The Hard-Nosed Business Case for Employee Ownership
Jay Goltz has spent much of the past year studying ESOPs. His surprising conclusion is that he can make more money owning 70 percent of his company than he can owning 100 percent.
Happy New Year!
Here are today’s highlights:
The minimum wage is rising across the country but it’s also becoming increasingly irrelevant.
Used car dealers are shutting down at the fastest pace since 2009.
Ryan Caldbeck: If you’re wondering whether it’s time to fire someone, it’s time to fire someone.
THE 21 HATS PODCAST
This week, Jay Goltz explains how he got interested in selling a percentage of his business to his employees and why he quickly lost interest once he started reading books, attending seminars, and talking to accountants and lawyers who specialize in employee stock ownership plans. To Jay’s ear, they all made ESOPs sound expensive, complicated, and risky. This was not something he needed to do. So why go to the trouble? Why take the risk? But he kept asking questions, and over time, he sensed that many of the problems he was being warned about didn’t have to be problems. As of now, he’s pretty much concluded that an ESOP could help him secure retirement for his employees while generating more profit for his business. In fact, he says, “I'm confident I can make more owning 70 percent of the company than I am now owning 100 percent.”
But he still has a few lingering questions, which is why we invited Corey Rosen to join the conversation. Corey helped draft the legislation that created ESOPs, he's the founder of the National Center for Employee Ownership, and he wrote the book on how the plans work. All of which led to an inevitable question for both Jay and Corey: If ESOPs are so great, why are there so few of them?
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
OPPORTUNITIES
Here’s one solution for the glut of office space: “The transformation from a real-life office into a facsimile on the small screen is part of the business strategy of Backlot, a location service for film and television production in New York, which offers landlords a way to earn revenue from their lifeless cubicles. The boom in content production and the demand for genuine locations have helped the business take off, said Darren Goldberg, managing partner and head of acquisitions for Backlot. ‘When you shoot scenes for shows like Billions or Succession, it’s not just about the one room,’ he said. ‘It’s really about the authenticity of the environment.’”
“Backlot offers film and TV productions easy access to 22 million square feet of offices, restaurants, and retail space across New York City. By scouting and prepping locations and handling paperwork and negotiations ahead of time, the company turns empty space into filming locations to feed the voracious demand for content.”
“Backlot’s clients include hospitality and real estate companies such as Hines, RXR, and Union Square Hospitality. ‘Commercial office buildings don’t like to interfere with their high-paying tenants, and they don’t want to be bothered by 150 people coming in to shoot a movie or TV show,’ Mr. Goldberg said.”
“A deal to place the entire portfolio of the real estate investor SL Green on Backlot has generated ‘millions of dollars for us in incremental revenue over the last several years,’ said Steven M. Durels, an executive vice president at the firm, which promotes itself as New York’s largest commercial landlord.” READ MORE
Private equity thinks child care can be big business: “The prices can rival college tuition: Bright Horizons charges up to $44,000 a year for child care in Seattle; at KinderCare in Manhattan, it is up to $40,000. And the services can be attentive. Parents often receive hourly updates: the exact time a baby dirtied a diaper, the number of raspberries a toddler ate at snack time, photos of 3-year-olds at the playground. Millions of American families are coping with a child care shortage brought on by the coronavirus pandemic. But one end of the business is thriving: national chains, some charging silver-spoon prices.”
“The companies, including KinderCare, Bright Horizons and Lightbridge Academy, serve about one million of the 12 million children under 5 in some form of child care.”
“In Laurel, Md., Carolina Reyes, the director of a small child care center, said she had trouble competing for staff with the name-brand chains. ‘They have the money to have a beautiful building,’ she said. ‘They give you all the techniques and all the ways of how to run it — how to have everything set. In my case, I have done everything on my own.’”
“Her rates, however, are more affordable. She charges $290 a week for a 2-year-old. A branch of KinderCare in her region quoted a price of $350 a week for toddlers.” READ MORE
RETAIL
Used car detailers are expected to shut down this year at the fastest pace since 2009:
HUMAN RESOURCES
Owners say it’s getting easier to fill open jobs (but it may cost more): “The U.S. job market remains historically tight. But December marked the first time since July where more small-business owners said in a survey for The Wall Street Journal that they found it easier—rather than harder—to find workers. Some entrepreneurs say steps such as raising pay, adding apprenticeship programs and rewriting job ads are starting to pay off. Others report an increase in applicants as competitors pull back on hiring or begin layoffs.”
“UnaliWear, a maker of medical-alert wristwatches, struggled this summer to keep new employees on the job. ‘They would ghost us,” said Chief Executive Officer Jean Anne Booth, who has 17 employees.”
“This fall, the Austin, Texas, company increased starting pay to $18 an hour from $15, and added a $1-an-hour raise after six months, aiming to put pay more in line with other local employers. ‘Right now, for the first time in a while, we are fully staffed,’ Ms. Booth said.”
“Chip Ridge, president of Millennial Title in Louisville, Ky., said he is hoping to make strategic hires in early 2023 as the housing and mortgage-lending industries continue to contract in response to higher interest rates and slowing sales.”
“‘There’s a lot of pretty high-level talent in our industry that’s being displaced as part of this shift in the economy,’ said Mr. Ridge, who has 33 employees. ‘There’s potentially an opportunity for us to acquire some really experienced talent that in a normalized market we would never have the opportunity to get.’” READ MORE
Even restaurant workers are coming back: “While higher pay is helping to solve companies’ hiring shortages, it is also eating into profit. Broomfield, Colo.-based Noodles, which now offers benefits such as paid paternity leave, adoption assistance, and tuition assistance for hourly workers and their immediate family, in November told investors that its wage costs were up 12 percent for the three months ended Sept. 27 compared with a year earlier. Chief Financial Officer Carl Lukach expects the chain’s labor costs to continue to grow next year. ‘You’re still seeing double-digit wage inflation because of the competition in the market,’ he said.”
“Restaurants’ margins, which have also been hit by rising costs for food, ingredients, and materials, have declined to an average of 13 percent from 21 percent before the pandemic, according to a survey of 800 operators by market-research firm Datassential. Some restaurant operators said their margins are far lower than that.”
“Timothy Tharp, owner of the Checker Bar and Grand Trunk Pub in downtown Detroit, said his staffing has improved and the quality of his applicants has shot up from last year, but he is barely breaking even and fears that raising his prices will unnerve customers. ‘I’m trying not to scare people away with $30 hamburgers,’ he said.”
“Fast-food workers earned an average hourly wage of $15.17 in October, up 26 percent from before the pandemic, Labor Department data show. Wages for workers at sit-down restaurants rose 21 percent to $18.70 an hour.”
“Both categories increased faster than the average worker’s wages; across private-sector employers, average hourly earnings for rank-and-file workers were up 16 percent.” READ MORE
States are raising their minimum wages, but it may not make much of a difference: “More than half the states in the U.S. are set to lift their minimum wages in the coming year, but the effects could be muted because many low-income workers already earn more than mandated due to strong labor demand. Wages have surged, particularly for low-wage workers, since the pandemic for several reasons, including widespread labor shortages. Many employers say they have to pay more than federal, state and local minimum wages to recruit and hold on to restaurant servers, hotel housekeepers, retail store clerks and other employees.”
“Through September, the lowest 10 percent of workers by income in each state earned hourly wages that were on average one-third higher than their state’s minimum wages, according to a Wall Street Journal analysis of data.”
“Bobby Stuckey operates two restaurants in Denver and two more in Boulder, Colo. In January, Denver will boost its minimum wage to $17.29 an hour, and Colorado will increase its to $13.65. Mr. Stuckey said he would voluntarily pay the higher minimum wages across all four restaurants because that will be fairest for all his employees. But customers will pay more, he said.”
“‘I don’t want to say the minimum wage has become irrelevant, but it has certainly become less relevant,’ said David Neumark, a professor at University of California, Irvine.” READ MORE
If you’re wondering whether an employee should be fired, Ryan Caldbeck says the answer is clear:
MARKETING
Amazon is increasingly dominating digital advertising: “A growing number of companies believe it’s useful for them to spend more on Amazon ads. And more stores are copying Amazon’s approach. For the first time in years, Google and Meta have grabbed less than half of the digital marketing money spent in the United States in 2022. Amazon, which took more than 11 percent of all digital ads purchased, was the biggest reason Google and Meta lost ground as advertising powerhouses, according to the research firm Insider Intelligence.”
“CommerceIQ, whose software helps businesses sell stuff on Amazon and other stores, told me that for each dollar that product sellers spent on Amazon ads during a holiday shopping stretch around Black Friday, they sold more than $5 worth of stuff most of those days.”
“In part because of Amazon’s success with paid product promotions, Walmart, Target, the grocery delivery company Instacart, drugstore chain Walgreens and other retailers are also putting a higher priority on tailoring commercials to influence what you buy, advertising specialists said.” READ MORE
TAXES
The IRS is putting that payment-service rule change on hold: “Anyone getting paid for their goods and services through apps like Venmo, PayPal or CashApp, or platforms like Etsy and Airbnb, just got a reprieve from the IRS. Following concerns expressed by the tax community, the electronic transactions industry, and some lawmakers, the IRS said Friday it would delay by one year the implementation of a rule change that would have resulted in a virtual paper chase of tax forms going out by January 31, 2023, to anyone using such apps for their business transactions.”
“The rule change requires third-party payment platforms to issue a 1099-K to the IRS and the app user for business transaction payments if they add up to more than $600 over the course of the year. A business transaction that is taxable is defined as a payment for a good or service, including tips.”
“It used to be those platforms only had to issue you a 1099-K if you engaged in more than 200 business transactions for which you received total payments of more than $20,000 in a year.”
“The new rule doesn’t impose any additional taxes on anyone. Nor does it change your obligation as a taxpayer to always report to the IRS all of your taxable income from your business activities. But the 1099-K reporting will make it harder for someone to evade the taxes they owe by underreporting their business income.” READ MORE
MANUFACTURING
Companies of all sizes are trying to move production from China to Mexico: “Jose and Veronica Justiniano were also dependent on vital goods from Asia and eager to find a vendor in the same hemisphere. The couple ran a small business, Veronica’s Embroidery, out of their home. They supplied restaurants, construction companies, and maid services with uniforms for their employees. ... In 2018, the couple bought their first embroidery machine, installing it in an upstairs bedroom. The next year, they secured their most important customer — Gloria’s Latin Cuisine, a chain of 22 fine-dining restaurants in Dallas, Houston, San Antonio, and Austin. The Justinianos bought uniforms from a company that imported them from Asia. Then they used their machines to embroider the logos.”
“Their distributor maintained huge stocks of inventory at warehouses in Texas, typically delivering within a day. But as the pandemic intensified in 2020, days turned into months. The Justinianos were late in their own deliveries, a mortifying threat to their business. Mr. Justiniano hurriedly sought another supplier. ‘The only way was Mexico,’ he said.”
“They eventually entrusted much of their business to Lazzar Uniforms, a family-run company in Guadalajara, a booming city about 350 miles northwest of Mexico’s capital. Lazzar’s commercial director, Ramon Becerra, 39, was eager to gain a crack at the enormous market to the north. ‘We know the U.S. is the future for us,’ Mr. Becerrra said.”
“They started small, with a few dozen chef’s jackets. By September 2021, Veronica’s Embroidery was purchasing 1,000 linen shirts in a single order, at prices close to what its previous distributor charged for imports from Asia.”
“‘This year has been a wake up call for the U.S.,’ Mr. Justiniano said. ‘We have to reconsider where we get our stuff made.’’ READ MORE
MANAGEMENT
The latest management trend? Ice baths: “The executives at Daring Foods in Los Angeles had a tough summer. The company, which makes ‘plant-based chicken,’ had grown 250 percent in its second year, and there was enough turnover that it started to feel, as the founder and chief executive, Ross Mackay, said, like ‘an elephant in the room.’ There was one solution: Jump into an ice bath together. The executives spent six minutes in icy cold water, breathing through the pain. ‘After we all did an ice plunge, and our endorphins were through the roof and we all felt great about ourselves,’ Mr. Mackay said. They ‘ripped the Band-Aid off’ and addressed the challenges they were facing.”
“Across the country, companies are entertaining clients with foot rubs and sound baths. Team brainstorming sessions are taking place in ice plunges and infrared saunas. Meetings with current or potential bosses are happening over IV infusions.”
“According to executives, employees and spas, companies and entrepreneurs are conducting more business than ever in places designed for wellness — and cutting edge treatments.”
“A 2022 study conducted by the Society for Human Resource Management in collaboration with other groups, for example, found that 88 percent of H.R. professionals believed offering mental health resources could increase productivity, and 86 percent said it could increase employee retention.”
“‘People are sicker than they’ve ever been,’ Dr. Leary said. ‘Business owners are starting to realize how backwards it is to say, Okay, for our Christmas party or team gathering or corporate retreat, let’s go booze them up and make them overindulge, which is a depressant and will slow them down.’” READ MORE
Thanks for reading, everyone. — Loren