“The three rules of ESOPs are cash flow, cash flow, cash flow.” – Sheryl Bayani-Alzona, attorney with the Employee Benefits Law Group, a Southern California-based practice that focuses on employee stock ownership plans. In this episode, Sheryl offers her expertise on the world of ESOPs and if this is the right exit strategy for you.
Sheryl starts off by explaining to us what an ESOP is. At a high level, an ESOP is an employee stock ownership plan. It is a retirement plan similar to your 401(k) profit sharing plan. However, it is the only retirement plan that is allowed to enter into a loan to purchase employer's stock from selling shareholders.
She dives into the main benefits of an ESOP to a selling shareholder, including the ability to defer payment of capital gains. She also discusses what types of companies usually use ESOPs as an exit strategy, with manufacturing, construction, and professional industries leading this list.
Sheryl also addresses common pitfalls that owners should be aware of when it comes to ESOPs, the biggest one being whether they can afford it. Companies need cash flow to function, and since the ESOP is funded by the company, it is important that the company's cash flow is healthy.
She also discusses the concept of a partial ESOP coupled with a later exit. She says this is an option because the ESOP is a ready buyer, and perhaps the only buyer who is willing to take a minority interest in a company.
Lastly, she shares two action items for owners:
1. Go through the ESOP suitability review process to make sure you know what you are getting yourself into before you establish an ESOP.
2. Call Sheryl. She works for the Employee Benefits Law Group, the largest ESOP consulting and legal practice in Southern California. Her direct line is 310-571-8896.
Disclosure: Information presented herein is for discussion and illustrative purposes only. The views and opinions expressed by the speakers are as of the date of the recording and are subject to change. These views are not intended as a recommendation to buy or sell any securities, and should not be relied on as financial, tax or legal advice. You should consult with your attorney, finance professional or accountant before implementing any transactions and/or strategies concerning your finances.
“The three rules of ESOPs are cash flow, cash flow, cash flow.” – Sheryl Bayani-Alzona, attorney with the Employee Benefits Law Group, a Southern California-based practice that focuses on employee stock ownership plans. In this episode, Sheryl offers her expertise on the world of ESOPs and if this is the right exit strategy for you.
Sheryl starts off by explaining to us what an ESOP is. At a high level, an ESOP is an employee stock ownership plan. It is a retirement plan similar to your 401(k) profit sharing plan. However, it is the only retirement plan that is allowed to enter into a loan to purchase employer's stock from selling shareholders.
She dives into the main benefits of an ESOP to a selling shareholder, including the ability to defer payment of capital gains. She also discusses what types of companies usually use ESOPs as an exit strategy, with manufacturing, construction, and professional industries leading this list.
Sheryl also addresses common pitfalls that owners should be aware of when it comes to ESOPs, the biggest one being whether they can afford it. Companies need cash flow to function, and since the ESOP is funded by the company, it is important that the company's cash flow is healthy.
She also discusses the concept of a partial ESOP coupled with a later exit. She says this is an option because the ESOP is a ready buyer, and perhaps the only buyer who is willing to take a minority interest in a company.
Lastly, she shares two action items for owners:
1. Go through the ESOP suitability review process to make sure you know what you are getting yourself into before you establish an ESOP.
2. Call Sheryl. She works for the Employee Benefits Law Group, the largest ESOP consulting and legal practice in Southern California. Her direct line is 310-571-8896.
Disclosure: Information presented herein is for discussion and illustrative purposes only. The views and opinions expressed by the speakers are as of the date of the recording and are subject to change. These views are not intended as a recommendation to buy or sell any securities, and should not be relied on as financial, tax or legal advice. You should consult with your attorney, finance professional or accountant before implementing any transactions and/or strategies concerning your finances.
00:00:01:02 - 00:00:31:15
Joe Seetoo
Welcome to The Ripcord Moment. I'm your host, Joe Seetoo. Today we're joined by Sheryl Alzona. She's an attorney with the Employee Benefits Law Group based here in Southern California, just in Los Angeles. And her practice focuses on employee stock ownership plans known as ESOPs. Sheryl, I'm really excited about our discussion today. You have a very distinct practice in really navigating the subtleties and the nuances and the complexities of ESOPs with your clients.
00:00:31:15 - 00:00:47:15
Joe Seetoo
And so I'm really excited to dig into our discussion and hear from you how these tools can really benefit owners as they're contemplating their succession planning. So let's start off on a really high level, and that is what is this sort of unicorn that's called an ESOP.
00:00:48:04 - 00:01:15:04
Sheryl Bayani-Alzona
All right. Thank you so much, Joe. What a wonderful question. So an ESOP is, as you said, employee stock ownership plan. It is a retirement plan. So, you know, similar to your 401k plan, profit sharing plan. But it is the only retirement plan that is allowed to enter into a loan to purchase employer's stock from selling shareholders.
00:01:15:19 - 00:01:51:18
Sheryl Bayani-Alzona
So it is designed by Congress to let privately held companies basically internally perpetuate without having to sell to outside third party buyers. It is a good benefit tax wise for all parties involved: the selling shareholder, the company and of course, the employees. And it's really designed you know, there's a special design by Congress. It is in the Internal Revenue Code.
00:01:51:18 - 00:02:07:05
Sheryl Bayani-Alzona
And they really thought about this. The governing law also is Employee Retirement Income Security Act or ERISA. So that is also one of the governing laws of ESOPs.
00:02:07:11 - 00:02:15:00
Joe Seetoo
And so if I'm hearing you correctly, it sounds like ESOPs, I'm guessing, weren't available prior to the ERISA act in the early seventies. Is that correct?
00:02:15:10 - 00:02:22:04
Sheryl Bayani-Alzona
Well, actually, the first ESOP was established in 1926.
00:02:22:07 - 00:02:22:21
Joe Seetoo
Really.
00:02:22:25 - 00:02:59:12
Sheryl Bayani-Alzona
Yeah, it was actually a Peninsula newspaper in San Francisco that first established an ESOP and then in the 1950s there are a few more. That's when Louis Kelso started with this idea, you know, of really letting the employees be capitalists themselves. And so he pitched that idea to Russell Long, and they are the ones that really started with this idea.
00:02:59:17 - 00:03:12:09
Joe Seetoo
OK well let's dig into some of the main benefits to the entrepreneur or the owner. What do you typically see are the main drivers or benefits that they inure through an ESOP?
00:03:13:04 - 00:03:27:25
Sheryl Bayani-Alzona
Yeah. So the main benefit to a selling shareholder really is the ability to defer payment of capital gains. So this is under section 1042, and I promise I'm not going to bore you with that code section.
00:03:28:27 - 00:03:30:04
Joe Seetoo
There's no test at the end.
00:03:31:13 - 00:04:13:15
Sheryl Bayani-Alzona
So it is section 1042. And really what it is, is when a shareholder sells to an ESOP and the ESOP after the sale owns at least 30% of the company, then the selling shareholder could make an election to defer payments of capital gains. Now of course there are so many details about this law, but the main things, you know, it only applies to C corporations and the proceeds, the seller would have to invest in stocks and bonds of domestic corporations.
00:04:13:25 - 00:04:58:29
Sheryl Bayani-Alzona
So your mutual funds or municipal bonds, those are out. You're not able to invest in those, but it is definitely a very big tax advantage to the selling shareholders. Now, when we have a discussion with a selling shareholder, we don't just talk about the 1042 benefit because sometimes it also makes sense to look at if the seller did not take the 1042 because one other requirement of this 1042 is that you will not be able to be part of the ESOP, but if you don't sell, if you don't take advantage of 1042, you can and your family members can.
00:04:59:13 - 00:05:01:02
Sheryl Bayani-Alzona
And so sometimes.
00:05:01:02 - 00:05:03:21
Joe Seetoo
Sounds like there's a trade off here, they have to evaluate.
00:05:03:28 - 00:05:22:24
Sheryl Bayani-Alzona
It is right. And so we don't just say here you know, take 1042, we have to look at both scenarios and see what benefit, you know, what is, what really would be the benefits to the selling shareholder and to the company of doing an ESOP.
00:05:23:02 - 00:05:56:02
Joe Seetoo
Well I think you bring up an interesting point here, right which is this notion for an owner looking at their different options. Right obviously seeking qualified counsel in you but also for the financial advisors like ourselves and the qualified tax professionals, I mean, assembling a team that can really help the owner think through all the different variables and the different scenarios to help them really achieve what they're looking to do upon their exit and part of their succession plan. Okay, we get this tax benefit.
00:05:56:02 - 00:06:14:16
Joe Seetoo
We understand we have to invest in like kind stocks or bonds. It can't be mutual funds. And so there are certain elections that need to be made in this analysis. What are typically the sort of companies that you see, generally speaking, use an ESOP as some sort of exit strategy or perpetuation of the business?
00:06:15:07 - 00:06:41:29
Sheryl Bayani-Alzona
Yeah. So actually there's this organization, it's a national organization that does research, they conduct research about really anything and everything about employee ownership. It's called the National Center for Employee Ownership. And they did a survey back in 2019. This is the latest one that I could find. And that survey said that 21% of ESOPs are in the manufacturing industry.
00:06:42:15 - 00:06:43:00
Sheryl Bayani-Alzona
00:06:43:09 - 00:06:43:21
Joe Seetoo
That makes sense.
00:06:43:29 - 00:06:53:29
Sheryl Bayani-Alzona
Yeah. And then another 21% is in the professional industry like your architects and engineers.
00:06:54:00 - 00:06:54:04
Joe Seetoo
Yeah.
00:06:54:08 - 00:07:22:26
Sheryl Bayani-Alzona
Yeah. And then, you know, researchers and all that. So and then the third one, the third more popular, you know, industries that have ESOPs are in the construction industry and those three really are you know, it hasn't changed, you know, year after year I seem to see the same companies in those industries that have ESOPs.
00:07:23:04 - 00:07:40:06
Joe Seetoo
OK, so it makes sense. I think I can see in the manufacturing and construction. And so those are sort of like heavy industry in many ways, sort of labor intensive to some degree. And you can see where you have a lot of employees. I guess the question on the middle one with the architects and the engineers, some what professional service.
00:07:40:06 - 00:07:51:00
Joe Seetoo
Are there other professional service firms that wouldn't be allowed to participate? And I'm thinking specifically like accounting firms, law firms, financial advisory firms.
00:07:52:01 - 00:08:01:24
Sheryl Bayani-Alzona
Well, so law firms, definitely it's out. It's really because, you know, the requirements to own a law firm is that you have to be lawyers.
00:08:01:28 - 00:08:02:12
Joe Seetoo
Sure.
00:08:02:16 - 00:08:04:05
Sheryl Bayani-Alzona
An ESOP cannot be a lawyer.
00:08:04:13 - 00:08:04:24
Joe Seetoo
Right.
00:08:05:17 - 00:08:13:09
Sheryl Bayani-Alzona
And because when you have an ESOP, you know, the shareholder becomes the employee stock ownership trust.
00:08:13:20 - 00:08:14:03
Joe Seetoo
OK.
00:08:14:05 - 00:08:32:12
Sheryl Bayani-Alzona
Not the employees that are underneath it. So even though, you know, I'm going to be a participant in the ESOP, and I'm a lawyer, I'm still not the shareholder, it's the ESOP. So that's why you're not allowed to do that. Same thing with doctors, you know, in order for you to have a medical practice, you have to be a doctor.
00:08:32:13 - 00:08:53:07
Joe Seetoo
Okay, so we've talked about sort of the high level benefits, some of the companies that traditionally use them. What are the common pitfalls or some of the sort of nuances, I guess, that owners really need to think through because the tax savings sounds wonderful. Right. But then there are a lot of requirements covered by ERISA that they have to make sure that they're in compliance with.
00:08:53:08 - 00:08:56:29
Joe Seetoo
So what are some of these things that an owner really needs to understand?
00:08:57:19 - 00:09:08:03
Sheryl Bayani-Alzona
Yeah, I think really the biggest one is, you know, when you sell, you have to really think about whether the company could afford it.
00:09:09:01 - 00:09:10:18
Joe Seetoo
Because the financing, right?
00:09:10:21 - 00:09:34:01
Sheryl Bayani-Alzona
Financing, yeah. Because so just going into a little bit more details on how this works, right? So when the seller sells to an ESOP, if you think about it, the ESOP doesn't really have money, right? It's the trust, right? You need to fund the trust who funds the trust? It's not the employees of the company. It is the company that funds the trust.
00:09:34:01 - 00:09:35:17
Joe Seetoo
The cash flow from the business.
00:09:35:20 - 00:09:57:09
Sheryl Bayani-Alzona
Yeah. So the three rules of ESOPs is cash flow, cash flow, cash flow. So, I mean, you know, you really just need to understand that this is what it is. You know, you can enter into a leverage transaction, meaning, you know, there's just this loan outstanding that's going to cripple the company.
00:09:58:04 - 00:10:09:02
Joe Seetoo
Because the structure is the ESOP goes and gets a loan from the bank that will provide the financing to pay out the shareholder. Is that correct?
00:10:09:14 - 00:10:14:05
Sheryl Bayani-Alzona
So it's actually the company would borrow from the bank.
00:10:14:11 - 00:10:14:22
Joe Seetoo
OK.
00:10:15:11 - 00:10:23:06
Sheryl Bayani-Alzona
And then the bank would then give the cash to the company. The company would loan that cash to the ESOP.
00:10:23:21 - 00:10:24:04
Joe Seetoo
OK.
00:10:24:24 - 00:10:29:03
Sheryl Bayani-Alzona
And then the ESOP would give that cash to the selling shareholder.
00:10:29:09 - 00:10:30:20
Joe Seetoo
OK, thanks for the clarification.
00:10:30:20 - 00:10:40:25
Sheryl Bayani-Alzona
That's one structure that you can work with, but sometimes they don't want to go to the bank for whatever reason.
00:10:40:25 - 00:10:41:10
Joe Seetoo
The owner doesn't?
00:10:41:17 - 00:11:13:04
Sheryl Bayani-Alzona
The owner doesn't, the company doesn't. So what happens is the owner could actually say, I'm just carrying the paper on this one. So the ESOP and the selling shareholder could enter into that loan. And so, you know, the seller would then hold the note and then the company would fund the ESOP every year via contributions, tax deductible contributions.
00:11:13:23 - 00:11:18:22
Sheryl Bayani-Alzona
And then the ESOP would use that to make loan payments to the seller.
00:11:19:02 - 00:11:31:15
Joe Seetoo
And do you have a rough percentage in terms of how many do you see that are financed with a bank loan versus the employer, the owner selling and carrying the note?
00:11:32:03 - 00:11:36:27
Sheryl Bayani-Alzona
I think I see more of the seller carrying the note.
00:11:37:22 - 00:11:38:01
Joe Seetoo
OK.
00:11:39:06 - 00:11:58:10
Sheryl Bayani-Alzona
Because it really, like I said in the beginning, you know, when you look at it, what will benefit the seller more, you know, 1042 versus not 1042. Because obviously if you think about it, if it's 1042, the seller would need the cash to invest. So that's when you see bank financing.
00:11:58:22 - 00:11:59:14
Joe Seetoo
That makes sense.
00:11:59:17 - 00:12:41:20
Sheryl Bayani-Alzona
Yeah, but if it makes more sense for the seller not to take 1042 than the seller would say, no, I'll take a note. I don't need the cash right now. OK, there could be a down payment just so you know, some of the loan will be a little bit less overall for the life of the loan, right. If, let's say the seller says, OK, I'm going to sell it for $4 million and the company says, OK, we can afford to fund the ESOP right now with $500,000, the ESOP will pay cash, $500,000 to the seller.
00:12:42:13 - 00:12:46:00
Sheryl Bayani-Alzona
And then the seller would take $3.5 million of note.
00:12:46:10 - 00:12:46:23
Joe Seetoo
Got it.
00:12:47:12 - 00:12:49:25
Sheryl Bayani-Alzona
So that's what they usually do.
00:12:50:03 - 00:13:19:17
Joe Seetoo
So we've got the cash flow issue in terms of evaluating the structure of the ESOP with the cash flow of the business. Are there any general rules of thumb in terms of looking at the, you know, the cash flow of the business, whether it's the, you know, the gross revenue or the EBITDA? And, you know, what percentage of the cash flow from the business should be structured to pay the for the ESOP payments?
00:13:20:05 - 00:13:31:23
Sheryl Bayani-Alzona
Yeah. So when you look at a transaction, so let's say we go through we actually call our analysis an ESOPs suitability review.
00:13:31:29 - 00:13:32:10
Joe Seetoo
OK.
00:13:32:15 - 00:13:59:03
Sheryl Bayani-Alzona
Basically looking at everything you know, is an ESOP right for you? That's really what we're trying to answer and when we say you, it doesn't just mean the seller, it means the seller, the company and the employees. So when we look at this and we say, OK, the ESOP seems to be right for you, we then go into how much can the company afford?
00:13:59:11 - 00:14:23:12
Sheryl Bayani-Alzona
Right. That's where the transaction design happens. And in that design, you know, you can say, OK, the company can only afford $500,000 every year for a year. And then, you know, we could either back out from that number, right? OK, this is all we can afford. So how much loan does that you know, give us you know?
00:14:23:12 - 00:14:53:25
Sheryl Bayani-Alzona
So we kind of just back down from that number. But most of the time, you know, we look at, you know, tax returns, we look at financial statements and like you said, EBITDA, that is a big indication of value. So when, you know, typically the ESOP could pay four or five times EBITDA that's like a good indication of.
00:14:53:25 - 00:14:54:18
Joe Seetoo
A pretty typical structure?
00:14:54:18 - 00:15:23:13
Sheryl Bayani-Alzona
Yeah, typical structure. You know, we've seen you know, it's probably not going to be you're probably not going to see like an eight times EBIDTA. I mean, sometimes it happens but you know, not likely because in the ESOP one of the requirements is that the ESOP as a buyer, they're not able to pay more than fair market value.
00:15:23:21 - 00:15:56:17
Sheryl Bayani-Alzona
You know, you really can't say my company's worth eight times EBITDA at the valuation, an independent valuation hired by the buyer, the trust of the ESOP is going to say, oh, but I can only pay you five X. So that's there is still negotiation. You know, I'm not saying, you know, this is it, you know, there are some levers that could be pulled and it's really a buy and sell.
00:15:56:18 - 00:15:58:13
Sheryl Bayani-Alzona
You know, there is some negotiation.
00:15:58:20 - 00:16:32:04
Joe Seetoo
Well, and that actually leads me to my next sort of question. Which is, right, we're in a market right now with interest rates being low, and, you know, multiples in many industries are just many times over 8, right,15, 20. I mean, whether it's, you know, obviously looking to the public markets, but even in the private markets. And so talk to us a little bit about this idea of maybe a partial ESOP coupled with a later exit, perhaps to a strategic or financial buyer that might actually help the owner achieve other objectives.
00:16:33:09 - 00:16:58:08
Sheryl Bayani-Alzona
Yeah. So that is definitely a possibility. You know, as I mentioned, the ESOP is already a buyer and it is perhaps the only buyer who is willing to take a minority interest. And so we actually have done this to several of our clients where the ESOP is only a minority shareholder.
00:16:58:08 - 00:17:02:13
Joe Seetoo
Typically above the 30%, though, for the benefit of the 1042?
00:17:02:13 - 00:17:28:06
Sheryl Bayani-Alzona
Yeah. So typically it's 30% sometimes somewhere at 49%, but definitely, you know, still holding minority interests. And so, so year one, let's say so year one, let's say Bob sells to the ESOP takes 1042, the ESOP owns 30%.
00:17:28:16 - 00:17:28:25
Joe Seetoo
Yeah.
00:17:29:03 - 00:18:18:13
Sheryl Bayani-Alzona
And then right after the transaction the company converts to an S-Corp, so elects to be taxed as an S-Corp. So the seller got the advantage of 1042, no payment of capital gains. In year two, beginning in year two, the company now will take advantage of not paying taxes on the 30% that the ESOP owns. Just a little bit of a background on S-Corp ESOPs because an S-Corp, it passes through the taxes passes through from the company to the shareholders and guess what?
00:18:18:13 - 00:18:23:20
Sheryl Bayani-Alzona
In an ESOP the shareholder becomes the ESOP trust.
00:18:23:25 - 00:18:24:07
Joe Seetoo
Right.
00:18:24:13 - 00:18:26:12
Sheryl Bayani-Alzona
The ESOP trust doesn't pay taxes.
00:18:26:19 - 00:18:29:29
Joe Seetoo
Right. Because it's like you think of like a 401k because it's under ERISA.
00:18:30:00 - 00:18:45:28
Sheryl Bayani-Alzona
It's under a ERISA, hence it's, you know, it passes through to the ESOP that 30% you don't have to pay taxes on. So imagine how you could grow the company without paying taxes. Right.
00:18:46:12 - 00:18:55:14
Joe Seetoo
There's substantial benefits to the sort of the cash flow of the business itself in growth mode, having an ESOP as one of the shareholders.
00:18:55:21 - 00:19:23:09
Sheryl Bayani-Alzona
Correct. And, you know, part of the analysis that we do is comparing a 30% S-Corp ESOP versus a 100% S-Corp ESOP. Which, as you can imagine, is a tremendous benefit. But going back to the original question, so let's say so year two, 30% S-Corp ESOP and now you're you know, you're making more money, right? Because you don't have to pay taxes
00:19:23:14 - 00:19:47:24
Sheryl Bayani-Alzona
on that part. And let's say in year four, there's a buyer. You know, you grew the company because of all these tax savings. And in year four, there is a buyer that is ready to pay you this tremendous multiple of your EBITDA.
00:19:48:06 - 00:19:55:07
Joe Seetoo
Because now you're getting a, you know, a third party strategic or a financial buyer who's coming in and offering a much higher amount.
00:19:56:12 - 00:20:03:14
Sheryl Bayani-Alzona
So you're, you know, as a strategic buyer, it can pay a premium, something that the ESOP cannot.
00:20:03:21 - 00:20:04:16
Joe Seetoo
Right.
00:20:04:16 - 00:20:29:23
Sheryl Bayani-Alzona
It's, an ESOP is an investor. And, you know, it's not a strategic buyer. So imagine, you know, the ESOP owning 30% and the shareholder owning the rest of it, 70%. And when you get 18x EBITDA, there is a win win for both.
00:20:29:23 - 00:20:30:10
Joe Seetoo
For everybody.
00:20:30:17 - 00:20:46:26
Sheryl Bayani-Alzona
The ESOP and the selling shareholder. Yeah. So it is you know that is a structure that the sum of the selling shareholders have designed you know, I'm going to hold on to a little bit.
00:20:47:03 - 00:21:10:27
Joe Seetoo
Yeah. Maybe we can pivot to the employees, right. Or the participants in the plan. Obviously, the structure there's a trustee that administers the plan, and so they're a fiduciary. But if I'm an employee and I'm participating in this plan and I've worked for X number of years and I'm ready to let's just say that hypothetically, how do I exit the plan?
00:21:10:27 - 00:21:30:11
Joe Seetoo
And I mean, I'm assuming I just tender my shares back to the plan and I go off into retirement and is it like any other retirement plan in the sense that at that point can I take my interest and roll it over to like an IRA rollover if I don't want to pay ordinary income tax at that time?
00:21:30:25 - 00:21:54:13
Sheryl Bayani-Alzona
Yeah, exactly. So it is you know, that's part of the design, you know, as a retirement plan, if you retire from the company, then you could elect to, you know, take your money, roll it over to an IRA and not pay taxes until, you know, whenever. And it is subject to, you know, required minimum distributions.
00:21:54:13 - 00:22:21:18
Sheryl Bayani-Alzona
So it's the same things that your 401k plans and profit sharing plans. Yeah. So there is that ability. And so that's why it is, you know, the pretax equity sharing tool, right? If you think about it because they don't pay anything until they are ready to take it out. And you know, at that point the company is required to purchase them out, you know.
00:22:22:20 - 00:22:33:15
Joe Seetoo
That actually brings up an interesting point before we pivot to the action items before we get there. One other question, and that is what is kind of a typical vesting schedule for an ESOP?
00:22:34:14 - 00:22:58:23
Sheryl Bayani-Alzona
A typical vesting schedule is a six year graded. That is the maximum that you could do in an ESOP. So basically starting to vest at 20% on your second year of working 1000 hours, and then 20% each year after that and until you reach the six year 100% vesting.
00:22:59:03 - 00:23:11:12
Joe Seetoo
And then one other question on that in terms of allocation of shares, I'm assuming there's pretty strict rules around governance of how shares are allocated within an ESOP, is that a correct statement?
00:23:12:06 - 00:23:52:06
Sheryl Bayani-Alzona
Yes, it is. You know, like I said, it's a qualified retirement plan. So it cannot benefit highly compensated employees. So a safe harbor way, a safe way to allocate contributions is pro-rata to compensation. OK, no need to do really any additional testing. You could also do allocation, you know, allocation rate groups, which is done more typically in your 401k or profit sharing plans.
00:23:53:01 - 00:23:59:21
Sheryl Bayani-Alzona
But doing it that way, you'll need to do other nondiscrimination tests. Got it.
00:24:00:04 - 00:24:16:14
Joe Seetoo
All right. Well, Sheryl, we call this the ripcord moment. We're going to wrap it up in the next kind of 5 minutes here. But the reason I call it that, right, is I believe that when owners go to exit their business, it's a little bit like jumping out of an airplane, and their parachute can't fail, their ripcord better be working.
00:24:16:20 - 00:24:35:08
Joe Seetoo
And so I always ask our guests to share two action items that owners, our audience can contemplate doing sooner than later. And in this case, if an owner is intrigued by a ESOP or seriously considering it, what are your two action items that owners in our audience should start doing sooner than later?
00:24:35:28 - 00:25:04:06
Sheryl Bayani-Alzona
Yeah. So definitely, you know, go through the ESOP suitability review process with us. So I think you really need to like you said, you know, dive in there and make sure that before you adopt an ESOP, before you establish an ESOP, you know exactly what you're getting. You know, let there be no surprises. Yeah. And so we'll walk you through that, we'll guide you through that.
00:25:04:06 - 00:25:12:20
Joe Seetoo
And real quick, on something like that. I mean, just from a time standpoint, how long does a suitability process, a procedure take for an owner? Ballpark.
00:25:13:09 - 00:25:18:02
Sheryl Bayani-Alzona
Ballpark. So I would say about six to eight weeks.
00:25:18:12 - 00:25:18:23
Joe Seetoo
OK.
00:25:18:27 - 00:25:39:00
Sheryl Bayani-Alzona
And really, it's, you know, two weeks of gathering information. You give it to us and then another two weeks we'll go through it. And then we set up a meeting, it's going to be about a two hour meeting and basically really going through, you know, what we see you know, are there ESOP stoppers.
00:25:39:09 - 00:25:39:19
Joe Seetoo
OK.
00:25:39:27 - 00:26:03:09
Sheryl Bayani-Alzona
Or can we say, no, no, no, no, no, don't do an ESOP, you're too small or you don't have enough cash flows. We could talk about these things and then after that, we write up a report for the company and the selling shareholder and basically laying out the options and their own action items.
00:26:03:13 - 00:26:03:23
Joe Seetoo
Right.
00:26:04:22 - 00:26:04:29
Sheryl Bayani-Alzona
Things to work on.
00:26:05:25 - 00:26:16:26
Joe Seetoo
Got it. Thank you for the clarity on that. So one action item is the suitability. And then the second one would be? Call me. Oh, that's an easy one, I love it.
00:26:18:08 - 00:26:19:06
Sheryl Bayani-Alzona
You know I'm a simple gal.
00:26:19:06 - 00:26:26:05
Joe Seetoo
So that's a great pivot to, you know, if somebody does want to get a hold of you, Sheryl.
00:26:26:26 - 00:26:49:05
Sheryl Bayani-Alzona
You know, this is our specialty. This is all that we do. Employee benefits law. That's why we're called Employee Benefits Law Group. You know, we are the largest ESOP consulting and legal practice in Southern California. I'm even going to claim that, you know, Western United States.
00:26:49:08 - 00:26:54:27
Joe Seetoo
And so what's your direct line if somebody does want to call you and is intrigued by an ESOP?
00:26:55:03 - 00:27:03:26
Sheryl Bayani-Alzona
Yes. So my direct line is 310-571-8896. And I do answer my phone, you know, when I'm here.
00:27:03:26 - 00:27:05:17
Joe Seetoo
Yes you do, I know that.
00:27:06:20 - 00:27:08:26
Sheryl Bayani-Alzona
So I will definitely answer the call.
00:27:09:02 - 00:27:31:21
Joe Seetoo
Yeah. Well, Sheryl, thank you for taking the time to be with us today to really share your specialized knowledge in this area, that I think is definitely worth exploring for many potential owners to consider the pros and the cons at least they're educated with the knowledge if this is potentially the right strategy for them. So great talking to you.
00:27:31:21 - 00:27:42:00
Joe Seetoo
I always enjoy our conversations as I'm always learning something from you, Sheryl. And we're going to go ahead and wrap it up. This is Joe Seetoo signing off from The Ripcord Moment and we'll see you next time.
00:27:43:08 - 00:27:44:01
Sheryl Bayani-Alzona
Thank you.