Episode 4: ESOPs in The Big Apple, And a Wrap Up

Rudy Caligari (00:00):

Lazear really, really were an amazing fit for us. We really liked their team. We liked their attitude, we liked their honesty, and I think they gave us what I thought was a very realistic value. And that’s a key element, right? And I think going PE, they’re going to tell you that your companies worth 10 times more, and then when you go into due diligence, they’re going to come up with a very long list of why it’s not and it’s a strategy for purchasing. ESOP is completely different at every level.

Speaker 1 (00:38):

From Lazear Capital, this is the ESOP Insider, and welcome to our final episode in our four-part series. If this is your first time joining us, I do recommend going back to episode one to get caught up on all things ESOP. Now, to date in this series, we have tried to give you a well-rounded education on ESOPs and their practical application. In episode one, we got a crash course on ESOPs from industry expert Ted Lape. Episode two, we sat down with ASI Roofing and had an in-depth discussion about how their ESOP increased profitability and productivity metrics, as well as helped shepherd in new blood to take the leadership reins.


Then in episode three, we chatted with our friends over at Axia Consulting, who leveraged their ESOP as a growth strategy as well as the tool for retention and recruiting consultants to their firm. And today we finish our tour with Rudy Caligari of Edge Rentals in New York. And Rudy brings a very unique lens to the conversation, having himself been through just about every type of deal possible. Rudy talks about not only how the ESOP helped with retention and recruiting and all the other great things ESOPs do, but Rudy is able to give us a firsthand account from having been through all these other business sales on just how an ESOP is different. So enough talk for me. Let’s dive in.

Rudy Caligari (01:54):

My name is Rudy Caligari. My background is I started my career in the film industry. I was a producer for about 25 years owning multiple production companies. I had the opportunity to go around the world and film in… I’ve filmed in about 40 countries in I think 40 some odd states. I was really fortunate enough to do that. And being New York based for the most part, we realized that there was a need for better solution for transportation. My business partner hasn’t been in the car rental business for many years. We decided to go into the car and truck rental business to supply the entertainment industry with the products that they need to move their people and their equipment around. So our clients are TV shows, movies, concerts, events.

Speaker 1 (02:54):

The company Rudy is referencing is called Edge Rental and surprise surprise, they are an ESOP. And we’ll get more into the nuts and bolts about how their ESOP works. But let’s go back to Rudy on starting it all.

Rudy Caligari (03:06):

Edge, by the time I started Edge, it was my third or fourth company. I’ve been an entrepreneur, business owner, a business starter for the better part of my whole career. We started Edge in the New York area, specifically for the entertainment industry. We decided we were going to go into the car rental business. We had our first client, which was a commercial production company, and the first vehicle they needed was an SUV. So we walked over to the Chevy dealer and bought an SUV with my Amex card, and the business was born and we didn’t even have a name or we didn’t have anything together. But as any business owner knows, it’s not how you started the business, it’s how you finish the business.

Speaker 1 (04:01):

So Rudy, I want to double-click into that. Let’s talk about exit strategies then, or what do you think is the best way to finish a business, as you say?

Rudy Caligari (04:09):

I would say that your exit strategy is sell the company when it’s the optimal time, not when you think you want to retire or you think the time is right. There will be a time that is correct. And when I say that, there’s a lot of variables make you start really considering an exit. A lot of it has to do with the economy, a lot of it has to do with the banks, and quite frankly, a lot of it has to do with who do you partner with to exit. At the time when we ESOP, which was in July of 2022, 6 months earlier, I wasn’t thinking about it, but a very good bank that I do business with, UBS, brought it up to our attention, the true value of what our company could look like in the marketplace. That really sparked our interest. And what’s an amazing thing about an ESOP is you could exit but still stay with it.


So my partner and I at the time, as I mentioned, we didn’t have an exit, okay, we’re going to sell this year. But when we realized the ease of doing an ESOP and the value at that particular point in time, there wasn’t much to think about. It was a no-brainer. Then it was about putting together the right team. You do your interview process and you see who works right for you and who’s going to carry you through to the other side with honesty and sincerity. There was a gentleman that came in and he said, “Your company has worked 10 to 15 times EBITDA.” And I kind of laughed and said, “Okay, great. We both know it’s not, so thank you for your time.”

Speaker 1 (06:08):

Rudy, you mentioned that your ESOP from ideation to closing went pretty quickly. What do you attribute to that success of the ESOP going so smoothly?

Rudy Caligari (06:20):

Why did it go so fast? Lazear has an amazing staff that’s really on their game. They do this often. They know what questions to ask. We had our books together and the process and how the banks work and the valuation we put together what later on after the ESOP was done, when I referred to the other parties involved, the valuation firm, so forth and so on, that we had chosen some really, really good people and probably some of the best in the business, and that helps as well. And we knew that going in, we didn’t necessarily choose the cheapest option because as we all know, picking the cheapest option could cost you a lot more in the backend. And it was a very good time for us. The banks were bullish, the valuation was bullish, our numbers were looking great, so let’s get this thing close as fast as possible.


And when you work with really, really good companies that are the best in their field, that’s what happens. One of the other reasons that we ended up working with Lazear is Lazear came in and it felt like they were asking all of the important questions about how we fleet it up, why we fleet it up, what vehicles we were purchasing, where were we purchasing them from, how did we work our financing. They were very interested in how our financing worked to match us with the right bank. And really they dived into the nitty-gritty at a very granular level to truly understand what we were made of. Who’s your personnel? What does everyone do? I was like, “These guys are asking so many questions.” It’s like, “Just sell a company.” But I realized that it was really important for them to really truly dive in and understand who we were and to help us.


It made us feel, I think by the end of it, the team at Lazear could have came in and run the company because they knew everything about it, and I’m not joking when I say that. I mean, they were really, we spent a lot of time together, even though it was a short amount of time. They were… Anytime they had a question, and it was an in-depth question, they just hopped on a plane and got here and we sat down. We had lunch and walked around our lot and showed them the vehicles and talked to them about the problems we were having. Maybe we had a recall with a certain vehicle or we’re having with a back order with trucks or whatever it was. And they really got into understanding it at a really detailed level.


And I think of course it helps because when they’re pitching to a bank on why to work with us, they really understood who we were. That’s super important. I’ve worked with brokers in the past that didn’t get or understand at all what we were doing, and it takes a lot of time and effort. I bet for the amount of time and effort they spent working with us, they probably could have got another deal done, but they did it right.

Speaker 1 (09:58):

Rudy, I find your story pretty unique in this, in that you’ve been around business deals for long enough and you’ve seen about every which way to structure a deal. What are some of your thoughts on an ESOP versus, say, private equity, a merger or an acquisition or a private sale?

Rudy Caligari (10:16):

Yeah, I’ve done PE, I did mergers, I did strategic sales. I’ve raised money with private equity. I’ve kind of bounced around depending on the industry and the business at hand. This was my first ESOP. I, like most people, I knew very, very little about it until I started to really look into it. And I don’t know, maybe being a cynical New Yorker, the first thing I said to my business partner is I’m like, “Is this even legal?” It seems too good to be true. And typically when things are too good to be true, they are, and obviously there are things about ESOPs that-

PART 1 OF 4 ENDS [00:11:04]

Rudy Caligari (11:00):

There are. And obviously there are things about ESOPs that may or may not work for the individual or the company. If you want a fast exit and not maximum value, but maximum amount of cash upfront, an ESOP’s probably not for you. If you want to stay around an ESOPs for you. If you want an exit, but you’re okay leaving a note on the table, the ESOPs for you. And that’s a key element. A lot of people came up to me and said, “You’re leaving, there’s a big note…” Let’s say you sell your company for… It doesn’t make a difference. Yeah, a million dollars and you get 250 grand on the walkout and then you’re getting in the other 750 over the next few years. You’ll get that 750, you’ll get that remainder providing that your company is doing well. Yeah, well, you could walk away. You could stay depending on what the structure is of the company and what your plans are, but that’s a really nice option to have.


You sell a PE, if the company doesn’t do well in the next few years, you’re not getting that second or third payment. We all know that there’s a second and third payment. You could very easily get pushed out. And if you want to control a narrative, if you want to control the direction of the company, with an ESOP you have full control. And that was very important, that my partner and I weren’t planning on exiting, so we weren’t looking to leave quickly, but we could also control the narrative. And that’s super important, because I control the rest of the money due to me. With PE, you’re losing control and you may lose control of how money is generated and income comes in, that you may not see your follow payments.


So it’s something to consider. Again, there is no right way to do any of this, it’s the way that works best for the company and the principals involved.

Speaker 1 (13:26):

Rudy, it’s pretty clear talking to you, you obviously care a lot about your company and your employees. How did they, the employees, receive the ESOP when they first heard of it?

Rudy Caligari (13:36):

Many of the employees at Edge are outside of Social Security and what little they’re putting into 401Ks. In today’s world that’s not enough to retire, especially living in New York, New Jersey, Connecticut where most of our employees are. With the ESOP now, they know that in 10, 20 years from now, depending on what their age is, 5 years from now, they’re going to be able to retire with capital that they would’ve never had before working for anyone else. Even if they work with one of the major corporations in the world, unless they’re becoming a civil servant or getting some kind of benefits from the government, a pension, most jobs don’t give pensions. So this is a pretty incredible thing for our employees.


And also the feeling for being a business owner to… We had a meeting with all of our employees, and at the time we had 70, 80 employees, and we sit them down and we said, “We’re giving you the company.” And everybody’s looking around. They’re confused, I would say. Because even though the terminology is you’re selling the company to the employees, you’re really not. You’re giving them shares. You’re here, you’re a good employee, you work hard. In your bank every year you’ll have more and more shares. It costs you nothing. So it’s an amazing feeling to do that. That’s something that out of all of the business deals I’ve ever done, the day that we did that was an incredible day for myself and my partner. We both got very emotional. It was like, I don’t know, going to your kid’s wedding, you’re trying not to cry so much.


But it was a very emotional day for us, and it was a day that we were very proud to say, “All of your hard work pays off.” Someone’s not an owner, you pay them 150 grand a year in New York, they come to work, they pretend they care, but they may not. Another employee offers them 175, very good chance they may leave. If it’s apples to apples. There’s no more apples to apples anymore. They’re making 150 grand, they’ve got stock in the company, they’re one of the highest paid employees. They’re coming in early, they’re staying late, and everyone’s doing it.

Speaker 1 (16:36):

Rudy, can you give me an idea of what’s next for Edge and what the next five years looks like?

Rudy Caligari (16:41):

The next five years, growth. Growth. And I think we’re going to go on a buying spree and then roll this up and call Ted and his company again and sell it again. I could retire tomorrow and walk away and go to the beach, and some days I think about it. But I think that the field that we’re in, there’s an opportunity and how the ESOP work, and once we pay down the notes, and again, I think we go and look at other companies that are similar to ours that we could acquire and then package it together and sell it again. And then all of the employees may not have to wait till they retire. They could get paid out and still keep their job depending on how we structure the next sale. Win, win, win. I mean, it’s great.

Speaker 1 (17:39):

And with that, we say goodbye to our friend Rudy and wish him the best of luck with all future endeavors. What I love about Rudy’s story is how strategically he thinks about all the pieces of a business and how, like in chess, he seems to be two moves ahead always. It was his due diligence and previous structure that allowed for that quick ESOP deal. Now, as we near the end of our program here, I’d like to bring in one last person to help us put a bow on all of this.

Bruce Lazear (18:05):

My name is Bruce Lazear, and I’m a partner here and the founder of the firm.

Speaker 1 (18:10):

I asked Bruce to briefly sit down with us and tie up any loose ends we may have in discussing the world of ESOPs. First though, I want to know how we get a start in the industry.

Bruce Lazear (18:19):

I go a law school ’24, and the first thing you learn as a young lawyer is something called fiduciary duty, that duty of trust to someone else who’s outcome is more important than your own. That’s what lawyers do. And because I was inculcated with that theory of the world as really a young kid, it’s something I’ve always carried with me, and it is the core of the view of this firm towards our clients. It’s about other people.


We do great by telling people what’s best for them and the truth, and it’s not about making a buck. Because honestly, your reputation will flourish when you do the right by everyone else, and it’s worked magnificently for us. So when a client walks in the door, it isn’t ESOP, non-ESOP, it’s what are your goals, where do you want to go. We commonly will sit with clients. We have several transactions right now where they walked in to talk about an ESOP, and we said, “In your industry, there are roll-up buyers, strategics, who will pay a price significantly greater. And yeah, you’re going to pay tax, but it’s all cash in a day. And let’s compare it to an ESOP. You tell me what you want to do, because we are about whatever you want to do. We are not a hammer looking for a nail.” And the response was, “I can get that outcome in a third party sale? That’s what I want to do.” And that’s what we’re doing for them.


So we always approach it with the idea that our highest calling is to honor the years and work of those clients to build something, and it’s not about us. We also have clients who walked in, they want to do an ESOP, we look at them and say, “It’s not right for you. And in fact, it won’t be right for you because you aren’t large enough to sustain this.” Or, “The company you’re running doesn’t even have enough payroll to make the numbers work. Because we’d doing a retirement plan. There’s all kinds of wonky rules within the tax code we got to honor as part of this.” So it’s about them. It’s about what they want to do, and we then use the means to get to their goals. We don’t ever think that we know the answer ahead of time till we talk to them.

Speaker 1 (20:29):

Bruce, in this series we’ve heard from many accomplished business owners on why they did an ESOP, but I’m curious, from your position and maybe just the high level, 30,000 foot view, why should a business owner do an ESOP?

Bruce Lazear (20:43):

We use them in ownership transition because the government is trying to encourage employers to do this. They very much so want owners of successful businesses to consider an ESOP a solution. So why do they want that? The reason they want that is that 65% of all families have insufficient retirement savings. That’s a daunting number. And 40% of all US employees retire with nothing but social security, which essentially means they’re poor. So the government is working hard to try to create incentives to saving for retirement, and an ESOP is part of that legislative intent. And the laws they’ve passed are intended to encourage business owners to make this their selection. So what did the government do to encourage business owners, like many of the people listening to this podcast, to consider an ESOP? And the answer is with, as with most things the government wants you to do, they give you a tax break. A tax break is how they motivate you to do things. Here the tax break is they will enable me to sell my shares in the company on a tax deferred and ultimately tax-free basis. So what does that mean? Let’s use a big number because I like round numbers. If I had a hundred million dollar gain-

PART 2 OF 4 ENDS [00:22:04]

Bruce Lazear (22:00):

… round numbers. If I had a $100 million gain, that’s what I sold my company for and that was my long-term capital gain, I would give $20 million, or 20%, to the federal government and the average of most states, about another 5%, $5 million. I would end up with $75 million. In an ESOP, there’s no federal or state income tax. I’ll end up with $100 million dollars, which is a third more money. So the government’s putting a tremendous incentive in front of that privately held business owner to consider an ESOP because they want to enrich their employees who are going to be given these shares so that they have better retirements and more comfortable lives. So they’ve married those two together.


The other enormous tax benefit the government put in is that they allow the earnings of this company after your ESOP to be tax-free, both federal and state. So let’s just play that out for a moment. It means right now, if you have a company making $ 10 million taxable income a year, and in January 1st, 2026, the tax rates go up, people are not paying attention, they go up again, it’ll be 39.6% federal plus the average state of 5%. 45% of the money will go to the government. So on my $10 million of earnings, $4.5 goes to the government, $5.5 sticks to my pocket. In an ESOP, that taxable income goes to a retirement plan. Your 401k grows tax-free, right? Well, if it grows tax-free, this will grow tax-free as well. So now I have $10 million of income going to a retirement plan. They don’t pay tax. There’s $10 million of income to pay me off. Whereas if I had kept it, there’d only been $5.5 million.


And then, to complete the circle, if I sell to an ESOP, I get the $10 million and I pay no income tax. We’ve married a tax-free buyer, the ESOP retirement plan, with a tax-free seller, our clients who take advantage of this code provision. And the impact is $10 million going in the front door ends up in their bank account when it’s done. So it’s incredibly efficient and increases their net.


So it really is intended by the government to encourage this behavior. And because we have five tax lawyers here, eight attorneys in all and 14 CPAs, we have spent more time understanding the tax benefits than any other firm in our space. And we’re able to deliver these benefits in a way unlike anyone else in the space. ESOPs are not built for everyone. That’s truly the case. First of all, they’re complicated transactions. Seven to eight sets of professional advisors are engaged in every transaction. A company making $1 or $2 million a year, this is a big, complicated transaction. And I would never encourage a client to undertake a transaction with transaction fees that were disproportionate to the benefits. It just doesn’t make any sense. So larger size, $3 million in EBITDA and up, is typically where we start, but our average transactions are materially larger than that on average.


Two, you want a company that doesn’t have explosive growth. If you have a high-tech company that could trade at 15-20 times earnings, we can’t duplicate that in ESOP, even with the tax benefits. And the reason why is we’re allowed to pay fair market value, and that’s dictated by the tax law, fair market value. Well, fair market value is what a financial buyer would be willing to pay. So a financial buyer, someone who’s buying your earnings, they aren’t your competitor who can kill half the jobs in the place and move the production to Mexico. There’s advantage. Those are called strategic buyers. They’re already in the business. Strategic buyers have cost elimination and maybe margin expansion that allows them to pay extraordinarily high prices.


We still are regularly and actively engaged in sales to strategic buyers. Our firm is not a hammer looking for a nail, that everything’s an ESOP. The largest transaction most years is not an ESOP here, because it’s a client that has something that this strategic buying community will value much higher. And we apprise our clients of that.


Now, we have other clients who even in that circumstances may look at the wealth they’re creating and look at their own goals. And goals are not as simple as financial goals. I think most investment bankers think all you do is look at the money. And fortunately, we aren’t them. We’re completely different. We look at, “What does this person want to achieve with their lives? What are they trying to do?”


So many of our clients are interested in wealth creation for themselves and their families as you’d naturally expect. But it’s not uncommon for a client to think of the goal as much larger than that, which is, “What does it mean to the team of people who made me wealthy? How can I pay them back?” A strategic buyer that is going to lay off half the workforce and move the plant to Mexico, well, maybe I could get a little more money, but maybe I don’t care about that marginal dollar as much as I care about preserving the jobs in my team.


We’re not here to be their moral… To choose that for our clients. Every one of them has spent most of their adult life, if not generations, building to this day. And they should do whatever they deem appropriate because earned that right. And all we’re trying to ascertain is, “What are you really trying to achieve? And let’s build a plan to that.” You don’t start with, “Let’s do an ESOP or let’s do a strategic or let’s sell to private equity.” You start with, “Where do you want to go? And what are the means best available to achieve the realization of those goals?” So that’s really where we start.


And if you work with us, the first thing we do in our introduction to ESOPs meeting, we spend serious time on financial goals and personal goals such as, “I want to rebalance my work versus family life.” That’s a personal goal. That’s not about money at all. “Is estate planning important to me? Am I really thinking about future generations? Am I thinking about my senior team and how to take care of them? Or maybe I have kids in the business that I sell. It seems like they won’t get it, but maybe in an ESOP they get the chance to lead and get a lot of the value.” So there’s many, many things we ask about with the intention of ascertaining what’s important to them, and then building a bespoke plan that speaks to those goals and that we can actually deliver on those goals.

Speaker 1 (28:37):

Bruce, we’ve obviously espoused the benefits of doing an ESOP, but candidly, are there any downsides to doing an ESOP to a business owner?

Bruce Lazear (28:45):

It’s interesting. In our transactions, people always say, “What’s wrong with them? It sounds so good.” And in the first meeting, in the first 10 minutes, I want to make sure I say this, which is, “This is not an all-cash deal. This is not an all-cash deal. You’re going to get, on average, 25% of your purchase price in cash and 75% will be owed to you and paid to you by the company over time. Now you’ll have operational control of the company, which means that the leadership that created all this value doesn’t go away. You’re still here.”


And a lot of clients can’t get over this idea of, “Well, can the company handle that much debt?” But it’s missing it. It really is, because if you think about it, what’s really happening is the company they control that’s gone tax-free, that pays me as the seller tax-free, that company, my debt isn’t real debt. It’s almost like equity. The money I would’ve gotten as return on my equity each year, instead, I’m getting tax-free, tax-free both sides.


So the idea of does all this debt weigh down the company and compromise its future? And the answer is no, because we build this so it doesn’t. We build it with tons of excess liquidity, meaning a line of credit where there’s lots of availability. We build these to be safe. We build these for success. Our clients are overwhelmingly successful with their ESOP companies. To date, and I’ll use the word yet, we’ve never in hundreds of these ever had a client fail. Okay?


There’s really good whitepaper research Rutgers University did that said that ESOP companies are significantly more likely to be successful, not go out of business, than non-ESOP companies. And it’s because of every employee is now an owner. They’re not working for the man, they’re working for their families.


So they are complex. They do use a seller note payment to me as the seller for a considerable part of the transaction value, but they’re safe because of the way that we construct them. It’s different owing a bank a bunch of money who might have to burn the place down to get repaid, and they’re willing to, compared to owing myself money, when to me, I look at this as a golden goose. I’m going to love, care for, and feed the golden goose. Somebody else might beat it with a baseball bat for one more golden egg. Our clients though, don’t do that. So suddenly, this highly leveraged transaction, which looks scary, if somebody else was owed the money, instead look comfortable and safe because you really don’t owe that much money to anybody else but yourself. So that’s one of the things that I like to talk about early and to educate.

Speaker 1 (31:29):

And I imagine too, some of that education and talking is setting expectations around timeline of when you would get paid out, right?

Bruce Lazear (31:36):

So let’s talk about that. Our average ESOP is paid to full in four to six years. That’s kind of a reasonable timeframe, because you get paid in cash and you get paid over time tax-free. But when I talk to our clients and I let them understand that they still have the operational control exactly the same day, they’re still the CEO, they still run the company, that an ESOP doesn’t mean that employees get to walk into your office, put their feet on the desk, and tell you how they’re going to change how the company’s run. When they get comfortable that, “Oh. Well, I’ve been a really successful entrepreneur for 20 years. I’m happy to work four or five years.”


For many of our clients, I’ll be honest, one of the goals is not to leave the company. Many, many, many people do not think retirement is playing golf and sitting on the beach. Many of them find that their place at the office is an important part of their life, which they enjoy. They enjoy the comradery of their relationships. They enjoy their success. They don’t want to go away. So the idea of saying four to six years to a guy who’s 60, he says, “Yah, that’s fine. I love coming to work. Maybe I’ll work…” I had one guy, he has a place in Naples, Florida, which is quite nice in the winter compared to the Midwest where I live, and he lives here. He said, “Yeah. I’m just going to work from Naples more.” But he wakes up in the morning, he works for hours with his team, takes the afternoon and plays some golf. But it’s rebalancing their lives, which you can do here.

PART 3 OF 4 ENDS [00:33:04]

Bruce Lazear (33:00):

… but he’s rebalancing their lives, which you can do here, but not eliminating the business. And the majority of them don’t want to do that.


I just talked to one of our earlier ESOP clients, wonderful transaction. He was a construction company, electrical contracting, plumbing, HVAC, all kinds of stuff. And he told me, he said, “My EBITDA this year is going to be in the thirties. When we did it, it was less than half this.” “And that was five years ago,” I said. And he goes, “If I did it now, I’d get a lot more money.” And I said, “Do you regret that you did it so early?” He said, “Absolutely not. First of all, I cleared my money for my family and we’re safe forever. But you know what? More importantly, there was not one day where this wasn’t my company and I couldn’t walk in the door and be part of our success and have the joy of doing it.”


You look at that strategic deal and that private equity company, I’ve never heard those words, and I’ve done at least 100 of those too. So, there, you’re irrelevant the day you complete the transaction. You might have a six-month severance, a one-year consulting contract. Nobody sticks around, because the culture of the people who wrote the check quickly squishes the culture it was built upon. And many, many of those companies aren’t fairly successful.


I mean, I’ve been doing this long enough where there was one private equity fund in the entire state of Ohio, and I remember it was organized, and I briefly thought about starting the second, to be honest. Private equity has flourished, but private equity, you just got to go back to what is it and why is it built. Private equity is the idea that somebody will raise money from retirement funds, pension funds, and high net worth individuals, and family [inaudible 00:34:54], ultra wealthy, and they’re going to invest it on behalf of that investor who has to know nothing and do nothing. And their goal, not surprisingly, is to make money for their investors. And there’s nothing wrong with it.


But the motivations become very different. A private equity investor takes the money in, and when they take the money and they raise a fund, it’s for a duration of time, five to seven years, close, end fund. Meaning, we’re supposed to get the money back to our investors very quickly. And I, as the private equity employee, partner, manager, I’m getting a percentage of the growth and value as fees to me, which can make me quite wealthy.


So, how does it work? They look for companies, private [inaudible 00:35:41] companies to buy, but unlike our clients who spent their adult life building something that’s part of their lives, they’re renting the company. They never really own it because they’re there three to five years on average. So, they come in, they want to cut all the costs they can, they probably want to do some other acquisitions and jam a few of these companies together, which of course makes lots of jobs irrelevant, lots of cost-cutting, a lot of people cutting, with the expectation and hope they can buy you at seven times earnings, six times earnings, five times earnings, get a couple other things, cut a bunch of costs, and sell it at nine times earnings in year three and make a bunch of money and distribute it to their investors and themselves.


But if you think of the business as more than simply an economic opportunity, what you’re going to see here is lots of unhappiness. I do not know a client of mine who sold to private equity who ultimately was happy five years, three years later, because they see that the thing they loved doesn’t look anything like what they built.


And I’m not faulting the private equity guys for going to make money. That’s their job. And I’m not faulting the guy who takes their money, because okay too, they have the right to make their decisions.


So, in the tortoise and hare, the hare gets out to a start, but the tortoise passes it. The tortoise is the ESOP.


I have a client of mine, not a client, a friend of mine who I showed an ESOP opportunity too. He fundamentally didn’t believe in his future earnings. He fundamentally knew that he was in the best year he ever had and questioned the future. And private equity put a bunch of money up and he took it. You know what I told him? “Good for you. That was the right move.”


If he’d really believed in the earnings, he knew mine was way more in an ESOP setting, but he didn’t. And I didn’t encourage him to do an ESOP. In fact, I told him he should do the other transaction because it was a ton of cash, and if the thing blows up behind him, it’s not his problem. And he fears it, because he has experience, he knows his industry is very volatile.


So, private equity can work. The great advantage of private equity is cash at closing. The downside is loss of control of your business, absolutely. And candidly, the culture that you built is going to go away. It’s not an if, and it’s not even when, we know when that happens, from the second somebody comes in. So, it’s a very different thing.


Now, let me compare and contrast to strategic sales. If I’m looking for the most cash and the least strings, I sell to my competitors, because they know my business. The private equity firm commonly walks in, doesn’t even understand your industry, and they ask lots of silly questions that your competitors know the answer to. They’ll pay more, because they have cost eliminations the private equity group doesn’t have. It’s an all cash deal typically, and it’s the highest and best outcome if you ignore the taxation and you just want to get cash off the balance sheet.


And we’re doing some very large strategic deals right now, ESOP couldn’t come close. They’re paying absurd prices. I’ve had much better outcomes for clients with strategic than private equity. I find private equity be a generally unpleasant outcome for our clients. And the ESOPs are the happiest outcome for the clients, just because they get so many goods that aren’t just about money, and they frankly usually get more money because of the tax benefits.

Speaker 1 (39:15):

And Bruce, before I let you go, I’m curious, what’s the future of Lazear looking like? What’s the next five years?

Bruce Lazear (39:21):

People ask me regularly what the next five years look like, and my answer is that what we’ve been doing is what we will continue to do, which is to get smarter and more technical, which enables more innovation while we exercise our creativity, which will create better outcome for our clients. At the same time, we will continue to bring in market leaders who will become Johnny Appleseed, the evangelist for ESOPs throughout the country, which will allow more privately held owners to realize there’s a third choice, “I don’t have to sell to my competitor. I don’t have to sell to private equity. I can do something that speaks to me and my goals, and candidly gets me more money because of the tax benefits.”


We’re going to continue to do that and find new industries where our expertise unlocks value for owners and for their employees. We have created an entire industry in our healthcare section, where senior living and multi-unit senior living and post-acute care, these owners didn’t have a good option of any kind, and our innovations are creating an incredible opportunity for those people and every single one of those caregivers in the four walls taking care of my mom and other people’s moms.


So, we are going to continue to get better at our jobs, we’re going to continue to have creativity flourish, and we’re going to continue to come up with novel, innovative solutions that aren’t out there, that empower lots of people to have better lives.

Speaker 1 (41:04):

We’d like to thank Rudy of Edge Rentals for giving us this time today, and we’d like to thank you for hanging with us during this four-part series. We hoped you enjoyed it as much as we loved making it.


Now, the goal of this series was to give you a broad view from the lens of a business owner on ESOPs and their application. But one takeaway I hope you have is that every ESOP is unique.


So, with that said, I implore you to reach out to our team here at Lazear to help decide if an ESOP or any other sale might be the right option for you and your company. No matter what step of the business sale process you are in, we want to be a resource to see if Lazear Capital can be a good partner for you and your team. You can drop us a line or get in touch with us at That’s Until next time.

Listen to All Episodes of The ESOP Insider

We help business owners make goal-focused financial choices that not only maximize wealth but also honor their personal and financial vision for the future. 

The Established ESOP
Podcast Replay: What is an ESOP and How Does It Work?
The Established ESOP
Podcast Replay: Why are ESOPs so Popular?
Episode 1: ESOP 101 With Ted Lape​

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