EP13 - What Could Go Wrong?

This week, Jason and Makenzie cover what could go wrong in an ESOP transaction. From concerns about overpaying for shares to the burden of debt service, unrealistic projections, and the momentum that can build during negotiations, this episode unpacks the risks that can make an ESOP feel “off track” and what causes those outcomes. Jason and Makenzie explore the difference between a deal that is truly broken and one that simply needs course correction, offering an honest look at the warning signs, human dynamics, and importance of sustainable structure.

Transcript

Speaker0:
[0:13] Welcome, everyone, back to the Journey to an Aesop and Beyond podcast, where we seek to make all things related to employee stock ownership plans both accessible and understandable. I'm your co-host today, Jason Miller.

Speaker1:
[0:29] And I'm Mackenzie Worth.

Speaker0:
[0:32] And we're going to cover a topic today that is often on clients' minds. In the early stages of exploring whether or not an ESOP would be the right transition for their ownership. And today, if we look at the glass as half empty, the way that gets articulated is, well, what could go wrong? So we're going to just have a casual conversation around the ways an ESOP transaction could go wrong. I use that word both deliberately and somewhat loosely because there's different gradients on what is something that is irrevocable, that's irreparable, that once we get into, we can't get out, and that's really wrong versus what's just a little off track that can be righted.

Speaker1:
[1:37] How do we

Speaker0:
[1:37] Feel about this topic today, Mackenzie?

Speaker1:
[1:40] Sounds good to me. A lot of things are coming to mind.

Speaker0:
[1:46] Pick one of those that come to mind and let's start there. I also have a few, but since I somewhat surprised you with this topic, what's the first thing that jumps out at you?

Speaker1:
[1:59] Yeah, I guess the first thing that jumps out at me is that... The shares were overpriced that the trust paid too much for the shares from the selling shareholders

Speaker0:
[2:17] That's a good one um so uh the the shareholders the former shareholders probably feel pretty good about that um correct or at least at least they could uh and that that is something that that comes up through the process like what um and i guess i'll i'll put it back to you for a second who would feel like the the weight of an overpriced transaction.

Speaker1:
[2:51] Probably the cfo the most or just executive leadership who is managing the repayment of the notes that come from the transaction. And if they were overpriced, then maybe these debt payments, the debt service covering whatever amount of period is burdensome more than expected or more than maybe was forecasted for the company.

Speaker0:
[3:29] We are diving into the deep end of the pool first. Uh, listeners, it may, it may get to shallower topics as our time goes on, but I think this is such a great place to start. The, so let's break it into the, the different pieces of how could something possibly get here? Uh, how, how could it feel like the shares are, are overpriced and, um, what, what, what happens? So. The first is the transaction was completed at fair market value. So Mackenzie, would you mind reminding our listeners what fair market value is as a standard?

Speaker1:
[4:20] Yeah, so it's when you have a hypothetical buyer and hypothetical seller, fair market value would be the value that both parties agree to based on both of them having the same information available um there's no certain premiums or anything everyone it's it's it's fair is i guess the simplest way to put it but i'll let you add more light there if that's not yeah

Speaker0:
[4:49] So willing i think one of the key words in the definition is a willing buyer and a willing seller, under a hypothetical arm's length transaction um where no one's operating under duress meaning no one's forced to sell, no one's forced to buy. And if we all had all the relevant information, uh, then we would naturally, uh, come into an agreement, uh, in order to transact dollars for, for shares.

Speaker0:
[5:22] And so that standard has different approaches and those different valuation approaches and those evaluation approaches that we've talked about on the podcast before primarily relate to a discounted cash flow, which is looking out into the future, pulling those back to today, and then agreeing on the objective inputs. What's your industry? How are we formulating the discount rate? Where does that come from? What are we doing to stress test cash flows? What confidence do we have in those? And when we put the two pieces together, we come up with a range of acceptable value. And then you know the trustees valuation firm is also doing this so that they didn't just agree on bar napkin right um so there was diligence done uh on behalf of the buyer which is the trustee so let's let's play um again this is our glass half empty episode uh how how could it possibly have been overvalued. If we're using a standard and we're using objective measurements, what are the things that could have led to the perception that the shares were overpriced?

Speaker1:
[6:47] Well, in the valuation for ESOPs, you're typically always negotiating towards the fair market value based on a discounted cash flow method. So you're looking at the future of the company, the projected earnings of the company over a certain amount of period, usually around five years. And that is what drives the valuation. There's a valuation range, of course, that also considers value based on historical performance, but knowing that the company is going to be repaying the debt with the future cash flows of the company, the future earnings are kind of the focus. So maybe those projections were not entirely reasonable or realistic, or maybe they were at the time, and for example, maybe you had a contract in your backlog, and for whatever reason, it falls through. But I think probably a more common scenario is when they're just probably generally not realistic projections. Yeah.

Speaker0:
[8:10] So I'm going to ask you a question. If you had the power to predict the future with 100% accuracy, what would you do with that power, Mackenzie, as it relates to finances?

Speaker1:
[8:24] Make sure all transactions are fair.

Speaker0:
[8:28] And that is such a great answer. My selfish answer would be go out and buy a Powerball ticket.

Speaker1:
[8:36] And that.

Speaker0:
[8:37] Right. Got to take care of number one. A little bit. So I like that there are two different ways to view this. So the first one is how reasonable are the projections that get built into the future of the company that value is derived from? So not just being glass half empty, but also being cynical. If there were shareholders that were looking to maximize value in an ESOP transaction, then everything in the future would be very rosy and they would swear by it on a stack of Bibles, right? So if our historical growth rate has been 4%, it's absolutely going to be 40% every year after the ESOP transaction because of the power of employee ownership, right? Um if our margins were three percent uh they're suddenly going to be 13 post transaction again because of the magic and the power of employee ownership um.

Speaker0:
[9:42] One thing that I would like to challenge in that rosy future projections case is while those are provided, they're prepared by management or by owners as part of the process. The valuation firm that supports the trustee and provides the fairness opinion does challenge those. They don't just accept them as gospel truth. So there does have to be some substance behind the projections. And I think the reality afterwards, after when it feels like the shares have been overpriced, is more likely, and in most cases, a consequence of an unfortunate series of events.

Speaker0:
[10:34] And whether that's macro economics that impact the overall picture that no one could consider or think about or predict or the loss of a customer or a client that was more material than it should have been or the loss of personnel that were key to a tragedy or something along those lines. Whatever consolation that may be, the feeling on the people bearing the burden After the transaction, so your CFO and the finance team and executive leadership responsible for growth, man, it's going to feel the same, whether it's something outside of their control or something that they think happened as a result of the transaction and overpricing the shares. What would you think about that?

Speaker1:
[11:22] Yeah, I think that's fair. And not only on top of those circumstances, I feel like most ESOP companies that are when they are created, we see a lot of times they just have never had debt before. So it's not only are they getting used to having debt payments at all, they're also dealing with other circumstances, like you mentioned, that may be out of their control.

Speaker0:
[11:56] We have a client recently ask a question and in the same vein and it got me thinking that's really where this topic came from in my mind uh and they they asked uh because their industry is relatively small everyone everyone kind of knows everyone and so they're they're aware of um it was a transaction that afterwards feels like this, right? It didn't necessarily meet the right expectation. It feels like it headed in the wrong direction. There are some major consequences that occurred. And maybe that was a result of being overvalued and or overleveraged. And the question was really wise. It was, how could this happen.

Speaker1:
[13:01] I mean, I think like any other transaction, and I mean, there are more formal processes. Obviously, it's governed by the Department of Labor, but it's not always going to be perfect. And maybe feasibility studies weren't thoroughly assessed. i guess it

Speaker0:
[13:28] Could be it.

Speaker1:
[13:30] Could be for many reasons

Speaker0:
[13:31] It can right uh what came to mind for me uh because it was framed the question was phrased with some background information um that uh that gave it some context i'm not going to share that portion but the the word that came to mind was how could this possibly occur especially if there's there's the other side negotiating for this like they had to agree on what the price was and the structure of of the debt that was used to finance the transaction and all those things and the word that came to mind was euphoria so let me lay out the emotional and psychological element of of an esop transaction That could have possibly led to accepting deal terms or the idea of projections in a way that would make sense if you're in the trenches. So arguably, the sale of your company to an ESOP or not, since you're leading a successful company, is one of the most, if not the most impactful and largest and most consequential financial transaction of an owner's life.

Speaker0:
[14:58] They filter through the different ways to sell their business or to make that ownership transition. They've settled on an ESOP transaction as the right path forward. They do their due diligence and get and agree to what they think they can go to market with their shares for. Whether they're pleased or not, whether they accept it, But there's a delta there between accepting an amount and being pleased by an amount of value. And then they do work through feasibility. I think every provider that's in our shoes out there does want to make deals happen and make them happen, not just correctly, but well, and for them to be successful in the long run. I think that's why a lot of people in our shoes do what we do. So with all the right intentions, let's fast forward through the process and say we've selected the right structure and we've brought in the right partners and we were able to obtain financing for an amount that may have exceeded our expectations in the beginning or may have matched our expectations.

Speaker0:
[16:17] Uh we we've hired the the team we're in negotiations and then mckenzie tell me how you would feel at this stage again let's imagine in the beginning that you were pleased with the value that we were going to take your your stock to market for and in the middle of negotiations um it's trending above what your expectation was how would you feel about that as a seller.

Speaker1:
[16:47] I mean i think naturally you would feel excited i think everyone i don't think anyone hates the idea of more money but at the same time we also see that happen with owners who are still thinking about the company and having the want the want the best for the company as well so So kind of weighing the trade-off of, okay, if I get more money, that's harder on the company. What's fair to both? But of course, naturally, I think everyone's first instinct is going to be,

Speaker0:
[17:28] Oh, that's awesome.

Speaker1:
[17:28] I'm getting more than I expected. Or they're willing to pay more than I expected. I expected.

Speaker0:
[17:35] And I, I believe that again, assuming that everyone has the right intentions or good intentions, that there, there are questions, there are gates in, in that scenario where you would be asking yourself, like, this is, this is great. Is there anything that I should be concerned about and uh advisors and uh and professionals will say uh you know here here's what that would look like um these are your options these are your levers um if you are a glass half full type person uh even if you are cautioned um, What is the likelihood of you pulling the brakes on a negotiation that is heading or trending in that direction at that time in the process?

Speaker1:
[18:36] Probably low.

Speaker0:
[18:42] And no one here is a bad actor right uh everyone wants a successful transaction everyone wants a sustainable esop uh surpassing expectations is a good thing um and the um, what's the what's the what's the term that i'm looking for uh the the can the can do or we we've done uh we've handled uh harder circumstances before or you know it's just kind of money so how bad could it be all of that gets influenced by how people are feeling in the moment yeah, and the result of that could very well be uh the that you know again that that euphoria of if we if we inhabit the moment from the perspective of of all the individuals and go i'm exceeding expectations everyone says that it's going to work uh and then that we've got levers we've got things that we can do and then we've we've never been in a scenario like this before but we've handled worse, and everything closes.

Speaker0:
[19:59] After that we have the reality of performance still has to occur and we're not saying that any projections were um off right because no one knows what the future is were they reasonable let's assume that they are reasonable but then something else happens.

Speaker0:
[20:22] The room i guess the margin for error uh shrinks when negative circumstances happen but what doesn't shrink after a transaction, is the amount of money that is owed to the.

Speaker1:
[20:51] And I think that's, I mean, especially when it's completely seller financed, that's also the risk that the seller is taking. They're entitled to all of the payments per the debt schedule. But if there is a case where there's a year that the company truly can't make that payment, I guess the seller's just, they're taking, they're assuming that risk as any other creditor would. Yes.

Speaker0:
[21:31] And if there's bank financing involved, does the bank care what the circumstances are more than it cares how it's going to get its money back?

Speaker1:
[21:43] No.

Speaker0:
[21:44] No. And that's not wrong, right? It's not immoral or moral. It's an amoral. argument and an outside creditor, a bank, has agreed to participate with a certain level of risk for a contractual return.

Speaker1:
[22:05] Over a period of time.

Speaker0:
[22:07] And when the rules of that contract or the circumstances of that contract change, when the risk increases, then they typically want to reevaluate whether they want to continue to participate at the increased level of risk and what that cost would be. Just like any other creditor would, just as you as a lender would, if you put yourself in those So it's not that there's no big bad banks that are just waiting for things to go wrong.

Speaker0:
[22:39] But if they're out there, they extended capital with assumptions that were agreed to that are numerically evaluated. And if they fall outside of those parameters, then they're going to come back to the negotiating table and say, do I want to participate? And if so, what circumstances need to change for me, if any, to remain participating in having my capital for this transaction? Transaction so that bringing them in uh bringing in bank debt does bring in a new party uh for the the company to deal with or maybe it just enhances what was already there if you have outstanding debt for the company but your point as you were an owner but now you are a creditor is just a role shift as a seller post transaction and you have more flexibility because for the portion that you took back, you are the bank. So you get to set the rules and your own tolerance with the company that you once owned fully and exchanged your shares for this debt instrument.

Speaker0:
[23:52] So there's definitely more flexibility as a seller note holder than there is in dealing with a third-party institution that.

Speaker1:
[24:19] So I guess I'm just thinking from a listener's perspective, like how can we assure our leaders or because I feel like what we're speaking about, like it can, I guess, can happen really in any transaction if projections are reasonable and the transaction closes and then you face these events and circumstances that are either in or out of your control. Then what?

Speaker0:
[24:51] This is the glass half full or half empty. Sorry. This is the glass half empty episode, Mackenzie. You want to provide some hope, right? Yeah. Put yourself in in the the seats around the table and ask where are we now and what do we do from here and that's really what you just asked me right what what do we do in this scenario, and this is a very specific one so we've laid out debt bank debt we've laid out seller debt And then the other assumptions, we can just make something up and just say now it was 100% transaction. But we're not up 10% this year, we're down 20%. And if we're already here, and we've already agreed to this, then what are our levers financially to bridge this performance gap so that we get back on track?

Speaker0:
[25:57] And your first lever as a seller, if there's a bank involved, your payments are already subordinated to the bank. The bank puts itself in first position. You're going to pay them first. They're likely allowing you to receive interest payments. Uh so the if the agreement had included principal payments on an annual basis or whatever that those are the first things to get kind of turned off so you you plug the hole with uh not paying out principal to you as a selling shareholder the next part of that is plugging the hole with the interest payments that were coming to you as a selling shareholder and you don't lose them uh It's called payment in kind or pick interest. Your interest accumulates as a liability on the balance sheet, but the money is not going out to pay you so that it can be directed toward the bank or to operations and getting things back on track.

Speaker0:
[27:04] You can see from if you were to completely seller finance and take all the risk as a creditor that you would have more control over first stopping your principal payments or shaving them and then your interest payments to stop the financial bleeding in the company and allow it to return. So from a financial perspective, those are the first levers to say, we got here, we're in it. How do we get through it? What do we need to do? And what options do we have?

Speaker1:
[27:47] That makes sense and i guess if you're in in that scenario where you're where you said you're down 20 versus up 10 then obviously those are the immediate levers but then probably your next steps are okay how do we get out of this like how can we strategize um to the extent of what is in your control.

Speaker0:
[28:09] And that's the place where many of you that are listening have operated for your entire lives as business owners. And earlier when I said in that euphoria, uh, time period of, we, we've always been able to handle things, right? If we fast forward to this, uh, hypothetical circumstance where we're down 20% and then we start figuring things out, Well, this is where you shine. This is where your executive leadership team shines. You have faced difficult things before, maybe in a different manner. This is just another difficult thing for you to face as a team, should these circumstances befall you.

Speaker0:
[28:54] I think where I'd like to pivot is back to, is there any way to prevent us from getting here?

Speaker0:
[29:02] Like what, what could we do to stop us from getting here? And it's not as simple as don't overvalue the company or don't project great earnings or don't accept negotiations that are more favorable to you than you expected. Well i believe that and we we do this um and i i would like to believe that uh again all all the other advisors in the space would do it as well is tracking the negotiations especially if they're matching or exceeding expectations back to what can the company tolerate and not just today, not just on projections, but what will it feel like when, if we, if we're 10% above our expectation, if we're 20% above our expectation for value, I mean, hopefully we have that, that problem sometimes, uh, if we're significantly above our expectation for value, how does that translate back? If things were to go off the rails and using that as an objective tests against that, that euphoric feeling of, man, we were, we're making a lot of progress to say, how is this going to feel if.

Speaker0:
[30:22] And what does the company have left to do before I have to start pulling those levers of, oh, I got to turn off my interest payments. I got to turn off my principal payments, uh, because we, we didn't anticipate this.

Speaker0:
[30:34] And that, that will help temper objectively the emotional euphoria of being more successful in the negotiation process than, than you may have anticipated. I think that's, that's the first one. Anything else come to mind?

Speaker1:
[30:54] Um, I was just thinking, I think that's a good point and it's not just the value itself. Like, can this value work? Um, it's going back and tracking, okay, does this value with this term work with this interest rate? It's considering all the different factors that you're negotiating, not just the transaction price.

Speaker0:
[31:24] I i think i think we've done this one uh a good service i believe is there anything else that we uh are are missing related to the first thing that came to mind for you which was maybe the shares were overvalued um do you think.

Speaker1:
[31:43] We covered most most of those yeah i would say so um Another one that comes to mind, which I guess could be interrelated to them being overpriced, but this can still be an issue in itself, even if it's not overpriced, is the term of the inside note. Or in other words, the pace at which you're releasing shares to employees' accounts.

Speaker0:
[32:19] Expand on that a little more. How could that go wrong?

Speaker1:
[32:23] Yeah, so in most ESOP transactions, or I would say majority, their leverage, meaning the ESOP trust has debt. It owes money to the company because the company is paying off the selling shareholders on behalf of them. And so when the trust receives that stock, the stock does not all immediately get allocated to participants' accounts. It gets allocated over time as the trust pays off debt to the company.

Speaker1:
[33:03] When shares are getting put into participants' accounts, that creates value. So the more shares, then the more value you're putting in employees' hands or accounts. I guess it's not really in their hands yet, but as you put more value into their accounts, then you're increasing what's referred to as your repurchase obligation, which we've spoken about on the podcast in various episodes. But essentially, you're expediting or accelerating when or how much you're going to be paying out to employees when they retire or when they exit the plan and they're entitled to their distributions.

Speaker0:
[33:56] From an employee standpoint, that sounds really good.

Speaker1:
[33:59] Yes. Yes, it does.

Speaker0:
[34:09] You hear me say this a lot just because... I think I'm scarred from my, my career as, as, uh, being very risk focused. Uh, so everything is a capital problem. Uh, and w the, the balancing act of being an ESOP company is, is very, very, uh, tenuous and can be delicate and can be fragile because when you do one thing, it doesn't just affect one other thing or two other things. It affects at least one more than it did before, if not two or three. And this is one of those on, well, if we're a partial ESOP, then we still at some level owe tax on our earnings? Whether we're a C, we owe tax on earnings at the company level, or if we're a partial S, then we still owe taxes for the portion that isn't owned by the ESOP that we have per rata distributions. How do we minimize the tax burden? I think that's one of the strongest attractions to ESOPs is its tax advantages to different parties or different stakeholders.

Speaker0:
[35:30] And one of the ways to do that is to make larger contributions up to their maximum to the plan to reduce taxable income. And in making that contribution, the company remains tax neutral for that amount as long as there are shares to release, which is the problem that you just identified. Let's release more shares so that we reduce our tax burden because we certainly don't want to pay taxes if we don't have to. And that feels really good to employees early and it feels really good to partial shareholders or outside shareholders or at least to the company under a C-Corp structure because no one's paying Uncle Sam.

Speaker1:
[36:20] But you're going to have to pay someone someday,

Speaker0:
[36:22] And every time those shares get – more shares than anticipated get released into participants' accounts, then they are going to come sooner for a larger amount than was projected or predicted.

Speaker1:
[36:38] It and one other piece of that too is when you're releasing all the shares early on then you may find yourself in a scenario where you run out of shares to allocate to new employees that join your company and if the esop is a big kind of recruiting tool recruiting and retention tool you kind of run out so to speak of that benefit and you're you

Speaker0:
[37:13] Would be in a place where you're kind of just.

Speaker1:
[37:14] Waiting for people to retire so that you can get those shares into other employees hands

Speaker0:
[37:22] I like to describe the tax benefit of the esop in a particular way and that's the if if we think about the idea of a hundred percent s corp esop there's no income tax due i don't know of a single person who says that's awful everyone usually says that's awesome and it it really is uh and In the early years of the plan.

Speaker0:
[37:52] That, if you want to call it tax advantage or tax subsidy, if you want to kind of put it in that term, the money that is available to the company that's no longer going to the IRS is used to repay the selling shareholders for the notes that they took or repay the bank and the selling shareholders for their exchange of value. So it has a direct benefit to selling shareholders. While that repurchase obligation is low, because we're trickling out shares over many, many years, so there's not a lot of demand for that repurchase. So the money is going to repay the debt in a tax advantaged way. And that debt gets repaid rather quickly with a successful ESOP. Then there's a ton of cash that wasn't going anywhere or used to be going to Uncle Sam that was then going to the selling shareholders that now doesn't have anywhere to go.

Speaker0:
[38:54] Except for honoring the promise of the ESOP itself, which is the retirement benefit to the employees. There's a period of time after the transaction debt is repaid with those tax advantage dollars, where when following a reasonable inside note length, that the repurchase obligation is going to be really light. It's going to be significantly less than the additional free cash flow. So you can imagine if we decided to release more shares early that we're borrowing from the future stream. We're pulling that forward and placing a new constraint on the company in order to honor that promise of retirement to the participants.

Speaker0:
[39:47] And that capital constraint is that the idea of all the extra money was going to the selling shareholders without impacting the operations of the company it's kind of operationally neutral because of the the money that used to be going to the irs is now repaying the debt relatively and then after that's done there's this this period of time where it could be used for whatever you want to use it for um but some of it should be carved out or should be thought as it relates to the that um that future repurchase obligation and if you magnify it and pull it forward it's almost like those in the indiana jones movie the temple of doom where they get stuck in the the thing that the spikes are coming out and the ceiling is descending on them um And in that one particular scene, it could feel like that at the wrong point in time. So the share really should be deliberate and and carefully planned. And I do think that if you're too generous, that it could go wrong in many different ways. Mm hmm.

Speaker1:
[41:00] All right i think we tackled that one as well

Speaker0:
[41:04] There is a subtle one that i wanted to bring up uh and i'm i'm gonna call it the the educational burden listeners if you are owners that are considering an esop transaction you are educating yourself in advance. You are privy to all the information related to your company and to what you're thinking and to how you execute on that plan, that ownership transition plan, to an ESOP. And thank you for seeking us out to be a part of that journey with you and others and for educating yourself and your partners and whichever portions of your team that you're bringing into the tent in advance. And we've talked about this a couple of different times in a couple of different ways. And the reveal is going to be really tight to you and other owners first, and then maybe to a couple of key people next within your organization.

Speaker0:
[42:11] And for many organizations, it stops there until the transaction is mostly complete or all the way complete. If you have an organization of 100 people and there's five people in the know, those five people have had months to participate in the process, to ask all of their questions, to get those questions answered in a way that helps you to continue through the process to make the transaction happen.

Speaker0:
[42:44] And there's a lot of information, uh, related to ESOPs, um, as you can tell from our many seasons of, of podcasts, uh, and you are digesting that over time, but it is still a very compressed time period to absorb all of the implications to the decisions that you are making. Uh, last time we spoke about, uh, working with advisors that will help you understand what you You need to understand in sequence to make the next right choice along the path.

Speaker0:
[43:21] But I would encourage you in this stage, it's not just about the rest of the company being educated on what an ESOP is and communication around that. The other part is getting your answers early in the process before any of them are things that can't be undone. And that's what I mean by the education burden. So you take all of this info, you wrap it up in the largest financial transaction of your life. You light the fuse that's leading to the firework that's going to go off when you sell your company to an ESOP. And it is a celebratory event. It's a great thing. I think almost everybody enjoys fireworks to some degree. And so that, that idea of we lit the fuse and now we're on the path, right? What, what do we do? of, if you have questions, please get them answered before the firework goes off.

Speaker0:
[44:26] Because if you don't, what happens sometimes is some answers may be taken for granted. You may have gotten the answer to your question during that period of the fuse is lit, we're excited and we're looking forward to the firework. And then you, you don't get confronted with the downstream effect or consequence of that decision until after the firework has gone off and everyone is on their way out of Epcot and on their way back with their tired kids to the hotel, right? Ready to do it all over again the next day. So, and you're like, Jason, what are you, what are you talking about? So what I have seen before is the structure of the transaction has been agreed to, all the questions have been answered, the transaction happens, and then now we have to start, we get a statement in the mail from our financial advisor, and it's got this 1042 portfolio of floating rate notes. So I've got floating rate notes, and I got a giant loan. What is this? My floating rate note has a terrible return. I don't want that kind of return. I think we should have better investments.

Speaker0:
[45:44] We should do another update on 1042, but that has its own implications on you're unlikely to be able to sell those. So this isn't financial advice. I need to kind of make that disclaimer. I'm not advocating for that. I'm just using a practical example of something that afterward, you're going to have more questions than you knew to ask in advance that you may have actually received the answers for, but because of that education burden, you're unable to process when you're confronted with it. And the same thing kind of happens around the inside note and the contributions. And the same thing happens with the loan covenants and covenant calculations afterwards. And what I would encourage you to continue to do is even after the transaction, don't drop the education component of your ESOP journey. Collect the statements, collect your accounting workbooks, collect your closing guides, collect your models, and revisit soon after and go back and ask the questions that you need in order to cut through any confusion that there may be. There is a lot happening leading up to an ESOP transaction, and bandwidth is at a premium, especially for successful business owners. Wouldn't you say?

Speaker1:
[47:11] Absolutely. And I think a good way to not drop that education is just staying involved in the community. The community is huge and there's so many different conferences you can attend with different educational sessions that even if it's a topic you think you understand or you know enough about, it just seems like there's always something you can learn or always another scenario you can hear about. That can prepare you so that you're not reacting as much and you're you're proactive in in decisions and in just being prepared as you navigate being an esop company

Speaker0:
[47:55] Sayings are sayings because they they tend to prove themselves out to be true and uh i i say this one often which is uh an ounce of prevention, is uh greater than the pound of cure right so if there is anything that you can do, in advance do it and explore it because sometimes the cure is much more costly, So just let that stay with you, listeners, as you're exploring the idea of an ESOP. I think these three larger topics that kind of follow the streams of different results or how they could manifest in different ways could be covered a lot of topics. Mackenzie, was there anything else that came to mind when I asked what could go wrong? All right.

Speaker1:
[49:03] Um, I thought, I thought of one, which I'm not sure how much time we need to spend. Cause I thought of it because of an episode you did previously with, um, Pete Shuler from Blue Ridge, but having, or I guess not having flexibility in your plan in the actual ESOP plan document.

Speaker0:
[49:24] Oh, yes, I would definitely steer listeners back to that particular episode that we released earlier this year with Pete for many details. But I think that's a great one. You want to increase, where possible, your flexibility around the obligations that you are placing on the future cash flows of the company. I think it dovetails back to your comment or the other topic around the inside note portion and release of shares.

Speaker0:
[50:04] I think the other thing that could go wrong, listeners, is that you haven't liked or subscribed to our podcast yet or shared it with a friend. I am very jealous. Plus, my son went on a trip to Idaho, I think, was it last year? All the years run together. I think it was early last year. I've always wanted to go to Idaho. If any of you are listening from Idaho, please reach out. We would love to talk to you about an ESOP, and maybe one day I get to come visit and fulfill my dream of visiting Idaho. Uh but please uh like subscribe share this episode with a friend or two so that they can learn about uh about aesops and start their own journey we thank you for listening uh and participating and we will see you next time.