Not Sold on ESOPs? There’s a New Alternative

In this week’s podcast episode, Ari Weinzweig of Zingerman’s and Brad Herrmann of Text-Em-All explain why their businesses rejected an ESOP in favor of an alternative few companies have tried.

Good Morning!

Here are today’s highlights:            

• Interest rates may be the biggest challenge facing small businesses right now.

• A  growing number of job postings are offering relocation benefits and requiring on-site presence.

• Litigation is plaguing the family business that invented the pizza pot pie.

• Small businesses are paying ever-increasing costs for climate change.

THE 21 HATS PODCAST

This week, two special guests who have built highly successful companies talk about what they ultimately plan to do with those companies: Ari Weinzweig is co-founder of Zingerman’s Community of Businesses, a collection of mostly food-related companies that are an iconic part of Ann Arbor, Michigan. Brad Herrmann is co-founder of Text-Em-All, a software firm based near Dallas that helps organizations deliver personalized, informational, and emergency messages by text and by phone. Both Zingerman’s and Text-Em-All consider themselves purpose-driven. Both practice open-book management. And so, not surprisingly, the founders of both companies took a hard look at selling to an employee stock ownership plan, or ESOP, in the hope that the cultures they’ve created might live on.

But both companies, independently, soured on the notion of creating an ESOP, one after spending more than $200,000 and coming within a week of closing the deal. And now, both have settled on a little known alternative, what’s called a perpetual purpose trust. So far, only a handful of companies have tried to create a purpose trust for this particular purpose, but Zingerman’s and Text-Em-All are taking the leap. As both Ari and Brad acknowledge, they’re kind of figuring it out as they go.

• You can subscribe to the 21 Hats Podcast wherever you get podcasts.

FINANCE

Gene Marks says the biggest challenge facing small businesses right now is rising interest rates: “Since March, 2022 the Fed has increased its federal funds rate — the rate it charges to its member banks to access money — from 0.25 percent to 5 percent. That’s a 20-fold increase in just a year. The Fed meets again this week — and may raise rates again. When a cost goes up by that much in such a short time, it ultimately has an impact. And now not only have borrowing costs for investors and businesses exploded, but the unusually quick rise of interest rates has caused some banks to miscalculate their money management, all with consequences. I’ve been seeing this all year at my clients. The prime rate is now at 8 percent, almost three times the level it was just a year ago. And this is the prime rate, which is used for the best and most credit-worthy of businesses. Few small businesses get that rate.”

• “Most are looking at rates between 9 and 12 percent on new or refinanced loans for working capital, equipment and property purchases. The high rates are causing many to rethink their inventory purchases, investments and hiring.”

• “A new survey of more than 500 small and mid-sized businesses found that 76 percent of them only had enough cash to operate for 60 days. As traditional banks circle the wagons, many of these smaller firms are forced to look elsewhere for financing — such as online lenders — and at much higher costs.” READ MORE

HUMAN RESOURCES

The WFH Vs. RTO battle continues apace and continues to have consequences: “Those consequences are increasingly reflected in job postings, according to an analysis by workforce demographic firm Lightcast. The analysis found the percentage of postings advertising remote work is trending down — falling from 8.9 percent in October 2022 to 6.4 percent in March. The percentage remains above pre-pandemic levels but is another example of employers regaining leverage in the hiring market. But Lightcast also found a small but growing share of employers are willing to pay up for onsite workers. Just under 2 percent of job postings in March offered relocation benefits. That's obviously a small percentage overall, but it's a notable jump from 1.2 percent before the pandemic.”

• “‘We’re seeing the push-and-pull between remote work and back-to-the-office play out in job postings. Remote work is here to stay. But some companies want employees to resume working in person and are willing to pay to relocate talent to fill those in-person positions,’ said Lightcast Senior Economist Layla O’Kane.”

• “Tax legislation and compliance is also a factor, with 18 percent of companies citing it as a concern. As we've noted, remote work can cause some payroll tax landmines for companies that aren't careful.” READ MORE

Airbnb says going fully remote has worked out just fine: “At a time when more and more workers are finding themselves back in their offices at least a few days a week, Airbnb is going full throttle on flexibility. This week marks one year since the company announced its Live and Work Anywhere policy, and now, it's time to gloat. ‘The business has actually never performed better since we moved to this program,’ says Airbnb Chief Financial Officer Dave Stephenson. ‘It's working really well for us.’ Other companies, including tech ones, are taking a very different path. The Pew Research Center found that among people whose jobs can be done remotely, just over a third are still working from home all the time, down from 43 percent a year ago.”

• “There is an obvious business interest here. People who can jet off somewhere with their laptops are potential Airbnb guests and hosts. Freeing people from the office has also provided savings for the company, whose office footprint is now less than half of what it was before the pandemic.”

• “Still, Stephenson insists that Live and Work Anywhere is really about winning the global war for talent. ‘The best talent in the world is not all within a 50-mile radius of San Francisco,’ he says. And that talent, Stephenson says, no longer wants to be tied down.”

• “Moreover, employees are happy. Airbnb's attrition rate is close to an all-time low and falling, the company says. And Airbnb's goal of hiring more women and under-represented minorities has gotten a boost from the new policy.” READ MORE

OPPORTUNITIES

Heidi Dillon is trying to bring more women entrepreneurs into the non-alcoholic sector of the male-dominated spirits industry: “As an incubator, Distill Ventures provides coaching and mentorship to brand founders to help them grow their company. Within the no- and low-alcohol division that she oversees, Ms. Dillon has made it a priority to focus on startup brands owned and run by women and minorities. By focusing on these start-ups by underrepresented groups in the industry, Ms. Dillon aims to normalize diversity.”

• “‘It’s their company,’ Ms. Dillon said. ‘So they shouldn’t have to say, I’m the female founder or I’m the Black founder. They’re just the founder. They don’t need an adjective.’”

• “That sensibility rings clear to Cindy Pressman, who created Atost, a low-alcohol aperitif, with her husband, Kyle, in 2020. When Distill Ventures invested in it in 2022, Ms. Dillon became her mentor.”

• “On numerous occasions, Ms. Pressman said, her husband would get the first handshake and most of the eye contact when they went to a business meeting. That’s not what she was used to in her previous line of work, in the fashion industry.” READ MORE

The types of businesses choosing to open in downtowns like Boston’s are evolving quickly: “Since February, Lee Morgan and Patrick Brewster have been serving canapés and cucumber sandwiches in a meticulously decorated storefront on Tremont Street. The Silver Dove Afternoon Tea Room is an anomaly downtown, open only from 11 a.m. to 6 p.m. Wednesday through Sunday. It’s a hub of finger-food, not business, vastly different from the sort of spots that populated downtown not so long ago: barbershops, boutiques, and dry cleaners for the office worker; no-frills coffee joints; a few fine restaurants and a host of establishments that dish up lunch in a to-go bowl. ‘After the pandemic, there are so many empty storefronts downtown,’ Brewster said. ‘You can’t put a fast-casual restaurant in all of them. It gives us the opportunity to do something a little bit different.’”

• “The launch of Silver Dove reflects the beginnings of a new vision for downtown retail. For years, city officials have said that Downtown Crossing and the Financial District should cater to student, theater, and tourist traffic in a post-COVID world, not just a dwindling number of office workers.”

• “Now, proof that this transformation is catching hold on the streets: High Street Place, an expansive food hall near Post Office Square, has proved a resounding success well after work hours. New nightlife concepts — The Wig Shop and Hobgoblin — have planted themselves on Temple Place where Wig World and Stoddard’s used to be. An indoor golf facility and bar was launched in City Hall Plaza in December.”

• “And the WNDR (‘Wonder’) Museum, an immersive art exhibit hall and cafe, will take over 17,000 square feet on Washington Street — space that once housed an Eddie Bauer store — in the coming months.” READ MORE

The very definition of retail may be evolving: “For the past year and a half, Luxuny — the atelier occupying this penthouse high above Bryant Park — has been the setting for various live performances, trunk shows, and chef tastings. Part luxury store, part art gallery, part private club, Luxuny is a bit difficult to define. Its founders, K.C. Jones and Luca Santonato, say their mission is to foster a space where ‘commerce meets culture and community.’ That may sound like a 21st-century sensibility, but this particular space, designated a city landmark in 1988 and once called ‘the most bizarre studio in the city,’ has a century-long history of hosting fantastic events — and fascinating people. The building was home to a women-only bar.”

• “A native of Rimini, a city on the Adriatic coast, Mr. Santonato was looking for a unique space to showcase his custom suit designs, and Ms. Jones, a stylist, pushed him to think beyond a store — and beyond fashion. ‘We wanted to transmit to our clients the feeling — what we call in Italy la dolce vita,’ he said.”

• “‘I design my own line of bespoke garments,’ Mr. Santonato, 41, said, ‘but I’m not the first one doing this, and I’m not going to be the last one doing this.’ The difference he offers is the unique atmosphere inside a historic space.”

• “Ms. Jones, 36, said that they were ‘still tweaking’ the concept, and compared it to making spaghetti: ‘Throw it at the wall and see if it sticks.’” READ MORE

CLIMATE

Small businesses are paying ever-increasing costs for climate change: “Three Brothers Bakery didn’t open its first location in Houston, Texas, in a flood zone. The flood zone came to them. Co-owner Janice Jucker’s father-in-law and his two brothers picked their spot on South Braeswood Blvd., and the bakery didn’t see any flooding until Tropical Storm Allison in 2001. It flooded again in 2008 when Hurricane Ike ripped its roof off and rain got in. Then, there were two more floods within a year in 2015 and 2016. Then Hurricane Harvey. Then Winter Storm Uri. Jucker pointed to decades of government-approved development that ate up natural drainage in the area and replaced it with concrete during a time when storms continued to batter the area, forcing small-business owners to survive massive amounts of economic damage. About 70 percent of the neighborhood left after Harvey, and it took time for them to come back, Jucker said.”

• “‘When it opened, it wasn’t in a floodway. But now, it’s considered a floodway because the government allowed it to become a floodway,’ Jucker said. ‘You may get insurance money, but you are not whole with the flood insurance. It doesn’t cover all the lost revenue or when people leave the neighborhood."

• “Now, when Jucker searches for new locations, she has specific criteria. ‘The two things we look for is parking, and did it flood during Harvey? If the parking is good and the answer is 'yes' on the Harvey question, we just will not do it,’ Jucker said.”

• “About 12 percent of businesses with employees across the country reported revenue losses related to a natural disaster in 2021, according to the Fed's recently released Small Business Credit Survey report.” READ MORE

FAMILY BUSINESS

There are lines out to the sidewalk, but the restaurant is caught in the throes of litigation: “In a town famous for its deep-dish pizza, Chicago Pizza and Oven Grinder Co. has made its own way since the early 1970s, serving an upside-down concoction created by its founder called the pizza pot pie. Today, patrons still line up on the sidewalk of the mainstay of Lincoln Park, a busy North Side neighborhood near Lake Michigan. And the original menu and cozy décor are largely intact—even though the owner died 7½ years ago, and his children, who worked there from a young age, are locked in a messy legal battle with a longtime employee and an ex-wife of their father’s over control of the business and the building where it is located. ‘It’s our entire family legacy. We created this concept, the menu. We built that restaurant,’ said Amy Bevacqua, the 58-year-old daughter of the founder, Albert Beaver Jr.”

• “The litigation dates back years, and has come with a host of unexpected turns. The next hearing is [this month]. After Mr. Beaver died unexpectedly on Oct. 31, 2015, Ms. Bevacqua said she flew from her home in New York to Wisconsin to begin to untangle his estate. There, she discovered that his computer and all his files had been taken from his home.”

• “She immediately called Shabbir Chagpar, a former busser who ran the restaurant and her father’s business affairs and whom she had known since she was a girl. She says he told her he had taken the files and computer because he was the rightful owner of the restaurant and the three-story building where it is located.”

• “The siblings tried negotiating with Mr. Chagpar, but with hardly any documents to bolster their side, they took him to court in Illinois in 2018. Things got even more complicated when Mr. Beaver’s fourth ex-wife, Barbara Beaver, entered the picture, also making claims to the restaurant. Then last summer, Mr. Chagpar died of cancer—but not before transferring his claim to the restaurant’s building to another longtime employee, Catherine Gallanis.” READ MORE

THE 21 HATS PODCAST: DASHBOARD

Where’s the money? This week, Gene Marks takes us through a case study of how easy it is even for profitable businesses to get caught in a cash crunch. The problem, Gene explains, is that business owners often have to pay taxes on earnings that have yet to reach the owners. Where does the money go? To inventory, to capital expenditures, to accounts receivable among other places. How can owners avoid the crunch? By staying on top of their finances. 

• You can subscribe to the 21 Hats Podcast wherever you get podcasts.

Thanks for reading, everyone. — Loren