Patrick & Kathy Terry (P. Terry's): "Why We Said No to $100M"

0:00Kathy Terry: I'll tell you it was between 70 and 100 million dollars. And you turned it down? I did turn it down. That is Patrick and Kathy Terry. 21 years ago, they opened a 500 square foot burger stand in Austin selling$1.60 hamburgers. When the offer came, they were rich on paper, but it felt like nothing. We took a little less than 10 million out. That's the only money we've ever taken out in all these years of Peter's in 21 years. Today, the business does between 150 and 200 million dollars a year. And instead of selling it, they're giving it slowly and deliberately to their 1 ,800 employees.

0:32Patrick Terry: There's no dollar amount, no dollar figure on relevancy. What this business has allowed us to do is feel significant, feel relevant.

0:41Kathy Terry: And love. Why would anyone walk away from$100 million twice? I asked them everything. This is the whole conversation. In 2005, Patrick and Kathy Terry, who were married for three months at the time, opened a 500-square-foot burger stand in South Austin. In the first year, they did about$600 ,000 in sales, which was actually in the red after depreciation. Kathy didn't take a real salary for over a decade. Then in 2016, with 10 locations, a buyer offered them between$70 and$100 million. They turned it down, pulled out just under$10 million, the only money they've ever taken, and went back to work.

1:16Kathy Terry: Today, P. Terry's runs 37 company-owned locations, employs 1 ,800 people, and does between$150 and$200 million in revenue, growing over 20 % a year. And now they're doing something fewer than 100 American companies have ever done, selling the whole thing to their employees. The conversations I get to have on this show are because of the Hampton community. It's a private network of founders and CEOs doing on an average$25 million a year where conversations about what your business is worth and what enough actually means happen all the time. I just get to bring them out into the open. If that is your world, check it out at joinhampton.com.

1:51Kathy Terry: In today's episode, first, we're going to walk through the numbers. From a dollar and 60 cent hamburger to the nine figure offer that they turned down. Then we get into the machine they built. An employee ownership trust, tenure based profit sharing, and$900 ,000 in interest free loans with almost zero defaults. And finally, the question underneath it all. How two people sitting next to$200 million in assets decided that$10 million and mattering to 1 ,800 people was more important. This is Money Wise. I'm Daniel Burke. Here's Patrick and Kathy Terry. Welcome back to another episode of Money Wise.

2:29Kathy Terry: Today, I have not one guest, but two guests, which is unorthodox and very exciting. I have Patrick and Kathy Terry, who I'm excited to learn from and to hear about some of their exciting business ventures, but also some unique perspectives of what they bring to the table and how they've built their business together. Kathy and Patrick, thank you so much for joining me on Money Wise today. Thanks for having us. Yeah, thanks. Absolutely. I'm super excited. I wanted to start with Kathy. Kathy, could you kind of walk me through what it was like growing up in your household and what money was like, but also the entrepreneurial spirit, kind of what prompted you to want to be an entrepreneur with Patrick later in life.

3:11Patrick Terry: Oh, gosh. Okay. I hope I can condense this down. So I grew up in West Texas in a small town, Midland. Both my parents, I guess what you would call entrepreneurs, but I didn't even know what that word was back then. But working class, my dad started industrial laundry on his own when I was around seven. And my mom was working at the newspaper, but then went on our own and started a bookkeeping service. But from an early age, all we did was work. You know, and I thought for the longest time in the summers and spring break that that's what you did. You worked. So I would work in the laundry or help my mom do books.

3:46Patrick Terry: And then for me, school was really not something we talked about much growing up. But I figured everybody else was going to school. I might as well. I stayed in Midland because the community college there gave the school, it was free to go if you graduated from high school. So I stayed there for a year and finally escaped the second year and went a couple of hours down the road to a small state school, Angelo State. and just happened to be dating a guy and his sister said, you really shouldn't be chasing my, following my brother to A &M. Go to UT and make something of yourself. Do your own thing.

4:27Patrick Terry: So that really changed the trajectory of my life. I went to UT, ended up working at a law firm while I was at UT. And when I graduated from UT with an accounting degree, I did want to go into accounting. So I stayed at the law firm. and just got lucky, met a woman who had kind of traveled the world. And I was like, who does this? Like, I didn't even have a passport, didn't understand any of it. But she inspired me. And so I switched law firms, was working at an IP firm, grinding, and decided I was working. I was in between big cases. I worked on a lot of high-tech cases, patent infringement litigation, and took a six-month leave of absence.

5:10Patrick Terry: and traveled around the world by myself for six months and came back. And that's when I decided, you know, I'm going to do my own thing. I eventually quit and said, okay, you can hire me back tomorrow, but at my rate. And so I gave myself a 500 % raise over and started working on my own and was, would hop, you know, from firm to firm and work on cases. So that was kind of when I got my entrepreneurial legs under me, realizing that I had value. I just had to figure out where my value was. And then that's when I met Patrick. And Patrick has his own little, he started as an entrepreneur a lot earlier, a lot younger than I did.

5:51Patrick Terry: But we'll get into it. But P. Terry's was definitely his vision, his thing. And I just, yeah, I joke that it was his passion project. But pretty early on, I realized it was going to become our passion project.

6:08Kathy Terry: It sounds like maybe you were his passion and then that was his passion project, right? And well, I'm sure we'll get to that. I know there's a priority list. That's a great story. And Patrick, I take it you were an ad guy for quite a while before P. Terry's. So walk me through your story, how you grew up around whether an entrepreneur spirit or business mindedness, kind of what led to the P. Terry's vision. Well, I always had it. I was five years old and I had a lemonade, a Kool-Aid stand out in front of my house. And it was always the next deal where I was going to, what little business I could start.

6:46Kathy Terry: I had a tennis camp when I was in high school and college. We traveled with, you know, 30 kids in rented vans. I was like 19 years old at the time running the camp. I'd always had something going on. I loved the restaurant business for whatever reason. You know, it's sometimes hard to describe or define, but it's kind of in my blood. And so I had had a couple of pizza places. I've just done a lot of different things. But after college, I did go into advertising, and I worked for Tracy Lock BBDO in Dallas. And I was on big accounts, you know, Ben Hogan and Frito-Lay, Phil's Petroleum. and it kind of gave me an experience that I had never, you know, lived with.

7:37Kathy Terry: You know, my dad ran a TV station in West Texas, not far from where Kathy grew up. And he clearly, on his own, running a TV station as an owner-operator, he clearly had done, you know, that entrepreneurial project that he would, you know, that he would live in his career with. That would be how he ended his long career in broadcasting. But I got bored really fast. I was in advertising and I had a nine to five job and it wasn't fulfilling enough, even though I worked on some great accounts and around some great people. And they taught me a lot about presentation and about dress and client relationships.

8:21Kathy Terry: That was really beneficial to me, but I got bored. And so I opened up a pizza place at night, um, take and bake pizza place that I ran from five to 10 o 'clock Monday through Friday. And then I worked Saturday and Sunday all day. So I was working 80 hours a week. Um, which, which, you know, uh, prepares you for the restaurant industry. And, uh, and so then, you know, I met, you know, So Kathy, we actually met at a gym and I was stricken very quickly. And then, you know, we started dating and then I had always wanted to open up a hamburger stand. I love the idea of burgers, fries and milkshakes.

9:06Kathy Terry: Very simple, very easy for me to understand. And I think it's something most of us agree on. you and I can get into this ridiculous argument about how we want our pizza, New York style, Chicago style, Detroit style, not a lot of argument about hamburgers, fries, and drinks. And so I like that idea. And location opened up and I sprung the news to Kathy a year after we'd been married.

9:31Patrick Terry: That would be three months.

9:32Kathy Terry: Three months after.

9:33Patrick Terry: Three months.

9:35Kathy Terry: I'm glad you're both here because we would never have known.

9:40Kathy Terry: And I, you know, and Kathy learned very quickly that all this talk that I had been saying all this time, there was something behind it. Because I talked a lot about it.

9:52Patrick Terry: Oh, yeah. I didn't think you'd ever do it. I just thought, oh, that's a cute idea. You know, okay.

9:56Kathy Terry: And then he did it. What was your initial reaction when Patrick came home and he said, hey, honey, I know we got married 90 days ago, but I have this crazy idea and there's a perfect spot for it. What was your initial reaction, Kathy?

10:08Patrick Terry: Oh, I thought, oh, cute. Okay, go, go for it. Yeah. I mean, I was, I literally was on a big case. I don't know if it was in DC.

10:15Kathy Terry: You were in DC.

10:16Patrick Terry: And I would come home on the weekends and, you know, I'm a detail girl. Like, I like to get into the weeds. And so I would ask him all these questions and he was, he had a friend and they were remodeling and, you know, hiring people off the street. Is that out?

10:31Kathy Terry: Like out of Green Acres, if you can remember that TV screen. We weren't getting much done.

10:36Patrick Terry: And so I kept asking questions. And then that's when I realized, like, oh, shit, you have no idea. Like you have the vision. Like the vision was there. And it's always been there. I can see it. I've always been committed to this vision. Yeah, I can see it. But, like, the details and getting the, you know, doing it. And so once my case settled or ended or whatever, then that's when I jumped in. And it's become, that was kind of the next three years of my life. What kind of Pete Terry's, yeah.

11:05Kathy Terry: So 2005, you open it. And tell me what revenue looked like that year. And then how it scaled from 2005 to 2026 now, 21 years later. I'm going to like have the answer to that. But I can tell you from my perspective, I just wanted to run the restaurant. And I wanted to do it my way. And I wasn't going to worry about what money we were bringing in. I was at an age that we had some money in the bank, so we weren't hand to mouth. And I knew that if we didn't look at the numbers, if we stayed the course of what we wanted to do, because we did know we wanted to serve high quality food at a really valuable, at a low price.

11:50Kathy Terry: We wanted to have a really great value. And I didn't want to be swayed by that. So you had the books.

11:58Patrick Terry: Yeah, I was doing the bookkeeping. And, you know, I just, I mean, the first year we, I mean. We made some money. Well, I mean, I looked at the numbers the other day. We didn't really make money that first year.

12:14Kathy Terry: So did you break even or was there a slight loss?

12:17Patrick Terry: We broke even. You know what? We broke. We were open six months. We were open six months. And we did, you know, when you start, yeah, actually we did. We didn't, at the end of the day, when you include depreciation and, you know, when you do all that, we were in the red. But we did.

12:36Kathy Terry: What are we talking? I mean, 100K in revenue?

12:39Patrick Terry: Oh, no, we had like, what was it? What was the numbers? We just looked at it.

12:43Kathy Terry: It's over a half million, wasn't it?

12:44Patrick Terry: Yeah, it was like 600 ,000, the first.

12:47Kathy Terry: Awesome. And that was one location. One location. And then the next year, what was it? And mind you, this is a 500-square-foot building. Okay. Oh, yeah. This is a drive-through and a walk-up window. Basically, like the room I'm in right now, but there's a door where you give someone a burner. And a hamburger was$1.60. Nice. You sell a hell of a lot. I can get down with that. I can get down with that for sure. I wish I was one of your first customers back then.

13:11Patrick Terry: Yeah. I mean, I think that the revenues the first year were over a million.

13:14Kathy Terry: Yeah.

13:15Patrick Terry: Yeah. Okay. But I never like I was the same way. Like I just was like, we just got to keep our head down. Right. Like we just got to stay, stay at it. Sure. But I remember distinctly I would pay sales tax on the 20th of every month. And I remember that check started getting bigger and bigger. And I'm like, oh, crap. We're doing well. Like, you know, if I keep having to pay more sales tax, that means, you know, something's good. Something, you know, good is happening. And so for me, that was kind of like my little marker that I didn't even realize. But, you know, we didn't open the second location until four years later.

13:53Patrick Terry: But Patrick actually was looking for a second location. But thank God we didn't get one. I mean, in hindsight, it was a gift not finding the second location.

14:02Kathy Terry: Kathy said they never networked. They never went to conferences. They never compared themselves to anyone. They just worked. And for 11 years, they had no idea what the business was worth. Hampton solves that exact problem. It's a private community of founders and CEOs running real companies. And the value is having peers who can tell you what your business is worth and what your options are before a private equity firm shows up to do it for you. These types of conversations happen every day inside Hampton. I get to bring some of them into the open. If you want to be in the room, go check out joinhampton.com and get a core group now.

14:36Kathy Terry: So that was 2009, the second location opened. Yes. And you were doing what in revenue at that point? We'd be doing close to$2 million.

14:45Patrick Terry: Yes. Yeah. Close to$2 million.

14:48Kathy Terry: Okay. And so let's jump to 2015. How had it scaled by then and then 2020 and now 2026? Well, the stores are, you know, they're all over the place. We have a store that'll do$6 million in sales. And we have a store that'll do$3 million in sales. So we're kind of all around the place. A lot of it has to do with the location and the size of the building and where we are. But we've also taken a different tact because we felt like in the last year and a half, as inflation was really creeping up and our costs were really creeping up, and we knew our customers were getting hit harder, that we actually went in a different direction and did not increase our prices.

15:39Kathy Terry: And so... So you're still$1.60 for a burger? Oh, no, that was a long time. Oh, okay.

15:44Patrick Terry: 21 years ago.

15:45Kathy Terry: I was going to say, that's like Costco hot dog status right there. $3.10 for a hamburger. It's still a great price for a hamburger. And so our margins have gotten even tighter. But what we've decided to do is, you know, we've decided to grow the business. And we'll do it on the backs of lowering our margins.

16:05Patrick Terry: Right. Right. But and then what are.

16:07Kathy Terry: Go ahead, Kathy.

16:09Patrick Terry: I was just going to answer the first question, like trying to take him back to 2015, because, you know, you know, the numbers. I mean, 2015, 2016, we actually were entertaining selling the business. And so so you kind of did a dog and pony show and put together. And that was really eye-opening, I think, for both of us, because I think that was the first time we really realized the value of the business, to be honest, right? I mean, that you think?

16:40Kathy Terry: Yeah. Oh, no, absolutely. You know, we don't network. We don't go to conferences. We really just keep our head down. And we don't really pay attention to what everyone else is doing. We've never had any real interest in that. It didn't really matter to us what everyone else was doing. We were going to do our own thing. And so all of a sudden we got an opportunity to sell the business. And it was for a considerable amount, enough, as we like to joke, to go live on an island. Yeah. And we learned that what we really wanted to know, or at least I did, I wanted to know how I was, you know, what my scorecard was.

17:20Kathy Terry: and when I found out that we were we were doing pretty well then we just went back to work but I think I needed that affirmation. Yeah and at the time And that offer in 2015-16 are you at liberty to disclose that amount? I'll tell you it was between 70 and 100 million dollars And you turned it down? I did turn it down yeah Very interesting we'll come back to that I'm curious what was the revenue that valued the business at 70 to 100 million dollars in 2015 i'm gonna i'm gonna say 10 12 times um sales okay i'm gonna say so really healthy and how many locations at that point i guess we're 11 years into the journey by then uh 14 uh 10 10 and 11 i think it was number actually we had 10 cany well what was 10 locations That was 11, but they opened.

18:17Patrick Terry: Yeah, we were about to open our 11th store. So we had 10. Wow. Yeah.

18:22Kathy Terry: Okay. And I want to come back to the acquisition story. How many locations do you have today in 2026? And what's your approximate revenue? 37. We don't really get into the revenue. I'll say it's between 150 and 200 million. All right. So here they were in 2016. They had 10 locations. Someone offered them between 70 and$100 million. And they said no. Today, there's 37 locations, and the business brings in the entire value of that offer roughly every six months. Turning down the biggest check of your life is usually a cautionary tale, but for the Terrys, it was the best financial decision they ever made.

18:58Kathy Terry: And they didn't say no because of the number. They said no because the number didn't feel like anything to them. That's incredible. Good for you. I mean, really, very phenomenal story. So you turned down an acquisition for 12X in 2015 because your goalpost, you mentioned, was not aligned with the payout that you were looking at. Is that what I'm hearing correctly? What we found out is that when we heard the number, and it was a great number, and it was obviously more than fair, and it was a reputable company, that we learned then, or at least I did, that that's not what I was interested in. I loved running the business.

19:40Kathy Terry: We loved our employees. We didn't want to sell. But I think it took that dog and pony show that Kathy talked about for me to realize that.

19:53Patrick Terry: I think for me, it was two things. It was one, validating Patrick's vision, right? Like it was great to know that, oh, wow, we have something of real financial value. Like somebody wants this. So, of course, you want validation. And that was great. And I think for me, the second thing was realizing that what we've built mattered more. The culture piece mattered more than what somebody was willing to pay for it.

20:22Kathy Terry: And you weren't willing to risk the culture piece in exchange for the payout.

20:27Patrick Terry: Like that is when I realized, oh, we got to protect the culture. We have to protect what we have built. And because that was my biggest aha moment was, okay, we can take this check and run off and go by our island. But who's going to take care of our employees that we love, that are family now? Who, you know, they're not going to do interest-free loans anymore. They're not going to bake birthday cakes anymore. They're not going to give back to the community. They're not going to donate every quarter like we do. You know, they're going to start selling frozen french fries. Oh, my God, what in the world?

21:07Patrick Terry: You know, like my brain just started thinking like they're, you know, it's going to be different. It'll be different. It would be more about like maximizing profit, right? You know, the quality may go down. The prices may go up. Like everything that we built our legacy on could potentially go away. And so for me, that was when I was like, whoa. So I think it did too. It validated him and it made me realize how precious this thing that we had built was.

21:40Kathy Terry: So here we have a couple staring at a nine-figure offer and they're asking each other, what is there enough? enough founders almost never get to have this type of conversation let alone an opportunity of an acquisition that size you can't have the conversation with your employees and most of your friends probably can't relate hampton is a private community of founders and ceos where we have tried to solve this problem that question gets asked honestly and constantly how much is quote enough this show exists to take those private conversations public if you're sitting with your own version of this decision, you'd fit right in.

22:13Kathy Terry: Go to joinhampton.com and see what this is all about. Yeah. And I think that's commendable. I love that story for both of you because newlyweds starting a business that really seemed almost impossible. Kathy, if I can put words into your mouth, you're like, oh, that's cute. That's a fun idea. And then turning it into 11 locations and a nearly$100 million acquisition offer. That's a big step in a direction that, correct me if I'm wrong, did you believe it could have ever gotten there at the beginning? Not me. I am. I, well, I never, you know, it's funny. I never thought that far out. I, I, I literally have.

22:53Kathy Terry: You're a next thing type of guy. One restaurant to the next, one burger stand to the next, one burger stand to the next. I can remember stunned to find out at one point that we had 300 employees. Stunned. In my mind. How many did you think you had? 80 or 90. I mean, when you're just concentrating on the next thing, and I say 80 or 90, hell, I didn't have a clue. It's kind of like the frog in the water. I'm just slowly, the concentration is just happening over time. And I'm not worried about anything else. I'm not thinking about the yacht or a private airplane. I'm thinking about, okay, where's the next location?

23:40Kathy Terry: And if I get up at 5 a.m. and drive around when there's no traffic, maybe I'll find it.

23:44Patrick Terry: Yeah, I knew there were almost 300 employees because I was baking cakes for every employee.

23:49Kathy Terry: Every single employee you were baking a cake for?

23:52Patrick Terry: Until we got up to around 300. It was actually...

23:54Kathy Terry: We still do. We still do. That's like a cake every day almost.

23:57Patrick Terry: Yeah. Oh, it was. After I quit at nine years and then I passed it on to Susie, who now is our official birthday cake baker. I mean, luckily now with locations in San Antonio, Houston, our commissary helps her out. But Susie still bakes birthday cakes. And when you apply for a job at Pete Terry's, you tell them which of these cakes would you like on your birthday.

24:19Kathy Terry: Wow. That's so special. I assume you get a lot of feedback from employees, like thank you cards. And how does that make them feel? Well, I think what happened, what we found out is that for a lot of our employees, that is how they celebrate their birthday. there may not be a cake wow and so i used to deliver the cakes so i would come home from work and kathy would hand me two cakes and i'd be back on in my car driving and i remember one night thinking you know this is a pain in the ass i've worked all day and now i'm driving out to one of the locations and we had maybe an hour plus yeah we had a rule back then that that we would sing happy birthday really fast, but we would sing it because there were cars in line and people were ordering.

25:07Kathy Terry: So I'd like the cake and everybody would sing it, you know, at three times the speed. And the person would blow out the candle and we'd take the cake in the back and they'd enjoy it that night. And what I saw that, that evening was a camera, a phones coming out and people taking pictures. And I realized how important it was that it mattered. And that changed everything for us. And to this day, maybe I'm a better CEO because I can tell you how many employees we have today. How many do you have? We have 1 ,800. And we still bake everyone a cake. So you turned down 100 million in 2015. You've grown five times, at least in headcount since then.

25:50Kathy Terry: Where does that bring your overall net worth today, business included and, yeah, personal net worth and then liquid net worth as well? So from a personal standpoint, for the first 10 or 11 years, maybe 12, I barely took a salary. I took just what we needed to pay our bills, our personal bills. we were so focused on growing the business and and at a rate that we wanted to without bringing outside money in we could always get a loan from the bank was obviously limited to how much we could borrow that that we didn't have any money i mean we personally we just had it all in the business and a buddy of mine much smarter than me when he found that out he literally sat me down He's like, you can't do this.

26:45Kathy Terry: You've got a wife and two kids and you can't just not have any money in your account. So we found a bank who said, you know, you can take some money out if you want. And so we took a little less than$10 million out and put that, socked that away in case something ever happens or, you know, for our girls, for Kathy. I don't, you know, we don't really spend a lot of money. And so that's the only money we've ever taken out in all these years of PTRs, in 21 years.

27:17Patrick Terry: And then just recently in June, we just transitioned or started transitioning to an employee ownership trust. So now the whole goal is to start selling equity to this trust. So we did do an initial seller's note. So we gifted shares to the trust and sold shares to the trust. So that will be our way to exit out of the business. So we decided not to sell to a strategic buyer, private equity. Like we decided a few years ago that we were going to try to find another way. You know, we needed a succession plan, right? And so that was kind of my job, my self-assigned job for the last five, ten years.

28:01Patrick Terry: You know, once we got that offer, that was when I realized, oh, we have an asset. I got to figure out what we're going to do with this. And so I've always kind of been trying to figure out how are we going to exit at some point. So we decided to we found this model and employee ownership trust. So we are now actively selling. So we just did a seller's note for a small I think it ends up being about 11 percent between the gift and the sale. And and so what it does is we self-finance it. So the business will start paying us for that equity. And then when that seller note is paid off, then we'll just sell another tranche.

28:39Patrick Terry: So that's kind of a long-term plan for us to reduce our exposure, I mean, get our equity out. But it's at a very slow pace that the business can absorb because we don't want to take on too much debt because we want to keep growing. and we also introduced profit sharing. So we wanted there to be profit for the employees to, you know, to feel ownership when you call it an employee ownership trust. So that's where we are today. But yeah, we didn't take anything out, like Patrick said, from 2000, I think it was 16 until just recently we started.

29:16Kathy Terry: And that 11 % sale, that comes to, I guess, 20 million out of$200 million business or what does that come out to?

29:24Patrick Terry: Well, we took a reduced value, right? Because we had a valuation because we took on minority investors. I mean, we kind of jumped ahead here, but if you want to talk. We took some minority, we took some friends, a friends round back in - What year was that?

29:44Kathy Terry: Six years ago.

29:46Patrick Terry: Right before COVID. Right before COVID.

29:48Kathy Terry: So like 2019. 2019.

29:50Patrick Terry: Yeah, 2019. Because we decided that we wanted to go into another market. We wanted to expand into San Antonio. So, you know, and this was another learning moment, too, for us, because Patrick at the time was like, oh, I probably need to bring someone in that has that expertise, because I don't know if I can, if I know what to do to get us to another market. So we actively did a CEO search, took us a long time, found somebody, brought him in. And that was when we did the friends and family round because we wanted him to have some capital to really expand. So we took on minority investors. You know, I think that was a small percentage, 10 percent maybe at the time and allowed him to get some capital.

30:32Patrick Terry: And so we started expanding heavily into San Antonio. and then we parted ways with him three years ago?

30:43Kathy Terry: Two, I think. Coming up to three, yeah.

30:46Patrick Terry: Coming up to three. And so, yeah, that was another thing. Like we have these minority investors. We need to give them some kind of exit buyout. So there were a lot of things that I was trying to navigate at the time when we were trying to find what we ended up with.

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32:05Patrick Terry: because we had the minority investors. Yeah, I mean, some - Sorry to answer your question. So we did a valuation for this EOT, but we sold it at a discount to the truck.

32:20Kathy Terry: Okay. Yeah, that's fair enough. So 10 million liquid, is that still the number? Yeah. Or has it grown since? No, it's weird. Yeah, 10 million liquid, and then let's say 200 million with illiquid assets with the company combined. Is that accurate? Yeah. some people would look at uh you know 70 to 100 million dollar acquisition and think why in the world did you turn that down but then i hear this sale that you're giving back to the employees with the profit share and some of your succession plan in my opinion that's a very noble succession plan but i would love to know your thinking behind that a little bit more and tell me why why that instead of going and selling it for probably at this point much more than 100 million if you really wanted to.

33:06Kathy Terry: Walk me through your thinking. I think it all started the first couple of years that we ran the business. I think the fact that Kathy and I were in the stand for those first few years, literally every day. And when you're working side by side as an equal, actually, I was an equal because I wasn't as good as they were. Um, but when you're there in a 500 square foot space and you're literally, it's 120 in, in this building, uh, in the summer because you've got all your fryers and your grill and it didn't matter what the HVAC was doing cause the windows were open. Uh, and, and you're sweating your ass off and you're, you're next to, you're next to these guys.

33:55Kathy Terry: And, and some of them still work for us, um, 21 years later. it changes your perspective you you you know their families you know a lot about their personal life you know we we established so much of our business you know the the cake the birthday cake started when when Rosario was leaving and Kathy found out as she was leaving it was her birthday and she was embarrassed that she didn't know and the next day she brought her a cake and that's that's how that started. It didn't start from a conference room. We've had non-interest-free loans for all of our employees for 20 years. That started. Really?

34:40Kathy Terry: Yeah. That started because Vinny called and said, I can't come in because my truck's broken. And I said, I don't want to work french fries tonight. I've already worked. How do I take a cab and I'll pay the cab fare? And I said, what do you need to fix your truck? And he said,$150. I said, here's$150. Pay me when you can. What's that look like on paper? What's the employee 0 % interest loan actually on a term sheet?

35:09Patrick Terry: I just looked it up. We have loaned out over$900 ,000, almost a million dollars. And our default, get this, is I think only$5 ,000 has been unpaid.

35:24Kathy Terry: But 5 ,000 of 900 ,000?

35:28Patrick Terry: 0.01 % back. Oh, my goodness. Yeah.

35:31Kathy Terry: So it's more business. Are we talking 12-month loans or one-month loans or every combination? We're letting them decide. So if I give you$300 and I say I want to beg next month, I haven't solved a problem. So if it's$50 a week until it's paid back, you tell me because I don't want you back in the hole that you're in right now. That's incredible. And you know what? It's just good business. It's just good business. It's more than that. If I can push back, it's more than that because you don't have to do that. And it's bad for business on paper. It's great for business because I know what you mean by that.

36:08Kathy Terry: It's, of course, employee retention and growth and people stick around. But, you know, an accountant might look at that and say, what are you thinking? Oh, absolutely. By loaning free money. But that's incredible, I think, for the human spirit. Then the other argument is, well, the bank's paying me one and a half percent. What am I really losing here? And for me to tack on a number, well, that's just bad taste. You know, that's just bad taste. Wow. Well, and I look at it as, you know, it's all about access, right?

36:38Patrick Terry: And we are lucky because we had access, you know, even to start this business, we had access to savings, right? And so for us, we're just creating access and opportunities for employees. You know, if if Vin couldn't get to work and he didn't show up to work and he lost his job, then the cycle never stops. Right. Like they have to be able to stay in the game. They have to be able to have stability, you know. And so the interest-free loans is just a way for us to give them, you know, create access to transportation, to stable housing, to opportunities. And that way they can stay in the game and they'll hopefully stay with us.

37:17Patrick Terry: And we have career growth opportunities. But you don't have to. If you want to stay working the grill, you can stay working the grill. But if you want to become a manager, I mean, our VP of operations started at the counter 16 years ago.

37:30Kathy Terry: But to go back to your original question, that's where this came from. I think it's kind of crazy how casually Patrick threw out that$900 ,000 figure. $900K in interest-free loans to hourly fast food employees over 20 years. And$5 ,000 in defaults. Only$5K. That's about half of 1%. Credit card companies charge 25 % interest and would kill for that rate. The most reckless looking line item on their books might be the most profitable thing they do. This is a crazy model and something that I really respect for the Terry's doing is giving their employees more than just a job. They really they've called their employees family a number of times through this episode.

38:14Kathy Terry: And this is the type of thing I think that really puts their money where their mouth is. You know, when you're working side by side and you know the people you work with and they have stayed loyal to you, you know, we have a Maggie rule. Maggie's been with us since pretty much the first day we, second day we opened. And Maggie's still working. She works the grill now at our busiest location. So this woman's been with us for 21 years. Her daughter's back working for us. Her mother works in the dining room. And the rule is that whatever we do, whatever decision we make as a company, we never disrespect Maggie.

38:55Patrick Terry: Or her position. Yeah.

38:57Kathy Terry: Yeah. I like that a lot. The people that are there. So I'll give you a perfect example. Before I took back the company, the office went on an outing on a work day and went to a vineyard an hour and a half away. and they had a nice lunch and they've toured the vineyard. And it was a group thing for the office. And they had a bus the whole bit. And then they got back and they posted some pictures on Instagram and Facebook and whatever. And in my mind, Maggie came home from pulling a double because she does that a lot, got home, took her shoes off, sat on her couch, scrolled through her phone and saw that her corporate outing, the company that has got her back, that are here for the accounting and the HR and the IT and the maintenance, all those people that are supposed to have her back were drinking wine that day.

39:59Patrick Terry: And celebrating.

40:00Kathy Terry: And that's disrespecting Maggie. So we don't do that around here. Yeah.

40:05Patrick Terry: I love the way.

40:08Kathy Terry: Go ahead, Kathy.

40:09Patrick Terry: That was the last trip to the vineyard.

40:11Kathy Terry: I love this concept, the Maggie rule. Every decision the company makes gets tested against one question. Does this decision disrespect the woman who's worked the grill since day two? 21 years. Her daughter works there now. Her mother works the dining room. And when the profit sharing checks go out next year, based on purely how long you've stayed, Maggie will get the biggest one in the company. Every business has a Maggie. Most org charts don't recognize that. Make a Maggie decision and understand what your decisions as a company affect and how they affect the most tenure employee, but also maybe someone who's very far down on an org chart, respectively.

40:53Kathy Terry: Your decisions affect everyone in the organization. I was going to say, the way you both think as business builders is much, very unlike a typical business builder. I mean, you're thinking of the human and the business builds, but the human is first, second, and third. The business is almost deprioritized in light of the human that you're really serving. And from a business standpoint, we recognize this has to be a two-way street. And so what we expect from the employee, you know, in the stand, we're going to take care of them. In return, they have to take care of the customer. If they're not taking care of the customer, then this doesn't work.

41:41Kathy Terry: Then we pat ourselves on the back all day long for being so nice, but the business goes to hell. And so that is the expectation.

41:51Patrick Terry: And it's paid off. I mean, our revenues are increasing. I mean, the last two, three years have been 20%, 25 % year over year.

42:01Kathy Terry: Wow. Yeah. And the profit, you are profitable, correct? Oh, God, yes. I wouldn't do this if I run profitable. Sure. I mean, it's incredible. Do you know what your profit margin is? We run, I'll tell you that our corporate runs about 16%. Wow. And, you know, we're incredibly efficient. You know, our G &A is— Sounds like it. Our G &A is below six. And we build two restaurants a year. And to build a restaurant these days costs over$3 million. So, you know, we're an expanding brand with a G &A below six. And a lot of it is just we're here. where the efficiency and looking for literally every penny.

42:56Kathy Terry: I would love, Kathy, if you could put your legal hat on for a second and explain employee ownership trusts to me like I'm an idiot. And you don't have to pretend because I literally have no idea what they are. So I am an idiot in this situation. I would love to just understand the actual concept of it and why you're choosing to do it. A little bit of context before Kathy takes over, because I'd never heard of this either. An employee ownership trust is how the Terrys are exiting a company doing between$150 and$200 million in revenue without ever selling it. By Kathy's count, about 100 businesses in the entire United States have done this.

43:32Kathy Terry: She's not a lawyer. She's a former paralegal who spent years figuring all this out herself. And she explains it better than most attorneys do. Listen for the difference between this and an ESOP. That distinction is the entire reason that I think that Terry's culture survives them and what they intend on surviving them many decades or even centuries longer than they're around.

43:54Patrick Terry: Right, right. OK, well, it's a really new tool that so don't be surprised that you haven't heard of it. It's it's a big thing in the UK. The UK, there's a lot of employee ownerships, a lot of EOTs, and there's a lot of government support, tax benefits. and it's fairly new here. I mean, I was just at a conference and my understanding, there's like a hundred businesses that have transitioned over to it. Total. Total in the US.

44:19Kathy Terry: Oh, okay.

44:19Patrick Terry: So it's very early on. I mean, there's ESOPs that have been around for a really, really long time.

44:24Kathy Terry: Heard of ESOP, yeah. Right. And that's what I assumed. This is much different than ESOP and I'm curious why this instead of an ESOP.

44:30Patrick Terry: Right. So an ESOP is, there's great tax advantages for an ESOP, But it also, there's a lot of bookkeeping, a lot of regulation. I mean, it's regulated by the Department of Labor and, you know, ERISA because it's a retirement plan. So basically, the difference is the ESOP is a trust and the EOT is a trust. But if we were selling shares to an ESOP, because it is a same tool to use for exiting. So we could sell our equity, sell our shares to the ESOP, but those shares get given to the employees and they're owned by the employees. And it's a retirement. The employees don't get any financial benefit from those shares until they retire or they leave the business.

45:14Patrick Terry: So if they leave the business, the business has to buy those shares back. So every year you're having to do valuation. So it's got a lot of bookkeeping, right? You're evaluating every year. You have to have a lot of capital, a lot of cash on hand because you're buying shares as people are leaving. And that just didn't work for us. I mean, our business, we have, you know, just the complexity of trying to buy shares back and forth. But also, it didn't for two reasons. One, our employees need money now. So the financial benefit wasn't there for short term. And also, it doesn't protect the culture.

45:54Patrick Terry: Because after an ESOP gets 51 % of the share, of the equity, then their trustee, they're motivated by, you know, maximizing the value of those shares. That's what their job is. And so if somebody comes in, private equity, or somebody comes in and gives them a crazy offer, they got to take it. So there goes your business. But it's good. I mean, I'm not down and dogging it because at least the employees get some benefit out of that. Like if they get paid, you know, if they sell, then the employees, their shares, they get out. But for me, I was trying to protect that culture. So what an EOT is, is we're selling shares to a trust, but the employees don't get any shares.

46:41Patrick Terry: It sits in the trust. But what the trust does, it protects the purpose. So you write your purpose statement in the trust. For us, it's to always be independent. It's always to create opportunities for employees, if that would either be profit sharing, if we have a good year, interest-free loans. You know, any kind of program, you know, 75 years from now, if somebody figures out another way to support employees, great. But, you know, also in there is always providing high-quality, affordable food. I mean, food may look different. It may not be a burger, so to speak. Who knows? but they need to be high quality and affordable.

47:19Patrick Terry: They always are going to have to serve the community. Like we donate one Saturday every quarter. We donate all of our profits from our stores to a local nonprofit. I mean, that's not written into the purpose, but it's protected by always being part of the community, right? So we lock in our culture and our purpose for perpetuity. So that trustee protects that culture. And we have a trust stewardship committee that is made up of employees and they are stewards of our business. So when we exit out, you know, it may take us a long time to sell this equity. I mean, hell, we may be dead and our kids may be selling equity to this trust.

48:03But there will always be a stewardship committee that makes sure management is operating with those principles.

48:12Patrick Terry: So they don't manage the business and operation. They just oversee the stewardship. And so that committee rotates. And our kids, I mean, Patrick has a founder role. We have a founder role in there. And so when our kids get old enough, they can serve on that role. Their grandkids can serve on that role, their kids. So it just locks in what is precious to us and what.

48:37Kathy Terry: A legacy in many ways.

48:39Patrick Terry: Yeah, exactly. So that was what I was looking for because I look at this as we left our business to our family. It wasn't our two girls. It was to our family because we consider 1 ,800 people that we've just expanded our family.

48:56Kathy Terry: Yeah. And because you mentioned your two girls, do they get any direct revenue from this, I guess let's call it a liquidity event? or is it all from the trust and being a part of the ownership of that over time?

49:11Patrick Terry: Well, we set up a trust for them back in 2015-16.

49:17Kathy Terry: Separate from this.

49:18Patrick Terry: Separate from this. So we have a small trust for both of them. So, yes, they will at some point financially, they can sell their, if they want to, they can sell the equity that they have to the trust as well. Okay. Yeah.

49:35Kathy Terry: That's cool.

49:36Patrick Terry: That's cool. Yeah, it does.

49:40Kathy Terry: It's still very complicated, but I think it's right in line with the philosophy that I think exudes from both of you. It's like, hey, we want to take care of these people right now in front of us. But also, I mean, you're talking in centuries, 75 years from now. I mean, so you expect this trust to outlive both of you and potentially your children and their children? Is that what I'm hearing? I think that's the hope.

50:05Patrick Terry: Yeah, that would be awesome. Really, it would be great. But for the financial benefit, since the employees don't own those shares, it's really just protecting their job, right? It's protecting the customer's experience. It's protecting their job. So what we did is when we implemented the OT, we also created a profit-sharing program for employees. So that's where they're going to feel ownership is starting in January, February next year. if you've worked with us for over two years, that's when you qualify for profit sharing. And so all of those employees that qualify will start getting checks next year.

50:44Kathy Terry: And do you split, is it like 20 % of the profit among 1 ,800 people or how do you calculate that?

50:51Patrick Terry: Right now, it's 5 % EBITDA. So right now it's small, but the goal is to get up to 20 % in the next five years.

50:59Kathy Terry: Right now, but only 400 qualify right now.

51:01Patrick Terry: Right, only 400 qualify.

51:02Kathy Terry: Because you had to work for at least two years. So sizable checks in most cases, I would imagine. Absolutely. And the most interesting thing about how that's decided was based solely on longevity. So Maggie's going to get the biggest check. She's been with us the longest. Doesn't matter what her position is. That's what it's based on. So we're trying to reward the people who have stuck around the longest.

51:30Patrick Terry: Yeah. It's more about contribution and less about hierarchy.

51:34Kathy Terry: Mm-hmm. And where does all of this leave you when the succession plan is done and everything's in the trust and you're no longer operating the company? What is retirement? I guess I'm putting quotes in that. What does that look like for the two of you? Well, Kathy has done this program, but on a day-to-day basis, she's really not in the office. I mean, she comes in and it's the white night and EOT and profit sharing and dashes back home. And she'll dash back in, I'm sure, along the way for something else. I'm here every day. And, you know, right now, I'm in good physical condition. I like doing what I'm doing.

52:18Kathy Terry: I don't see retirement anytime soon. We have a sophomore in high school, so it's kind of like we're not going anywhere. And so I think, you know, at least for the next three or four years, I don't see any changes. I think at some point somebody will step in and I'll step back and let a gradual change of the guard happen.

52:45But it's not easy.

52:46Kathy Terry: You know, it's not easy when you've done this for 21 years and you're going to do it for three or four more. You don't walk away so quickly. They still need my help, you know. I still contribute. But I have to say it's easier today than it's ever been. I have to say that the first three years were really, really difficult. and so when I look at that I think god this is a this is a cakewalk what I do today compared to

53:19Patrick Terry: what we do to build where we are yeah yeah but I think the goal is to to reduce the amount of time that you're here spend more time you know we have a place in California so we do like to get out of the Texas heat so spend time spend more time there and um yeah I mean it's it is this has become our identity. So it is kind of hard to think about what do we do after. But yeah, I mean, we'll see. I don't know.

53:51Kathy Terry: We're going to have to just see. I talk to founders every day and I think a lot of them resonate with that. Once you build something for 10 or 20 or 30 years and you put really your life into it, it does become a part of your identity. It becomes an important part of your identity and thinking of that maybe changing down the line. I mean, it's a challenge, I think. I can resonate with that, and I think many of our listeners can as well. Yeah. Well, it's also different when your name's on the cup, you know. That is true. It really is. If this were Bob's Burgers, I'm not sure I'd give a damn. It's not.

54:27Kathy Terry: Bob's Burgers is a great show, but you're right. That is true. You know, that's funny. You're basically the real-life Bob's Burgers. Yeah.

54:35Patrick Terry: I mean, I do think—

54:36Kathy Terry: Although they probably operated quite a bit better. No. I'm curious with the, you mentioned a private island a few times, and I don't know if that's facetious or if that was actually really a thought. 10 years goes by and the company's, all the payments are done, the EOT's in place, the company's worth, let's say,$500 million. Do you still have 10 million or have you figured out a way to turn that 10 into 50 or 60 liquids so that you can go buy that private island? So the EOT allows us to do that. So every year we can sell shares to the EOT, which is in fact selling shares to the company. And that allows us to pull some money out every year.

55:13Kathy Terry: So where's the private island going to be? Well, it's really a funny thing. I learned I don't want to live on an island. I can tell. I need conversation. Yeah. Yeah. So I think, you know, California in the to escape the Texas heat is a is a wonderful thing. It's not original, but it's a good idea. And we love Austin. We have a lot of we've been here for a really long time. Very fortunate. You know, this is one of those those things that. But, you know, we started this in an area of South Austin, which is at the time 20 years ago was kind of like the last remnants of that hippie Austin that doesn't really exist anymore.

56:07Kathy Terry: But I'm not sure we could have succeeded like we did in any other community. Austin was amazingly, especially South Austin, was amazingly forgiving of all of our mistakes because we made a lot starting out. And we could see they were rooting for us. And when you have customers that are literally coming back day after day because they want you to succeed, they see how hard you're working, how hard you're trying. um it's an uplifting feeling and very hard to just walk away from the community that helped build you uh i have a we had a a customer this how long ago was he drove a yellow cab um and i still get texts from um well i i heard from him last week and so uh you when when when And that's, you know, that's the foundation of your company, your business.

57:08Kathy Terry: The people literally cheering you on as you're making mistake after mistake. It makes it very special. And probably one of the other reasons it was hard to just walk away. We do know our customers. Yeah. Yeah. And as I'm hearing you talk, the audience from Money Wise is one part business builders. that I think our peers to you even resonate with a lot of what you're saying. And the other part are founders or business owners of like one to$10 million companies. And I'm curious, you at one point decided 10 million was enough. A hundred million is not something I need right now or not something that kind of seals the deal for me.

57:52Kathy Terry: What do you know today after doing this for almost 30 years that that person at the three to$5 million mark right now just doesn't know? Well, it depends on the person. You know, Kathy and I laugh about how it looks how it looks how generous we might be. But it's really we're very selfish. We love this. We we we get so much pleasure and enjoyment, personal satisfaction out of the people that we're surrounded by. That there is, and I know this is as corny as hell, but there is no dollar figure that could match the feeling when an employee walks up to you and goes, man, I need a thousand bucks to get my truck fixed.

58:50Kathy Terry: And I turn and go tell accounting to write a check. Yeah, that's incredible.

58:55Patrick Terry: Yeah, it's what I tell people at the time. You know, there's no dollar amount, no dollar figure on relevancy. You know, and what this business has allowed us to do is feel significant, feel relevant.

59:12Kathy Terry: And loved. Thank God. You know, for people to openly like you and walk up and smile and say thank you for what you do for the community, which is usually the first word out of a customer's mouth. Yeah. You know, and we don't live in Mayberry. You know, this is Austin's a big city. And so to have that constant wherever we go, to have touched that many people, yeah, the island sucks. This is okay. This is okay. Yeah. I talked to so many founders that would be thrilled to be able to buy a private island. Patrick got handed the opportunity to literally do just that, and he realized he didn't want to.

59:58Kathy Terry: If this episode has you rethinking what your own exit is for, you have to go check out Hampton. It's full of people, founders, CEOs, people doing on average$25 million a year who are having those same conversations and questioning those same decisions about their own company and their own, you know, enough. I host this show because of people in Hampton that bring some of their stories out into the open. If this show resonates with you, go to joinhampton.com and check it out. Well, look, Patrick and Kathy, this has been incredible. I really admire both of you for the way that you've built your business.

1:00:30Kathy Terry: I travel to Austin every so often. I will definitely be eating a burger, maybe with the both of you, next time I'm in town. I'll let you know when I'm in town. We can share a$1.60 burger. I was promised by the founders that it has never increased in cost. No, I'm kidding. I'll pay full price. But this is really great. I think there's a lot of people that are going to listen to this and even think through the EOT model. I think that's a really powerful model that I think will change, in your case, 1 ,800 plus people's lives for decades even to come. So thank you so much for sharing that with me.

1:01:04Patrick Terry: Yeah, and I'll just offer it up. If anybody is interested in learning more about EOT, I'm happy to sit down with any founder or business owner and walk them through it.

1:01:14Kathy Terry: Careful, you're going to get like 10 ,000 calls in a few weeks.

1:01:16Patrick Terry: You know what, it's great because it allows you to exit, it, but it allows you that it allows a way to exit, but your purpose never exits, right? Like it's the best of both worlds.

1:01:27Kathy Terry: You're right. Well, you heard her. If you are interested in modeling after the EOT, she is the one. She's the one to talk to. Thank you so much for that, Kathy. Both of you. Thank you. This has been a pleasure. I appreciate you both. Thanks for joining me on Money Wise. Thank you.