ESOPs Gain Momentum: DC Advocacy, New Legislation & a Strong Lending Market

In Episode 23 of ESOP Radio, Trevor Gilmore and Ben Spadt discuss encouraging developments for employee ownership coming out of Washington, D.C. Ben shares insights from the ESOP Association's advocacy efforts on Capitol Hill, including proposed legislation aimed at expanding ESOP access through government-backed lending programs and increased contribution flexibility. The conversation also covers comments from Department of Labor leadership signaling a more favorable outlook toward ESOPs and employee ownership. 

The hosts also dive into the current ESOP lending environment, highlighting increased competition among banks, favorable interest rates, and growing institutional support for employee-owned companies. Trevor shares what he's seeing firsthand while raising capital for ESOP transactions and explains why lenders increasingly view ESOP companies as attractive, lower-risk borrowers. 

Finally, Ben shares the story of a recent 49% ESOP transaction that created 65 new employee owners while allowing founders to maintain control and gain liquidity. The episode showcases why employee ownership continues to gain momentum as a powerful succession planning and wealth-building strategy. 

Key Takeaways

•  ESOP advocates met with members of Congress to support legislation benefiting employee ownership. 
•  Proposed government-backed ESOP loans could improve financing access and transaction flexibility. 
•  Department of Labor leadership indicated a more favorable stance toward ESOPs and employee ownership. 
•  Industry efforts continue to clarify "adequate consideration" standards for ESOP transactions. 
•  Banks are increasingly competing for ESOP lending opportunities with attractive rates and terms. 
•  Employee-owned companies are often viewed as strong long-term borrowers with stable cash flows. 
•  A recent 49% ESOP transaction allowed founders to maintain control while creating meaningful employee ownership. 

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

Speaker: 0:04

Hi everyone, welcome to ESOP Radio. There's positive news for the industry coming out of DC, Rutgers University released a study proving that Esop companies increase productivity by 6 to 7% and were busy helping business owners navigate their strategic options. I'm Trevor Gilmore, CEO of Menke And I'm Ben Spadt. So, Ben, to kick things off, what you've been up to lately. Yeah, out and about in the world. I, just got back from DC where we were advocating for Esops, and I have actually closed a deal where a company sold 49% to an Esop. Nice. And then behind the scenes, I've been, working on our repurchase obligation software modeling, which we call our success score. And, trying to make that better, more effective, as a better decision making tool. Trevor, what have you been up to? Yeah. So, Ben, I'm still climbing down from the high of running the Boston Marathon last month. That was an awesome experience. Excited for the upcoming Chicago Marathon in October. So I need to start the new training cycle here. Coming up in, by early July. Yeah. I went to a few car events here, and. So. Calendar, you and I are both car buffs. Absolutely. Oh, it's cool to see all the awesome stuff out there. A lot of Porsches and so on went to air water specifically for any car buffs listening and also workwise then raising a lot of money for several clients. And that's giving me Intel on the current lending environment out there for Esops. So, Ben, you're fresh out of DC. What did you do? What happened there? What are the key takeaways here for our listeners? Yeah. Well, personally, the first two days of the conference in DC was advocating for Esops, like I said a little bit earlier. And what we did was we went to both the House of Representatives and the Senate and talked to our congresspeople about what bills are currently out there on the floor. One is for contribution limits and things like that as it pertains to Esops. Another is having government backed loan to help fund these transactions. Let's think about that actually. So government backed loans, are we talking about like a mortgage? You know, the government backs certain mortgages and it's a 30 year, you know, basically to make homeownership affordable. Right. Similar concept here is, hey, I'd do a government backed loan possible it is a longer term. Yeah. The, essentially it's sort of if you want to think about like the SBA where you could get a traditional business loan, but rather than having assets to back it or a personal guarantee, the government says, you know, we will step in and guarantee this loan. So it's typical to, a government like an FHA loan or something like that, or USDA loan, but it's more business related is there's no increased costs outside of the administrative costs to taxpayers. And it just further incentivizes lenders, like you said, to lend to these types of transactions and lend more money. You know, right now we're seeing, you know, 100% transaction will lend some of it. Perhaps we can get to a point someday where they're lending the entire amount. Yeah. Okay. Well, that's definitely promising. And I would the government basically be guaranteeing loans right now. You know, the traditional banks out there lending SOPs are basically that same pathway remains the same in terms of who's making the loan. It's just, hey, the government will come and guarantee and possibly go higher than the traditional 2 to 3 times EBITDA that we see out there on a senior basis. Absolutely right. And so those are a couple examples of what's currently proposed is legislation. And one of them was up for a floor vote in the House. And so you know, we're they're saying, hey, this is coming up for a floor vote. Please either vote yay or, you know, speak about it, learn more about it, that sort of thing. So there was a good number of individuals there representing all states. There was a couple from some territories that were it was interesting to see. And then the, the back half of the week was more of a traditional conference for a lot of continuing education, but because of the unique nature of it being in DC, we had some representatives from our government come and talk, and one is a newly appointed, undersecretary Under Secretary Daniel Aronowitz, who basically came out and said, you know, Esops are no longer in the crosshairs. We're very pro Esop. We want to expand employee ownership, really soothing a lot of the concerns that we once had about the these types of deals and setups being under more scrutiny from the government and from Orissa, and now they're looked upon more favorably. That's great. Did he give any insights there on what's changed, you know, in terms of the appetite, you know, in terms of the Esop oversight, governance, so on, I know valuation is a big part of it. Also following a procedure is, you know, documenting the process you receive. For those listening, RSA is basically the governing body that oversees retirement plans, is created in 1974. And, it's a very much a procedural driven agency. So do you talk much about that in terms of procedures, etc., you know, especially as it relates to evaluation? Yeah. And is the, I guess the teeth behind RSA, it's the, enforcement side of things since what he talks about was, you're right, the adequate consideration, making sure that these esops are being sold, bought and sold at fair market value. And that was another thing we talked about with our legislators, too, was defining what that means more tightly, defining what that means as opposed to having it being open to interpretation. And so he said that, you know, there are efforts in place to put some sort of guidelines in place as to what adequate consideration is. Another one was a lot of, you know, faith and a lot of a lot of the lawsuits will just say fall upon the trustee, you know, for not acting on behalf of the benefit of all the shareholders in the Esop. And for what, one reason or another, that was one that was in the crosshairs with so was targeting these trustees and really being aggressive at making sure that they're doing the right thing. And and that has lessened. There's a lot more trust put in the trustee. That's their name. That's exactly right. Yeah. And then on the flip side, our participant lawsuits as well, these plaintiff lawsuits that are suing the trustees or suing the Esop for, you know, not managing their funds correctly, and a lot more trust is being put on the on the shoulders of the trustee. Obviously, they're insured to the gills. But there are you know, that is their job. That's what they're there for. And hiring a good trustee is important. And then as far as those plaintiff lawsuits are concerned, I guess we're sort of not flying it all the way up the flagpole, making sure those are vetted, making sure they're not frivolous things like that before they advance in the courts. And so, you know, it's a multi-pronged approach. But at the same time, the the bottom line is esops are looked upon more favorably. And so I think that's the major takeaway from DC is that we are trying. Oh, it's been 52 years, and we're still defining what adequate consideration is for the for these esops. And so hopefully we're getting to a point where we have, you know, if anything ever gets called into question, you can say, well, I followed the, the steps outlined in, in the code, whereas now there's a lot of interpretation. Absolutely. And this really is your return on the importance of hiring the right team. To execute any such transaction, having an arm's length negotiation. Very true. And it's you know it's like building a house. You could be the GC the general contractor, do it all yourself. But hiring somebody like yourself or me to quarterback that deal be the GC. We know the players that are out there. You know a lot of these banks. You know you're raising money for these esops that otherwise they wouldn't know existed or knew that banks could be this favorable in lending. We know. And do we know a lot of trustees, every player in this space and and valuation companies. So it is good to effectively hire a good GC to make sure the deal is successful. And at the end of the day, and Esop is a broad based benefit plan for the employees to last into perpetuity. And that's what we want to create a long term sustainable plan that benefits all employees. That's that's fantastic. So yeah, great news overall. Sounds like your trip to DC was productive. You do anything fun out there you know as you get out? I didn't have time. I didn't have time. So I came to DC straight from Washington State, where I worked with a well drilling, water well drilling and pumping company to sell 49% to the employees. And so we shook hands, took pictures, all that sort of thing celebrated in order to, you know, help solidify that we are keeping jobs local. We are keeping businesses local. We're generating wealth with these employees. One anecdote this is actually from DC, but I talked with an employee of an Esop in Iowa who had worked there for five years, and she said her Esop account was three times that of a 401 K at a previous employer where she had worked for ten years. And so these are dramatic, dramatic shifts in, you know, retirement, wealth. We can create just from your hard work. Blood, sweat and tears going into your job creates this, real benefit. And, you know, we're out there hopefully helping the rank and file. And so in north of Spokane, there was, 65 employee owners now that have skin in the game. And it was huge. There were smiles across the room about how they felt like, you know, now we are a part of this together and we're creating a brighter future together. And and only selling 49%. The owners were able to still maintain control, still run the business the way it was run the day before. Now have a, you know, 65 employee owners and that's awesome. And also them the founders there too, they got a liquidity path there. So they're able to get some cash out for their 49% stake money. And we created a diversified if all your retirement, all your wealth is tied up in your business, which for so many of these founders, it is it's a great way to get chips off the table to diversify, to help start that succession plan or continue whatever succession plan you had in place. Now, Trevor, I've been talking way too much on this early going, but you've been raising a lot of money for these deals that we're doing these transactions. What trends are you seeing in in the banking and finance space. Yeah. So overall most banks are all in on Esop lending. So I've noticed a huge shift past couple of years. A lot of the regional banks out there, even the large nationwide banks have sophisticated Esop teams. And they're all in on Esop one. And so seen very competitive terms out there and just overall hunger to lend money. So that is bright news for the owners of companies looking at the Esop option and saying, hey, how do I get some cash out. You know, not actually finance this whole thing on my own, which that traditionally has been one of the the key ways Esop deals are financed. So as far as terms go or see interest rates very competitive think, you know, so for a little over one to two and a half depending on the company size, their balance sheet and so on. So let's translate that to interest rates. That basically means somewhere between 5 and 6 is right now. And again prime right now 6.75%. And we're talking about senior loans for Esop transactions that are well below prime. Right. And that's a typical to what has happened in the past. And in the very recent past. People have been sort of shy or a little hesitant to lend at all, let alone at a rate that is that favorable. Yeah, exactly. And also, we're seeing Esop friendly covenants out there too, you know, in terms of the cash flow metrics, you know, making sure that the bank understands what the Esop is, there's a big noncash component to it, you know, as you know and I know, but this is getting in the weeds. Yeah, I mean, in the beginning especially you know that Esop internal loan. So being able to look at the actual real cash flows of the company and make the decision based on that. So we're seeing that. So it's been a very positive shift overall. You know I'm promising too. So it's been fun too because showing these options, finding the right long term partner is going to grow with their clients later in this process. It's been fun. Have you seen it specific to one particular industry or multiple. Yeah. So across all industries no. We do a lot in the AEC architecture, engineering, construction. We do a lot in math. And then on top of that we work with media companies. We work with manufacturers. So one of our clients had a cool manufacturer, awesome business, a base in California. I've been in business 35 plus years and very innovative, very clean balance sheet. You know, we see that with companies like the Esop. You know, typically they're operated very conservatively, not much that reinvest in the business, reinvest in growth, reinvest in the people. And then that tends to mean, hey, that's going to be a good company to go Esop. And then on top of that positive signs for great. And they have terms as well. You know this that's a mainstream client you know have that sort of factor there. Absolutely. Absolutely. Yeah. You know when you start with a good work product like that good financial statements healthy balance sheet, it makes everybody's job a little bit easier, makes ours when it comes to install, designing and installing the Esop. It makes our job easier, makes the banks easier, the credit underwriters and what you know, they know what they're looking at. They feel confident that they're lending into a good opportunity. You know, I say often more so than the numbers themselves, a well-run company is just as important or more important in order to have a successful Esop. And this is, you know, in a successful a lending scenario to. Absolutely. And another trend to been out there on the banking front is more and more regional lenders. And the large as we talked about, are actually recruiting Esop talent, you know, to be part of their banking. And that's huge because these companies realize that these are companies I should say these banks realize good Esop companies are going to be awesome bacon clients stable cash flows. Yeah, right. Because staying independent, you're absolutely right. You're not just going to get that Esop loan. But there may be a line of credit. There may be other products that they have that and can help build their the bank's portfolio with that one client. And you hit the nail on the head. You know, a lot of these regional banks, they lacked the understanding that knowledge of what an Esop is and how an Esop works. So they are going out and they're hiring those with experience to help shore up those deficiencies. So that they can feel confident lending in these situations. And you're right, we are seeing more and more in that. You see LinkedIn all the time, this person's change from this bank to the other because of that Esop experience. Yeah, that's that's never ending. But yeah, we're we're seeing also that Esop companies default on their loans a lot less. I was speaking with a banker and private equity firm or PE backed firm. You know, in essence they did a huge dividend. Yeah, I pulled a bunch of money on and defaulted right away. So that's pretty good. You know, you don't necessarily see that with these companies. You know, this is very much the long term, long term cash flows. How do we make this thing sustainable for the long run. And then another anecdote to, one of our clients, we were raising capital for, their existing bank, small regional bank. They literally got on the phone with us, you know, said, I don't think you should do this. I don't do it. It's like, well, guess what? They lost a client, you know, because one of the banks, you know, Esops. And this was an awesome prospect. Solid balance sheet, solid growth. You know, you look at the metrics, you know, that the bankers all care about in this company. Pass them all with flying colors. You know, they're bankable client all day long. So you know that sort of posture. They ask the client, well, yeah for sure. And it's it's exciting to see that because, you know, in the past, that wasn't always the case. You know, now we're seeing many more banks out there interested in esops all in on esops, even at the top CEOs of these large banks to now understand what esops are. That was both surprising and refreshing to hear. But you you said something important to about these ratios that that banks concerned themselves with. And I just wanted to say that as part of our Esop fit analysis, where we're looking to see if, you know, is your company a good candidate for an Esop, we look at those as well so that we can talk the talk when it comes time to, interview these banks and make sure that we're getting competitive terms. We want to know the company shoulder this, this debt and how easily. And then when we know we take that to the banks and say, hey, we've got a great prospect here. Here's all the metrics that you would be concerned with. And then they're easy to jump right in. And, you know, you might have a term sheet in a week as opposed to if we have to figure that out on the fly, it takes a lot longer. And sometimes the terms are worse. So, you know, I think we offer a great a value add there to, to help bridge that gap something. Yeah. And you know, our role is to find the best banking partner for our clients. Right. And knowing them inside and out, knowing the the financial ratios, the fundamentals everything. But yeah. Hey then that was awesome discussion today. Thanks to everyone for joining us. That's it for today. Stay tuned. We have new episodes coming out. We love talking about ISAs, valuation, finance. Follow us on your favorite podcast channel, whether that's Spotify, Apple, YouTube or even check out our website. Menke.com and Trevor Gilmore. You can reach out to me on LinkedIn under my name. Same thing with Ben Spadt. Have an awesome day everyone. Take care. Take care. But what?