A Key To ESOP Success: Develop Future Leaders
A Conversation With
Chair of Corporate Group & Founder of
Employee Stock Ownership Plan (ESOP) Practice Levenfeld Pearlstein, LLC
David Solomon founded and currently serves as the head of the Chicago-based law firm Levenfeld Pearlstein’s Corporate Practice Group and ESOP Services practice. An ESOP gives owners the chance to stay involved with the company while also providing the employees with an opportunity to benefit from the value of the Company’s stock they otherwise probably couldn’t afford. David believes the key to a viable, sustainable ESOP is for its current owners and leaders to share a commitment to fostering a culture of leadership in part by always providing their leaders and managers with mentoring and leadership development opportunities.
Leading with Courage Academy: What makes you smile when you get up in the morning?
You know, you do something for 25 years, and every once in a while, you wake up and you say, “I helped somebody through a problem that they had…” whether it be a big problem or a little problem. That’s the fun part of what I get to do – I, along with my colleagues, help people solve their business challenges. People trust us to give them advice so they can make better business decisions. We also help people with some of the most personal things they’ll ever do with their business or life.
Any books that have guided your business beliefs or practices?
I recommend the book, Getting Naked by Patrick Lencioni. The concept of the book is when you’re in a professional service business you must be comfortable with and willing to tell people the “kind truth”, even if it isn’t something they want or expect to hear from a professional advisor. Then, give them your best advice and be vulnerable with them by saying, “Look, I may not have all the answers for you, but here’s what my gut is saying.” That’s the kind of place we have at Levenfeld. And that’s the kind of practice I’ve always wanted to be part of.
I enjoy giving people the peace of mind that they have somebody in their network that they can trust. And we’re subject to confidentiality rules and guidelines too. There are certain things people can tell us that stay with us. They don’t always have that with their family or friends, but they get that from us. I’ve always found that philosophy to be what distinguishes us from other law firms. It’s a part of our culture from the top down.
What’s important to know about you?
There’s a saying I use and it’s activity without achievement is a waste of time. It’s a take on something John Wooden, the legendary basketball coach, said. This is something that really rankles me -- when I see a lot of people chasing this and that just for the sake of activity with no clear goals or objectives for why they are trying to accomplish. I’ve always tried to follow the rule that if you’re going to put forth an effort, it has to be a means to an end and a goal. It’s my pet peeve -- people who are obsessed with chasing their tails or going after the next best thing. By chasing a hundred things, they never seem to really achieve anything.
Can you share how you got where you are today, especially how you got involved in ESOPs?
I tell my kids all the time, “Life will take you on the path that it’s going to take and you can’t always plan for or expect where it leads.” ESOP work was an accident at the beginning, then it became intention. Let me try to explain.
My first job out of law school was at a bank. I rotated through different positions at the bank and on my sixth rotation, I was moved into the trust area. They had a bunch of ESOPs they were working on that were the kind of ESOPs that you’d expect from the 1980s; those where stock of large, public companies was being put into the hands of employees as an anti-takeover strategy. I was always looking for a way that I could merge my finance and legal backgrounds and I suddenly found it.
The bank put me in the trust division, and I learned what an ESOP was. Then, in the mid-90’s, the bank started getting more involved in these transactions. But they weren’t being done by the large public companies any longer. Instead ESOPs became a go-to business succession strategy for successful, privately-held companies. That’s how I got introduced to many of the businesses and advisors with whom I interact with today. Over time, a lot of the people I knew became leaders of their organizations, and like me, we had all come through the ranks. We all belonged to organizations and professional service firms that were geared to helping people get involved in the community. So some of my involvement with ESOPs was luck and then at a certain point, I found that I liked them and what they represented. Then it was intentional and I began thinking, “Okay, where do I find the place where I can do this the best?”
What has helped you develop as a leader?
I’m the oldest of three. I came from a family that had a very patriarchal culture. My grandfather was very much in control of the family. Then he passed at age 72. My dad was in his early 40s at that time and he kind of took that over. My dad died young at 58, when I was 30, and I naturally fell into the family leadership role due to these unfortunate circumstances. I was thrust into it and being the oldest of my brothers and cousins, I was looked to for almost everything.
When I was younger, I was involved in a lot of charities and moved through their ranks and became a leader in many of those organizations. I learned a lot from them about leading a group of likeminded people in an environment where we all had a common goal. Throughout my law firm career, I’ve always been given leadership responsibilities within the firm itself. For example, I started the ESOP practice here when it didn’t exist. Along the way, there have been many touchpoints and experiences that have gotten me involved in many leadership positions and opportunities.
Has your leadership journey been more self-directed than planned by your Firm?
Yes. And it’s like everything else. Sometimes it’s a matter of who’s going to step up when this opportunity pops up. It’s a mixture of being given the opportunity and wanting to go after it. There are people in this world who are happier being followers than leaders. I’m just the opposite.
What are some inflection points you’ve crossed during your career?
Every ten years or so, there seems to be, for me anyway, a break where I need to make a decision. At 21, it was, do I pursue a finance degree or go to law school? I went to law school. At 30, it was, “Do I get out of banking and go into law?” Yes. At 40, it was, “Do I switch from the old law firm to Levenfeld and start an ESOP practice at it?” I had to decide if I wanted new opportunities to work with some new colleagues that may have a little more energy and enthusiasm for an ESOP practice. I came to the conclusion that I had sort of plateaued at the old place, so here I am.
Now I’m 51 and I’ve made a conscious personal decision to make more time for smelling the roses. Do a bit more traveling; try to take some more time for myself. Trying to carve as much of that out as possible before I get too far down the road. A lot of people say, when I’m 60 I’ll sell and I’ll have time. Some don’t make it, right? My father didn’t make it. I think, at some level, you have to become a more well-rounded individual. That was my 50-inflection point. I’m taking a bit more time for myself.
Any regrets about the decisions you’ve made? There are always things in your life when you’re working that you didn’t do on the personal side. I wasn’t always at every baseball game, I didn’t coach my kids’ sports teams and that sort of thing. I chose to focus on my career during that period of time. You can’t look backward. I always tell that to the young people who are working for me and trying to manage their work-life balance. I tell them it’s about quality, not quantity. You don’t have to be at everything. You have to be there for the most important events and when you’re present, you’re present. That’s what your kids will look back on and remember. I know this because when I’ve talked to my kids about that, now that they’re adults, they’ve always told me when you were there, you were there.
Is there any person in particular that made a tremendous impact on you as a leader?
When I joined here, Bryan Schwartz, one firm’s founders, asked me a very simple question: “Do you have courage?” And I thought that was kind of a weird question. I’m just moving three blocks away from where I work now. I don’t think that’s very courageous.
Bryan went on to frame it for me. He said, “Look, you’re in a comfy environment. You’re a leader there. You’re in good standing. You could probably stay there for the rest of your career and be perfectly fine and comfortable, but do you want to challenge yourself and do you have the courage to make yourself better than you are today?” And that was kind of what got me. So he was responsible for getting me to move to Levenfeld. There is no doubt about it. He sealed the deal.
What do you like about the ESOP community?
There are a lot of great mentors in the ESOP community. One of the things that I think is unique about our community is how open everybody is. People just give advice freely and try to involve and include others and not make people feel that they don’t have time for new ESOPs. Even people who I competed with were very generous with their time and advice and telling me how to make my way through the community. Now that I am one of the “senior” members of the ESOP community, I am trying to pay it forward like my mentors did for me.
Do you believe in leading by example?
I think that’s a big component of being an effective leaders. You have to be out front and you have to emulate the behavior that you’re expecting from others. In my opinion, if you’re not the first one in, the last one out, and people don’t see you in the trenches with them, they’re not going to respect when you ask them to do something. You can’t always say you’re in the mud and I’m up here. You sometimes have to get in the mud with them. I think leading by example is very important for sure.
Have you ever had a job that you absolutely hated and how did that impact who you are today?
I’m lucky because I’ve never had a job that I hated. Most people in my generation probably have worked at six, eight or ten places. I’ve worked for four in 25 years. So that’s a reasonably good track record. Two of them were short term at the beginning, but the last two were 11 years and now 12, so that’s a lot of longevity.
I think there are certain aspects of this job that I don’t like, two of these, for example, are being very administrative and inwardly focused. I think I’m better when I’m out there with clients, spending time with them and getting them to trust me and my colleagues. I think you have to proactively spend time with clients, visit them, see their place and be invested in them as opposed to just waiting for the phone to ring.
What is it that makes the ESOP transaction special?
There’s only one way to say it. It’s a happier way for an owner to sell his or her company. Our clients are mostly privately-held, and in many cases family-owned and very entrepreneurial type of companies. The dichotomy you see is, with an ESOP they’re very much in control of the sales process. They’re also very generous with their people. They involve their people; they worry about their people. It’s not to say that those who sell to private equity care any less about their people or are only concerned about how much they’ll receive at the closing, but they’re not necessarily as satisfied when they look back on a sale to a private equity firm as they are when they sell to an ESOP. Anecdotally, I’d say if you compare the ESOP versus the non-ESOP track, the main operator of a non-ESOP deal won’t be with the buyer more than 12 months after closing in most cases even though they have contracts to stay on for three years. They throw their keys on the table, they keep their rollover equity and they’re gone and that’s probably 90-95% of the time.
In contrast, former owners of ESOP companies are usually are typically still working for the company in some capacity five, seven, even 10 years after the ESOP is formed. They stay involved not just because they help finance the sale to an ESOP, but the former owners usually continue to invest their time and their energy to the continued success of the business. While there needs to be balance between a former owner who wants to retain full control forever which can be counter-productive to the success of the ESOP, it is helpful for the former owners to continue to be invested in the future of the company. Most business owners who sell to an ESOP are not the type of people that just throw their arms into the air and say, “The future is not up to me and I don’t care what happens after my year is up because I don’t have any control over it.”
Any ESOP deals that have made a lasting mark on you?
It’s amazing to see groups of employees that never had any wealth and had no prospects of generating wealth, walk away with six or seven-figure check from the ESOP. The one that stuck with me closed in 2008. A gentleman came to the US from communist Hungary with maybe 20 bucks in his pocket in 1968 and proceeded to build a tool and stamping business. He made a lot of money along the way, but when he was ready to sell, he decided to use the ESOP as his exit strategy. When we were sitting at the closing table, his wife just starts crying because she was thinking about all the people that she and her husband grew up with. She told me that I couldn’t even imagine what they saw as kids, such as people getting shot in the street, losing their freedoms and having everything dictated to them and in our conference room they were about to get a check for more money than either of them could ever imagine. Those kinds of stories you don’t normally hear that with private equity deals.
What kinds of mistakes do you see ESOPs regularly making that you wish you could press the do-over button on?
A lot of the deals that went bad, ultimately went bad because they just didn’t invest the time to make any meaningful changes and bring people through the ranks and develop the next generation of leaders and managers. If the leaders of an ESOP-owned company do not invest the time in developing the next layer of management or give them the tools to be successful, those ESOP companies are the ones that have trouble.
Why do you think they’re not investing in developing their next generation of leaders and managers?
It costs too much. Some think, no one developed me, they’ll develop themselves. I think some of it’s ego. Some of it is they didn’t care about their people. They just wanted to do the ESOP to cash out of the business.
What sort of mindset do you think the leader of a successful ESOP has to have?
The ability to stay involved and mentor and develop the next layer of management. The next generation needs to understand and be trained in how to perpetuate a culture of ownership. Maybe that’s done by investing in an open book management tool platform or spending some time with other leaders in other organizations. It means going to ESOP conferences and diversifying your knowledge base.
What are some of the difficult moments you’ve faced as an advisor to ESOPs?
Having the difficult conversation with leaders and owners, a couple of years after closing, where I have to say, “Remember when we talked about management succession and getting new people involved and changing your management style and being more open?” It’s necessary when they don’t do it on their own or they don’t follow through on their commitments to bring in outside board members. I’ve found that these conversations go well about 50% of the time. Some say we’re still working on it, or we need to be more patient or we’ve got everyone’s best interests at heart. And some people say we just haven’t found that it makes a difference, or we don’t see anybody capable of doing what we do, so we just have to keep doing what we’re doing until we get paid.
What’s the best piece of advice you’ve given?
My best advice for ESOPs is to involve your people early and often, even though it may seem like it doesn’t matter. Make sure that you spend time initially with the new leaders when you become an ESOP. Be sure to make the change a fun, memorable event or rollout. Don’t do it in the middle of the day when everybody’s busy. Do it at night and do it with cocktails or dinner, something nice. Invite the spouses. Send the information home so that the spouses will read it too. Also be sure you spend the time to make it personal.
Then, involve your entire organization because sharing ownership is really about celebrating your organization’s culture. Get a lot of people on your internal subcommittees. Foster the development of a lot of ESOP champions in your organization. This is going to be easier when a lot of people understand it. And the other thing I tell people is to be patient with it too. It doesn’t happen overnight. It’s a rule of five. The fifth year generally is the year when somebody is going to walk away with a check and that’s when it becomes real.
What do you see as the biggest challenge facing ESOP leaders today?
I think the biggest challenge we have as ESOP leaders and advisors is how to make the business viable. It is very difficult to make this a long-term sustainable program. You have to involve a lot of professionals from different disciplines. You can’t just go to your lawyer and say, “How do I make it sustainable?” You need to work with your ESOP trustee, accountant and valuation expert. You should go back to your investment banker and commercial banker to ask, “How do we make this program relevant ten years from now as opposed to just the five years before I plan to exit? How do we maintain our momentum so that we have a healthy, thriving, sustainable business?” That’s the biggest challenge.
Given that’s the biggest challenge, what’s the future looking like for ESOPs in general?
The government has provided a certain level of incentive for people to do it with the S-Corp tax benefit. It’s been around for several years and we’ve already gone through one round of tax reform and it didn’t get scratched. It’s been a long time since there have been any meaningful changes in the ESOP tax laws. So, I don’t worry about that anymore, regardless of which party is in power.
I also think there’s a fallacy that there hasn’t been growth in ESOPs. I think it’s been steady only because we create new ones at the same rate that mature ones go out of existence. There’s a couple of things that the community is doing to promote ESOPs. The state governments and the Small Business Administration (SBA) are pushing them. The more people in government that can help us do that, great. But there’s no substitute to just having people tell their story. And then instead of country club chatter being, “I sold my business for 18 times.” You’d like it to say, “I did this ESOP and I did well up front. I did well on the back end, too, and boy, I helped a lot of people.” There is no substitute for that grassroots talk.
If your organization has an ESOP (or even if it doesn't) and you’d like to discover how your employees can build higher trust relationships that will help you retain your “A players”, talk to Leading With Courage Academy today. Our assessments, workshops and leadership development programs are designed to make an enduring impact on your team and meet your desire to have employees who are more present, energized and focused – on their goals and those in the big picture of the company. Call us at 312.827.2643 or email Hello@LWCAcademy.com.