Bonus Episode: A New Way to Sell Your Business

Introduction:

This week, in a special bonus episode, Michael Brown, co-founder of an innovative company called Teamshares, explains how he and his co-founders are bringing a fresh approach to a big challenge. Teamshares is buying the businesses of Boomer owners who are ready to retire but, in many cases, struggling to sell. Once the business is bought, Teamshares is turning the employees of those businesses into employee-owners, which is intended to strengthen the businesses while also addressing income inequality. So far, starting in 2020 and flying largely under the radar, Teamshares has already bought more than 60 businesses in more than 40 industries, most ranging between $1 million and $5 million in revenue. Along the way they’re learning some intriguing lessons about what it takes to build a business.

— Loren Feldman

Guests:

Michael Brown is co-founder of Teamshares.

Producer:

Jess Thoubboron is founder of Blank Word Productions.

Full Episode Transcript:

Loren Feldman:
Welcome, Michael, it’s great to have you here. If I’m not mistaken, you have something of a corporate M&A, Wall Street kind of background. How did you get interested in small businesses?

Michael Brown:
Thanks for having me, Loren. I started out of college, I did about seven years of investment banking, mostly work in sort of advising large companies that were either selling a company or helping another company buy a company. And so I effectively took that skill-set, and my path to becoming a business owner and entrepreneur originally was to go out and to go buy a single small business. I bought an electrical contractor in Western Canada, moved there, left New York for two years to go figure out how to run it, and over time, we ended up buying about eight of them in total. That was the start of my career, and then I transitioned into entrepreneurship and business ownership from there.

Loren Feldman:
How did the business do? Tell me about that.

Michael Brown:
It did pretty well. I mean, it depends on what timeframe you measure it, because in the first six months, all of a sudden, the revenue was down, because there was sort of a mini-recession. But overall, I think the business grew from, on average, $5 million of revenue originally, when we first bought it, and I stepped in to be president. And today it does more like $10 to 12 million of revenue. Just the same as any small business owner, lots of bad months and bad quarters and mistakes we made. It sort of worked out in the end, but we really had to learn by trial and error how to run the business.

Loren Feldman:
What was your goal when you bought the business? Where did you think this might lead?

Michael Brown:
Directionally, a little bit similar on a microscopic scale to Teamshares, but without the employee ownership. Hadn’t had that insight originally. I originally thought that we’d probably buy five businesses over 10 to 15 years, in no rush. And one of them would end up sort of being really, really interesting to help try and work on and grow, and that would be it. That was what I would spend the rest of my career on. And it took several years to have the insights, along with Alex and Kevin, the other founders, that led to Teamshares.

Loren Feldman:
Can you give me a sense of what the biggest surprises were, when you actually took over a business and had to run it?

Michael Brown:
Yeah, I mean, honestly, the first one was so embarrassing, in hindsight, but I actually didn’t realize—because my entire career was in financial analysis and relationship management and some form of sales. I had really never managed anyone. I managed one analyst at a time. I actually didn’t understand that the job of a president of a business—typically the business owner or president, in my case—was to make decisions. And it struck me in the first sort of hour on the job when someone in the safety department came in and said, “Hi, I need you to make a decision on our safety program.” And my first question was, “What’s safety?”

The second thing I’d say is that, I’d heard this phrase from an acquaintance of mine who had done something similar. He also came from finance, originally, and he said, “You know, Michael, businesses are not spreadsheets, and you’re gonna learn this really quickly.” Because going into it, I didn’t want to screw it up, and I only knew businesses through spreadsheets and presentations. And I knew conceptually that that was true, but it just took time to really understand how a business actually works and the very human sort of interactions that go into collecting cash and making it work. These are the kinds of things that the founder of a small business that opens the doors learns from the ground up. And I had to sort of plop in and not know how the business worked, and then also learn how a business actually worked financially from the inside. So I’d say those are the two big surprises.

Loren Feldman:
At this point, you’ve got a business where you’re trying to address really big issues that affect most, if not all, small businesses, in terms of how a business owner gets out of the business when the time comes, and how employees are compensated, and do they end up with a secure retirement or not? Did you anticipate that you would end up trying to address issues like that? Or were you buying a business back then for the reasons most people buy a business?

Michael Brown:
Very much the latter, Loren. Again, like I said, the original goal was to buy five businesses, eventually, a couple of years in. Alex, one of the founders, invested alongside me initially and then eventually became a partner, jumped in to help run and acquire other companies and transition them. But no, it was intellectually interesting. We thought that it would make for a good living, but it was a massive pay cut to making the sorts of salaries and bonuses we were making before. And I think it was a combination of: We should build something in the end that’s meaningful and worthwhile. But it was really for its own sake.

So we were sort of just really trying to learn how small businesses were acquired, how they were transitioned, and how they were run. And then along the way—we didn’t know what to do with this insight right away—but our largest customer at the biggest company was an almost $10 billion annual revenue, fully employee-owned construction business in Western Canada called PCL. And a generation prior, it was bought from the founding family for something like $40 million. And so, needless to say, that sort of piqued our interest, and began an intellectual fascination back around 2015-2016. But it took many years for us to sort of have the insights that led to Teamshares.

Loren Feldman:
Were there light-bulb moments where you realized, first, what the problems were, and second, that you might be able to come up with an attempt at solving those problems?

Michael Brown:
Yeah, I think there were a couple. And again, they were spaced out over, I want to say, about five years or so. I think the first light-bulb moment was that we were able to get the acquisitions done quickly and cheaply in 60 days while maintaining great relationships with the selling owners. I mean, I think to this day, we’re still friends with them. And so I think we were able to basically remove almost all the cost of acquiring a small business, compared to what a typical search fund or a slightly larger sort of private equity stock position would entail. That was one thing.

I think the second thing was just the observation around employee ownership. Because in Edmonton, Alberta, because PCL was one of the most respected and largest companies in town, there were other companies that had become employee-owned. And so it made total sense that employee ownership was good for companies and good for people. At the same time, we just didn’t really know what to do with that for a while. And then I think the third insight is, we started to realize that we’d like to sort of work in this industry for the rest of our careers, but there probably was something bigger to do. We didn’t know what yet. We certainly didn’t know it involved employee ownership.

What we did know is that there was a societal problem. Even though we knew viscerally how hard it is to sell a small business, we just honestly didn’t know the stats around 70 percent of small businesses that try to sell end up not selling. There are sort of 3 million of these things that are owned by people in this Baby Boomer cohort.

So I think those were some of the sort of predecessor light-bulb moments. And then I think, after 2018, we started working together on what would become Teamshares. And the eureka moment was realizing that the reason these things are even for sale in the first place is, frankly, because of the GI Bill, in our opinion. As college became, in a really great way, very accessible to a lot more people, it became an aspiration of small business owners who do really well financially, and their kids all went to college, in general, right?

And so, businesses never used to sell. They just used to transition, generally, within a family. But now a lot of the kids of the owners who we see—their kids are doctors or dentists, or they work at Deloitte, or something like that. And so we thought, “Hmm.” The eureka moment for us was that, to really solve this problem at scale, that we could be the financial bridge that basically bought the company from the retiring owner, using the expertise that we had developed. And we could basically be a financial bridge to let the employees end up owning the business.

And in doing that, we do a couple things. We were never interested in building a private equity business. I mean, we turned down offers to join private equity firms. We could have done that. It just wasn’t interesting to us. We were interested in solving the problem at scale. And so we thought this would be interesting, because we could basically be the common sort of initial buyer of the businesses.

Loren Feldman:
What’s the distinction you’re drawing between what you do and what private equity does?

Michael Brown:
So private equity tends, first of all, to play with larger companies that generally start with at least $5 million in profits, and scale up into public companies they take private. So their model, as some of your listeners will know, is to raise money from foundations and endowments and institutions, buy businesses, and within 10 years, sell the business. And so our strategy is not to sell the businesses. It is to let the employees earn 80 percent of stock ownership through time, through service, over 20 years.

So the businesses in the design of Teamshares’ business model will never be for sale again. The business’s succession loop, the succession problem for all the businesses we are working with—basically, the succession gap is broken or filled in another way. Because you don’t ever have to sell the business again. They just end up 80 percent employee-owned and 20 percent Teamshares-owned.

Loren Feldman:
Could you walk us through an example, just to show us how this works? Like a typical company.

Michael Brown:
Yeah, so we work with businesses that are as low as $1 million of revenue up to $10 million in revenue. And our goal, over time, is actually going to be to try and address even smaller companies. But we would buy the business from the retiring owner, and then we would do an announcement with the key employees to get them comfortable shortly before closing, and then have sort of internal champions ready before a more general announcement. And then shortly after the announcement, we would issue 10 percent of the stock, basically diluting ourselves, diluting Teamshares, and issue 10 percent of the stock to the employees across the board.

It’s not a key person program. It’s for everyone who’s there who’s an ongoing permanent employee of the business. And then we would also hire a president, and we vet them, and we put them through a one-month training program, and then support them thereafter. Because in addition to the financial transaction that needs to happen for the owner to sell their business and get some of their retirement proceeds going, they also need to transition the day-to-day leadership of the business. And so we also recruit the president. So that’s the gist of the model. And then we transition over 20 years, starting at 10 percent of employee ownership, and ending up with 80 percent employee ownership.

Loren Feldman:
And you’ve done this, I believe, with about 64 companies in 43 different industries. When did you do the first one?

Michael Brown:
The first one, I think, closed in January of 2020, and we did one a month in the first quarter. And then we all know what happened in March and April of that year. And so we decided that it was in the best interest of the company to stop doing new retirement-sale acquisitions and to support the existing companies. And at that time, it was a very small company. It was three founders and two other colleagues. And so we sort of spent the year supporting those companies to get through that very difficult economic environment and starting to build software to be ready on the back-end to start doing more of these retirement sales.

Loren Feldman:
You said your typical range is between $1 million and $5 million, I believe. A million dollars in revenue is not a lot of money. And you need to replace the owner with a president who’s going to run the business. You need to give equity to employees. You need to invest in the business to grow it, presumably. How does that work? Where does that money come from?

Michael Brown:
Yeah, there are a couple of questions in there. The ways we finance buying the businesses from the retiring owners are very similar to any sort of financing, which is a mix of equity and debt that we provide. So that the owner gets a significant amount of their cash out at close, and then some ongoing payments over time. In terms of the size question within there, we will go as low as $1 million of revenue and as high as generally $10 million in revenue. That’s just the top line sales. The profits can be as low as $100,000 to $200,000 after paying for a president, which is a real expense to the business.

But we have a couple of goals here. So one, we are trying to address as many companies as possible. And so we all know that the tail skews left, that there are many more small businesses than there are large ones. And so to your question around, “How do you make the math work and how do you afford a president?” generally, as we go and address smaller companies, a president may start to lead multiple companies, so that their cost is shared over a couple of different companies. Whereas the typical, today, medium-size business might be more like $4 to 5 million of revenue, and the president’s salary sort of fits comfortably in that cost structure. And it typically is less than what the former owner, who built the business and deserved to pay themselves whatever they want, cost was historically.

Loren Feldman:
How do you value the businesses you buy and set a price?

Michael Brown:
We value the businesses based on the cash flow of the business. So to be a little more specific, basically, the operating profit, and also considering what the CapEx capital investment needs are in the business. And then we propose a multiple, based on that number, based on our own calculations for the business’s financials.

Loren Feldman:
Is that regardless of the industry, or does that get taken into account as well?

Michael Brown:
It’s regardless of the industry. It’s really about how steady the financials are, and potentially what the growth outlook is.

Loren Feldman:
Do you think you typically come in at market value—what a business owner could get if he or she took the time to try to sell it on the market?

Michael Brown:
Well, these businesses are on the market. Of the 81 companies, including the companies that have not yet closed, I think all but four of them were for sale by business brokers. So they are on the market, and that broker is running a process to solicit multiple offers. And overall, today, historically, about 50 percent of our letters of intent are accepted.

But if you look at the ones where we are very close to the asking price, it’s about an 80 percent acceptance rate, which I think speaks to the act of choice that small business owners are making in choosing employee ownership as their legacy, but paired with transaction certainty. Where we end up having a different view on price isn’t because we’re doing anything hardball. This is maybe one of the misunderstood things about Teamshares. We actually just have a very different view of what the ongoing cash flow of the business is. That’s generally when we get turned down. It’s because we are at a lower price because we have a different view of what the cash flow is.

Loren Feldman:
Isn’t that something that’s kind of black and white?

Michael Brown:
It is to us. But I don’t think it’s black and white to everyone. I think it’s very emotional. I mean, we’re rooting for business owners everywhere. So if someone is going to pay more than what we can offer, even though we’re buying things very much within markup, they’re trying to maximize their estate, in many cases. And generally we are very competitive.

Sometimes we’ve actually had situations where people have gone with a higher offer that was only say $200,000 higher than ours. But actually, the other party didn’t have financing lined up. It’s cheap and easy to write someone a letter of intent. But Teamshares closes 90 percent of its letters of intent, which is basically unheard of. And so we’ve had multiple companies that actually had a busted process where they had an LOI signed, and the transaction never got closed. And they came back to work with us.

Loren Feldman:
It’s only been about three years since you bought the first company. What can you tell us about how they’ve performed after you’ve bought them?

Michael Brown:
They’ve performed really well. I think of the first 50 companies, on average, the revenue and the operating profit of the businesses have grown versus what we expected. We think that we’re heading into recession, and so the numbers will probably pull back a little bit. But so far, so good.

Loren Feldman:
Can you share any specific numbers across the board for revenue growth or profitability growth?

Michael Brown:
I’ll decline to share specifics, but it is, normal, healthy growth. We’re not doubling the size of the company in a year, typically. There are some businesses that actually start to double things. They’re on track to double over three or four years, but those are outliers. Most small businesses, we think, are driven by the economic cycle. And so a typical growth could be 5 to 10 percent revenue growth.

Loren Feldman:
Do you treat all the businesses the same? Or do you look at them and assess the potential for growth, if there’s greater investment, and put more money into some than to others?

Michael Brown:
In general, how the rules are set, are the same for all companies. How our share program works, and how presidents are hired on, that’s all the same. Most of our companies are doing very well. There’s a small handful that have declined since we’ve bought them, and they’re not in trouble, but they need help. And so we do really focus on them. We’ve never had a write-off. We’ve never had a company fail. And we would like to keep that track record going as long as we can.

We do spend time helping companies that need to return to a normal profitability. And then I think for companies that have growth potential, we’re increasingly spending time with those companies, too. But I think the goal of employee ownership and having these really talented presidents and their leading the companies along with the other middle managers is to try and make them—the biggest way that we can address wealth inequality through employee ownership is by helping as many companies as possible. We’re hoping to do this thousands of times. And in order to do that, the companies need to be self-sustaining, both from a financial standpoint and from a leadership standpoint. So we’re trying to help the companies really act quite independently on a day-to-day basis.

Loren Feldman:
Where are you finding your presidents who take over these businesses? Are they people who have experience doing this kind of thing?

Michael Brown:
Very few of them have experience running a small business. And we have a fairly contrarian view that we actually think that business acumen and empathy and general leadership skills are what are helpful and required. And we, nearly in all cases, deliberately recruit that and train someone who’s actually not from the same industry. Because we’ve just sort of learned the hard way that actually hiring someone from within the industry often creates a lot of conflict with the existing employee-owners. Because there are things that are done a certain way, and someone from a different company will have a very strong view on how the operations should work and can really change things and ruffle feathers.

So the people who we do hire, they’re people who have worked at Walmart and USAA, people from McKinsey, people from BCG, people from Deloitte. We’ve started recruiting out of business schools too. They all have substantial business experience, and some of them also have military experience, too. So they have leadership experience and business experience. But by design, we are recruiting generalists and training them to focus on leadership and teaching them the skills of how to run a small business.

Loren Feldman:
That’s really interesting. There’s a pretty strong debate about whether you can teach entrepreneurship or not. A lot of people think you can’t, that the only real way to learn how to run a business is by running a business. Many entrepreneurs learn the way you did: Trial and error, making mistakes and figuring it out. What have you learned about teaching people to run a business?

Michael Brown:
I mean, I think that’s exactly right. So I think our whole model is set up for that, and we expect that there is a real learning period. I think, in our view—I think most of our presidents agree—it takes about six months to drop into a business that you’ve never run before, in an industry you’ve generally never been a part of before. It takes about six months to have even a 50-percent confidence level of how the business works. And so we do retain the former owner for a lengthy transition. And we focus on—

Loren Feldman:
What’s lengthy?

Michael Brown:
Six months, and we generally now have the president in there within two to three months. And that’s six months of sort of actively being involved in the business. And then generally, these relationships are really good, and the president will have lunch sort of once a month with the owner and continue to draw on their expertise. But we’re also focused on businesses that have a deep bench of office managers and an operations director. They’re now earning stock in the business and have even more leadership duties. But they are key people in running and transitioning these businesses.

I think the other thing I would say is that I think founding a business and running a business that is already at some level of size, those are two totally different skill-sets. And so what we’re describing here is not starting a business from scratch, I would agree—having done both of those things—those are very different skills. I don’t know whether they can be taught or not, but these people are being dropped in to train to run a company, not to sort of start one from scratch, from zero revenue, on day one.

Loren Feldman:
Are you expecting significant growth out of these companies? Or are you okay if they continue to perform as they’ve performed in the recent past?

Michael Brown:
So the whole model does not rely on the companies to grow in any meaningful way. We just expect them to grow sort of the way they have in the past. But that said, what we’re seeing in the first 50 companies that have been closed and been with us for more than a couple of quarters, is that the pattern that’s occurred over time in employee ownership is happening again at Teamshares, which is that when you give people a stake in the outcome, when you give people a financial asset—equity in the business—you sort of re-energize growth.

Because one of the things that happens is that the retiring owners, they need to run the business very conservatively before they sell. There are a lot of reasons for that. And so everyone is aligned for growth and excited about the new chapter, and so I think what we expect will happen is that over a long period of time, most businesses will grow faster and become more profitable. But we don’t need that to happen. We just think that that is part of what the magic of employee ownership is.

Loren Feldman:
Do you have a set formula for what percentage earnout you require an owner to accept and over how long a period it takes to get paid out?

Michael Brown:
We don’t have a preset formula there.

Loren Feldman:
So that’s negotiated deal by deal.

Michael Brown:
It’s negotiated. Typically, if there’s an ongoing payment, it’s typically over five years. I don’t want to provide any tax advice, but generally, sort of the installment method allows someone to defer taxes for up to five years.

Loren Feldman:
So you do anticipate an owner being involved for a significant period of time?

Michael Brown:
No, they don’t need to be operationally involved. But what we like to do is to have a really strong ongoing relationship with Teamshares. So we have someone who runs a former owner program and takes people on trips. And they’re going through a very big emotional transition, to go from something that either they founded or possibly their family founded, and it’s been their life, their source of fulfillment. And they made an active choice. We’re only working with owners of retirement age, and so it’s time to retire, but it’s still hard.

And so I think we’re very focused on making the transition happen quickly, so that it allows the organization to move on to the new chapter away from family ownership—which is a wonderful thing, but it’s different than employee ownership—and then keep the owners as engaged as they wish to be with us afterwards. And we’re starting to see a real community of former owners who had chosen to make employee ownership their legacy with Teamshares.

Loren Feldman:
How do you view the purpose of that community? Is it something you’re doing because it’s helpful to the owners? Or does Teamshares get something out of that as well?

Michael Brown:
I think we each get something out of it. We think that for them to properly do the transition, that a former owner—even though they made the choice—they actually need to come to grips with that. And so helping them through that journey in peer-based settings, of hearing from former owners that have already gone through the journey and sort of sharing their experiences, we think is very helpful.

And then I think from a Teamshares perspective, we always view things as win-wins. Not only is that the right thing to do, but one of the strongest things we can do with our brand is to have nearly all of our former owners say that, yes, they would sell to Teamshares again to make employee ownership their retirement legacy. And that’s just about the case in all cases. And so, yes, it’s a win-win. It benefits them, and it benefits us.

Loren Feldman:
One of the reasons a lot of business owners struggle to sell their business is because they struggle to get themselves out of the day-to-day. They’re too much a part of the business operation. And that can be a financial problem, it can be a problem just in terms of getting the work done, and it makes it hard to transfer the business to someone else. Can you help business owners in that situation?

Michael Brown:
Not yet. We really hope to in the future. But typically, we need at least two other managers or key employees. It’s very rare for there to be something like a CFO in place. That’s not affordable in a small business. But the two-employee business, that is actually too small for us right now. We have no set timeline. We hope to address and serve their needs in the future. But it’s not something we can quite do yet.

Loren Feldman:
Where does the money come from that goes to the employees? As the percentage of ownership increases over time, does that have to come out of the business? Or does that come out of your investment fund?

Michael Brown:
The money that’s used for the purchase upfront is from a mix of debt and equity. There are investors buying Teamshares in both sources of capital. In terms of the initial stock grant, that is Teamshares voluntarily diluting itself by granting 10 percent of the stock. Because we believe in employee ownership, and we believe that it would be rude and, frankly, impractical to ask people to write checks to buy into the business. And so we make the gesture to grant 10 percent of the stock to the employees who are there at the time of transaction. And so they earn that over four years, through service, through vesting of their stock. And then we all share together in dividends that occur, and Teamshares sells back its stock over time. So the money that is used to transition employee ownership is coming from the cash flows of the business.

Loren Feldman:
The debt that’s created, is that debt—

Michael Brown:
There’s no debt on the businesses. So Teamshares does take on some debt at its parent level, but there is no debt on the businesses. So basically, if a business had $100 of extra profit that could dividend, the employees would get their piece of the dividend and Teamshares would get its piece. And then we would also sell back our stock over time, too. That’s what transitions employee ownership over time to increase the percentage ownership of the business until it’s 80 percent owned by the employees and 20 percent by us.

Loren Feldman:
Is there tension at Teamshares in the way you run the business, in terms of, to what extent are you addressing societal issues, and to what extent are you trying to make money and turn a profit?

Michael Brown:
For us, there’s no tension, because we believe in positive-sum thinking. We think this is played out not only in large scale employee ownership environments, but it’s also played out in the tech sector. So I think if you go back to the 1970s, stock options are a different instrument, but it was really Arthur Rock running around Silicon Valley, convincing people to give stock options to management. And then eventually, over time, by the time we get to the 90s, widespread employee stock options existed in the tech sector. And I think a negative-sum view of the world would think, “Oh, but I’m getting diluted,” or, “We’re giving money away.”

But we would argue that the success of the U.S. tech sector is a necessary ingredient of widespread employee stock options. It is a form of employee ownership. It’s not quite the same as our model. But we would say that it would not have had the same success without that ingredient, and that it created value because it aligned everyone to give them a piece of skin in the game and participate in the creation of the value of that business.

And so I think that there are people that are confused and think, “Oh, is Teamshares a charity or using employee ownership as a gimmick?” And it’s neither. We are a for-profit, capitalistic business that has a different view of what capitalism should be, and that it involves sharing in the economics of the business. And that the only way that we can scale employee ownership is by being a profitable business to keep reinvesting our profits and our cash flow into making more retirement sales happen, and eventually funding other employee ownership products in the future.

Loren Feldman:
Why aren’t you just doing ESOPs—employee stock ownership plans? How do you think about that? And is that something that you considered when you first developed your model?

Michael Brown:
We have great admiration for the ESOP structure, and we think that’s been tremendously successful for America and for American business. We focus on a really underserved market for employee ownership, and that’s what we call the true small business market, right down to $1 million to 5 million in revenue. So generally, we’re working with really, really small businesses that haven’t historically been a part of the ESOP community. We don’t meet with ESOPs. We think they’re wonderful, and we’re rooting for employee ownership in all forms.

Loren Feldman:
ESOPs come with a huge tax advantage. The government decided to try to encourage employee ownership by telling owners essentially that businesses don’t have to pay taxes on the profits that go to employee-owners. That’s such, potentially, a valuable tool. Did you try to make use of that? It must have been hard to walk away from that opportunity, I would think.

Michael Brown:
The tax benefits of the ESOP structure are incredible, both for selling owners and for the companies that are employee-owned. We don’t benefit from them. What is highly differentiated and appropriate for our model is the size of the company, down as low as that $1 million revenue market. So it’s expanding employee ownership into that true small business size.

The other thing is that, because we are the buyer for the small business, there is a sort of traditional counterparty, a common initial buyer that’s catalyzing this and serving as a sort of financial bridge to employee ownership. And so what’s very helpful about that for all stakeholders, including the brokers that represent the owners, including the sellers, including the employee ownerships, and the presidents, and ourselves, is that every time you do something, you learn from your mistakes and you make your model better.

Just like the reason that airplanes don’t crash that much anymore. It’s because they fixed their engineering and they fixed their safety practices. And planes, at least in North America, rarely crash anymore. And so a very similar sort of learning curve has been experienced at Teamshares, where we didn’t have everything figured out in the first one. I think that the first company sort of knew that, and we’ve now done it over 60 times, and they generally go pretty well. So being that common buyer that’s catalyzing it is something that’s quite different, too.

Loren Feldman:
Well, I also think it’s really worth emphasizing that with an ESOP, you are perhaps changing ownership over time. But it’s not a succession plan. You’re not providing new leadership to take over. Whereas you do accomplish that.

Michael Brown:
Again, ESOPs are great, and I think the big difference is that we really just focus on the small business market. And we help facilitate that financial transaction and that leadership transition by bringing in the generalist president to help lead the rest of the employee-owners into a new chapter.

Loren Feldman:
How do the companies that you buy do, in terms of employee retention?

Michael Brown:
They do very well. We have about 1,600 employee-owners who we’ve issued stock to through our employee ownership stock software, and probably getting close to 300 of those people would be the key employees, the right hands of the owners who we would speak to before closing. And fewer than probably, I think, five have left. It’s a very, very small amount. So that is a fairly remarkable lack of turnover.

In many business models—there are some pizza shops that Teamshares has acquired to make employee-owned—there is very natural turnover. It happens in trade businesses, too. So we’re rooting for all long-term retention. Teamshares, actually, by the way, doesn’t make hiring and firing decisions. We only hire the president, except for rare circumstances—if something really unethical happened—we don’t step in to do that. We hire and train and hold the president accountable. And then they and the other managers make the hiring and firing and promotion decisions on the ground.

Loren Feldman:
I believe I read on your website that all employees are retained and earn stock in the company at the time of the transaction. I assume that doesn’t tie the president’s hands, in terms of firing people who need to be fired going forward.

Michael Brown:
Yes, every employee-owner, every employee who is there before the transaction, they all participate in stock and voluntarily choose to accept it. And at the same time, being an employee-owner doesn’t guarantee someone a job. And so it’s the team on the ground, the leaders of the companies, who make decisions based on people’s performance, their attitude, all the same, normal things that would have happened before and after.

Loren Feldman:
What happens when an employee is fired or leaves? Is there a vesting period?

Michael Brown:
If an employee owner leaves the company, either on a voluntary basis because they’ve chosen to go and do something else at another company or move town, or if they were let go, their shares that they would have earned through a period of time would be bought back from the company with cash. So they really do directly own common stock in these companies.

Loren Feldman:
Where does that cash come from?

Michael Brown:
It comes from the companies.

Loren Feldman:
Do you have a batting average, in terms of the performance of your presidents? What percentage of your presidents are still in place from day one?

Michael Brown:
We have a pretty, pretty high retention rate there. Probably there’s been about 10 percent turnover, which I think is a necessary evil. I think the job is not for everyone. And there are some people who get in there and realize that they maybe thought it was going to be something more like a strategy job, a desk job.

Loren Feldman:
It’s a challenging job, by definition. You’re taking people who have not worked in that industry and putting them in charge of a business with a host of employees.

Michael Brown:
I don’t have the exact number at my fingertips, but I would say, I think roughly so far we’ve had about 60 presidents, and maybe six have either been managed out or have decided that it’s not for them.

Loren Feldman:
Do you feel like you’ve kind of solved the puzzle of what it takes to run a small business in America? Have you learned things that you would share with us that you think are really crucial to a successful small business operation?

Michael Brown:
I think we’ve learned some things, but I think that thoughtful people are always learning and are never done learning. But I think a pattern that we may be starting to match is something like Y Combinator. I think Paul Graham, one of the four founders of Y Combinator, has written that they observed a pattern that after a partner at YC had advised 100 startups, they had sort of seen most of the challenges. So I think that we are sort of approaching that similar pattern. We definitely don’t know it all. We’re constantly making new mistakes and learning and diagnosing and trying to fix them so that we don’t make the same mistake again.

But I would say, I think the biggest thing is—I realize your audience is not just people who are ready to retire. It’s a whole swath of business owners who may have just started or be in the middle of their career—I think the biggest things to focus on after the company has crossed that million-revenue mark, and you can start to afford to add other people to help—other managers and office staff—it’s worth really investing in processes. So things like that book Traction and the EOS system.

There are other tools out there, and we’re not here to endorse it, but I’ve used in the past so that at an individual level, I think it’s great, really helping that transition, the classic sort of E Myth challenge of transitioning from a technical person to a business person. And I think that there are great frameworks and coaches out there to help with that. And whether someone wants to sell eventually, or just kind of own the business until the day they pass away, they need to be able to get some of their time back and their life back and maintain sanity, really build a team and build some processes.

I think the other thing is that a lot of people underinvest in their financial practices. And I think it’s worth people trying to engage, whether it’s their local accounting firm or a fractional CFO, and really try and get good monthly numbers. It’s not something we require. We don’t require them at all. We look at the annual financials of the business. But we have to come in and really help the businesses. We have a significant accounting team that helps them try and get accurate monthly financials.

I think a lot of small business owners are—and this is not a criticism, it’s just a reality—running the business from intuition, sort of focused on where the bank balance is. And then the financials, meaning the P&L and the balance sheet, are sort of an after-the-fact scorecard. And they’re running the business off of operational data. And you need both, in our opinion. You don’t necessarily need anything that fancy. You just need QuickBooks Online or something like that, and you need someone from the outside looking in, so people talking to their CPAs and other advisors to try and get help from the outside to make sure their numbers are accurate.

I think the other general thing is that small businesses are often not charging enough. A lot of small businesses are serving big companies that have huge profit margins. And small businesses start off by trying to price their way in by being the cheapest electrician in town. And they just, frankly, need to sort of charge more in order to retain and pay their teams well and eventually afford benefits. So that’s another thing we think that small businesses would generally benefit from.

Loren Feldman:
Michael, I’ve really enjoyed this. I would love to keep in touch and see how things continue and evolve. My thanks to Michael Brown of Teamshares, and of course to our sponsor, The Great Game of Business, which helps businesses implement open book management and employee ownership. You can learn more at greatgame.com.