Joe Phelps’ management idea. Birmingham, 2005

Finding a market for the founder’s stock: Three markets: Public offering Competitors Employees

My philosophy and life goals: For my life to feel worthwhile, I must: enjoy life as I live it, help build something that makes the world a better place.

The 3 Options in the context of my goals 1.Public offering Not practical 2.Sell to competitors Would destroy the culture 3.Sell to employees Best chance of getting value and perpetuating the culture is an ESOP

Most common ESOP scenario: ESOP borrows from bank to finance the purchase of 30%+ of the stock from the founders. –ESOP must have 30% for seller to avoid taxes The founder guarantees the note. The founder avoids capital gains tax. A portion of profits goes to payback the principle and interest to the bank. –The company deducts the ESOP contributions. If there’s a bad year, there’s trouble with the bank.

My scenario: I loan the ESOP $3MM to buy 30% of the company at 6% interest. The interest on the loan comes to me, not the bank. I won’t avoid capital gains tax on all of the $3MM. If there’s a bad year, I’ll be flexible with the ESOP.

Here’s the kicker: In the past, we’ve shared 50% of the profits with the associates: –Half allocated to cash distributions –Half to ESOP stock –Current ESOP holdings are 7% At our Oct. 7 th Annual Retreat, I announced: –100% of profit goes to the ESOP until the $3MM note is paid.

The rationale: Associates are immediately in an “owner” frame of mind. –Focusing on increasing revenue –Decreasing expenses This first 30% “primes the pump” on the ESOP without incurring bank liability or interest. I’ve found a market for 30% of my stock. –And for the 15% of the company that’s held by others After the loan is repaid, the ESOP can borrow on its own and buy more stock.

Projections: At current agency size At 11% profit The $3MM loan will be paid in 3 years. The last 40% will be tax free. Profit sharing will return to 50%. The ESOP can then buy another 30% –Financed by me or the bank. I’m open to all comments, concerns or questions.