episode 129 – transcript

Dave Cain:  Welcome to unsuitable on Rea Radio, the award-winning financial services and business advisory podcast that challenges your old-school business practices and their traditional business suit culture. Our guest are industry professionals and experts who will challenge you to think beyond the suit and tie while offering you meaningful modern solutions to help you enhance your company’s growth.

I’m your host Dave Cain. With the variety of benefits for business owners and their employees alike, it’s really no wonder why employee stock ownership plans, or ESOPS, continue to grow in popularity throughout the United States. That being said, it’s one thing to read about the pros and cons of this type of succession plan in the latest business journal or in the Internet and quite another matter to embark on your own ESOP journey.

That’s why in today’s episode of unsuitable on Rea Radio, we are going to hear from someone with first-hand experience. David Phillips, president and chief operating officer of Architectural Systems Incorporated in Central Ohio is here with us today talk about the reasons why he opted to put an ESOP into play. We’re going to learn why this was the company’s succession plan of choice and what goals they hope the ESOP will help them accomplish. We’re also going to ask them about their experience during the implementation process.

Welcome to unsuitable, Dave.

Dave Phillips:   Thank you.

Dave:     As we were getting ready for today’s podcast, you hit something really true and dear to me as you said, “Look. I don’t believe cell phone should be allowed in any business meeting.” I kind of like that.

Dave P:  I agree.

Dave:     There’s just so many interruptions, how many times that occur.

Dave P:  Well, I think if you can’t go 20 or 30 minutes without your cell phone, you don’t manage your time very well.

Dave:     That’s probably right. Why don’t we jump into the ESOP story. Let’s do a little elevator speech on ASI, Architectural Systems Incorporated, which we know around here as ASI. What do you guys do? What’s your elevator speech?

Dave P:  We are a commercial roofing company, probably one of the largest in Central Ohio. We primarily do private negotiated work, many big clients, Honda Limited. We do a lot of the developers in town, and we have a huge service department where we go around and service roofs, try to keep them serviceable until it’s time for new roofing. We do not bid a lot of public work. We stay in the private sector, but we also do metal siding, commercial metal siding, other metal roofing, and mostly just single ply roofing on the roofs.

Dave:     Well, you’re certainly an icon around Central Ohio, but you probably go throughout the United States for-

Dave P:  We have been to Waco, Texas is the farthest we’ve been, one of our clients. We don’t travel to look for work, but our clients that we do business with sometimes-

Dave:     They find you.

Dave P:  They will ask us to go out of town for them.

Dave:     Sure. How long have you personally been in the construction business?

Dave P:  32 years-

Dave:     32?

Dave P:  … I believe, yeah.

Dave:     When did you start your company ASI?

Dave P:  We started ASI in 1986. It was a manufacturers’ rep firm, and I was a sales rep at the time. We turned it into a construction company as we know it today in 2002.

Dave:     Any time you start a business, there’s always this issue of succession plan and never quite know when to start having those conversions. It’s not one of those things you roll out of bed in the morning and say, “Look. I’m going to do a succession plan today.” It’s one of those things that’s tough to get started. How did you get started with thinking about a succession plan?

Dave P:  That’s a good question. I have three children, and none of them wanted to get into the business, so I decided I had to do something else to figure out what to do with this company. Probably four years ago, I started thinking, what am I going to do with this company when it’s time? There’s several options: turn it over to your children, which that was not available; sell it to a third party, a competitor or a private equity or something to that; or ESOP. We chose the ESOP way. We had an offer on the company in 2014 and turned it down because there were too many restrictions on what I was going to do after we sold it. This is where we … But we thought of this probably four, five years ago.

Dave:     It’s taken the whole … I guess the message there is, this is not one of these things it happens over night. You’ve gotta put it in play several years and give it some thought process.

Dave P:  Well, it’s kind of funny. I was at a conference with Firestone building products just two weeks ago in Phoenix. A guy next to me asked to me what I did, and I explained to him how we were in ESOP and went through it. He said to me, “Yeah, I’m starting to think about succession planning. I’m 70 years old.” I said, “You might be a little late.” It does take some time.

Dave:     Sure.

Dave P:  It takes some time to make sure you … If you make a snap judgment, you’re probably not going to do very well.

Dave:     One of the things that I hear from our clients and friends that are in the ESOP is there’s this tremendous amount of loyalty to their employees, and they’ve said, “The ESOP helps me as the owner give the team an opportunity to own part of the company and some continuity, some security.”

Dave P:  Well, the employees are your number one asset, contrary to popular belief, and they’re very hard to find right now. There’s a shortage of people that want to be in the construction business. We wrestle with that every day. Yeah, you want to leave a legacy, everybody wants to leave that, but our employees are why we are where we are today. I get a lot of the credit, but they did all the work.

Dave:     They did the work.

Dave P:  They did the work.

Dave:     That’s fantastic. I mean, that’s great as business owner that you’re willing to be the cheerleader for the team. I mean, they’re right. Those are the team that did it. They-

Dave P:  They did.

Dave: … and this is a bit of a reward for them, opportunity.

Dave P:  That’s the plan.

Dave:     Walk me through the emotion of the decision to start the succession plan and make a decision. That probably wasn’t an easy process.

Dave P:  No, but once I hit 60 years old, I decided that I wasn’t going to live forever, and I had to do something.

Dave:     Oh, come on. We’re going to live forever.

Dave P:  Well-

Dave:     60’s, what, the new 40?

Dave P:  In theory. But you have to look down the road, and I have no intention of retiring yet, but you have to look down the road at where you’re going to be in 5, 10 years. A lot of people don’t do that, but knew this isn’t something you can do overnight, and we wanted to, like I said, when my children decided they weren’t coming in the business, and I learned about the ESOP, I thought this would be a great way to reward the people that got us where we are and allow me to exit on my own terms.

Dave:     Under your ESOP plan as we sit here today, which is fairly new plan. I think you shared that occurred in September of 2017?

Dave P:  Yeah, September 15th.

Dave:     You still maintain control. You do the day-to-day activities. You’re still the CEO and many other things in the company. Even though the succession plan is in place, you’re still actively involved, no change.

Dave P:  Oh, it won’t change for a while. My next big project we have to work on is finding the person that’s going to replace me and build the management team so I can step back, but this is going to be a, we’re going to do baby steps. It’s not going to happen overnight. That’s why I have the five to seven-year plan on my exit.

Dave:     Would you hire you to run your company?

Dave P:  I would hire me. I don’t know if I could work for me.

Dave:     Well, that’s a good, honest answer. You look, as you set this up, I think you said five to seven years. To me, I think that seems like a pretty good timeframe to get the management team in place. Now, you’re employee-based. How many employees do you gave?

Dave P:  85.

Dave:     85. What would be, just off the cuff, what would be the average length of employment for most of the team?

Dave P:  Yeah, they’re 5-10 years.

Dave:     Okay, so you have mid to long-term employees.

Dave P:  Right. This portion of our business, the actual construction end of it, we are starting our 17th year.

Dave:     17?

Dave P:  Mm-hmm (affirmative).

Dave:     When you explain the ESOP to the team, how did they take it? Did they understand the-

Dave P:  A lot of-

Dave: … concept?

Dave P: … blank stares.

Dave: Stares?

Dave P:  A lot of blank stares. Yeah, the first thing was, “You’re going giving us this company for free?” I said, “Well, yes and no. You’re going to earn it,” but it’s a complicated thing, and they’ll have a better understanding in a couple of months when we get our first statements and they can actually see what they’ve, own and what they’ve earned. Right now, it’s kind of a mythical thing right now.

Dave:     It’s a paper item until they’re-

Dave P:  Right.

Dave: … they begin to get some funding and so forth, so not only is it the ownership concept, but it’s also a retirement mechanism for most of team.

Dave P:  Well, that’s what it is. It’s a, basically a glorified pension fund that they do not have to fund. In the past, we still do have a 401(k) that we matched, and now we don’t match that anymore. We put that money in the ESOP, and it grows much faster than their company match.

Dave:     A lot of times, when you hear of employee stock ownership plan and the employees feel, “Okay, wow, I’m an owner. There’s some things I want to change around here. I’m going to make some decisions on buy this, do this, hire this person,” and that’s not really practical.

Dave P:  No. It’s no different than if you owned a, let’s say a share of Amazon. You’re not going to go in there and tell them who to hire, are you?

Dave:     I don’t think.

Dave P:  Okay, it’s no different. They’re shareholders.

Dave:     They’re silent shareholders but work on the day-to-day business.

Dave P:  They work on the day-to-day business. They participate in the profits. We have officers and managers that make the day-to-day decisions just as it … The basic structure of the company did not change from September 15th to September 16th.

Dave:     So it’s business as usual-

Dave P:  Mm-hmm (affirmative).

Dave … job security galore, maybe even more.

Dave P:  Well, what you hope they get out of it is everything they put into it, they will reap the benefits. Hopefully, there’s some self-policing going on. If you have people that don’t show up to work, maybe their own peers will encourage them to either show up or go. Maybe the waste at the end of the day, instead of throwing things away, they may be able to reuse things, take a little more care of what is the property the company provides instead of, “Oh, it’s company property. Don’t worry about it.”

That’s the hope. You hope that they figure out that they’re, when they do a job, they’re doing it for themselves too, not just for me.

Dave:     Right. Right. After you made the decision and signed the paperwork, did you go out and celebrate a little bit?

Dave P:  A little bit.

Dave:     A little bit, huh? That’s part of a, you enjoyed the fruits of your labor.

Dave P:  Yes.

Dave:     Again, this is, I think as we talk about this, this is a complex transaction. This-

Dave P:  It is.

Dave:     This is not something that can happen over night, and I would imagine the, what I also hear and see is the cost to put one of these in place and administer it over the years is not cheap.

Dave P:  No. It’s expensive, and the way these things are financed is, in our case, I am carrying 70% of the note, and every couple of years, the bank will step up and pay me money, and then we’ll reduce the note. There’s an investment for me to stay in to make sure everything works. They’re not cheap to do.

Now, you can do them several ways. You can go assemble your own team and save some money, or you can hire a professional, which we did, and they’re a little more expensive, but they do it every day. I doubt if I’ll ever sell another business again, so one time in a lifetime, you’re not really good at it.

Dave:     Yeah. A fellow partner of mine, Lee Beal, constantly talks about you and the success of your company and the ESOP. I know, he’s not in the room, but I know he’s extremely proud and use you as a model in the ESOP field.

Dave P:  Lee and I have been doing business together for 35 years, and don’t tell him this because he’ll get a big head, but he’s become a mentor of mine too because not only has he been my accountant, but he’s been a business advisor that’s never been afraid to tell me that, “Maybe you ought to rethink that. That’s not the right idea,” as opposed to telling me everything I do is great.

Dave:     That’s role that I know Rea & Associates and our advisors and CPAs try to get more involved and get behind the scenes. There’s an emotional part of doing this, and we have to understand that. It sounds like the two of you connected over the years. Don’t tell him, either. I think he’s pretty good at that. Don’t tell him that.

Dave P:  He is. He is. We go way back from when I was first a manufacturers’ rep, and I brought in my two pages of stuff for him to do the accounting on, and I think he was like, “You can do this yourself.” Nope. I’m going to have an accountant.

Dave:     Yeah. Two pages of accounting stuff, huh? Things have changed a little bit.

Dave P:  A little.

Dave:     Yeah. You know how to run the computer very much?

Dave P:  I’m-

Dave:     The big computer.

Dave P:  I’m dangerous on it.

Dave:     You’re dangerous, huh? You stay away from that?

Dave P:  I try to.

Dave:     Yeah. You’re not one of these guys that are on the phone all the time, are you?

Dave P:  I’m on the phone. I’m a big believer in face-to-face communication. I do not like to solve issues via email or text, and most of my employees know that.

Dave:     That’s your culture. That’s your culture. As you mentioned, the five to seven years is your plan. Five to seven years goes pretty quickly. That’s going to force you to really buckle down and look for that next general manager or CEO or CFO to replace you.

Dave P:  He’s working for us.

Dave:     He’s working for-

Dave P:  He’s been here five years. I think he’s the right guy. We’ll see. He just was promoted this morning to vice president, and we’ll see what happens.

Dave:     What are you going to do when you step away? You have hobbies and activities, or are you going to stay involved?

Dave P:  I don’t know yet. It’s kind of hard when you’re self-employed, entrepreneur-type to turn the key off as opposed to somebody who works for the big corporation, and they put their 30 years in, and their money’s right, and they want to get out. We have to win every day to make it work. It’s hard to turn that off, and it’s funny you ask that.

We spent a month in Florida, my wife and I, a month of January in Florida, and on the way home, she was saying what a great time we had, but when we get back, she’s not quite sure when this ESOP is going to end and I retire, but she let me know that between 8:00 and 4:00, I need to find some place to go every day, so we’ll see how that goes.

Dave:     Yeah. You’re going to clean the garage every day.

Dave P:  No.

Dave:     Something like that.

Dave P:  I don’t clean the garage-

Dave:     No.

Dave P: … so we’re not going to do that, but I play golf, and we travel, and I have other investments in some other businesses. I’ll keep busy.

Dave:     What’s your handicap?

Dave P:  We playing for money?

Dave:     We can.

Dave P:  Then it’s a 12.

Dave:     That’s, oh. We might have to play one of these times, but the-

Dave P:  That’s 12.

Dave:     The thing that impresses me about you, and again, we met a few times, but just from discussions with our team that knows you, you’re one of these business owners that over the years has done just about anything and everything inside your company to make it happen. You mentioned the two-page accounting ledger. You’re out bidding, you’re out inspecting, you’re out hiring. You’ve done it all. I can see how that’ll be tough to step away.

Dave P:  I’m not good at that, and as we had a meeting this morning because we just finished performance reviews, and I said the management’s set for right now, and I’m going to try to rise up to 10,000 feet and look down on the company and put the pieces in place and make it work, and I’m probably not going to be very good at it, so you guys are going to have to tell me, some time, back away, and I haven’t because it’s hard for me to not get my fingers in everything.

Dave:     You might know when it’s time. They-

Dave P:  I know.

Dave:     You might know.

Dave P:  Yeah.

Dave:     These younger owners, and we have them in our business, they have a tendency, if they’re good, they push you out of the way.

Dave P:  I assume these new managers we have are going to out-kick my coverage anyway. Probably do better than I did.

Dave:     Yeah. Well, that’s good attitude to have.

Dave P:  I hope so.

Dave:     Let’s say I’m a business owner thinking of an ESOP, and we’re out having a cold one. What piece of advice would you give me?

Dave P:  The first piece of advice I would give you is to hire a professional that does this every day. Do not try to assemble your own team. You can’t run your business if you’re trying to do that. I had trouble running my business day-to-day, and we had a pro doing it for us. I would tell them to make sure you’re ready for this. It’s a good deal for your employees, and you have to sell it to them to make sure they understand it. It works for me. I can’t speak for everybody else, but the biggest piece of advice would be work with pros because it’s complicated.

Dave:     We’d love to have you back on after maybe two years, three years into this, just check up on you, see how it’s going, and knowing how you guys operate, I think it’ll be a huge success.

Dave P:  Yeah, that, I’d be happy to, unless things to really well, then you’re not going to find me.

Dave:     You’ll be down in Florida, and-

Dave P:  Around Florida or-

Dave: … you’ll be down a single-digit handicap, and we’re never playing unless we’re on the same team.

Dave P:  Florida or California. My son lives out in LA, so we go out there and visit quite a bit.

Dave:     There you go. Our guest today has been Dave Phillips, president and CEO of Architectural Systems Incorporated, also known as ASI. Thanks again for joining us on unsuitable today, Dave.

Dave P:  Thank you.

Dave:     It’s been really great listening to your story and hearing the reasons behind your decision to pursue an ESOP. Listeners, you probably have a lot of the ESOP-related questions. This is your chance to send them into us at podcast@reacpa.com.

Next week, we will have Tim McDaniel, Rea’s own succession plan expert, back on the podcast to answer your questions and to discuss the ins and outs behind an ESOP feasibility study. Don’t forget to subscribe to unsuitable on iTunes today to make sure you don’t miss the valuable second half session of our ESOP conversation. Until next time, I’m Dave Cain, encouraging you to loosen up your tie and think outside the box.

Disclaimer:  The views expressed on unsuitable on Rea Radio are our own and do not necessarily reflect the views of Rea & Associates. The podcast is for informational and educational purposes only and is not intended to replace the professional advice you would receive elsewhere. Consult with a trusted advisor about your unique situation so they can expertly guide you to the best solution for your specific circumstance.