The Case for Employee Ownership Trusts
Brad Herrmann, co-founder of Text-Em-All, explains why he and Hai Nguyen chose an EOT over an ESOP.
Good Morning!
Here are today’s highlights:
Ami Kassar says everyone should have a line of credit.
Gene Marks says all owners should be kicking the tires on A.I. apps.
If TikTok is banned, it will affect plenty of business owners.
Gen Z is fighting inflation by shopping on Facebook Marketplace.
MANAGEMENT
Brad Herrmann makes the case for Employee Ownership Trusts (much as he did at the recent 21 Hats Live event in Fort Worth): “An EOT is a type of employee ownership option that is widely used in the U.K. but is just gaining ground in the U.S. Although similar, an EOT is different from the more popular employee stock ownership plan. Both options create a trust for the business owner to sell their shares to, but how those shares are handled differs significantly. In the case of an EOT, shares are not disbursed to employees, so the trust does not have to buy the shares back if an employee leaves the company. Employees in an EOT benefit from simple profit-sharing. Another benefit of an EOT is reduced regulatory requirements compared to the ESOP, making it a less complex and more flexible option for companies and their founders.”
“All too often, founders or executives decide to sell a company, only to see a large portion of the workforce laid off by the new owners. ... For a founder who has built a company from the ground up, worked closely with individuals for years, and views the company's employees as part of their family, the thought of them losing their jobs post-sale is often a sickening prospect. With an EOT, however, employees are in control of their fate, investing in a future that no one can take away from them.”
“One of the biggest benefits of the EOT model is that it leaves the original owner in control. When a founder sells their company to a venture capital or private equity firm, they often lose all control over the company they built. In contrast, when an EOT is created, there are very few changes in the day-to-day operations, especially for the founder(s) of the company. In the case of my company, I remain CEO, my partner and I both have seats on the board, and it is business as usual.” READ MORE
FINANCE
Ami Kassar says you should have a line of credit: “I often meet entrepreneurs who have solid, profitable businesses and no debt. When I ask whether they have a line of credit for use in case of an emergency, they frequently answer that they are reluctant to get a line of credit because they are risk-averse and afraid to take on debt. This answer makes no sense to me. There are a few things about lines of credit that are important to understand. For example, you are not required to use it. It is a checkbook that would give you some options and flexibility should your world turn upside down unexpectedly.”
“Like many of you, I spent some of my early career with a big corporation. By 2008, I was chief innovation officer at a company that was one of the largest issuers of credit cards to small businesses. As the recession hit, more and more of my colleagues were laid off. Finally, one Friday, it was my turn.”
“On my way home from being laid off, I stopped at a bank and deposited a check for the full amount of my home equity line of credit. The check had been sitting in my desk, unused, for the previous seven years. I started my company, MultiFunding, the next day.”
“When you obtain a line of credit, I generally suggest that the amount should be for about 10 percent of your top-line sales, 85 percent of accounts receivable, or 50 percent of inventory, whichever is greater.” READ MORE.
ARTIFICIAL INTELLIGENCE
Here’s how Gene Marks thinks you should prepare your business for A.I.: “Unless you’re in the software business, it’s unlikely that you’ll be developing your own A.I. solutions. But those in the software business certainly are and it’s our job — as business owners — to speak to the companies that provide accounting, collaboration, customer relationship management, and other software and find out what A.I. functionality they’re rolling out. Maybe it’s a faster way to respond to customers or a quicker methodology for billing or collecting receivables.”
“We should be getting demonstrations and kicking the tires on new features. In addition to talking to vendors, it’s just as important to find out what other businesses and people in our professional communities are doing.”
“‘We tell our clients they need to do whatever they can to get educated on A.I. now,’ said Anthony Mongeluzo, the president of PCS LLC, a Moorestown, [N.J.], technology services provider. ‘Hopefully peer groups and industry groups can help. Most people think of ChatGPT when you say A.I., but there are tens of thousands of A.I. apps out there to utilize and integrate with your technologies.’” READ MORE
MARKETING
Among those protesting the possible banning of TikTok? Business owners: “‘Banning TikTok would shut down a lot of small businesses, including mine,’ said Brandon Hurst, 30, a Los Angeles plant shop owner who credits the app with boosting lackluster sales. ‘These representatives and senators don’t understand that what they’re doing won’t just harm people they call ‘content creators.’ It would hurt small businesses.’ Dozens of TikTok supporters gathered outside the Capitol on Wednesday to oppose the measure, which passed the House with overwhelming support but faces an uncertain fate in the Senate.”
“More than 7 million American businesses market or sell their products through TikTok, according to the company. According to a study issued Wednesday by Oxford Economics, a financial consultancy, TikTok drove $14.7 billion in revenue for small-business owners last year and contributed $24.2 billion to U.S. gross domestic product.”
“Even as TikTok has become increasingly important economically, it has drawn fire from policymakers in both parties, who have expressed concern about the content being served to users of the app and about its parent company’s ties to China.”
“Proponents of the House measure say they have no intention of banning the app. Instead, the measure would require TikTok, which is owned by China-based ByteDance, to be sold to a U.S.-based company within 180 days. If ByteDance refused to sell, U.S.-based app stores and web-hosting services would be prohibited from providing TikTok to the public.” READ MORE
POLICY
Business owners say they would like to see the SBA modernized: “Overall, about 63 percent of small businesses give the federal government a ‘C’ grade or below on the effectiveness of its programs, and 71 percent give it a ‘C’ or below on communicating and marketing its programs to small businesses, according to a survey of small businesses by Goldman Sachs 10,000 Small Businesses Voices. Just 34 percent of small-business owners say they have a good sense of what federal programs, services and tax credits are available to them.”
“But where small-business owners are nearly unanimous is in their desire to see a modernized Small Business Administration. About 92 percent say it’s important for Congress to update the SBA — an agency that has not been reauthorized by Congress since 2000.”
“Janice Jucker, co-owner of Three Brothers Bakery in Houston, said many of the SBA’s programs and resources are rooted in an economy that has long since changed. ‘Leaders in Washington often talk passionately about their support for small businesses and praise small business as the backbone of the American economy, but small-business owners would like to see that talk turn into action by having Congress prioritize modernizing the Small Business Administration,’ Jucker said in a statement accompanying the survey results. READ MORE
RETAIL
Outdoor Voices is going online only: “Outdoor Voices, an athletic apparel company, is closing all its stores on Sunday, according to four employees at four different stores who were granted anonymity because they were not authorized to discuss the news. In an internal Slack message reviewed by The New York Times, some employees were notified on Wednesday that ‘Outdoor Voices is embarking on a new chapter as we transition to an exclusively online business.’ Products in stores are going to be discounted 50 percent, according to the Slack message.”
“Founded in 2014 by Ty Haney, the brand became popular for its muted tones and highly Instagrammable aesthetics. Think matching crop tops and leggings in pale shades of earthy tones. Its hashtag and company mantra, #DoingThings, became popular on social media, where brand loyalists would regularly share images of themselves participating in athletic activities like running or hiking or spinning.”
“Many Outdoor Voices customers weren’t just shoppers; they were devotees. The company was a chic athleisure brand perfectly positioned to attract millennials, but it was also selling a lifestyle. A lifestyle that helped the brand raise millions in funding. In a profile in 2019, The New Yorker likened Outdoor Voices to Lululemon.”
“Behind the facade of hashtags and spandex, however, trouble brewed. In 2018, the company was valued at $110 million. By 2020, that valuation figure had dropped to $40 million. Several senior executives left the company in succession.” READ MORE
ECOMMERCE
For Gen Z, Facebook Marketplace is the internet’s garage sale: “For many 20-somethings who don’t have a lot of disposable income, Marketplace is a place to get deals on items they wouldn’t normally be able to afford. ‘As someone who’s in their young 20s, I want to have nicer things but I don’t have the financial means to get there yet,’ said Ms. Chiu, who added that she preferred Marketplace over other sites because its interface was easy to use, making it easier to find deals on furniture.”
“‘Facebook Marketplace is often referred to as ‘the internet’s garage sale’ and is a modern-day counterpart to eBay and Craigslist,’ said Yoo-Kyoung Seock, a professor of textiles, merchandising and interiors at the University of Georgia, who studies consumer behavior among Gen Z and millennials and environmental sustainability in the textile industry.”
“For a generation that is environmentally conscious and prefers to shop secondhand, Marketplace has become popular. ‘Young people, including students and young professionals, are increasingly drawn to used goods,’ Dr. Seock said. Faster inflation has also made secondhand purchases a practical choice, she added.”
“Some buyers say they prefer Marketplace over Craigslist, which was popular among older generations searching for used goods, because unlike Craigslist, Marketplace buyers and sellers have profiles with ratings that make them more trustworthy and messaging is built-in on Facebook, making communication easy.” READ MORE
THE 21 HATS PODCAST
Man, I’m Glad We Didn’t Do an ESOP: This week, Matt Hoying, president of Choice One Engineering, explains to Shawn Busse and Jay Goltz how he created a DIY employee-ownership plan for his firm. Some 10 years ago, Matt’s predecessor as president tasked him with selecting an ownership structure that would engage employees and help Choice One be as successful as possible. That sent Matt on a mission in which he researched the pluses and minuses of every structure he could find—including employee stock ownership plans—before ultimately creating his own structure.
Matt’s plan doesn’t enjoy the tax advantages of an ESOP, but it’s open even to part-timers, and it requires employees who want to be owners to make a financial investment in the business. In other words, they aren’t given ownership; they have to buy into it. Shawn and Jay quiz Matt on the choices he made and how the plan has worked out.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
Thanks for reading, everyone. — Loren