Speaker: 0:01

Welcome to The Heart-Led Business Show, where compassion meets commerce and leaders lead with love. Join your host, Tom Jackobs, as he delves into the insightful conversations with visionary business leaders who defy the status quo, putting humanity first and profit second. From heartfelt strategies to inspiring stories, this podcast is your compass in the world of conscious capitalism. So buckle up and let your heart guide your business journey.

Tom Jackobs: 0:36

Welcome to the heart-led business show where passion meets purpose. And today we're graced with the presence of Kelly Finnell, a Titan in the realm of ESOP consulting. With over 300 electrifying speeches and 14 insightful articles under his belt, Kelly's heart beats to the rhythm of ownership, succession, and helping businesses flourish. As the president of EFS ESOP consultants, he's turned the complex world of employee ownership into a symphony of success. So get ready to dive into the conversation about heart-led business ownership from one of the best in the biz. Welcome to the show, Kelly.

Kelly Finnell: 1:14

Thank you very much. It's great to be here.

Tom Jackobs: 1:16

Wonderful to have you here as, as well, and have you on the show. I've always been really interested in the whole ESOP program and of course, I'm gonna have you define what that is for the listeners that don't know what an ESOP is, but I think it is one of the most beautiful ways of creating a legacy, and that's just my own personal opinion. But I always like to ask, though, on the first part of the show, what's your definition of a heart-led business?

Kelly Finnell: 1:42

One of the articles that I've written is called Compassionate Capitalism,

Tom Jackobs: 1:48

Wow. Okay.

Kelly Finnell: 1:48

and the definition of a compassionate capitalist is someone who does well for others while doing well for himself. And to me, that's a heart-led business. I've got this scale that I talk about with business owners. It's called the Greed Scale. And on one end of the scale is Mother Teresa, the woman who gave away all of her earthly possessions to take care of the poor. And on the other end is Gordon Gekko.

Tom Jackobs: 2:19

Greed is good, baby.

Kelly Finnell: 2:21

And in order to be a good candidate for an ESOP, you don't have to be Mother Teresa. You're going to get fair value for your business. But you can't be Gordon Gekko. You have to be looking at something beyond yourself. And most of our clients are motivated primarily by taking care of the people who have helped them get to the point where they can cash in on their life's work. They wanna do that in the most financially. Efficient way possible. And the tax benefits of an ESOP allow them to bring those two things together, doing well for others, while doing well for themselves.

Tom Jackobs: 2:57

Yeah, that is, I think that's gonna be one of the top definitions of a heart-led business. I really appreciate that too. That you do well by others. You're gonna do well by yourself. Everybody wins at that point.

Kelly Finnell: 3:09

The only loser in an ESOP is the tax man.

Tom Jackobs: 3:12

That's okay.

Kelly Finnell: 3:14

Exactly. I don't lose any sleep at night because of that.

Tom Jackobs: 3:18

Yeah, I don't think I would either, so that's awesome. So aren't we, for those who don't know what an ESOP is could you define that for us?

Kelly Finnell: 3:28

Yep. So let's start at the very beginning. It stands for Employee Stock Ownership Plan. Some people mistakenly refer to it as an employee stock option plan, and there's a big difference between those two. With an option plan, the employees have to come up with money to pay for the stock that they end up owning with an ESOP. The company finances that acquisition of the stock that goes into their ESOP accounts, and the employees don't spend any of their own money to do that. The beginning and employee stock ownership plan, and by definition, it is a retirement plan, like a 401k plan. With three key differences. The first difference is that an ESOP can borrow money. Every other type of retirement plan is specifically prohibited from doing that. The second is that an ESOP can engage in certain transactions with parties and interest, and I'll come back and explain that. And then the third difference is that an ESOP is required to invest primarily in the stock of the sponsoring company. So the business that I own. So when you put those three things together, what happens is with an ESOP, a company borrows money. Part of that comes from a bank loan, and the other part of it comes in the form of an IOUA seller note issued by the company to the selling shareholder. So those that gives us our two sources of capital, that capital is used to purchase stock. From our business owner. And so that's the transaction with the party in interest is the retirement plan is purchasing stock from the business owner and then over a period of time, 20 to 40 years, generally the stock is divided up among the employees ESOP retirement plan accounts, and that gives them a way to own the business that our client, the selling shareholder is cashing in on.

Tom Jackobs: 5:33

Oh wow. Okay.

Kelly Finnell: 5:34

That's really what an ESOP is. It's a retirement plan with those three key differences that allow it to act as our retirement plan for the employees and a liquidity and succession vehicle that maintains the company's legacy, as you mentioned, for the business owner.

Tom Jackobs: 5:51

Yeah. And the employees don't have to put any of their own money necessarily into it to buy the business.

Kelly Finnell: 5:58

It is very rare for employees to put in their own. Yeah, it's less than 2% of the ESOPs that we work on have any employee investment. 98% of the time the company finances 100% of the purchase of the stock that goes into their accounts.

Tom Jackobs: 6:19

Okay. Sweet. And when you mentioned the time horizon is 20 to 40 years, is that when would a business owner think about starting an ESOP in their career?

Kelly Finnell: 6:32

Yeah, most of our clients are baby boomer business owners, so that generation that was born between 46 and 64. They're getting along a little long in the tooth at this point. So most of our clients begin the process somewhere between age 60 and above. We have clients that sell to an ESOP into their early to middle eighties or eighties. Yeah. And so, there is a range. But the owner is going to get paid out much more quickly than the employees are going to receive the stock in their account. So the owner might get paid out with a down payment financed by the bank loan day one it close, and then get paid off on the seller notes over a five to seven year period. Okay. So there's a disconnect between gets his money and when the employees get the shares that are allocated to their accounts. Employees get those benefits spread to their accounts over a period of time.

Tom Jackobs: 7:34

Okay, so is it that over that period of time, the 20 to 40 years, that's when the ESOP is paying off the loan and paying off the owners? So then the full equity is then in the shares? Is that the process? Okay. Alright, cool. Nice. So what size of business do you typically work with to get a ESOP in place?

Kelly Finnell: 7:56

Yeah, that's a great question and it's very important because I get two or three calls a week from business owners that are interested in doing an ESOP. And they have all of the right motivations. They're heart-led businesses, they have all of the right motivations to do it. And we get to the end of the conversation and I ask them about the company's financial metrics, and they say we had a profit last year of$300,000. That is not a good candidate for an ESOP. ESOPs are expensive to implement because they're highly regulated by the government. There are many teams of lawyers involved in every ESOP transaction, and so in order to be a good candidate, a company needs to have a minimum adjusted EBITDA of at least$1 million and$2 million works better. So to give you some real life input, over the last four years, our smallest client had adjusted EBITDA of 1.2 million. Client had EBITDA of 56 million. And the mean was 4 million of EBITDA. And that's really what in general, the ESOP market looks like.

Tom Jackobs: 9:11

Okay, so yeah, I, I work with a lot of doctors that have practices in, in, a lot of'em are cash pay, private pay practices that are probably meet in that range. So they're doing, five or 6 million gross and so they might be having that. How do you work with a business that is tied around an individual that might, they might be the heart-led individual, that's the practitioner and also owner of the business.

Kelly Finnell: 9:37

So that's another very important determining factor as to whether or not a company is a candidate. You've got to have the financial metrics that we just discussed, but in addition to that, since an ESOP is an internal transition, it's imperative that the company have a successor management team.

Tom Jackobs: 9:56

Ah, okay.

Kelly Finnell: 9:58

Many of our clients already have that successor team in place. Every once in a while we have a company that's a good candidate for an ESOP. They don't yet have that successor management team in place, and they use the ESOP as a springboard for the future to help them create that successor management team. And that might come from internal people who have been with the company for a while, or it might, they might come from outside the company, so they might be an external hire.

Tom Jackobs: 10:32

Okay, that's cool. So let's kinda shift gears a little bit. Let's talk about the heart a little bit and what brought you to build a heart-led business and support other heart-led businesses.

Kelly Finnell: 10:44

It was like many business owners, something that happened totally by accident. When I was in law school. This was 1979. So ERISA the law that codified ESOPs for the first time was only five years old. Between my first year and my second year, that summer, I had a job working for a firm in Massachusetts. And every Monday morning we had a meeting and the leader of the pension team assigned projects for the week. And this is 1979. There was no email. So he had received a letter in an envelope delivered by the United States Postal Service that asked for a white paper on ESOPs. And so he looked around the room and all of these very experienced pension lawyers said, man, I don't know anything about ESOPs. And so the leader of that group decided to assign that project to the kid. And in 1979, I was the kid. And so I went to law school thinking that I was gonna be a litigator, which is the traditional path for lawyers. But because of that experience, that summer, I decided that I was gonna go into business law and tax law and help people sell their businesses to their employees with a huge tax subsidy from Uncle Sam.

Tom Jackobs: 12:19

That's awesome. That's a long time to be doing the work that you're doing.

Kelly Finnell: 12:25

I know. It's hard to believe.

Tom Jackobs: 12:28

So you must absolutely love it. What's the drive now? Not being obviously in 79, you're being told to do this, but what's the driver now for you?

Kelly Finnell: 12:38

It's primarily I love what I do. I love helping business owners. Cash in on their life's work. They had a dream and the dream was to build a business that was gonna benefit their family and their employees. And there's nothing in the world more satisfying in my mind than helping them achieve that goal. And so that's one of the drivers. Now, the other driver, honestly, my seven grandkids. One of my personal goals is to create memories for my seven grandchildren. So I'm making money and putting that money to use to achieve that goal.

Tom Jackobs: 13:21

Oh, I love that. Yeah. Memories are so much better than things for sure. Yeah. Do you mind sharing one of the memories that you would love to share?

Kelly Finnell: 13:34

Yeah. There are lots of great experiences that I've had in the ESOP world, but perhaps my favorite at least recently was a company that we worked with in Alabama. It was a large company. When we began working with them, they had 1200 employees, uh, doing very high tech, sophisticated engineering work. Their primary client was the Department of Defense. And we had done their ESOP 10 years later, the company had grown substantially from 1200 employees to 2200 employees. And a strategic buyer, an international company based in France, came along and said, we're gonna make you an offer that you can't refuse. And so this 100% employee owned company sold to this big international company for 1.6 billion with a B dollars, and much of that money was divided up among those 2200 employees. So a few months after the transaction I took the CEO, the former CEO now of the company to dinner, and I said. Tell me the best thing that happened as a result of this transaction. He said we had an employee who had been with the company 40 years. He said he was one of our least organ organized or least educated, non-professional employees. But he had been with us forever. He loved the company, we loved him. And after I had done the meeting where I explained to the employees the sale and what this was going to mean for them, this gentleman walked into my office he said, boss, I appreciate everything that you talked about during that meeting, but could you help me understand what that means to me? And the boss got on his computer and called up this gentleman's account, and he said, it means that in six months you're gonna get a check for over$4 million.

Tom Jackobs: 15:48

Oh.

Kelly Finnell: 15:50

And this was a guy who wasn't making a hundred thousand dollars a year. Never dreamed that he would have this type of financial security, and he said to the boss, he said, I'm gonna set up a fund so that everyone in my family for generations to come, can go to college. He said, I never had that opportunity. And he said, that's what I'm gonna do with this money that I'm gonna get. I'm not gonna spend it. I'm gonna use it for grandkids and great grandkids for generations to come.

Tom Jackobs: 16:24

Wow. That is such a beautiful story and so heartfelt. That's great. Wow. What a great payday too.

Kelly Finnell: 16:33

Yeah. The CEO of that company felt like a million bucks because he was involved in doing something that had that impact for people that he cared about.

Tom Jackobs: 16:47

Yeah. Yeah. Now, just outta my own curiosity, that the CEO that was involved, was that the original owner or had the owner already just.

Kelly Finnell: 16:56

This was an old company.

Tom Jackobs: 16:58

Okay.

Kelly Finnell: 16:58

This was when we did this transaction, we called it G three. So this was a third generation transaction, and this CEO that I'm referring to was actually the fourth generation CEO. This company that had been around a while?

Tom Jackobs: 17:14

Okay. Okay. Nice. The owner of the company at some point had developed the ESOP and passed that on down to the employees and okay. It totally makes sense that that's very cool. What about, what, what goes through the mind of the business owner that's wanting to put together an ESOP and sell it to their employees? Do you have insight into that?

Kelly Finnell: 17:38

I think that our clients tell us that culture is the key to their company's success. And that culture is something that has been developed intentionally by the owner of the company. He wants there to be a certain feel that the employees and their customers get from doing business. They want those folks to feel like it's family, that they can trust him, and that they can rely on them, and that the company has the employees and the customer's best interest at heart.

Tom Jackobs: 18:11

Yeah.

Kelly Finnell: 18:12

They know a wise business owner knows that if they sell to a third party, such as private equity, that third party's gonna tell'em, look after the sales, nothing is going to change.

Tom Jackobs: 18:23

Right.

Kelly Finnell: 18:23

But the reality is everything is gonna change. If I write a check to buy your company. I'm in control and I'm gonna run that company the way I want to, not the way that you had run it and that your predecessors had run it. And so when a business owner wants to cash in, but at the same time maintain the company culture and maintain the legacy that the business represents for the owner and his family, then they're really good candidates and they are really focused and attracted to employee stock ownership plans.

Tom Jackobs: 19:00

So why not just move it down the family line, give it to your son or daughter and move it down. Why? Why the employees.

Kelly Finnell: 19:07

Some business owners do that, and that's not necessarily inconsistent with doing an ESOP at the same time.

Tom Jackobs: 19:13

Okay.

Kelly Finnell: 19:14

You can do a combination of transitioning to family and to, employees. By doing a partial ESOP in which your employees end up owning a portion of the business, likely something like 49 to 51%, and your family members own the rest of it. So those two goals are not inconsistent. But it's Rare for the family to have the money that the business owner might need to fund their retirement.

Tom Jackobs: 19:50

Yeah.

Kelly Finnell: 19:50

And so in that situation, the business owner needs to sell to get some liquidity.

Tom Jackobs: 19:57

Okay, nice. Now, you being a heart-led business owner as well, what challenges or great moments have come from being a heart-led business owner for you?

Kelly Finnell: 20:10

The experiences that I have every day in dealing with business owners, and helping them achieve their goal of taking care of their employees and their families. That's what it's all about for me.

Tom Jackobs: 20:26

Yeah. Yeah. You perpetually have that great smile on your face like throughout the day as you're helping these folks. Yeah.

Kelly Finnell: 20:34

It's very fun and rewarding.

Tom Jackobs: 20:36

Yeah. So how do you balance, and this really the purpose of the show is talking about the balance between making a profit and having a healthy business, but also being that heart-led business. How have you seen either your clients or yourself balance having a heart-led business, but also making sure that you're making a profit and you can help people along the way?

Kelly Finnell: 20:59

I think that business owners focus on culture. And treating their employees the way they would want to be treated and treating their customers, that way. To me, that's what being a heart-led business and being a good candidate for an ESOP is all about, is caring about something in someone beyond yourself.

Tom Jackobs: 21:20

Yeah. And then allowing the employees to shine and blossom and pull up the business as well. Yeah, there's a, I had a guest on the show and he runs a payroll company and he was, he's going through the ESOP program as well. He is I couldn't imagine my kids running this business. These guys have run it, for the last 30 years. So who better to leave the company to then the employees? Yeah. And then get that great tax benefit as well for doing that. Yeah. What other stories do you have about some of the, maybe some of the train wrecks that may have happened? Everybody loves a good train wreck story, but.

Kelly Finnell: 21:57

Fortunately I haven't had many of those, but I've had one that really sticks out. I got a call from a business owner went to his office, said, I think I wanna sell and I wanna sell to my employees. And my lawyer has told me that an ESOP is the best way to do that and that you're the person that I need to talk to about an ESOP. And so the first step in our process with a client is to do a feasibility study. And in that study we answer the four key questions that I have. ESOP specific valuation, how the transaction's going to be financed, what can you do in addition to the ESOP for your mission critical employees. And then who runs the company corporate governance, who runs the business after, the ESOP is implemented. So we did that feasibility study at the end of it he said, okay, let's go. I wanna do an ESOP. That's very unusual. I had two meetings with this gentleman and ESOPs are complex

Tom Jackobs: 23:02

Right.

Kelly Finnell: 23:03

He claimed to have grasped everything after two meetings and had made a decision to go. So I was a little suspicious because that's so unusual. Usually it's a multi-month process for a business owner to process all of this and make the decision. But we went ahead, we got everything implemented. And like any business transaction, when you do an ESOP, you have a due diligence meeting. And the purchaser in an ESOP transaction is the ESOP trustee and the ESOP trustee and the ESOP due diligence meetings ask the same kind of questions that any purchaser, would ask. And many of those questions are focused on risk. And so the business owner, the seller in this situation was asked verbally and in writing multiple times, are there any lawsuits or government actions pending against the company? And he said, no.

Tom Jackobs: 24:02

Okay.

Kelly Finnell: 24:03

That turned out to be a lie. And the transaction a year later when this was discovered was unwound. He had all of his sales proceeds clawed back, and the company was then sold, and I don't remember the exact numbers, it's been a while, but let's say he sold for$25 million after the dust settled and all of the damage was taken care of. The company sold to a third party this time for$500,000.

Tom Jackobs: 24:37

Oh wow.

Kelly Finnell: 24:40

So you know the message is if you think an ESOP gives you a way a fast one, you're not a good candidate and you're going to be disappointed with the end result.

Tom Jackobs: 24:54

Yeah. And that, that makes sense for somebody that's just driven by profit there. He's probably was in this trouble, wanted to get out of the business as quickly as possible, and he is oh yeah, this ESOP would be good because employees don't know what, those stupid employees, whatever that mentality is, which is ridiculous. Yeah. That's interesting. Is that, that trustee, is that one of the employees or is that somebody assigned?

Kelly Finnell: 25:18

No. There are professional ESOP trustees around the country. There might be 15 to 20 of them, and these are people who, have advanced professional education and designations and have been doing this for 20 years and do you know, 30 to 40 transactions a year and know how to do this and do it right, which is critical to protecting the selling shareholder from fiduciary risk.

Tom Jackobs: 25:48

Yeah. And then, and they're protecting the employees as well, right? In terms of sure that they're not.

Kelly Finnell: 25:53

That is exactly right. They're ensuring that the employees through the ESOP don't overpay for the stock that's being purchased from the owner. That's the number one responsibility of the trustee.

Tom Jackobs: 26:09

I would see that, that's, that would be the, probably the biggest risk in terms of, or the biggest lever an unscrupulous person to pull is let's just jack the up the company. They won't know any different, and then on with it. Yeah, that's interesting.

Kelly Finnell: 26:24

I'll tell you another heart-led story about sales price. I had a company in Middle Tennessee, the CFO came to me and he said, I think that the owner would be a good candidate for an ESOP, but he has all of these misconceptions about ESOPs he doesn't think that an ESOP's gonna be able to pay him fair value for the stock. And I said send me some financial information and me and you will have a conversation about that. And then you can go back to the owner. And see what he thinks. And he did that. And at the beginning of the next conversation, the CFO said, the owner thinks that his stock is worth 24 dollars a share. And I had gotten the financial information, had my analyst look at it, and I knew it was worth at least 27 and a half dollars a share. And so I said to the CFO, look, I guarantee you that we can get more than the owner's goal. And we discussed the details and the process and he said, okay, fine. So we went through due diligence, we negotiated with the trustee, and I came back and the trustee had offered over$27 per share. And I said to the business owner, we've exceeded your goal. We've gotten you more than$27 a share, and that will be the sales price. And I'll never forget this. He said, you didn't listen to me. He said, I want$24 a share. And he said, that's all I will take. He said a way for that additional money to benefit the employees.

Tom Jackobs: 28:09

Wow.

Kelly Finnell: 28:09

He said, I want to be paid fair value, which I think is X. And if I can get more than X, then I want the employees to benefit from that. Not all of our business owners, in fact, that's rare, that happens and that is so counterintuitive, and that has happened more than once.

Tom Jackobs: 28:30

You work close enough with your employees, and if you have that culture, it's, it becomes like a family too. And hopefully a functioning family not a dysfunctional family, but a functioning family that doesn't screw each other out of money and stuff like that. I mean that, yeah, it makes sense. I think I would do something like that too if I went through at ESOP. I get what I think I deserve out of the company. The employees, like you said at the beginning of the show, the employees are the ones that are building that company with you and you wouldn't have that success without them. That's very cool. Kelly, this has been just a fascinating conversation. It's typically, it's a little bit different than our normal conversations, but I think it, it goes to the core of, that you can still have a profit business and still be heart-led and make sure that goes for generations to come. And I love that so much. How can people learn more about your work and get in touch with you if they wanna create an ESOP as well?

Kelly Finnell: 29:24

They can go to our website, which is www execfin E-X-E-C-F-I-N.com. We got lots of educational material on the website and so that could be a great resource for people I've written a book they can find the book and a link to Amazon to purchase the book online. The book is the only one of its kind that's written for business owners. There are lots of ESOP books that are written for lawyers and CPAs and investment bankers, but there's only one that was written for business owners. And so it gives a simple explanation of what an ESOP is and how a transaction works, how it benefits the employees and the tax benefits. And then it also has about six case studies. And I have found that's the best way. You're focused on stories. Yeah. And what I think business owners relate very well to stories. And so there's six stories that are based on real life clients, and so I think it would be a great. Resource for anyone that's interested in learning more about ESOPs.

Tom Jackobs: 30:31

Awesome. And we'll link that all that up into the show notes as well. And I think you, there's a link that we'll have in there as well for the introduction, the ESOP introduction program that you have as well. Cool. Thank you so much, Kelly, for sharing your wisdom and sharing your time with us today. I really appreciate it and I know our listeners really enjoyed the conversation as well.

Kelly Finnell: 30:50

Thank you. I enjoyed it very much. Great to be with you.

Tom Jackobs: 30:53

Awesome. And thank you listeners for watching the show today or listening on your podcast application of choice. I really appreciate it and I know Kelly appreciates you spending the time with us today. Make sure you're checking everything that he's doing down in the show notes. We're gonna link all that up so it's super easy for you to go down there. Click away. Go find that, resources and stay heart-led with your employees.'Cause that's such a beautiful thing that you can leave to your employees if you have a business that can do an ESOP. And if you could do me a favor real quick, and that is to share the show with a friend or family member that could use the advice that we shared on today's show and that might be interested in learning more about being a heart-led business. And until next time, lead with your heart.

Speaker 2: 31:37

You've been listening to The Heart-Led Business Show, hosted by Tom Jackobs. Join us next time for another inspiring journey into the heart of business.