the company, whether it financially, functionally, managerial, because, you know, as we've alluded to a little bit here, some of those employees might have been worried about that aspect. And so did you notice any changes that sort of organically happened, or did you have some in mind that you wanted to kind of gradually implement? I think the main thing is, is we became a lot more focused on the on the company's finances. Because Heather and I are our first and foremost planners and we're and we're client facing. So we're, you know, we're we're still doing the work and kind of on the side we also manage we manage. But I think our management team especially noticed. Notice the difference that we suddenly became a lot more focused on the monthly revenues than net income. And they they realized there was there was sort of a shift happening where we were becoming more more and more, you know, like a traditional business, really keeping an eye on the numbers and making, you know, making small adjustments. So as a manager, you feel like it's a small adjustment, but from the employee's perspective, it's like, hey, they they took away my a favorite coffee or you know, something. Right. And so we, we got feedback about that. We've always tried to be transparent, but I think the, the Esop has given us sort of like permission internally to talk more freely now that the business side of the business, rather than always focusing on the planning staff which have which we love. And so I think that's been a natural been a good benefit because now I think the employees are getting they're getting more information about what makes the what makes the company tick and how they keep it going long into the future. And I think that also the pre funding, I don't want to say forced, but it pushed us to start talking about it the Esop earlier because we were pre funding and we were saying we're trying to set money away for this pre funding or we're looking at our discretionary spending differently or you know those kind of things. And so we had to talk about well why are you doing that. You know sort of it gave I think it also gave us a little bit more of a ramp up to the actual transition or the actual transaction to close as an Esop. We we were making some of those changes. So we were talking about this is why we're making them and this is what we're there's a there's a reason we're doing this kind of, dialog, especially with our, our leadership team, but firm wide as well. Yeah. So the pre fund really allowed you to have that runway roll that you saw out with all the employees. You know, when it was set up. And as a 2020, 2023 as when we started okay. 2023. So Esop we set it up in 2023 allowed you three years of tax deductions, funding. I know you all put millions into that, you know, as a way to have that down payment. And that gave us 2 to 3 years of roll out of time there with the employees so that they understand, hey, this is the direction of M-group. This is where we're going giving them comfort. And they started getting those statements to showing what their allocation was for those years. So compared to some transactions we do where clients go all in 100% right off the bat. You know, this definitely led to an orderly transition, especially on the employee side. Right. And then for you all to saying, hey, let's take a look at the revenues profit. Let's get to that point that we're comfortable to actually transact and make it happen. You know, when you look back on the the years of pre funding, anything you would do different, you know, in terms of anything from business approach to employee communications, you know, anything that stands out during that initial phase. I think more more every post say the same thing more probably more, more, more outreach to the employees. We get so busy with our planning projects and our our business things. It's hard. It's hard to stay on top of the communications, strategy. But I think, you know, the more the better. We probably should have been sending out updates like, you know, every, every month, at least every few weeks because things there was always things happening. And I think the, the employees and the management team, they, they really like to know what, what's going on. And I think also, you know, I think we were chatting about this a little bit before we, we started. It's it's a complex process. There's all sorts of nuance to an Esop. And so I, I also feel I totally agree with Jeff more communication. And also there were times that we thought we understood and would answer a question and then we would realize, oh, that's that's not quite right. You know, we need to go back and circle back on that, to correct ourselves. And so I don't know how exactly to do that differently if we were to go back and do it, but understanding it better ourselves, some of the nuances of it to better communicate it as well. Yeah. And hindsight's always 2020. Right. And it's, you know, you're in that pretty fun phase and, you know, figuring out, hey, how do we communicate this? What information should we share it now? What shouldn't we. You know, and that's always a tough one to ultimately figure out and act on. Yeah. Because you want certainty. You know, and with the transaction you have to get through the negotiation. And once you get that terms you then you have certainty of the deal. And there's some information that's too much information or two detailed information that's kind of being thoughtful about, not in an effort to not be transparent, not to share. But if you don't have the foundation of what an Esop is and how it's how it operates, then some of the sending lots and lots of detail about nuances, you're kind of missing. Missing. Yeah. And we find in our client base, it takes employees a few years to really get the hang of it. They need to get several statements under their belt, hear the story, get those touch points, whether it's quarterly, monthly, whatever that cadence is. And also the longer they're employed and closer they get to retirement. That's when a lot of people start caring, you know? So you take a look at age groups. Is is that's usually when the Esop becomes very important because you're like, hey, retirement isn't that far away. What do you know? What do I have accrued so far in my care, in my IRA, in my ease of account and having the Esop account skin in the game being vested with the company and tied to the success, that tends to be a win win at that point. So I know earlier you mentioned, hey, some of the younger employees are very much focused on the cash compensation versus the Esop. Of course, though, if you were for an Esop company a year younger, you probably like that when you left and got that rollover right or figured out what you wanted to do with it, you know, and then at that point that's that's when it'll become a rule for them. It's like, hey, this is real money. And I know the benefit rate that you all pay out, you know, and it's meaningful. It's, you know, it's it's not, you know, pennies, you know, so the employees are accruing a nice balance there, which is awesome to see. Yeah. I wanted to touch base on a trend we're seeing out. There is more and more generation acts are Gen X business owners and leaders are companies. You seen that you saw a model earlier? Our company, Menke has been around for a while now, 52 years, and I've been here 11. And when I first joined, a lot of our clients were very much baby boomers, you know, well, past retirement age doing the Esop because, hey, I need to do something, you know, let's do this Esop. We're noticing a trend past several years, much younger client base, very intentional about their planning. And obviously in groups you fit that profile to a tee and it sounds like you got exposed to the whole Esop concept early on, and that's how you got exposed. Hey, this could be a possibility there. But I'm curious if seeing how older generations handle the retirement and succession and just long term planning, if that shaped your idea to to say, hey, I want to create a strategy now versus wait several years. Yeah, I hadn't really thought about this over until I read your prompt for this question about it after reflecting on it to compare the generations, if you will. I think our our parents generations really like identified with their their work. Their work was sort of their whole like self self-identity almost. And so in that kind of framework, you know, you don't easily, you know, give it up and saying, I think that's why we see these kind of, you know, all the stereotype of the person working, you know, way past, normal retire any, you know, any conception of a normal retirement age and just, you know, there's just work, work, work, work. And I think our generation kind of saw that in our parents. Like, my dad basically had the same job for 50 years working at a community college as an instructor. And he he loved it. He, you know, when he stopped working, that's kind of like when he started going downhill. But he was really invested in his self-conception as professor at a college for a long time. And I think, I think the following generations have a more nuanced view of like, work is just like one part of your life. It's not like your whole it's not your whole identity. I think that, like, maybe we were more open to thinking, about transition at an earlier age than some of the prior groups going to. Yeah, thanks for that. Jeff. And I was speaking with, one of my friends last week who had a career in tech and retired younger than, you know, most people that she was her whole point is I didn't retire. I just, focusing on different things. They just stopped working. She was very against the word retirement. I was like, hey, this seems like I'm on the board of, you know, a nonprofit, humane society, so on and so forth, you know, doing all these activities. I'm not retirement to me. Sounds like like I'm done. You put your feet up. Yeah. So I think that that to your point, that's the kind of identity just tying it to doing one thing could be shifting a bit, you know, and it's, hey, there's all these different aspects to life, and work means so many different things, right? I think also for our size company, you know, and and as you know, the owners started looking towards retirement. There were a relatively small company. And so there's a big sense of wanting to wanting to plan. We are planners too, so wanting to plan it so that it felt like everyone was kind of taken care of, or there was an attempt to keep that foundation, keep who we were with M-group. And so yes. Just hasn't. Yeah. Left to go play golf. And I'm for some reason that's not what I pictured doing when he does. But you know, when you're with a smaller company, it's not just like, oh, this person leaves and somebody else just. And everything just keeps. We felt a need to, like, think about it holistically and think about what Jeff and Heather had, you know, founded back in 2006 and which we've all worked across all levels, all of our employee owners, what we've created and what's the best way to keep that foundation there and keep that culture there and have the stability so that, for instance, when Jeff does decide to retire, he feels really good about it and not like he's leaving his team, you know, with uncertainty or anything like that. So I think that also pushed us. Yes, I agree with what Jeff said. And we definitely see that that there's more of a desire to think about. Life's not as you are who you are at work and that's your full identity. But also, I think the structure and the size of our firm really lent itself for us to think about it earlier. Yeah, culture is so hard to define, but culture makes or breaks companies and you know, and makes or breaks these out companies as well. Right. And having that culture you just described, keeping the company independent, caring for everyone. Everyone has skin in the game. You're doing it. You're seeing cool creative work, helping cities think about the future. Or May is our model. Sounds to the ideal of this day. You should come over and you should come over and write marketing copy for us. Travel and Jeff I instead of golf I think you would run. I think you started doing international marathons, right? You were a runner. Not not just to just marathon, just marathons elsewhere. Yeah. Awesome. And it's been you know, we're recording this, what, March 19th, 2026. So it's almost been a year since the year I've came in about all the stock in the company. So you're, you're basically there at that one year of, of it actually owning the whole company. How have the employees reacted to that news? Was there excitement, fear all the above. And then it's a question number one. And then two. Have you been able to take a deep breath since then? I know when you go through these transitions, a lot of work, due diligence, answering questions, you know, that pop up and so on. It's, you know, and a lot of intensity for several months. Have you been able to get back to just focus on the business and how has that felt, or do you miss the whole transaction thing? And if so, we might need to hire you to help us on deals. You want to take that? Well, Heather, I don't miss the transaction piece of it. I mean, I, I learned a lot. It's kind of like when you buy a house, right? And you, you know, with all the that paperwork that you're like, do I really have to read all this? So that was a process. Glad we did it. Don't know if I'm dying to go through that process again. Learned learned a lot. I think that, you know, I think some employees have been really vocal about their excitement about the Esop. I've had a number of people, you know, but now employee owners just come up and say thank you. I recognize that that was that was something you guys didn't have to do. And I, I appreciative of it. I think some people still don't fully aren't fully like what does this mean for me? I think, you know, I think this year is going to be a big change to those statements that you mentioned, Trevor, because this will be the first time our annual statements will come out for 2025, where it's actually showing your shares, you know, as opposed to the previous two years that was showing a cash balance based on the pre funding. There's going to be a shift there. And I would imagine that will be kind of a discussion topic with the larger team to understand why is this look so different this year. That's kind of getting used to that. And then seeing the value of the company reassessed each year and what that means, what their shares and their vesting. So I think there's a lot of learning curve to come. We definitely are focused on, you know, the company and you know running the company as best. We can. And doing the very best we can. On behalf of all of the, employee owners that that we now have, a group of I think we're 43, right around there. So we're we're that's our focus. I think what Heather touched on, well, earlier, like when that transition happened, it or so some of the immediate topics that were coming up were around succession planning. At first when I got like, well, about, you know, are we talking about this? But we realized that just because when you explain Esop and you start talking about retirement for employees and you're talking with owners, everyone just assumes that, okay, okay, this is what the owners are doing so they can exit just to be more intentional and more deliberate around talking about succession planning, which I think was great because it gave a lot of answer, a lot of unanswered questions. But then other people started being more open with their retirement plans. So as a firm, we could start to actually like, you know, think about, you know, replacing people when they retire, you know, in 2029 or 2032. And you'll really extend that, that planning metaphor, you know, being able to actually plan for these kind of things that otherwise could just kind of happen, like, you know, with two weeks notice or whatever. So I think it's kind of changing the culture of the firm in that way that people are being more comfortable talking about sort of their long range, their life. That's great. So increased transparency in essence. And, you know, when you're working at a consulting firm or any company for that matter and, you know, totally new, you know, like people don't know how to ask, ask about succession, you know, you know, rewind. You know, years ago when I was at a consulting firm and, you know, the owners, you know, they question, you know, hey, what happens when you know, when they retire? I was too afraid to ask, you know, what do you get there? Okay. We think about that. You can't even think about that. Yeah, exactly. Oh, I could think thinkable happening. You know I go you know so Esop the transition allows hey like tone at the top. If we're talking about that it kind of opens it up right. It makes it less taboo. And that feeling of like if you're sharing with me, I'll share with you kind of I think that's really spot on, Jeff, that increased that transparency as we increase the transparency about succession planning from those, those, top positions. It I think it allowed other people to feel open to sharing that as well. Have you noticed at all, after going Esop, any of the clients, you know, if they they think it's a great thing, if they notice, you know, and does that aspect come in at all when you when you bid for work having those discussions with the cities. Yeah, I've, I've, I've had some experience with that travel where I'll be meeting with, a client and talking about some immediate planning need they have, and then they'll suddenly say, oh, yeah, we we saw something about, oh, your email your employer now we think we think that's great. You know, it really gives us confidence that's happened more than once. And spend a really great a great response. We've had, I think from my clients, the ones that have spoken about it and we have it all over our marketing and, you know, on our proposal to try and, and how about from a recruiting perspective as well, have you found with the prospective employees being an Esop company, you know, you think of the Esau compensation. It doesn't show up on your W-2, but it's material, you know, and you get the statement once a year and you the total comp package is your W-2. Plus, you know, the Esau has that come into play at all helping, you know, I know it's a very competitive job market. And then you all are in such a niche as what fields if that has been a competitive advantage at all? I would like to think so, but I would have to go back and talk to our HR person and see, how that's factored in. We have we haven't been doing a ton of hiring. Most of it's been kind of at the very entry level or people with who who have decades of experience. But I think I think over time it will help with both, recruitment and also also retention, obviously. But yeah, we'll have to kind of keep an eye out on that because that that would be that would be our goal is to make it make us the employer of choice and be able to compete with not only other consulting firms for the best planners, but also with the cities themselves, who obviously hire a lot of planners. Heather, Trevor was asking if we'd seen a benefit on the recruitment side of know hiring, having that having that Esop structure in place and saying just to have just a handful, that's great. I know I've seen a few posts on LinkedIn, you know, the past, several months, some hiring out there. That's and that's that's great to hear. And yeah, I know we're up here at time. Any final parting tips for anyone listening that might be considering an Esop? I think the thing Heather and I talked about before this, interview was even though we felt like we got an early start, there's really this really. We couldn't really start too early. You could, there's so like like Heather talked to, there's so much to learn about the Esop process I found, I find the history of Esops is is interesting material as well how they came about. But I think any any business owner who has any inkling of awareness of they need a, an exit strategy and a succession plan, they should at least educate themselves on a, on an Esop so they're aware of it. So you know what would probably be their biggest? They say they say that when people buy their home, that's their biggest transaction for business owners, this is probably the biggest transaction they'll ever do. You can't you know, even if you're in your 20s or 30s and your business owner, you should you should know about this absolute plan or any plan often. Right? Hopefully you had an espresso and there's some tasty ramen treat in hand. I do recall that they were like, reaching out to Heather. They're in Rome. When? In Rome. Thank you, Jeff and Heather, for your time today. Thanks for this insightful discussion. And we've often said esops are for the doers. The builders and the planners. Having skin in the game is real. This discussion is living proof. Thanks for joining Esop radio and check us out on Menke.com, LinkedIn, Spotify, Apple, or YouTube. Also check out M-group, check them out on their website. They do really interesting and cool work. And if you're in the Bay area, they probably helped some aspect of the cool new design of your city. Thanks everyone! Have an awesome day! Thank you.