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  • Writer's pictureby Lee Eisenstaedt

The ESOP Transition: Making Your First Steps Count

A Conversation With Elizabeth Di Cola

Senior Vice President, Group Head, ESOP Finance Group

First Midwest Bank

If you’re considering or have recently implemented ESOP ownership, Beth Di Cola is one of the best professionals in the world of corporate finance you can talk to – which is precisely what we did in a recent Leading With Courage Academy conversation. In our hour together, we tapped into Beth’s in-depth knowledge of ESOP ownership, bank lending, working capital management solutions and capital asset financing to provide insights that every closely held business, owner and management team will want to keep in mind if they seek to navigate a successful ESOP transition.

LWCA: Beth, you’ve had a really interesting career where you’ve been with a number of banks and had several deep learning experiences that have prepared for where you are today. Share a bit with us about where that path started for you. Beth: I graduated from college with a degree in finance at a time when there was a recession. The job I ended up getting was as much a matter of serendipity as anything else. I ended up in a very highly technical corporate finance position.

At the time, I was very shy. The role I had as an analyst was a good one for me because I also was highly analytical, so I used my analytical abilities to break through being shy as I developed a reputation as one of the best in the business at the kind of analytical work I was doing. That enabled me to ask for a frontline role in transactions because the knowledge base gave me the courage to talk to people about what I did. Once I had a sense of confidence that I knew what I was doing, I was able to bridge over to roles that were more externally focused. So, for me, that was really stepping up.

How did you build that confidence? Feedback from colleagues and people senior to me. People in the market. It was also from my realization that I could do this complex analysis better than many others. I also realized that I was good at connecting the dots and was perceived as very trustworthy. This allowed me to go far. I was doing leverage lease syndications and there were people in the market who, because I was very straightforward and not a typical salesperson, trusted me when they didn’t trust others in the market. I believe that gave me a competitive advantage in what it was doing.

After being in that world for about nine years , I started getting bored. It was a very tight market with little growth opportunity. There was exciting work going on, but most of that work that was getting done by large institutions in New York not small firms like my own. I also realized that I had a knack for the legal and tax aspects of my work. I came to an inflection point in my career. I was either going to New York to be involved with more cutting-edge finance work or going to law school to switch careers.

I was given excellent advice from the man who had been my mentor for many years. And he said, “Look, you’ll be able to succeed in New York. You’ve got what it takes, but you’re not that personality. In New York your colleagues are as likely to knife you in the back as your competitors are. That will wear on you because that’s not who you are.”

I thought about his advice and decided he was right. I made the decision to leave my finance work cold turkey and go to law school full time. Ironically, after I graduated from law school I didn’t pursue a career as a transaction attorney, but as a lawyer dealing with employee benefits.

While I was practicing in a big law firm, I got involved in social justice work in the child welfare arena. I realized I had a passion for working on behalf of children. As a result, I took a nine-year detour out of the commercial world to represent foster children in the child welfare system.

What was it about that sort of work that spoke to you on a higher level?

I think it was a call of faith and something from the heart. I stayed with it for a long time and ended up in a management position. But then my kids were born and I realized that it was going to be challenging to raise a family on a public servant’s pay. I began exploring how I might put to use the the various skill sets that I had developed. I met Betsy Purdue, a very well-known attorney in the ESOP space. She looked at my resume and said, “Well, you’ve got a finance background and you’ve got an ERISA background. Why don’t you come do something in the ESOP community?”

Just by serendipity, as I was networking with people in the ESOP trustee space I cold called the person running the ESOP lending team at a regional bank. I had lunch with him and he offered me a job. So I began developing a specialty lending to employee-owned companies.

Your story is similar in some ways to David Solomon, a noteworthy figure in the ESOP world who was telling me that about every ten years, there seems to be an inflection point. One of them is, “Do I go to law school or do I stick with corporate finance?” Another is, “Do I change law firms and go to a bigger firm or a smaller firm?”

That is interesting because I have passed my ten year inflection point! I’ve been working with employee-owned companies as a banker now for 13 years. I think that there was a more subtle inflection point. That was a shift from being focused solely on being the lender, the relationship manager, I took over management responsibilities. So I think the inflection point for me right now is that while I still have a client-facing role and a production role, I am shifting my focus to honing my leadership skills and my management skills. Like so many others, I find that as I move further up the food chain, I rely less on my technical skills. It’s much more leadership, management and people skills that propel me. I started with a technical role, used my technical acumen to to ease into an external role, and now I am leveraging all my skill sets to develop as a leader You’ve seen a lot of different transactions, but what do you find is so unique or special about the ESOP transaction? Most of the time, negotiations are tough, but even so in ESOP transactions the norm is not negotiating for negotiating’s sake. It’s not to say that ESOP transactions never fall apart because the parties can’t agree, but there’s a different tenor to the process than other types of transactions.

What do you think accounts for that?

I think that many of the players at the table face each other again and again. That’s not to say that the attorneys don’t vigorously advocate for their client’s positions. They do. But they don’t stake out positions that they know are losers just to dig in or to preserve a precedent. Frequently, people in the ESOP community come to the table firmly believing in the concept of employee ownership. As long as it’s a good transaction, they think, “Let’s get it done if we can and come to an agreement.”

It’s less about who’s winning. It’s a win-win. And they come into it already predisposed to a win-win.

I find the transactions are different primarily because the seller often focuses on the ongoing legacy and sustainability of the company. It’s not about getting every last nickel off the table. They want to maximize their return, but they also have concerns about legacy, culture, and employees and this is different from those selling to a private equity firm. How the owner comes to the table is shaped a lot by who their attorney is. Unlike a private equity firm that is at the table again and again with multiple transactions, most business owners will only sell one business. They’re coming to the process heavily reliant on their outside counsel. So, a lot depends on the advice they’ve received.

Along those lines, how has your work for ESOPs helped you become the leader you’re striving to be?

In working with ESOPs and employee-owned companies, I have the opportunity to interact with many management teams and owners of different stripes. I have a chance to see different styles, just like I did as a young professional, watching how people negotiate transactions. Now, my interactions tend to be with senior management and with founders of businesses. I’m also a non-fiction reader when I have the time. Working with ESOPs has motivated me to do more reading about the benefits of employee ownership and how leadership plays into that.More recently, I’ve been reading about purpose-driven businesses and B corporations. All of these inputs help me develop as a leader. Is there a particular mistake that you’ve seen ESOPs regularly make that you wished you could hit the “do-over button” on?

In a typical ESOP transaction, there’s a natural tension that exists when the transaction is structured. The owner would like a certain amount of liquidity upfront and that creates a tension around that because the more liquidity to the owner upfront, the more debt the business has to take.

Most of the time, the owners and senior management team have not run a business with non-productive debt – non-productive being if you borrow money to buy a building or a new plant, that investment in the building is ultimately going to produce more cash flow because you can expand your business. If you borrow money to buy a piece of equipment, likewise, one hopes that you’re not borrowing it unless it’s additive to your business.

When a business borrows money to buy out the owner, that money’s going to the owner. It doesn’t increase the capacity of the company. So running a business under that circumstance is different. You’ve got this tension of how much a business should borrow. How much does the seller want in liquidity? And you’re dealing with decision-makers who are not used to answering the “What should we do?” question. What is optimal here? And then layered on that is the fact that in order to grow the business, the management team needs to preserve the ability to borrow more money or invest in itself later.

“The mistake that I have seen is that the business doesn’t take on more debt than it can service, but sometimes takes on more debt than is optimal, given the need to have room to grow later.”

So, in terms of structuring transactions, that would be something that I have seen. It’s challenging in a situation where you’ve got a business, owner and management team who have never done this before. Now, if you’ve never sold your business before and you sell it to a private equity firm, at the end of the day, your responsibility is over. But when you sell it to your employees, oftentimes you’re doing that because you don’t want your responsibility to be over. It’s not somebody else’s problem.

What’s a recurring frustration to those of you who are knowledgeable ESOP lenders?

I would say it’s the difficulty in explaining to an owner or a management team that there is a value to our knowledge. Often, our biggest competition is an incumbent bank. And then, the incumbent bank often wants to keep the business or wants to keep the client but does not have any ESOP expertise. And it’s hard to value something you don’t understand.

I hate to say it because it sounds self-serving, but I believe that there are people who want to make sure that the attorneys they retain understand an ESOP transaction and they know that they should choose any trustee who knows what they’re doing because otherwise, the Department of Labor will come knocking. They understand that the valuation firms know how to value ESOP companies, but it’s not as clear to them that there is a value to banking with a company with ESOP experience. You were asking a moment ago about mistakes I regularly see and one of them is companies choosing to remain with their accounting firms, especially smaller accounting firms who say that they understand ESOP accounting. What we end up finding after the first audit is that financial statements are not prepared accurately. That would be another mistake. Not every accounting firm understands ESOPs on a technical level. In other words, make sure your advisors are well-versed in the ESOP world to confirm they understand what it’s all about.

Yes. I would. I’m more comfortable with that generalization because it doesn’t sound selfish. One of the most rewarding phone calls I ever took in my time doing what I do came from a CFO who, after a transaction closed, said, “I’m so glad you’re there with us because you know about ESOPs and what you’re doing.” This is probably the only time this management team will do a transaction unless it’s to sell the business. It’s undoubtedly the only time the owner will ever sell a business. They’re getting into something that’s regulatorily complex and surrounding themselves with advisors of every stripe who know what they’re doing and bringing a measurable benefit to the company.

That’s a good point. Can you tell me about the hardest decision-making moment you faced as an advisor to ESOPs? What was the outcome? Two come to mind. One was a situation to pass on an opportunity to work with the client, where I knew the client and the parties involved. Although a part of me wanted to get re-engaged, I decided with my gut and after analysis that it was simply not a good transaction and that the bank should pass. That was very hard because you have that familiarity and people who would like you to be involved. But it just was not the right thing for my institution. Still, it was a tough decision considering I had a prior relationship with them.

Do you regret that decision?

No, I don’t. It was the right decision for everybody because you know, sometimes if you reach too far to get something done in the financing the outcome is suboptimal for all involved. In my view, you always need to leave yourself a little bit of room because things don’t always turn out as planned. What was the other hard decision you mentioned?

This one worked the other way. I was a relatively new banker right at the front end of the financial crisis. There was a client that I inherited that was not doing well at all. I had to decide whether to support hanging in there with the client or to take a more conservative position and cut bait. Doing the latter would have meant foreclosing. There was plenty of collateral and that was a tough decision because I thought, “if I’m wrong on this, there’s going to pain among the employee-owners. On the other hand, my reputation internally was on the line to advocate for a position that could have turned out to be wrong. That was risky, especially since I was relatively new. That took courage on so many levels. So I’m assuming you went through with the transaction.

I just looked at it and I said, “This is a business that can be saved.” And it worked out well.

In your view, what sort of mindset do you think the leader of a successful ESOP has to have?

Well, it depends on how you define success because the answers are different. If you define success as the optimal performance that leads to the optimal benefits from an ESOP, that’s a different answer than if you define success as merely running a successful business. Because I’ve seen both. I’ve seen situations where the sale to the ESOP was a tax-advantaged corporate finance strategy and the management team and owner had no interest in employee ownership. They dotted their I’s and crossed their T’s, but they didn’t use the ESOP. But it was nonetheless a wildly successful business.

So that mindset gets dictated by objectives.

It does. So that’s why I said it depends on how you define success. The ideal mindset is a leader who wants to optimize the value of the ESOP and optimize the performance of the business. In addition, I think servant leadership is really important. You have to demonstrate genuine care about the employees for those employee-owners to be engaged in the way that you want. It’s your responsibility to make sure that they know that their efforts matter, that you support their acting as owners, , that you retain communications firms and leadership firms and that the employees act like owners and invest in the success of the business. Through your decisions and behavior, you signal that they’re essential.

What do you think is the biggest challenge facing ESOPs today?

The biggest challenge remains a lack of knowledge and awareness about ESOPs as an option. I don’t believe there are political challenges because I think that there are reasons ESOPs are viewed favorably by conservatives and liberals, which should protect ESOPs as an ownership succession vehicle.

The other big challenge that’s more problematic right now is that there continues to be a distrust of ESOPs by the Department of Labor. Consequently, you have statutes that enable ESOPs, but you also have a regulatory arm that has an unfavorable view.

Is it that there have been abuses they’ve seen or filing, you know, actions taken? Or is it just a fear?

It’s something that they believe smells wrong, but they don’t know how to evaluate it. Fortunately, to help with that, you have groups like the ESOP Association and other various industry organizations working on that. There’s an effort to involve members of Congress.

Do you have any leadership hacks that have worked well for you? A tip, a technique or strategy that you use to be a more effective leader?

It’s hard to do, but listening is essential because often times if you take the words at face value, you might miss what’s going on. It plays into the one quality I admire most in a leader – open-mindedness.

The best practices of ESOPs can be adopted by any family-held or privately-owned organization. Leading With Courage Academy is focused on helping owners and leaders of these companies build healthier, thriving, sustainable organizations. To learn more, visit our website,, or give me a call at (312) 827-2643.

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