Agency Unfiltered - Greg Linnemanstons from Weidert Group

ESOP: Employee Stock Ownership Plans

Greg Linnemanstons, President of Weidert Group, joins us to talk ESOP: and how the trust he set up for his team benefits the agency, the employees, and his clients. We discuss why their leadership decided to set up an ESOP for Weidert Group, the financials and factors to consider for your agency, and the benefits you may see.

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Episode Transcript

Welcome to Agency Unfiltered. I'm your host, Kevin Dunn, and Agency Unfiltered is a biweekly web series and podcast that interviews agency owners from around the world about agency operations, growth and scale. Episodes can be found on Spotify, Apple Podcasts, or wherever you listen to your podcasts and you can find our videos and full transcripts on In today's episode, we travel 30 minutes south of Green Bay to Appleton, Wisconsin, to talk with Greg Linnemanstons, president of Weidert Group. Greg teaches us about ESOP, or Employee Stock Ownership Plans. ESOP is an employee benefit plan that gives your employees ownership interest in the agency and Greg explains what motivated his decision to form an ESOP, what financials and other factors to consider for your own agency, and what benefits he's seen for the company, his employees and his clients. Agency Unfiltered begins right now.

KD: Well, Greg, welcome to Agency Unfiltered. Super psyched to be here in Appleton.

GL: Glad you could come, Kevin.

KD: I'm glad we picked the right chairs for this. This was a no-brainer once we saw these. But, I'm here today to talk about ESOP. I bet you can explain it more eloquently than I can. First question, at a high level, just what is ESOP and how does it work?

GL: Well, it stands for Employee Stock Ownership Plan, that is the first thing. It's a Department of Labor regulated program that is intended to allow for sustainability, so that an owner of a business, or owners of a business, can, in effect, sell it to their employees and, in selling it, establish both a retirement plan and a tax shelter. The mechanics of how it works is you create an ESOP Trust. It's a third party entity and you technically, and legally, sell the business to the trust. And then, the purchase by the trust can be financed by bank financing. That doesn't happen real often in service businesses like ours, and that was the case with us. The prior shareholders actually financed it. So, all of our prior shareholders now are note holders and the business is paying them back and it's being done in 10 year notes.

KD: How did you discover it and what did that process look like? Did it say this is something we want to pursue further and roll out for our agency?

GL: Well, kind of a unique situation. We've had an ESOP consultant as a client for about 10 years and so we create a lot of content for him. We have done some web revisions for them. We really knew their content frontwards and backwards. And so, we'd been hearing about all the different benefits that small businesses could realize in succession planning using this ESOP structure and ours took place, we actually did the ESOP about 2.5 years ago but it goes back four or five years, had an informal conversation with him, with one of these consultants, and just started to back of the envelope, figure out what we needed to do to make it work, how big we needed to be, what kind of EBITDA we needed to be generating because the biggest thing about an ESOP is you have to have tax liability that you're going to avoid by setting up the ESOP, that more than pays for the cost of setting it up, because it's not cheap to set it up. There's gotta be an ROI. It's gotta make sense financially.

KD: That makes sense. So, employee-owned, structurally, what does that look like for the whole agency team? What does the payout structure look like and what form does that come out as?

GL: Well, I'll take a step back. The employee owned, the way the shares are actually owned, the ESOP Trust that we created legally continues to own the shares but they're put in a beneficent account in people's names every year. So, every year we have a distribution so people are considered shareholders because they will benefit when they retire from the sale of those stocks but the fact that they have those in their retirement accounts doesn't give them voting privileges, they're not voting shares. The trust continues to hold the voting privileges, if you were looking at it that way. So, in terms of control, our control really didn't change in a practical sense. I'm still the president. Our leadership team is made up of people who were shareholders, because we're all note holders now. And so, we're still running the business very much the way we were before the ESOP. The one exception to that is that legally we do report to our trustee, who we hired to watch over us, which the Department of Labor strongly recommends and if we don't do a good job running the business, we will hear from him.

KD: Have you ever had friction points or disagreements in the direction to take the company?

GL: No, so far, and we're in year three, we've had an annual conversation with him. It's a conference call and he does his fiduciary responsibility by asking questions about business operations. Are we hitting our budget? Are we adding new clients? What's the people component look like? Are we attracting the talent we need? Are we satisfied with the way things are going? And the conversation this year was typical. It was scheduled for an hour. It lasted 50 minutes and at the end of 50 minutes he said, "Well, I'm good." And that's it.

KD: So, it aligns with the direction and what you're trying to do as just a good owner, right?

GL: Yeah, yeah, yeah.

KD: That's great. What did the rollout look like across the team? How did you get additional leadership buy-in? What does the communication plan look like to the rest of the employees? I would imagine there's some excitement around it. What did it look like?

GL: Well, we started by bringing the consultant in and he did a pro forma for us. It's the first run at the financials before you actually do the sale and when he did that, it was, in effect, creating an impact statement for them as individuals, so they could see, okay, if this works, if it grows the way we think we can grow the business, if the profitability continues to track on this track, if we do a good job running the business, here's what it could look like for the individuals in the room at the end of 10 years and it was eye-opening. I think the youngest guy on the team thought that the number he was looking at was the collective number and it was his and he went, "Wait, wait," and so the buy-in was if we do a good job, we can grow a lot of individual wealth in our retirement plans and that's meaningful. It was exciting to see somebody in their lower 30s recognizing that we have the power to change our retirement quality of life. When we rolled it out to the team, we actually had an off-site, we had a party. And we invited one of the consultant's people to help us make the presentation but we played a role, as well. We did some game playing where we wanted them to learn something about what it means and so we had some competition. We had drinks. We shed a few tears because we were pretty excited about it. It was a big day.

KD: Doesn't sound like much pushback.

GL: Oh, no, well, and there shouldn't be because you're giving employees a new benefit they didn't have before and they don't have to put any of their own money into it, so it's pure, no strings attached. If you are a full-time employee and you contribute in doing your job well, you're going to grow the value of your holdings. You're going to grow the value of your retirement and add to our sustainability.

KD: And I mean, I would imagine that that sort of benefit, you mentioned it's unique, I would imagine there's not a ton of other, specifically agencies, but many businesses doing this and the value it can mean for your retirement quality of life. Do you see it being a major differentiator for talent acquisition, the type of candidates you see come in?

GL: I know my pitch is different when I'm hiring people. I do all of the offers and I've always loved doing that. Now, I'm taking it to a different level because I'm, in effect, telling people that you have the opportunity to become an owner and to realize some true wealth accumulation beyond your compensation. And people are a little bit incredulous at first. "Wait, what, how's that work?" And so I do a lot of splainin'. And it's really fun. I would say that it does contribute to a better closing rate with people that we're trying to hire.

KD: Does it have any impact or does it ever come up in conversations you have with clients, with prospects? Does it make its way into the sales process, as well?

GL: Yes, absolutely. It's one of our differences. We tell prospects and we remind our clients that when you talk to a Weidert team member, you're talking to an owner and they have the long-term interest of the business and of our clients very close to their hearts, that it matters. It matters in a very meaningful way.

KD: That's great. And I would assume that that resonates very strongly with those prospects, those clients.

GL: I think it does because they're not running into any other agencies who are doing that.

KD: Why don't you think more agencies evaluate this as a plan? Or why doesn't ESOP, why isn't it more visible amongst agencies, do you think?

GL: I think that the HubSpot Partner ecosystem is very young and so, most partners are focused on growth and client acquisition. They're not focused on sustainability and succession planning. There's not many partners my age. I mean, that's the reality. Most partners are probably in their late 30s, early 40s, so they're not thinking about the end game yet and this is something that, it's not too early because when you think about it, especially if you're a seller doing the financing, it can be a long financing process. Our notes were 10 years. You could extend that longer, if you needed to. So, if you're 40 years old and you're looking at 10 or 15 year notes, that's not too early to start thinking about that if you want to retire at a relatively young age. And if you create the right wealth, you could. Yeah, I think there's some larger agencies, a non-HubSpot, that we've seen. We've come in contact with a few and they've had the benefit of having the critical mass of 100 employees and the cash flow that goes with it. I think there're a lot of agencies our size, we're 25 full-time people right now, who don't think they have the cash flow or might not think they qualify per Department of Labor regs, to be able to do an ESOP, but the most important thing, you've gotta have the tax liability that you're avoiding and you've gotta have the EBITDA that makes it a good investment, because you're selling it to yourself so you're taking on the debt. You are pledging, I mean, we've pledged that the business will fund the debt. And so, there's some risk involved.

KD: Yeah, you have to make a bet on yourself.

GL: You're making the bet on yourself and you gotta believe in it.

KD: When you talk about succession planning, it sounds like, from your perspective, not enough agencies are starting to think about the end game. When we consider ESOP as an option, what do you feel most agencies, what else should you be weighing as options for exit plans? What does it stack rank up against as far as exit plan options?

GL: Well, the two that we looked at, we looked at creating phantom stock for our team. It wouldn't have been 100% though, it would have been select people getting phantom stock grants or asking for them to invest. And so, in a lot of cases, that involves your employees putting in their own money, taking on debt themselves and that's something that not everybody's going to jump at, especially if you've got young people and they're building a family, they're maybe buying their first house. They're not in a position to do that. So, that's got barriers. The other option, the other exit plan that I know a lot of agencies consider because I talk to people about this, is selling to some bigger entity. That some big traditional agency will come along and want an inbound division and consider them. We did consider that, as well, and that was a good way for us to get a good sense of market value. To have a credible third party look at us and talk us through how they did the valuation and listen to the rational side of it and compare that to what we could do with an ESOP. So, for us, that was the best case where we could look at two very viable alternatives that were both positive and there were pros and cons to the two directions and it actually made the ESOP an easier decision because we saw we were getting fair value in the transaction and then there was the third party that looked at us and said, "Yeah, you're a good bet."

KD: Yeah, right. It's validating, if anything, you know.

GL: Exactly, they validated us and that was really a blessing. It was stars aligning that happened the way it did, so we were fortunate.

KD: Not to backtrack, but go back to the structural component, how customizable is the plan, in regards to, well I would assume like employee tenure, salary, what's the vesting schedule? How customizable is the stock distribution based on all these employee criteria? Does that make sense?

GL: Yeah, you have a lot of latitude. In our case, in general, we wanted to follow the structure of our 401k, because we have a 401k as part of our benefit plan and it's got a nice match and it's easy enrollment and so we wanted to follow a lot of the elements of that plan. So for example, that's a five year vesting, so our ESOP is a five year vesting. We had participation was a full-time employee and we defined full-time employee as 1,000 hours worked in the course of a year, so we're actually able to use this hiring a couple of guys that we were talking to them the end of June and my pitch was, "You know, if you start July 1, "you'll get your 1,000 hours in "and you'll participate in the next vesting." Or the next distribution. And that accelerated the decision in both cases.

KD: It's a great closing argument.

GL: Yeah, yeah. And while I know there are some Department of Labor requirements that you can't violate, there was plenty of latitude for us to build the plan the way we wanted that supported what we're trying to accomplish, it supported our culture, it supported the team element of how we work. So, there's pretty much flexibility and not terribly complicated. We were able to work with a law firm that focused on ESOP plan creation and they're pulling something off the shelf and showing you, well you have degrees of freedom here, here and here. And here are the options.

KD: They try to templatize it to some degree and then here are the levers you pull.

GL: And listen to you and understand who you are and what you're trying to accomplish, to steer you away from things that could be violations of your culture, that could create inequities that you would never accept.

KD: So, I feel like we've touched on some of this but let's just say I'm somebody listening in, I want to go learn more or I want to embark on this journey. What are my immediate next steps? Find a consultant, find legal representation or a law firm that specializes in this. Are there any other immediate next steps I should be taking?

GL: Well, they could go to Google and they could do some searches for questions that they have about how do you qualify as a small business, how do you know if “am I going to fit?” But, you could also, if they have an attorney, and most of us have had cause to have an attorney, ask an attorney for a recommendation to an ESOP consultant because most attorneys know somebody who's doing the work. It'd be very unusual for them not to have that kind of a contact. Otherwise, you search to find a consultant. Boston area, if you go home and you do Boston area ESOP consultants, you'll get a lot of choices.

KD: So, like anything else, go to Google.

GL: Go to Google, yeah, yeah. And if they're not satisfied with what they find, give me a call and I'll put them in touch with our consultant, who's also a client, so he appreciates referrals. And I would be happy to give a referral because they handled our business very well and I've sent other business their way and I get nothing but positives from people who go to 'em.

KD: As an ESOP organization, is there a community you're now a part, is there a need for a community? Are there any conversations happening amongst ESOP organizations? What does that look like?

GL: There are state and national ESOP associations. There's conferences. There are informal communities. It lends itself to community because people who are involved are facing the same issues, even though their businesses are very different and so, it's good to have a sounding board, it's good to have people to talk through. We're less than three years into it and it's helpful, when we talk to somebody who's 20 years into an ESOP because they have had a lot of people retire and so they know your liabilities never completely disappear, they change. Right now our liability is the notes to finance the ESOP. 10 years from now, those notes will be completely satisfied and our liability will be people's retirement accounts and so, being able to share that and learn from people who have gone further down the road is very valuable.

KD: Let them experience some pitfalls or some friction points and then you'll just—

GL: Yeah.

KD: That's great. Last question for you, not necessarily ESOP-focused but I do ask this in every episode. What is the weirdest part of agency life?

GL: Yeah. Boy, for me, and my team knows this, is that I feel like leading a group like this I've become far closer to my emotions and I've become a crier.

KD: Oh yeah?

GL: I have a lot of happy moments that just choke me up. It's been an incredible journey. We've been at this a while and the progress we've made, the milestones, and so it's weird that I used to be a very chronic type-A, a lot of bad behaviors, and I've become much more emotional about it and much more in tune with what I'm feeling about where we are and what we're accomplishing.

KD: Yeah, that's great, more happy tears, hopefully.

GL: Yeah, I don't cry when I'm not happy.

KD: Well, that's it. That's all I have for you, Greg, so I appreciate you coming on.

GL: Yeah, my pleasure. Thanks for coming to Appleton.

KD: Of course—thanks for having me.

GL: Pleasure having you, you bet.

Thanks for tuning in to another episode of Agency Unfiltered. If you like what you saw, heard or read, make sure to subscribe to our playlist on YouTube, our podcast on Spotify or Apple Podcasts, or our newsletter on Alongside episode launch notifications, the newsletter also comes with a ton of other helpful, strategically-curated agency content from yours truly. And if you want to keep the conversation going, or provide a counterpoint to this episode's discussion, tweet me at @kevin_dunn. I'll see you again in two weeks but in the meantime, keep it unfiltered and let's all grow.

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