Why Employees Want Equity — And How ESOPs Deliver

Chapter 1: Introduction

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Hi everyone. Welcome to the official ESOP Radio.

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I’m Trevor Gilmore, CEO of Menke, and I’m Ben Spadt. Investment banking with Menke.

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There is a new trend emerging in California’s Central Valley Valley.

Chapter 2: Central Valley Trend: Employees Want Equity

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That is, the large valley that starts around Sacramento and goes all the way down to Bakersfield and a little bit further south.

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It’s often called the breadbasket of the United States. A lot of agriculture happens there.

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Employees are now demanding skin in the game. As a result,

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a lot of Central Valley companies are using Esops as a growth and incentive strategy.

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Hat tip to the Business Journal for reporting on this new trend. Ben, what can we make of this? Yeah, I think, you know,

Chapter 3: Shift Away from Traditional Benefits

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you alluded to it a little bit, but employees don’t. Standard benefits aren’t enough anymore. Employees what skin in the game.

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And they want to realize some upside towards the future.

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So if I’m an employee in the Central Valley taking a look at prospective jobs out there. In the past, you were looking at normal benefits,

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paid time off, health insurance, and so on.

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Esops or any sort of equity included in that compensation package is often not part of it. So you’re saying, hey,

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employees are now armed with this knowledge that there are Esop owned companies out there in the Central Valley, and I want to seek those out.

Chapter 4: Recruiting Advantage of ESOPs

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You’re absolutely right. And even, you know,

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perhaps you’re employed currently at a company that doesn’t have any Isa,

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but you’ll see some in your community that are and that’s a oftentimes an attractive,

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you know, option for those employees to move. The second piece here is kind of, you know, that mentality shift.

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We’re seeing not only boomer, boomers that are selling businesses,

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but gen X businesses owners are planning now for the long term, you know, whether it be the future of the company, of the long terms of their lives.

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And many of them are using these Esop structures as a conduit for their own liquidity, but also for succession.

Chapter 5: Gen X Succession Planning Shift

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And I think even, you know,

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if I wanted to put it in a real close neighborhood type setting, you know,

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you want to go into the grocery store and be able to look your, your employees in the eye. Absolutely.

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And let’s talk about this trend we’re seeing with Gen X’s daughters.

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And we’re seeing this here at many across our client base.

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There’s been a change in the past couple of years with our new clients come in and the door staying here men key design and ease of structure.

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For me that’s going to provide a long term ownership, succession, liquidity for me.

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And on top of that, business continuity and it’s often a Gen-X business owner who is thinking that long term as you’re like,

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hey, in the next five, ten years, I want to have an orderly transition. I want to plan this out.

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I don’t want to wait for fate to decide for me.

Chapter 6: ESOPs for Liquidity + Continuity

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And that’s been a huge shift compared to what we saw in the past with different generations and in terms of long term thinking.

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And it’s cool that we’re seeing this trend in the Central Valley. Absolutely. And you’re right, we do see it across the board.

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And like I said, it’s no longer just the silver tsunami.

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But we have these Gen Xers that want to take some chips off the table and, and sort of add to that company culture.

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And furthermore, data proves out that a good equity share program like an Esop can help lift business revenue and profitability in the long term.

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You know, some of it be a tax savings, some of it because these employees now have skin in the game. I mean, we talked with,

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one of our interviews in the past about how they have their staff now looking towards fuel costs and how do I save money there so my account can grow in the future?

Chapter 7: Performance & Profitability Impact

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Absolutely. And Esops are very flexible,

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as we highlighted in our Esop bootcamp and different Esop radio episodes and Esop can come in. I’m own, 1% of the company can own 100%.

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So just like you think tech companies out there that have employee incentive stock and that just is maybe 2 to 5% of the capital structure.

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Same thing with the Esops. It does not need to own all the company. It can earn a small chunk.

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You know, there’s no right or wrong answer.

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You can always increase the Esop ownership over time.

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So we’re seeing that fit in into these models out there in the Central Valley.

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So data proves that good equity share programs such as Esops lift the business revenue and profit for the long term.

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Ben, I know you did some research here.

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Provide some insight there on how a good equity share program like an Esop can enhance the company’s long term cash

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flows and long term strategy and long term survival. Absolutely. So, you know,

Chapter 8: Tax Advantages of ESOPs

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let’s think of it in terms of 100% Esop to begin with.

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A lot of times we have these, you know, you sell the entire company to the Esop. And so if it’s an S Corp,

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all those profits flow through to the owners.

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And the owner in this case is an Esop trust and Restore Trust does not pay tax.

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So we’re getting a huge tax savings on the corporate level from that with which can increase profitability there alone.

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And then additionally, you know,

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if we think more from a qualitative aspect, less quantitative,

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we have everybody rowing in the same direction, so to speak.

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Everybody’s working towards that same shared goal,

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and everybody is operating a little bit more efficiently. Perhaps everybody understands that, you know,

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if we take care of things a little bit better, these things that we now own,

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our profitability will increase and the numbers bear themselves out. The most recent data is from 2023,

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but it just shows that of the most successful private companies in the United States,

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a good chunk of them are esops or have some sort of equity component. Absolutely. And, Ben,

Chapter 9: Ownership Mindset & Efficiency

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you have good insights into our sustainability practice here at many companies.

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Are there long term cash flow planning and Esop buyouts and so on.

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And you see probably a lot of Esop millionaires in that data. Absolutely.

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And a lot of times that’s the first question we get is when when do I become a millionaire as this Esop employee. And at the end of the day,

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you know,

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you just continue to put in that hard work, continue to grow.

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And there are companies that you would not expect that somebody that started out scooping ice cream or pumping gas has become a millionaire

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just by showing up to work and doing their job. Yeah, amazing stuff here.

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So I think the main takeaway here of the trend that we’re seeing in the Central Valley,

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which I think is we’re going to see this nationwide as well, you know, is there’s a trend with employees wanting to gravitate towards

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companies that will give them skin in the game so that their hard work translates to future wealth in the long term.

Chapter 10: Talent Attraction & Retention

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So the idea of, hey, I’m just, you know, working for cash and that’s it.

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And I don’t care if I have skin in the game. You know, I think that those days might be limited. No, I fully agree.

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And I think whether the company sells 5% or 100% to the Esop,

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you know, it solves a lot of a lot of questions that they may be searching for. How do I attract and retain top talent. And this can be a big component to that.

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You know,

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part of the total package or total rewards is a lot of the HR speak is.

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But these problems these issues are not just from the Central Valley.

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They apply to businesses across the United States.

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And I think that’s where we can fit in to really help out identify these problems,

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these pain points that these companies face. And we have solutions for them. Absolutely. And and then I’ll give you two scenarios.

Chapter 11: Final Takeaway: Equity as Expectation

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Option one is a job offer for a consulting firm that has a decent base,

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you know, maybe some incentive pay. You know, bonuses and so on, but no equity.

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Option two is one that offers long term equity. All things equal.

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Was wondering in the pic if you take the long term equity, of course.

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I mean I don’t have to think about tomorrow then or I have to think a little less hard. You know, that’s already taken care of.

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Whereas today I just have to worry about showing up, doing my job, getting things done. Exactly. So skin in the game,

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we always give the analogy no one washes a rental car,

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and it’s really cool to see that this is happening nationwide.

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And I think a bit of it is always supply demand. Two right. Has talent is out there. And on top of that.

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So the companies need to be awesome places where employees want to work. And on top of that,

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you have so many business owners who need to create a strategy for their business, for their long term succession,

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for their liquidity.

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Esop and the right fact pattern makes tons of sense. It’s not for everyone, as we know, but for the right company. And we always say,

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hey, if your company is better off independent, Esop could be a viable structure here. I fully agree Trevor.

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Good point. Yeah.

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So let’s leave here with one question for you listeners.

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How are you using equity in your growth strategy. Send us a note to chat more.

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Reach out to us email or follow us on Spotify,

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Apple, YouTube and also ESOP Radio on LinkedIn. Hope you enjoyed the session! Have an awesome day everyone!