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  • Writer's pictureby Lee Eisenstaedt

How ESOPs are Equipped to Deal with Turbulent Times

A Conversation With

Dan Markowitz, CPA

Partner & Leader of ESOP Practice

Boulay LLP

Dan Markowitz, CPA leads Boulay LLP's ESOP practice and guides his clients from start to finish or meets them wherever they are in the process. He specializes in audit and other financial reporting engagements for private and ESOP-owned clients in a variety of industries including retail, engineering, professional services, real estate, and manufacturing and distribution.One of Dan’s main goals are to be the trusted resource his clients seek out and to pair them with other strategic partners with whom they can form lasting relationships

Leading with Courage Academy: Dan, let’s start easy. What makes you smile when you get up in the morning?

Dan: First and foremost, my family. Second, I love working with business owners and being a resource for them.

How did you get where you are today?

I went to Penn State University. I was walking around the hockey rink one day and I ran into a familiar face that I knew through hockey. He asked me what I was doing for the summer and I said, “Well, I’m looking for internships at accounting firms.” He happened to have moved over from the local prosecutor’s office, investigating white-collar crimes into a public accounting firm in New Jersey.. And he said, “Send me your resume.”

Two days later, I had an interview and two days after that, I had a summer internship. So that internship kind of kicked off the whole process. I recall going out lunch with some of partners at the end of the summer. During that lunch they made me an offer for a full-time job, which I accepted,. I went back to finish my senior year with a full-time job in hand and didn’t interview anywhere else.

About two and a half years into my career, the firm sent me to Las Vegas for training, which is where I also met my wife. She ultimately moved from Minnesota to New Jersey, and when we started talking about having kids, we decided to move back to Minnesota. Fortunately, Boulay took a chance on me even though they didn’t have any open positions because a couple of partners thought it was essential to bring good people into the firm whenever they found them. I started working on ESOP-owned companies, but just on the corporate audit side, and started learning more about ESOPS and the reasons organizations set them up.

I made Partner five years ago and around then, the Firm was looking for somebody to take over as the lead in the ESOP practice, but just from a marketing perspective. They asked me if I’d be interested, I said “sure” and dove right in.

I was fortunate that I got to take part early in a big ESOP sustainability project that helped launch Boulay’s ESOP consulting practice. Since then, I have been active in the ESOP community, developing referrals and building on the strength of Boulay’s reputation in other areas. Back then, we worked with 45 or 50 ESOP organizations. Today we just have over 110 ESOP clients. Was there anything special that happened to help you develop as a leader? Or was it more of a self-development sort of process that you were on?

Not to be cliché, but I think team sports plays a big part in molding individuals and teaching them about leadership early on in their lives. I regularly reflect on how my hockey coaches handled situations. It always brings back a rush of memories of the leaders I want to be like and those I don’t want to be like. Here at Boulay, we have a program called Emerging Leaders Academy and that group provides the soft skills (a.k.a. essential skills) for developing our staff. I think there are a lot of companies that have similar programs, plus there’s Vistage and other CEO groups that can help on the soft skill side.

In college, and as you go through your career, you’re more focused on the technical skills than the essential skills like building a team, delegation, and providing feedback. Then one day you become a leader and suddenly those skills become more critical to your success than your technical skills. So, as you’re developing yourself and other young leaders, you need to find time to work on those soft skills – before you actually need them.

There are many cases where we try to shape and coach people who just don’t have it in their DNA to fill a leadership role. Worse yet, they don’t want that role. Many times, they are quite happy being technical experts without people responsibility. I think honest assessments about emotional intelligence are useful for knowing what a person’s strengths and weaknesses are. Let’s face it: Some people are not built to be leaders. One of the biggest mistakes that we all make is putting people into leadership roles who we know won’t succeed, but we do it to appease them, they do it to appease us, or because that’s what the next move is expected to be. That’s when people and organizations get into trouble.

What have you found makes the ESOP transaction special?

You’re giving ownership to a broad base of employees and empowering them. This fosters retention and loyalty among those employees. ESOPs give employees a sense of purpose that what they’re doing everyday matters. They’re making an impact and you’re providing them with a company retirement benefit, at no cost to them. There are cases where I’ve looked at a company or talked to a business owner and walked away saying the culture would never support an ESOP. The transformation wouldn’t be right for them because you don’t create an ESOP to create the culture you want to be. You create an ESOP to celebrate the culture you already have, and in doing that, you reinforce a purpose that strengthens employee loyalty and improves retention.

Is there a particular mistake you’ve seen ESOPs make on a regular basis that you wish you could hit the do-over button on?

A few. One is around communication. Leaders and managers shouldn’t underestimate the power and importance of communication, especially when the ESOP is new. The ESOP is a structure that’s different from what most of us are familiar with. So, the more communication that either the founder or the CEO delivers around those differences, or by bringing in outside advisors to give presentations, etc. the better.

Over-communication is huge and it’s impossible to do too much of it. I’ve never heard of an employee who left a company because it over-communicated; because they were seeking an organization that communicated less information or less frequently.

Second, I advise clients not to get too aggressive on the financial projections. You want to make sure that the business owner feels like they can meet those projections going forward because if they don’t, it’s just going to cause issues on the backside. Third, be thoughtful in the initial plan design, understanding the options and their impact, both intended and unintended.

How do you think the work you’ve been doing with ESOPs has helped you become the sort of leader you are striving to be?

What’s helped me to grow is becoming an advisor and coach to my clients. I can’t tell you how many phone calls I’ve taken during the pandemic where clients are looking for advice on making payroll and rent - what are some ideas? The fact that clients are calling is a really good sign because that means I’m not just there to do their compliance work (a.k.a an audit or tax return). They’re coming to me looking for counsel and see me as a trusted advisor. Number Two is dedication in the form of immersing yourself. I don’t think you can just sit on the outside and touch an ESOP every once in a while. They are simply too complex. You’ve really got to dive in and make it a focus, whether that’s attending and actively participating in conferences, reading, meeting with referral sources or talking with clients, etc.

How much of your time is dedicated to ESOP?

It’s probably about 70% or 80% now.

What else has helped your success with ESOPs?

I think finding like-minded and like-age referral sources. There is a core group of young service providers in the ESOP community, so becoming friends with them and being a trusted referral source to those individuals has been impactful. Finding people that your clients can turn to for years and grow up with them is extremely powerful and lets people build lifelong connections.

It takes a long time to cultivate business relationships and develop trust. But once you get there, it’s amazing. I think we get too hung up on business development. I don’t think we should even be calling it business development. I think we should be calling it relationship development. It all comes back to developing and building relationships. People get in trouble when they are impatient and look at it as development. It implies they’re looking for immediate gratification.

What sort of mindset do successful ESOP leaders tend to have?

They’re looking out for all employees’ and stakeholders’ interests, but they’re visionary in that they have different ways to think about the business, grow the company and more. They’re trusted, forward-thinking individuals rather than backward-looking.

Can you take me inside your scariest or worst moment as an ESOP advisor and what the situation was? What did you do and how did you grow from it?

The worst situation happened to an existing client of Boulay, but we weren’t involved in their ESOP transaction. Some key things just weren’t sounding right and when I sat down with the CEO, we found certain projections were too aggressive or not entirely based on the facts of the market. They were overstated. We spent about a good part of a year meeting and discussing the options, and the CEO did a lot of digging.

I suggested that one way to handle the situation would be to go under attorney-client privilege and do another valuation to see how far off we were. As we were dealing with that process, we got a letter that the transaction was being audited by the Department of Labor. It’s still under audit today. The most challenging part was working with a CEO who wasn’t part of the initial transaction, inherited it and was being required to manage the business to an unrealistic number. Our job was to help him work out of the problem and avoid land mines along the way.

Thinking about scary times, we’re in one right now. Is there anything you believe ESOPs need to be thinking about as we go through the pandemic that a non-ESOP company doesn’t have to be as concerned about?

There are a couple of things going on: You’re going to be hard-pressed to find a company that hasn’t had to reduce its payroll expenses. The one thing that an ESOP has to deal with that is different than your typical privately-held company is the focus on and concern with the employee-owner issues. The biggest employee-owner issue is how many employees are owed money from the ESOP when they exit the business and redeem their shares. And depending on the plan, the timing of that distribution can vary. So not only do you have to have the cash flow for the day-to-day operations of the business, but you need sufficient cash flow for the distribution obligations to exiting participants.

I think it would be naive to believe that the impact of the pandemic will be over soon and we’re not going to have more layoffs or furloughs. Most of the tactics to avoid them have already been used. It’s not only about the cash flow analysis of running the business and getting through this difficult time, but also the impact other mandatory distributions have on the company.

What’s the future look like for ESOPs?

I think that a couple of things are going to happen. I believe that private equity multiples are going to come down. I think you’re going to see some rightsizing of that. You still have an aging population of business owners who have to think about what they will do with their businesses. What you’re going to see is that ESOP companies will probably come out of this more stable than a business owned by a financial buyer due to the tax incentives available to 100% ESOPs. I think business owners and employees will like that.

Why do you say that? Why will they come out stronger?

One, the price of the transaction will be a more reasonable multiple of EBITDA. Two, we’ll be less inclined to leverage the entire ESOP using senior debt. We’ll leverage only a portion with senior debt, with rest typically being seller-financed. A seller-financed deal is usually a lot friendlier than those financed by banks or private equity, which also means it can be much easier to amend terms with the seller. Financial buyers are going to be making short-term decisions because they’re in it for the short-term. They’re more likely to cut payroll costs, for example, which will save money today, but affect the growth in three or five years. Whereas an ESOP company needs to balance the short-term with the long-term.

Is there a particular story that you’d like to tell non-ESOP leaders about your experience with employee ownership as they consider whether to form an ESOP or not?

We had an ESOP where you had secretaries who had worked for the company for 30 or 35 years receiving a seven-figure check as a retirement benefit. That was 100% all company-paid benefit. That’s pretty impactful. You don’t ever see that anywhere else and that resonates with me.

Another story that I enjoy is an ESOP that dealt with specialized manufacturing. Initially, we were going to do a management buyout and the three that were going to buy it were skittish about taking on the debt to do it. We walked through the ESOP model and they said, “We’re already being run like an ESOP company.” That’s perfect. The ESOP cemented that the company would stay in its particular town in Minnesota for the next 20 to 30 years without an issue. That keeps jobs in the community, keeps people employed, gives them retirement benefits and helps them become an employer of choice. It doesn’t get much better than that.

There’s a lot that goes into creating and strengthening a Culture of Leadership. Like succession planning, self-awareness, employee engagement and understanding the behaviors of what forms a cohesive team and high-performing organization. Where do you even start?

Right here with Leading With Courage Academy. We’ve built customized roadmaps for leaders to leverage their ESOPs toward an unmistakable culture and we’re ready to do it for you too. Talk to us today at 312.827.2643 to learn how our assessments and workshops can register a phenomenal impact on your leaders, managers, individuals and teams.

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