Equity for All: Revolutionizing Business with Employee Ownership

0:00At the end of the transaction, that ultimately it was sold for$3 billion to somebody else. And each of the employees on average got$175 ,000, which was incredibly meaningful to them. And it was a win. How much more successful would you be if you had lunch once a week with insanely successful entrepreneurs who shared their biggest secrets on how they think and achieve success? Grab your seat at the table because this is Business Lunch with Roland Frazier and Ryan Dice.

0:35Welcome to another episode of Business Lunch. And today's a snackable episode with Roland where he's gonna get into some more tactical strategies that you can start using to live a rich and happy life. If this is the first snackable episode you're hearing, I'd encourage you to go back and listen to some of the other episodes that Roland has put out. And if you wanna get notified every time we release a new episode, go to the new businesslunchpodcast.com website and we'll send you detailed notes along with every episode. That's businesslunchpodcast.com, www.businesslunchpodcast.com, and you can sign up for the free email newsletter where you'll be able to get all the highlights and resources from the episodes.

1:10Hey, everybody. Roland Frazier and Ryan Dice here with another issue of the Business Lunch Podcast. Ryan, how are you doing today? I'm doing very. So is it an issue of it? Like this is a print podcast? Yeah. Or is it an episode? We print this. Print podcast, yeah. Or is it that we have issues? Yeah. Well, I mean, God knows we have issues. Yes. Personal business. So many. But that's what makes this an interesting show, right? Oh, yes. Oh, yes. No, I'm doing great. I actually just got back from doing another round of college visits with my oldest, who's going to be heading off to college next, you know, in the fall.

1:45And so that's always fun, but bittersweet. But man, what a pain in the butt. All that stuff is just. Man, I keep trying to get my kids to go back to college and just stay somewhere far, far away. And it doesn't work. That's cool. It is a very exciting time. I remember when I was leaving for law school and moving across the country and my mom was crying, you know, as I was leaving with my U-Haul truck piled full of all my stuff. It's a, you know, probably less for guys and more for moms. That separation, I would guess. But it's a thing. Other than that, life is good. life is good how about you yeah everything's going well busy but i feel like it's been busy since october and it's not stopped uh and it's good and bad like it's great because it's busy and there's lots of stuff going on but you know i'm uh i'm looking forward to finding some little break in the uh in the activities yeah where is this like freaking laptop lifestyle that i was promised i mean i've seen the late night infomercials and the uh the the tiktok and Instagram influencers.

2:52And man, we got like these companies and they're all doing really, really well. So, you know, I need my laptop on the beach kind of thing. This is garbage. I think you would hate that. I'm actually pretty sure you would. But there are two answers to that. One is that I find that most of what I do is on a laptop. So technically, while I am on the laptop for, I don't know, 72 hours a day, it is a bit of a laptop lifestyle. It's just a question of the timing that needs to be adjusted. The second thing is, I'm guessing that most people don't have not only a portfolio of companies that they're involved in, but also they're constantly doing new ones.

3:33I think if we said we're done and we were just going to let the existing portfolio go, then it would be kind of easy breezy and we'd get bored pretty quick. But the fact that we have so many things, you were just calling me earlier saying, you know, where's that agreement for that deal, right? It's, it's cause we're doing stuff, right? So I think that's it. If we just stopped doing so much stuff, but when you love what you do, it's really hard to do that, right? Yeah, I'd be bored. I mean, you're right. I mean, I say all this completely sarcastically and tongue in cheek, cause I'd be bored out of my mind.

4:09I do think it's important though. A lot of people have this image of entrepreneurs, especially for some reason now, because the holding companies, I think you've largely popularized a lot of this stuff, holding companies and doing acquisitions. And everybody says, oh, you do this and then you don't have to work anymore. I never said that, by the way. No, I know you don't. I know you don't. But that is, it is said. And I think unfortunately, a lot of people believe it. And it's unfortunate for two reasons, because one, it's not true. And two, it's no freaking fun. So anyway, all that being said, life is good.

4:41Things are busy. That's kind of the goal. That's the plan. I love it. What are we talking about today? So I sent you over. I don't know if you had a chance to look at it, but there was an article that came out in the news about what KKR is doing through one of their companies. Who's KKR for those who don't know? I'm sorry. KKR is Colbert Kravis and Roberts, I think, or Robertson. Anyway, it's a big PE company. We've sold companies to them in the past. They're very well known in that world, PE being private equity. I'm jargon constrained today. Sorry about that. I was like been in this. So anyway, they buy and sell companies, right?

5:26And they're always trying to figure out how can they make more money. There was a lady who was working at a company called Project Equity. And Project Equity was intended to, it was a nonprofit, the opposite of what private equity companies are interested in. But she was working at this nonprofit helping companies transition. I thought this was actually interesting because there's all these baby boomers who are aging out and companies that are passing. And so she was really kind of targeting those companies to help the employees of the companies acquire the interests of the owners that were retiring anyway, and doing it in a way that they would then be able to continue the legacy of the company, but also their employment and, you know, keep it from going into the hands of somebody that maybe, you know, wouldn't treat them the same or whatever.

6:19And I, so, so she was going into the hands of a mean, nasty private equity group for example. Yes. Yes. And so she actually was a law school graduate and a smart person and everything. And she was reading and there was a paper that was published by somebody from KKR that said, look, my theory is that we make more money if we give equity to the employees. And that's not something that private equity is typically very fond of because they're in and out. They're there to flip the company. His thesis was, I bet we make more money if we go in and we get buy-in from all of the employees and we let them participate in some part of the equity.

7:00And if we do and they work harder and the company sells for more, we'll actually make money. It'll be free to do that. We'll be doing a good thing. Win, win, win all the way around. So they ended up working out a deal where she came to a new company. I want to say it's Ownership Works, something like that, but it's its own company and the company is working to help this happen in private equity deals. but I believe it is for profit now. I don't know one way or the other. I don't think they said. So the idea is that if in deals that private equity, and I think they said they've got about 25 firms that are private equity companies that are like now enrolled to participate with these guys.

7:44So there was a deal that they did and the deal that they did was with just kind of a classic acquisition. It was, I think, an overhead door company. And in that deal, the employees, the hourly employees that were making less than$100 ,000 a year were given somewhere between four and 6 % of the equity in the company. Now we'll talk about kind of what it's split up between them all. That four to 6 % was a pool split up between. They didn't each get four to 6%. Yeah. Each of the hundred and some employees got four to 6%. I'm not sure how it worked it out, But yeah, yeah, exactly. And so I wanted to make sure that we clarify these things for some of our listeners who may be like, oh, I'm going to go and execute this right away.

8:27Everybody gets more percent of business. I have nothing left. So anyway, at the end of the transaction that ultimately it was sold for$3 billion to somebody else, and each of the employees on average got$175 ,000, which was incredibly meaningful to them. And it was a win. The return on investment for the private equity company and its investors was 10 times their investment. So I'm guessing they paid$300 million for it. And it was the best return that they had had on a deal since the heyday LBO salad days of the 1980s. So they were happy with that. I was reading along here the Venetian Resort that I guess Apollo was another firm that purchased.

9:18The company said the equity for each employee, there's about 7 ,000 employees there. And each of those employees will end up with about$10 ,000. And then it looks like there's another one. Simon & Schuster was purchased by this same firm, KKR, last year. And management is going to do the same deal there. And they're setting up websites where, and I think this is actually important. And they're now setting up websites so that the people can track the value based on a hypothetical exit of their shares. So it feels like they're getting stock in a publicly traded company, even though it's private.

10:01So that's the overlay. What are your thoughts? Let's talk about your thoughts generally on equity for non-executive team members and then what you think about something like this. Yeah. So just if somebody wants to, if you're listening to this and you want to go read the article, it's in the New York Times. And the headline is, yeah, we'll drop a link, but it's private equity is starting to share with workers, comma, without taking a financial hit. And the reason I mentioned that is because I'm not sure I agree with the premise. It's not true. They are taking a financial hit. Private equity is starting to share without taking a financial hit.

10:38But, you know, I just come back to the whole like, so my thoughts on this in general, and we talked about this in previous episodes in practice. And you and I have done this a number of times and we've seen it done a number of times across hundreds of different businesses. I've never seen nor have I ever experienced giving equity to non-executive employees being anything that that drove anything other than kind of confusion and entitlement. It certainly didn't drive growth. It certainly didn't motivate people. And I would argue that if they get a significant windfall at the end, it might even make it harder to sell the business if they realize, if the buyer realizes, holy crap, all these people are going to be gone.

11:20So I got a couple of problems. So that's my thoughts in general. In terms of this article, it feels to me like classic New York Times communist propaganda. Just going to throw that out there if you want to know my bias on things. I would also say, number two, correlation does not equal causation. So when they're like, this company did this and they had this amazing result. Well, that's great. I'm really happy for all involved, but we don't know the counterfactual. It's not like we can go and experience, you know, an alternate universe where they didn't do this to find out if the results, you know, were, you know, were any different.

11:57So my experience is that this kind of stuff doesn't work. I think the example they use are correlations, they don't prove any causation in any of this. And it was at the bottom, but I was skimming the article. And they talked about how the message doesn't automatically resonate with employees. And the quote was, take Terry Andres, who worked for three years as a sales manager at Colson Group, a manufacturer of casters and wheels. When Blue Wolf Capital acquired them, the company announced the equity sharing plan, but Mr. Andreas found it difficult to discern how much it would be worth and when the employees would get their payout.

12:35It wasn't an effective way to motivate the people who supervised, he said, and wasn't enough to keep him from leaving when another company offered higher pay. It's very nice. I appreciate it. But for me, just tell me exactly what I can work towards. And that, to me, I think sums up the employee mentality. Like most of the people who work, and I don't mean this, by the way, to disparage them. They've got these things called lives outside of work. And I think this is incredibly difficult for entrepreneurs and for top level executives who so much of their life and their identity is wrapped up in their work.

13:10We can't imagine what it is like to be someone who just wants to show up, who wants to do great work, work with great people, have a great experience, produce a great product of service, and then go home and live their lives. And what they're looking for is not these amazing upsides. If something happens, what they're looking for is a greater degree of certainty and security. I do think what you said, my favorite part, if you're going to do this, the fact that they're gamifying it by being able to show people, here's a hypothetical of what it would be worth. I mean, I think that helps. I think there's two problems.

13:45One, it sounds like a liability. It really does. Like this is hypothetically what we're worth. And now somebody is going to go and make a whole bunch of purchases based on that. It doesn't come true. And you want to talk about people hitting the freak out button and running to the exits. Tell somebody, allow them to see like the value of this stock that they've been given in this private company. How do they respond when it tanks? Cause it will, I mean, imagine all these companies that did this type of structure back in 2001 and 2002. And then you go this year, we're just everything gets marked down because everything got marked down.

14:24And now they're saying like, oh, gosh, I thought that this was worth, you know, 220 ,000. And now it's only worth, you know, 120 ,000. Well, that's still a lot of money. And it was still just given to you. But all they saw is that they lost 100 grand. And so I don't know, man, I'm not buying it. That's my take. I'm not buying it. Yeah. And some of the things that that, uh, that you want to think about would be in like in an ESOP, there is government supervision of what's going on, uh, looking after the employee, by the way, uh, sorry, he's employee stock ownership plan with, um, with those kinds of programs, um, or with, you know, even when you have equity, you normally have voting rights and things like that.

15:09These employees don't have that. I believe that they lose it if they're not there. So you would also run the risk potentially of somebody terminating employees they didn't like before an exit. These aren't issues that are novel, by the way. It's just things to think about. But yeah, I mean, ultimately, you're making a bet with equity of the company. I believe the headline is deceptive because it clearly costs them. Ultimately, the argument is that the unproven case study tells us that possibly you might get more if you do this. That's a lot different than how to create a win for employees that doesn't cost you anything, in my opinion.

15:48So I think it's just I think it's interesting. It'll be fun to see if there's some data that comes out about it. I don't think I'm going to rush to argue that we should do that in our portfolio companies. I know that you're a strong advocate for this, but I'm going to say I think that maybe you should change your mind and not do this right. I'll tell you what I'm a strong advocate for. I'm a strong advocate for those who have the ability to move the needle and to directly add value and who are motivated by doing it. I'm all for allowing them to participate in some way, typically not direct equity.

16:25You know, you and I have talked about this in the past. We love fandom equity structures. We love profits only interest, you know, kind of structures where it's it's not true equity, but they're compensated like that. But I think I just think it's so important. And I to acknowledge that not everybody's motivated in the same way. And where somebody might say that, you know, you know, oh, Ryan and Roland, you're just you're just greedy. You know, you're you're unwilling to give, you know, equity in your business to people. Well, number one, it's not greedy to say, I don't want to give away something that's mine.

16:59Like that's not greedy. We don't ask other people to do that. We don't say, you know, if you do, we typically would call it charity. So the reason that you would do this in a business context is because it's going to drive a positive outcome for the business and its stakeholders. And so I think what it is, is it's it's arrogant to assume that everybody is motivated the same way. And I would much rather come up with payment, with compensation structures that get people what they want, which is I'm going to work really, really hard, do an amazing job, and I'm going to get a check today. Not some mystery monopoly money down the road when and if we sell.

17:39That just, to me, feels like, again, I think you get, and they even said in here, I think the direct quote was, Mr. Stavros acknowledged that private equity has problems. This gives workers a rare chance. But is it a direct result of the program? It's hard to say. Helps with morale and involvement. I like they said, we don't need that perfect data. We don't need perfect data to believe in this. Well, I mean, so, okay. So we just want to do this. We're going to go with anecdotal evidence. they yeah they said that that at the end of the day the gist of it is that this is more of a pr play than it is anything else so you know what i'm fine call it that but let's not pretend like we're you know you know like this is some noble thing that you're doing no this is another pr move to try to get around all the like the bad pr that frankly a lot of private equity companies rightfully have, which is when they swoop in, they do cut a lot of jobs.

18:48They create efficiencies in ways that aren't always popular, but I don't know that this is the way to get it done. So I'd pass. I think there's a great bit of PR on behalf of the job. Kudos to their PR team for getting this pushed through. I'm buying it. Yeah. I think I align with you on that. Obviously, one of the reasons we're business partners, I feel like reward people for the thing that they do that increases the value or profits of the company, reward them with cash, measure it not indirectly by some blanket plan that rewards everyone. I just think that, like I said, that's communism and it doesn't seem that it has been very successful in most places.

19:27So that being the case, figure out a comp plan that says, here's the comp that you get if you do this. I know I learned when I was long ago, one of the first companies that I started out in California, I would give Nordstrom gift certificates to the employees as bonuses. And then one day I asked, I said, how do you like that? Because I was very excited about it because I was shopping at Nordstrom and I was like, cool, maybe a chance to get something at a place that you wouldn't normally shop and all that. And I got basically told, and I was very disappointed, but I got it, we'd rather have the cash.

20:03And what you do is you're giving us a gift certificate for a place that has expensive stuff that we don't wear anyway. We can't afford it if it's more than the gift certificate. Most of the stuff we want is more than the gift certificate because these were$1 ,500,$200 gift certificates. And so thank you, but could we just have a cash? And I was like, yeah, that makes sense. And that's, I think what's going on here. I think you pointed out really, really well. And there are so many ways to compensate people for their direct contribution to the company that don't require blanket equity things that create liability and loss of, you know, loss of ownership for you that I'm, I'm, I'm leaning against this one also for the, all those reasons.

20:45So what do you guys think? We would love to hear your feedback on this. So in the comments, if you're watching this on YouTube or if you're listening to this, feel free to reach out to us and let us know on the socials. And if you like this kind of stuff, share it with a friend and we'll see you next time on Business Lunch. Ever wonder how some people build real wealth through acquisitions while others just sit on the sidelines? Well, I'm here to tell you it's not about luck. It's about having the right system, the right deals, and the right guidance. And that's exactly what we give you in the Epic Deal Fast Track.

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