Building a Legacy: Is Employee Stock Ownership the Right Choice? - Part One (#269)

Host Scott Couchenour sits down with Harman Construction President and CEO, Wayne Witmer, to explore the strategic advantages of Employee Stock Ownership. In this episode, they break down the critical question: Is an ESOP the right choice for your business transition? Join us as we discuss how to balance leadership succession with a commitment to the people who helped build your business. 

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Podcast Chapters:
00:00 — Introduction
00:59 — Guest Welcome: Wayne Witmer
02:09 — What is an ESOP?
03:11 — Motivation Behind Pursuing an ESOP
08:00 — Progress and Current Stage of the ESOP Journey
10:57 — Administrative Management and Cultural Impact
15:46 — Personal Impact on the CEO Role
19:00 — Financial Transparency and Communication with Employee-Owners
20:54 — Outro

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Learn More about Scott Couchenour
Scott Couchenour currently serves as the “Fourth Quarter” life and business coach and founder of Serving Strong since November of 2007. Scott helps business owners and executives in their 40's and 50's who are in pursuit of their next adventure in life. He concentrates on helping create clarity and design a comprehensive life and business plan. He helps not only with strategy but secures solid traction through an iterative approach. Scott's clients are reaching new heights and accomplishing much more than they ever thought possible. Scott is also the host of the podcast show, Serve Strong Finish Strong which began in June of 2022 on the Mission Matters Podcast Network.

Learn More about Wayne Witmer 
Wayne Witmer joined Harman in 1990, the day after returning from his honeymoon. Married with four children, Wayne enjoys family, travel, sports, and music. Wayne holds a business administration degree from Eastern Mennonite University and worked his way up from project management and business development to president and CEO. “Communicating with employees and clients to make sure that goals and expectations are met is very important,” says Wayne. “I work hard at making that a priority.”

Active in the industry and community, Wayne is past president of AGCVA Valley District, Has served as an AGCVA state board member and was selected for the Butler Building Systems national advisory council. He is a past member of Harrisonburg Rotary Club board and served as club President.  Wayne currently is a member of the Central Valley Habitat for Humanity Board. Faith and trust in God is what keeps him focused and inspired to lead well in all he does.

Mastery Partners

Elevating Businesses to Achieve The Business Owner’s Dream Exit 
The unfortunate reality is that for every business that comes on the market (for whatever reason), only 17% of them achieve a successful exit. You read that right. 83% of attempted business transitions never reach the closing table. Mastery Partners is on a mission to change that. We ELEVATE businesses to achieve maximum value and reach that dream exit.

Our objectives are simple - understand where the business is today, identify opportunities for dramatic improvement, and offer solutions to enhance the business, making it more marketable and valuable. And that all starts with understanding the business owner’s definition of his or her dream exit.  
Mastery has developed a 4-Step Process to help business owners achieve their dreams.

STEP 1: Transition Readiness Assessment
STEP 2: Roadmap for Value Acceleration
STEP 3: Relentless Execution
STEP 4: Decision: Now that desired results are achieved, the business is ready for the next step in the journey!

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Transcript

Tom Bronson (0s): Welcome to the Maximize Business Value Podcast, brought to you by Mastery Partners, where our mission is to equip business owners like you to maximize your business value and achieve the exit of your dreams, whatever that means to you. With insights gained from over a hundred business transactions, we share real world strategies, lessons, and expert advice to help you build long term sustainable value in your business.


Each episode is hosted by one of our Mastery certified partners, their seasoned experts who've helped countless business owners navigate the complexities of growth, scaling, and building value. They bring firsthand experience, actionable insights, and a passion for helping you build a business that thrives. So, let's dive in.


Scott Couchenour (59s): Hi, this is Scott Kau, and welcome to Maximize Business Value, a podcast for business leaders who are passionate about building long-term sustainable value in their businesses. Today I'm excited to introduce you to Wayne Whitmer, president and CEO of Harman Construction. Wayne, welcome to the podcast.


Wayne Witmer (1m 17s): Thank you. Looking forward to joining you


Scott Couchenour (1m 19s): Now in this discussion, I'd like to take our viewers and our listeners into the realm of what is known as an esop, and we'll discuss what that is in a minute. But first of all, for our viewers, tell us a bit about yourself and a little bit about your background.


Wayne Witmer (1m 34s): Yeah, I'd be happy to. So I have been in Harmon Construction for now 35 years. I'm starting my 30, 50 year. Wow. And I grew up in a construction company in Ohio, which you know, well, Whitmer Incorporated, that's the family business that my brother runs. So we had some construction in our blood and ended up in Virginia for college and stayed here and ended up getting connected to harm and construction and growing in leadership there. So it's been a good journey and enjoyed being part of it.


Scott Couchenour (2m 9s): Well, great. Great. So let's get into this whole business of esop. First of all, what does ESOP stand for? It's ESOP, but what is ESOP?


Wayne Witmer (2m 22s): So it's an employee stock ownership plan. Okay. And while I am not an ESOP historian, the origins go back to the seventies as a way for businesses to transition their businesses really into a retirement plan that brings value to all of the employees. So it's really a neat program.


Scott Couchenour (2m 45s): Okay. Okay. So it is an an option if a business owner is listening to this broadcast and or this episode, and they're thinking about options of what they, what they could do with their business now that they're getting older and they're thinking about their next act and that sort of thing. And ESOP is a very viable way to go, as you can attest, right? Yeah. So let's, let's discuss your own experience with your company's ESOP process.


First of all, what was the driving motivation behind pursuing an ESOP in the first place, and how did that align with your vision for your company's future?


Wayne Witmer (3m 27s): Yeah, so I'm gonna give a two part answer because I know really well the founder of our company and his journey and what led him there, because I was right alongside of him in that journey. Carl Harmon was the founder of Harmon Construction, and as he looked to transition, first of all, I would recommend any company, the first step is to transition leadership. So Carl began the transition with me to leadership of president. I've now been 16 years in this role.


So that happened long before ownership transition, because what you'll hear people say that talk about ESOPs is it's important to have a strong management structure in place, and I think that's important for any business type transition, but for esop, it can become uniquely important. So Carl's goals were, he wanted, he, he is, and continues to be very concerned about the ongoing success of his employees. He very much cared about their future.


So we talked about myself purchasing the company and maybe even a small other group of employees purchasing it. And that was something that was looked at, and I'll talk later about what attracted me to the esop. But our experience has been that there are companies that do private sales of their company, and that works fine as well. Sometimes what you find though, is those companies that are looking out, there're either looking for a deal, right?


They want to pick up a company at a bargain. So it's tough to get the real value out of the company for the owner. Or If you do get value, they're looking to carve it up. So they're a bigger company that maybe they'll cut out middle management and they'll change the culture. So if you're looking to keep your culture in place and maximize the value, the ESOP's a good way to do it because you, in that process, there is a trustee that is hired, and it's regulated by the Department of Labor.


There's clear guidelines where the trustee's job is to protect the rights of the employees. So the trustee helps in negotiating with the owner. So that's a process where we were able to keep the core of the company together and the culture in place. And that trustee hires a third party independent appraisal company. So the owner knows he's getting fair value and the employees purchasing it get a fair value.


So speaking for Carl, and again, I've heard him share these same things, what aligned for him is he got good value, but he had his goal met of keeping his culture and his team that he's fond of together. Now, for me, Scott, I'm looking at sure, if I would've borrowed a bunch of money and said, Carl, I wanna buy the company, that likely could have worked and maybe my net worth five years from now would be much greater. But what I loved about it is the motivation and what's a very stressful industry.


But for me to get up every day and know that my efforts are benefiting 62 employees and their families, and so sure. As my reward less, yes. But of course, any company like an ESOP tries to have compensation structures that bring value to all employees. So I'm not saying that we're working as the discount. We still keep all of our employees compensated at market rate.


And, but for me personally, the idea that the efforts that I expand every day can contribute to the wellbeing of 62 families is rewarding.


Scott Couchenour (7m 27s): Yeah. So there's, there's quality and quantity and, and you could go the route of quantity with a low quality, in other words, knowing that you're putting your 62 employees in peril by getting a bigger payout. But, but there's, there's the, what do you value? If you value the culture and you value your employees, then an ESOP is a very good viable way to look at transitioning your company.


Wayne Witmer (7m 58s): Right?


Scott Couchenour (7m 58s): Yeah. So I'm, I'm curious what part of this whole process now you, you're almost done with a, with an esop, right? Where are you in the, like is, is the ESOP process complete for you guys or are you close?


Wayne Witmer (8m 18s): I'd say we're well along in the journey. Let's talk about, without getting into specific numbers. Sure. We had a pretty aggressive seven year goal to buy the stock from Carl, and the initial is a 75% purchase. So we have 25% yet to go, which we'll be in conversation with purchasing the remaining 25%. But of the 75%, we have two payments left. So it's been an incredible success for us.


So we have more than doubled the cash from when we started, and we have 10% of the debt. So it's been a raving success. We have two payments left, and now we can get into the weeds of this a little bit later if you want. I won't go too deep in ESOP strategy, but one thing that somebody who's looking at transitioning to an ESOP needs to figure, so now we have the initial note about paid off. So the burden on cash coming outta the company is greatly reduced.


It's kind of like those of us that put kids through college. You know, once the kids are outta college, you feel like you've gotten a raise, right? So once we have the ESOP note done, there's a whole lot more cash. Now, that's one of the factors that helps ESOP transactions to bring value to the seller because all of the profits that we use to pay back the note are not taxed. So if we would earn a number, let's pick a number, you are in a million and a half or 2 million of profit, instead of 30 to 40% of that gonna the government, that all stays in the company to be used to make the payments, and that helps the appraisal for the owner to get his return.


So now, once the notice paid, the one thing that you need to prepare for, and we're doing something now, which is called repurchase obligation studies. So down the road, we look at the age and expected retirement of employees and anticipate what's in their account and we can buy back the stock. That's how the employees get their value. We buy their stock back. We allow ourselves five years, but still we've run some projections.


We're five or six years down the road if we have a bunch of employees with big accounts, we also have to prepare for enough cash to be able to repurchase the stock. Right. That's the second phase of, you know, of what you plan for is you're actually paying your employees for their stock down the road.


Scott Couchenour (10m 57s): In this process, what surprised you the most? Like was it more complex than you thought? Did it change the way you thought as a leader?


Wayne Witmer (11m 8s): Well, there's a couple of answers to that question. So first of all, the amount of details that you need to manage are not small. Now, fortunately, we have a wonderful CFO, Nancy Bowers who has owned this process and she's immersed in it. And so you wanna have a good financial management team to help you process it. And you wanna align yourself with good consultants. We have a third party trustee that guides us through the process, and we also have an ESOP attorney as well as our CPA, that guide us through the process.


So you probably may have a few more consulting fees going forward, but it's not oppressively. So we may spend 30 or 40,000 more a year on consultants than maybe we normally would. That might be a little high, but that's close. So I, I would say that the burden of administration isn't necessarily greater than I expected, but it's also something you need to be, be prepared for.


The second thing that, I don't know if it's a surprise, because we hope this would be the case, but the impact on our culture has been really good. We've always prided ourselves in a family culture. But if you remember, Scott, and I know you do do a lot of business reading through the grant pandemic when there was this labor shortage and you heard stories of people paying sign-on bonuses for new employees or giving bonuses to your existing employees to keep them to stay.


We haven't lost people, period. We haven't done crazy other than market rate increases. We haven't had to, we haven't been held hostage. And I think part of it is the employees start to see their stock certificates. So every year we're required to have a third party independent appraisal of our stock value. And then as the stock shares are earned and placed into the accounts of the employees, and we could talk more about this or not about the mechanics of how stock is released into their accounts, but once they start seeing year one, you could be, let's just say that you're a mid-level employee.


Let's say you're a construction foreman or supervisor, you know, you might, year one, and by the way, you weren't asked to bring capital to this, so the employees didn't have to come out of pocket. So year one, wow, I've got $8,000 of stock. And then year two, wow, I'm at 17, and by year six, we have some of these employees that might have 80 to $90,000 of stock within six years that they didn't do anything. So they start to see that, and they realize that when they get up every morning and it's 13 degrees temperature, and you're out there in the elements doing construction.


Right. That, wow, I'm actually participating. And let's be clear, Carl Arman, who owned our company, was very fair to his employees. So this isn't about, there are a lot of employee employers like Carl that that treat their employees fairly, but the the reality is that if you know that you're getting up every day to make one person wealthy, that's not as motivating.


Right? Right. And even though you like that leader and he's fair and all that, I'm just saying human nature where, wow, I'm getting up today and I'm helping build the future value for my family. Yeah. That, that has had a great impact.


Scott Couchenour (14m 53s): Yeah. When, when the, when the job gets tough, or even when life gets tough and you have the job, it's, it seems to me that it would be so much better when you're, when you're going to work to be a part of something bigger than yourself, and there's ownership to that. That's, that's what sticks out in my mind, is no wonder the culture and the mindset and the energy within the company has profoundly been impacted on, on a very individual level.


That's that's fantastic. Right?


Wayne Witmer (15m 30s): Yeah, it is.


Scott Couchenour (15m 32s): And, and, and even the owners who are transitioning to the employees to know that that's what's happening also, it's like a win-win on both ends. So


Wayne Witmer (15m 44s): It is. Yeah.


Scott Couchenour (15m 46s): Okay. So, so looking back at the process so far, how has it stretched or changed you as the CEO personally? What's the impact on your life?


Wayne Witmer (15m 58s): Well, I think it's mostly Scott, the things that I referred to it. I am motivated and honored to be able to help build the value for all of the employees. Now, one of the things that is important to know about an ESOP is do the employees all of a sudden think now that they have a vote? Mm. Our company is managed like it was before the esop. So if you role was a carpenter, you're still a carpenter. And if you're a project manager, you're still a project manager.


As president and CEO, my roles are still the same, to make sure that we're heading in the right strategic direction, that we have the right method to go to market, that our clients want to make sure we're managing risk. So it still is the same construction business that has to be managed in the same way with the same strategy. Now, like I mentioned for the financial management, CFO, there might be some different metrics that you use and different processes that you use.


But yeah, for my role as president and CEO, I still have to focus on the blocking and tackling, so to speak, that I did before.


Scott Couchenour (17m 14s): Now, in that blocking and tackling, you've been there 35 years, so you know what it's like to be blocking and tackling without an ESOP and blocking and tackling with an esop. Is there any added pressure from your perspective when you do that blocking and tackling, knowing that employees have that ownership?


Wayne Witmer (17m 37s): That's a good question. I think that I may answer it different. If we weren't profitable and we struggled. So like, for example, and, and, and this, I think it's a fair question. If I was the sole owner, and let's say we had a year where we didn't make any money, and I could say, well, I'm fine, but you know, our employees are still paid and you know, I can live with that.


But if I was leading a company that struggled and didn't make profits and the stock was not growing and it was actually shrinking, and now I'm looking at 62 employees and they're like, Hey, what's going on here? You know, I maybe in some ways it would add pressure, but since that's not been the case, since we've been profitable and cash is growing and the stock has been growing, it is very rewarding.


So, you know, as you would know, just from your consulting and all types of businesses, profits make everything easier. You know,


Scott Couchenour (18m 53s): They cover a multitude of sins. Yeah.


Wayne Witmer (18m 56s): So, so I think every business structure is easier with profits, but I think personally, I would feel responsible if something that our employees could benefit from isn't a good thing.


Scott Couchenour (19m 14s): Right


Wayne Witmer (19m 15s): Now, I'll say this, that the message that we would send in that case is also the employees didn't invest in it either. Whatever stock value they get is intrinsically given to them.


Scott Couchenour (19m 27s): True. True. So it doesn't really make you more accountable and more serious about your job. It just takes the seriousness with which you take your job and adds an element of employee awareness to that. It's not like you're more accountable and, and, and more diligent than you were before the esop, but now you're, you're just approaching the job in the same way with this added awareness that Yeah.


That the employees own part of it.


Wayne Witmer (20m 1s): Yeah. And we also give a lot more information to the employees as co-owners. So do they, does every employee see the financial statements and the balance sheets? No, but we give summary information so they know generally the profitability, the company and the cash position. And so now,


Scott Couchenour (20m 20s): Is that unique to you all? Is that, is that unique or is that something that you have to do as a part of the regulation


Wayne Witmer (20m 27s): That is, well, I don't know that it's unique to us. I can't speak to how other ESOPs give information. There might be some that give more, some that give less. I don't think there's any regulatory requirement that we have to submit this certain type of information. I did think of one more unique structure that we set up to reward longevity.


Speaker 4 (20m 54s): Thank you for tuning in to the Maximize Business Value Podcast. This episode is the first of a two part release. Part two will posted next week.


Tom Bronson (21m 6s): Thanks for joining us for another episode of the Maximize Business Value Podcast. I hope today's conversation sparked new ideas on how you can continue driving value in your business. But remember, it's not just about listening. It's about taking massive action. Visit our website mastery partners.com for more resources. Grab a copy of any of the books in the Maximize Business Value series on Amazon or via the links below.


And don't hesitate to reach out if you want to know how to apply these concepts to your business. So until next time, I'm Tom Bronson reminding you to relentlessly execute while you Maximize Business Value.