ESOPs Are Great. But Not for Me
In our latest 21 Hats Podcast episode, as we continue our exploration of employee ownership, a philosophical issue hangs over the discussion: What exactly do business owners owe their employees?
Here are today’s highlights:
A restaurant owner asks, Why would you want to work in a restaurant?
Amazon is squeezing the nearly 2 million small businesses that sell on its marketplace.
A business coach says 30 years of trying to improve employee engagement have failed.
Getting employees to return to the office may be a lost cause, but opportunities are appearing in the new business districts hybrid workers are generating.
THE 21 HATS PODCAST
ESOPs Are Great. But Not for Me: Last week, Jay Goltz continued his exploration of employee ownership, flying to Portland to meet up with Shawn Busse and Jim Kalb, a friend of 21 Hats who has already sold a portion of his business to his employees. The three owners planned to attend a conference promoting employee stock ownership, but things went somewhat awry. Jay and Shawn left the conference early, Jim canceled his flight, and as has happened before in his brushes with ESOP professionals, Jay walked away feeling convinced—convinced, that is, that an ESOP probably isn’t right for him. Two days later, we taped this podcast episode, which quickly turned into one of the more raucous conversations you are likely to hear about a somewhat technical business topic—although we did manage to find some clarity in the end. In Jay’s words, we agreed to agree.
Along the way, we confronted quite a few relevant questions, such as, do ESOPs have to be so confusing? Are the professionals who pitch ESOPs trying to make them seem complicated? If Jay wants to sell 30 percent of his business to his employees but continue running it, how much control would he have to give up? Will an ESOP make life easier or harder for Jay’s two sons in the business? Instead of an ESOP, could Jay accomplish most of what he wants to accomplish by setting up a profit-sharing bonus plan through his 401(k)? Hanging over the conversation was a larger, more philosophical issue: What exactly do business owners owe their employees? And whatever those obligations are, do they extend beyond the sale of the business? Do they extend beyond the grave?
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As he closes down, a restaurant owner says his biggest mistake was sticking to the standard business model: “Even before the pandemic, I could talk to five of my colleagues who said, ‘Yeah, this is beating the love out of us.’ Because we don’t have the staff. We can’t attract long-term staff because we’re not giving them an equal shot economically. The model we had, in order to make as much handmade food as we could, was to work long hours and to sacrifice. To be great at something, there are prices to be paid, and we willingly paid that through divorces, addiction, and by being marginal human beings. There were a lot of great people with massive heart doing this. But that model — small profit margins, no days off, the 14-hour days, the self-indulgent rages — that model’s gone.”
“Why would you come to work in a restaurant? Why would you go to a culinary ed program and come out and you’re offered $16-$18 an hour with no horizon to anything more?”
“I used to have on my job application, ‘We work sick, hurt, dead. And if you’re dead, I want a note from the devil.’ That was the hiring document. I am so sorry to ever have printed that.”
“This is a passion for people. So we have to give the people with the passion the opportunity to have a life. And that’s what we didn’t do. And I think that’s the biggest mistake of my entire career.” READ MORE
Is banning children under 10 a good idea for a spaghetti house? “Nettie's House of Spaghetti in Tinton Falls, N,J., said on Thursday that it ‘will no longer allow children under 10 to dine in the restaurant’ from March 8. Its posts on Facebook and Instagram stated: ‘We love kids. We really, truly, do. But lately, it's been extremely challenging to accommodate children at Nettie's. Between noise levels, lack of space for high chairs, cleaning up crazy messes, and the liability of kids running around the restaurant, we have decided that it's time to take control of the situation.’ Some social media users appear to love the idea. One wrote on Instagram: ‘Never been to Nettie's but knowing I won't have to deal with children at a restaurant makes this establishment much more attractive. Will be coming soon!’ Another said: ‘I didn't think I could love Nettie's more but here we are!’”
“It's unclear how the policy will be enforced. One Instagram user wrote: ‘Will you be checking birth certificates at the door? My 8-year-old is the size of an 11-year-old.’”
“If the point of the exercise was to generate publicity, the policy seems to have been a success. The restaurant's Facebook post has had more than 28,000 reactions and been shared almost 8,000 times.” READ MORE
For the seventh straight month, inflation cooled in January: “Consumer Price Index data released on Tuesday showed that price increases picked up briskly on a monthly basis last month. That was true across both key measures: the one that includes gas and groceries, and a ‘core’ index that strips out those products because of their month-to-month volatility to get a better sense of the underlying inflation trend. The price index was up 6.4 percent in January compared with a year earlier. That was a very slight slowing from 6.5 percent in December, and is down notably from a peak of about 9 percent last summer. But compared with the previous month, prices climbed 0.4 percent after stripping out groceries and fuel — a rapid pace of growth that matched the increase in December.” READ MORE
Ikea is thinking small: “Ikea’s Planning Studio was developed to reach shoppers living in areas that its typical big-box stores aren’t located in. These new Planning Studios in the U.S. are around 8,000 to 9,000 square feet and focus on key areas integral to city living, such as kitchens, bathrooms, and bedrooms. Ikea plans to open more Planning Studio locations in Rome, Tokyo, and San Francisco among others. The new Planning Studios are part of the 3 billion euros (or about $3.2 billion) Ingka Group, Ikea’s largest franchisee, planned to invest in its new and existing stores. The investment also focuses on developing physical stores so they can serve as e-commerce distribution centers. Ikea did not share financial figures on how the Planning Studios are performing so far.” READ MORE
Amazon is taking half of each sale from its merchants: “Grappling with slowing sales growth and rising costs, Amazon is squeezing more money from the nearly 2 million small businesses that sell products on its sprawling online marketplace. For the first time, Amazon’s average cut of each sale surpassed 50 percent in 2022, according to a study by Marketplace Pulse, which sampled seller transactions going back to 2016. The research firm calculated the total cost of selling on Amazon by tallying the commission on each sale, fees for warehouse storage, packing and delivery, as well as money spent to advertise on a site where hundreds of millions of products jostle for attention. Paying Amazon for logistics services and advertising is optional, but most merchants consider these a necessary part of doing business.”
“Chuck Gregorich, who sells fire pits and outdoor furniture, says turning a profit on Amazon is getting harder. One of his popular fire pits costs $200, of which Amazon takes $112 for its commission, warehouse storage, delivery and advertising.”
“That leaves him with $88 to pay the manufacturer, ship the product in from China and cover his overhead. He expects his Amazon logistics expenses to increase up to 8 percent this year due to a new fee structure that took effect in January and additional changes scheduled for later this year.”
“‘I’ll have to raise my prices, and I already raised them a lot last year,’ said Gregorich, who is based in Eau Claire, Wisconsin.” READ MORE
Thirty years of attempting to drive employee engagement have failed, says Bill Fotsch, a longtime business coach, because employees crave meaningful work more than compensation and perks: “Giving your employees an unearned allowance won’t engage them—partnering with them, like trusted adults, will. For more than 30 years, the focus on employee engagement has been the opposite. The Gallup 12 is a leading example--all the questions center on better addressing employee wants, without engaging the employee in the work they're actually doing day-to-day.”
“Where is the link between an employee's actions and overall company performance? How are we working with employees to overcome challenges, and consequently grow?”
“Even Gallup will tell you that after decades of this approach, engagement has not improved.” READ MORE
Is returning to the office a lost cause? “Three years into the pandemic, business leaders and city officials around the world are still trying just about everything to lure employees back into offices and revive local economies. But new data on in-person work analyzed by Bloomberg News show that in a number of cities across the U.S., Fridays at the office are dead. Mondays are a crapshoot. And returning to pre-pandemic work schedules looks like a lost cause.”
“Nowhere is the economic cost of remote work more pronounced when it comes to spending than in the world’s leading financial center: New York. Manhattan workers are spending at least $12.4 billion less a year due to about 30 percent fewer days in the office ...”
“Losing $12.4 billion a year translates into missed sales for restaurants, retailers, and other businesses that drive New York’s economic engine.”
“[But] the growth has turned the neighborhoods where hybrid workers live into a new kind of business district.” READ MORE
Carey Smith, founder of Big Ass Fans and Unorthodox Ventures, offers a warning about convertible notes: “During a recent trip to Europe, we met with the founders of another medtech company who have a device that solves a real problem. The device treats an issue, at home, that now requires a visit to the doctor's office. We thought, What a great product! And we liked the founders. They appeared to have made many of the right decisions with a clear-sighted, long-term view. Or so it seemed. We soon realized that they'd made an avoidable mistake: kicking the proverbial can down the road when it came to funding.”
“Like many entrepreneurs, the founders of this device company had sought out investments from family, friends, and angels early on to start their company, and issued multiple convertible notes over several years.”
“Convertible notes make life better for everyone in the moment, and that's precisely why these founders found them so attractive. They got their money in a matter of weeks.”
“We wanted a certain stake in the company. The founders said sure, and we agreed on that certain amount. But later they told us about several outstanding convertible notes, changing the deal we thought we had wrapped up.”
“We (kindly) enlightened the founders to the problem, which set about a round of renegotiating, which is never a good thing for a founder.” READ MORE
The Biden administration is restarting a $10 billion tax credit for clean-energy manufacturers: “Clean energy projects that expand domestic manufacturing, reduce industrial greenhouse gas emissions or help create a domestic supply chain for critical minerals can begin applying for the ‘advanced energy’ tax credit at the end of May, the Treasury Department announced Monday. The program provides a 30-percent tax credit for technologies including carbon-capture systems, grid-modernization projects, clean-hydrogen production, and electric or fuel-cell vehicles, as well as equipment that reduces emissions from industrial facilities, the department said in a notice.”
“The first round of funding, some $4 billion, includes $1.6 billion devoted to projects in areas where coal mines and coal-fired power plants have shut down.” READ MORE
21 HATS: LIVE FROM CHICAGO
Join us for the very first 21 Hats Live event: This intimate, three-day gathering will be limited to 20 business owners/CEOs. It starts with dinner on Wednesday, May 17, and runs through lunch on Friday, May 19. It will feature lots of opportunities to engage with other owners on similar journeys. We’ll have two deep-dive peer group sessions, for which you’ll help choose the topics. Bring your own challenges! You’ll also get to hang with 21 Hats Podcast regulars including Paul Downs, Jay Goltz, Liz Picarazzi, Sarah Segal, and Dana White. And you’ll participate in the taping of a podcast episode.
Plus: Tour Jay Goltz’s retail operation. Take an architectural cruise on the Chicago River. And make connections that will last a lifetime.
When: May 17-19.
Fee: $2,750. (All meals, activities included. Travel, hotel not included.)
Sign up: Reply to this email with any questions or to reserve your spot.
THE 21 HATS PODCAST: DASHBOARD
The Good News About Gen Z: This week, Gene Marks talks about what Gen Z values in a job. The research suggests it’s not the job -- it’s more about people and meaning. And that’s good news for smaller businesses, because those are things they can offer. But you might want to emphasize that in your job descriptions. Plus: Is this recession happening or not? And what will ChatGPT’s upending of search mean for all of the businesses that have been investing in SEO? They’re not going to be happy, says Gene.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
Thanks for reading, everyone. — Loren