A Successful Owner Chooses an Innovative Exit

Introduction:

This week, special guests Laura Anderson, founder of Local Ocean, and Peter Koehler, her succession-planning advisor, explain why Laura decided to sell her thriving seafood business in a transaction that created a business model that is neither widely known nor widely understood. It’s called an employee-ownership trust, and there are only about 50 of them in the United States. But their numbers are growing here and abroad, and for good reason. The trust model offers owners something of a choose-your-own-adventure option that can allow them to sell for a market rate in a relatively uncomplicated transaction that makes it far more likely the business will remain true to its established mission—especially when compared to selling to private equity or even to an employee stock ownership plan. Of course, there are challenges, including getting a bank to consider financing one of these deals. But in this episode, Laura explains why, with Peter’s help, she decided to trust the trust.

— Loren Feldman

Guests:

Laura Anderson is founder of Local Ocean, a restaurant and fish market in Newport, Oregon.

And Peter Koehler is founder of Lumo Group, which is based in Portland, Oregon, and advises mission-driven businesses.

Producer:

Jess Thoubboron is founder of Blank Word.

Full Episode Transcript:

Loren Feldman:
Welcome, Laura and Peter. It’s great to have you both here. As I think you know, we’ve been talking a lot on this podcast about ownership models and business transitions and succession plans, which is why I was eager to speak with both of you. To start, Laura, maybe you can give us a little background on Local Ocean seafoods. How did you come to start the business?

Laura Anderson:
Thanks, Loren. Local Ocean is mostly a seafood restaurant located on the Oregon coast in Newport, Oregon. I came from a commercial fishing family, and I’ve always been really deeply connected and close to the fishing industry. We started the company about 20 years ago. I started it with another commercial fisherman, actually, who had a little more business acumen and also a lot more collateral than I did at the time, both of which were very handy for starting a new business. I did buy out that business partner after about the first eight years, so I was sole owner for quite a while until we did the employee-ownership transition.

But really, our special sauce is that we are located right across the street from one of the most dynamic and diverse fishing fleets on the West Coast. So our ability to access that seafood product directly from boats and be able to serve that product up the same day, often, in our restaurant, was really something that was critical for our brand and was ultimately, I think, the North Star for our success over the last 20 years.

Loren Feldman:
Is the restaurant that exists today pretty similar to the one you opened 20 years ago, or did it evolve?

Laura Anderson:
Yes and no. Interestingly, there are a lot of mainstays on the menu that are just so popular that we still offer them. But the size of the restaurant has definitely changed. When we started, we had a fish market and only about eight tables. As people were lining up for our cups of roasted garlic and Dungeness crab soup and our perfectly grilled tuna mignon and our fishwives stew, we quickly realized we needed more tables. So we just started stuffing tables wherever we could and had outdoor seating.

At one point, we had three-hour waits in the summertime. So at that point, I bought the building, and we added an upstairs to the building. And we expanded and doubled our capacity, which is about what I would consider a right size for us. We still do run waits in the summer, even with our expanded capacity, but it’s a manageable operation that I think we’re really comfortable with now.

Loren Feldman:
I think you said you started primarily as a restaurant business, but you eventually started doing other stuff as well?

Laura Anderson:
Well, we always had the fish market. Part of our mission was to be a showcase for the local seafood species that we harvest here off the Oregon coast. So the fish market really allows that to happen. We’ve stayed pretty true to restaurant and fish market. During the pandemic, we did pivot into a really successful meal kit called Dockbox. We were sending our signature seafood dishes in meal kits—think HelloFresh kind of form—across the state, and that was really cool. As the world kind of went back to its normal patterns, we’ve wound that program down to just kind of a special-occasion offer. So we still stay fairly focused on restaurant and fish market.

Loren Feldman:
And when did you start thinking about some sort of business transition or succession? What prompted that?

Laura Anderson:
Well, oddly enough, I think I started thinking about it when we were starting the business back in 2002. I always had a hunch that employee ownership—there was something there that would be meaningful. I know it made sense to me. I thought, “Wow, if I was an employee, and I felt like I was an owner of this business, I might behave differently.” And so, at that point in 2002, I started collecting some information on ESOPs, employee stock ownership plans. I think I went to a seminar or two and talked to some different business owners that were using ESOPs.

But you know, when you’re growing a business, doing something really complicated—well, it seemed really complicated to me at the time—like an ESOP took a backburner. So it wasn’t until probably 2020, kind of the seminal year for many of us, that I really said, “It’s time to look at what the exit strategies are.” And lo and behold, there were some new options there that were really compelling and exciting for me.

Loren Feldman:
How did you find out about those new options?

Laura Anderson:
Well, I started with just a Google search, like many of us do, and I stumbled across some websites that led me to a group called Project Equity, which is based out of California. And I reached out to Project Equity, and they got right back to me. They’re a nonprofit that is really invested in promoting employee ownership across the nation. They offered a feasibility-study package, if you will, that seemed to be a really good first step in looking at what the modern and current options are for employee ownership and helped me to deduce what the best fit for Local Ocean Seafoods might be.

Loren Feldman:
How did you end up running into Peter?

Laura Anderson:
Well, after going through that process with Project Equity, we looked at ESOPs. We looked at worker-owned cooperatives. And we also looked at what I hear referred to as different things—employee-ownership trust, perpetual-purpose trust, stewardship trust—but the trust ownership model in its different incarnations.

One of the things that I really liked about the trust model for ownership, more so than the other two options, was that, well, compared to an ESOP, I really liked that it was more of a real-time benefit for employees. ESOPs are more of a retirement benefit for employees. And when I thought about the demographic of our workforce being largely young people and a lot of immigrant labor, I thought, “Wow, we’re going to be challenged to incentivize people with a retirement plan when they’re coming to work what they think is maybe just a summer job.” I mean, interestingly, a lot of those summer jobs turn into tenured employees, but they don’t know, at the time that they start, that they’re going to build a career with us.

The worker-owned cooperative model was definitely more bench-tested in the country, and there’s a lot more options to look at out there, in terms of case studies. But the one thing I didn’t really love about the co-op model is that an employee has to opt in, meaning they have to sign up and even put in a nominal contribution. It doesn’t have to be much. It can be $25, which doesn’t seem like a barrier for most of us. But in fact, I was a little concerned. I have a hard time getting employees just to pay $3 for a phone app so they can manage their schedule. We have to subsidize that for them. You know, you’re working with a lot of young people and also people who just, like I said, don’t know if they’re going to be there very long.

What I loved about the trust ownership model is that nobody has to opt in. Everybody’s included once they meet your predetermined benchmark for what that kind of vesting level is. And you just have a lot more flexibility, in terms of the management structure and the governance structures. So Project Equity really specialized in coops, and they didn’t have a lot of experience with trusts. And lo and behold, we had that experience right here in my home state of Oregon. Peter was working with a company at that time that was specializing in this new form of ownership.

Loren Feldman:
Peter, tell us: How did you come to specialize in this area?

Peter Koehler:
Yeah, so I was working in the food world in Oregon. I was working at a startup grocery store here that was like a healthy convenience-store hybrid. And when I was working there, I was in charge of kind of the capital-raising piece of the puzzle. I had come from a political fundraising background and kind of parlayed that into capital raising at the startup level. And then, after that, I went out on my own to help other mission-driven companies think about how to capitalize their companies for growth. At this point, I wasn’t doing succession planning or anything like that. It was all about just helping mission-driven companies find aligned capital.

And as I was doing this, as a consultant, I got approached by Organically Grown Company, which is the largest independent, organic-produce distributor in the country. And they’re right here in Oregon. And they were planning to do this pioneering new form of ownership, which was a perpetual-purpose-trust transition, and this was 2017. And so they, to facilitate that transition, needed to bring in capital to buy out the outgoing owners, which included both an ESOP as well as a bunch of human owners. So they brought me on board. I helped them raise money from aligned investors so that they could make this transition possible. And right after that transition happened, they were then the largest purpose-trust owned company in the United States—or if not the largest, one of the largest.

Loren Feldman:
How many do you think there were at that point?

Peter Koehler:
There were very few. There was a handful, maybe a dozen, but most of them were small and unknown. Now, there are only 50 in the United States. There’s a lot more in Europe, but it’s newer in the United States. And people like Laura, they truly are pioneers, because there’s only 50 businesses that have done this, that have made this transition to a purpose trust or an employee-ownership trust. But it’s growing rapidly.

And so after Organically Grown did this transition, we started getting calls from peer companies all over, because Organically Grown is kind of a hub, they work with farmers. They work with sellers, retailers, and they’re this hub in the middle of this organic industry. And if you think about the organic industry, the dawn of the organic movement, quote-unquote—of course, it goes back centuries—is like the late ‘70s, early ‘80s. And there are all these idealistic young founders in their 20s or early 30s at that time who, 40 years later in 2018-2019, are at retirement age. And they want a way to transition their business without compromising the integrity, or the purpose, or the values, or the way they treat their employees. And so, when OGC, Organically Grown, did this transition, we started getting calls that said, “Hey, can you help us do something similar?”

So, sensing an opportunity both to help and to diversify OGC’s revenue a little bit, we started an in-house consultancy called Alternative Ownership Advisors, which Laura alluded to before. At AOA, Alternative Ownership Advisors, for the next four years, we helped companies like Local Ocean explore these transitions and execute these transitions. And then, ultimately, having a consultancy housed inside of a produce distributor no longer made sense. Organically Grown Company was a fantastic incubator for that, but we decided to move it outside of the confines of the produce-distribution business and continue to work elsewhere. So my colleague partner, Natalie Reitman-White, and I, spun off and we both started our own businesses. She started Purpose Owned. I started Lumo Group. And we both work on these trust ownership transitions, and we continue to collaborate on a lot of the deals that we do to this day.

Loren Feldman:
Do you specialize in trusts, or do you do other alternative forms as well?

Peter Koehler:
We help people explore, and we try to do it in a neutral way. Like, look at ESOPs, look at co-ops, look at trusts, even just look at traditional employee-buy-in programs. You know, something like where they just buy in over time, like the law firm model.

But ultimately, if they want to actually move forward and implement and execute, that’s the only thing that I focus on. Anything that Natalie focuses on is going to be the trust structure. There are other service providers like Project Equity, who are great at other things like co-ops or ESOPs. But we focus on trusts.

Loren Feldman:
So, Laura, when you connected with Peter and you started to learn more about trusts, did it appeal to you right away? Or was it more of an acquired taste?

Laura Anderson:
Oh, honestly, it appealed to me right away. But I didn’t really get it for quite a while. I was having a hard time wrapping my head around what this meant. What is a trust? How does it actually own a company? It’s a piece of paper. Like, what does that mean? Coming from the business world of individual ownership, I had a very strong sense of what I thought ownership meant. And this was really changing the whole nature of that. So it took me a while, but once it clicked for me, and once I got it, I was like, “Wow, this is really game-changing.” I was all in when we went into it, and yeah, I’m still all in. I think it’s an incredible model for ownership for the future.

Loren Feldman:
So maybe at this point, I think the time has come to explain what an employee ownership trust is. Peter, why don’t you do that? And then Laura, maybe you could, after that, explain what it was that it took a while to sink in and what became meaningful to you once you understood it. So Peter, first, what is an employee ownership trust?

Peter Koehler:
Sure, so like Laura mentioned, there’s a few different terms people use. So I’m going to zoom out, and I’ll start with the term “perpetual purpose trust.” And then we’ll zoom in a little bit on employee ownership trusts. So perpetual purpose trust ownership—or what often people call trust ownership or steward ownership—the thing that it does is it makes it possible for business owners like Laura to sell or transition the ownership of their company in a way that maintains the company’s purpose and values and perpetuates its independence.

So that’s what it does. Now, let’s get specific. Let’s take the phrase perpetual purpose trust and focus on two key words: perpetual and purpose. So, perpetual: This is important, because what you’re doing is, you’re replacing a mortal human owner with an immortal perpetual owner. And this immortal perpetual owner, the trust, never wants to sell the company. It never wants to take a dividend. It never wants to extract value. It just wants to hold this entity and make sure that it’s governed to purpose. And of course, you know, it has to make a profit. It has to survive as a business. But the trust is interested in the purpose as well. So that’s the perpetual part.

Loren Feldman:
I think, to the extent people are familiar with this concept, if they’ve heard of one, they’ve probably heard of Patagonia, and they know that Yvon Chouinard did this. And the purpose, in that case, I believe all the profits of Patagonia going forward go to a foundation. That’s the purpose. And obviously, it’s climate-related.

Peter Koehler:
The purpose could strictly be to benefit the employees who work for the company. In Local Ocean’s case, I’ll let Laura share her purpose statement, which has to do with, I think, both sustainable seafood and employees, if my recollection is correct. But you don’t need to have some fancy structure like Patagonia’s.

In many ways, Patagonia is the exception, not the rule, when it comes to trust ownership. Most of the businesses making this transition are not big, well-known businesses. They’re small- or medium-sized businesses like Local Ocean. Many of them are family businesses, who maybe don’t have heirs who want to take it over. But they all share this desire to perpetuate something bigger and more meaningful than just maximizing profit for the sake of it. But I think it’d be helpful maybe to dive into the specific Local Ocean example of how they set up their trust.

Loren Feldman:
Maybe you can start, Laura, by telling us: What was it that you struggled with? What was it that it took you a while to get about the trust platform?

Laura Anderson:
I think it was just kind of like Peter said. It’s this non-mortal owner. It’s this piece of paper. And so that was just a little bit nebulous, as we were working through this with our transition team. So I mean, essentially what happened with AOA—with Peter, Natalie and their other partners at that time—was they brought myself, and I think there were five of us from our leadership team at Local Ocean, together for weekly meetings over a fairly robust period of time. I think it was probably about six months of what I would call intense meetings, and then maybe another three months just to kind of fill out those details.

Some of the first things that we had to do were, as a team really, define that purpose. And we don’t have a single purpose statement. The company has a mission statement that’s a single statement, but the company is not necessarily the trust. The company is still a corporation. So what was Laura Anderson previously—Laura Anderson and my business partner—we owned an S corp. Many of us are familiar with that. The tax liability flows back to the owners through a K1. When I bought out my business partner, we had a thousand shares of stock. I bought 500 shares of stock from him, and I paid that on a personal note over a seven-year period. All of that debt was paid off before we started this process.

So really, what we had to do was define this new owner, in terms of purpose, and we actually have 12 purpose statements that range from purposes around people—particularly our employees, and how they benefit from the company—purpose statements around our product and really ensuring that we continually and always buy the majority of our seafood direct from our local fishing fleet through these relationships and through these fair purchasing practices. As I said to you, that’s really the hallmark of our brand, and it’s how we’ve been successful. So ensuring that we do that in perpetuity was very important to me. We do have purpose around planet, and philanthropy, and advocacy, and supporting values-aligned partners through donations. But as Peter said, we have to have a profit.

So we actually have 12 purposes. And then we had to really get to a governance model that would define a group of people who would be there to annually review what the company’s results are to those purposes. So just this last year, we—myself and the CEO of the company—put together our first results-to-purpose report, where we have metrics for every one of these 12 objectives. And we can measure how we’re doing relative to that. And we turn this over to what’s called the trust stewardship committee. That’s written into the trust agreement that we have a body of people that reviews the results-to-purpose and says definitively every year, “Are you doing what you said you were going to do?” And if you’re deviating from what you said you were going to do, then we need to remediate that.

So if, for example, we were selling a product that was not aligned with our values—in our case, farmed salmon would not align with our values of wild and local—then that trust stewardship committee would take action with the CEO who’s ultimately responsible for those purchasing decisions. So that kind of put in place an oversight committee. They have a very limited role. It’s just that. That’s all they do. They don’t run the company. They don’t make the purchasing decisions. They just make sure that things are going according to plan.

So once that purpose and that committee was established, that goes into the trust agreement. All those shares that I talked about got boiled down to a single share. Local Ocean is now a single-share corporation. And the reason for that is that it’s indivisible. Local Ocean can’t say we want to sell 50 percent of our company to another seafood company. That would be outside of the rules. We could, in fact, merge with another employee-owned trust or stewardship trust, which is within the rules. So Organically Grown Company, for example, and Local Ocean could merge, but only in as much as they’re both of the same structures. Those were some of the kind of nitty-gritty, legal, logistical details that got worked out over this six-month period. But it was incredibly valuable, in terms of really defining the brand and making sure that we’re set up for success.

So the Trust has its oversight committee, but the company is still the company. It’s now a C corp. We had to make that transition because there’s no mortal entity to take the tax liability, so that was pretty simple. And the C corp is run by a board of directors, which is primarily all of those accountabilities flow to the CEO of the company. So as a founder, I am on that board of directors, and I have a seat in perpetuity, as long as I want it. If, at some point down the road, I decide that, “You know what, I’m kind of ready to really move on and exit the company,” I can leave that seat behind. But they can’t get rid of me until I’m ready, so that’s kind of cool.

It allowed me to retain some oversight, which is important to me. We’ll probably talk a little bit about how the buyout was financed and some of the other relationships that I still have with the company, but suffice it to say, one of the beauties of the trust model is that there is a lot of flexibility for every founder-owner and entity to define the system that works best for them. And Peter and his partners were really great about bringing case studies to us so that we could learn about how other companies were approaching governance. And I think we landed on a structure that works well for our company.

Peter Koehler:
And now Local Ocean is the case study we bring to new clients.

Loren Feldman:
I do want to talk about how you financed it, Laura, but first, did this deal close in 2020? Or when did it close?

Laura Anderson:
We closed the trust in June of 2022.

Loren Feldman:
Oh, okay. And can you give us a sense of how big the company was at that point in terms of revenue, employees?

Laura Anderson:
Yeah, we had reached a point where we were kind of maintaining a $6 to $7 million sales top line, and we had about 80 employees when we’re in our peak season. We maintain about 70 employees year round for the slow season.

Loren Feldman:
And you needed to get some money out of this, as the owner of the business. How did you arrange that?

Laura Anderson:
Yeah, so, I think the financing part of it is still something that’s a little bit nascent in the country, probably as a whole. As a business owner, I was very experienced in signing a lot of bank documents and doing a lot of personal guarantees for every single loan I took out. When I bought my business partner’s shares, when I bought the building, when we did a major remodel on the building, I always had to sign a personal guarantee, which basically said: If I fail on this, you can pretty much take me personally to the end of it. The employees don’t have that risk. They are not true owners, in the sense that Peter mentioned; the trust is. And the trust has nothing. The trust, in fact, doesn’t even have a bank account. At this point, we had a bank account for a brief period of time to distribute that single share of stock, but the trust has no interest in amassing any kind of wealth, and it doesn’t need it for anything.

So the traditional banking sector has a really hard time with this. There’s nobody to hold accountable in the event of a business failure. We had a couple of options to consider. One was looking for impact investors that are willing to go out on a limb and take risk for supporting social impact ventures. And also, as the outgoing owner, I could hold a personal note for the company that could be paid over time. We were, I think, lucky. I think it was a best-case scenario for me. We were able to find an impact investor that financed about half of the buyout. And I took a personal note on the other half of the buyout, but we were refused by our first overture for banking.

And Peter was there through that whole process, trying to nurture that relationship and really make that deal happen. It took several months of just a lot of grunt work and paperwork and handing over documents to ultimately find that they weren’t willing to do it. So I think Peter and I both are of the mind that we have a long way to go, in terms of getting more banking options, especially for owners who maybe aren’t willing to or able to carry a personal note. But right now, those are kind of the main financing options.

Loren Feldman:
What does the impact investor get in return for providing half of the financing?

Laura Anderson:
I mean, it’s a market-rate loan. They have an interest rate commensurate with market rate. So they are acting as a normal bank would with normal bank interest. It’s just, they’re taking a larger risk: If the company fails before the end of the loan, there’s nothing to back that up, except for the collateral of the business, which would probably not cover the loan.

And one of the other challenges is, I was always used to having a line of credit for the business, which sometimes we would tap into during the slow season, just to get through the winter months. We have a very cyclical tourist economy. And so, this wasn’t available through my normal bank. They are a small community bank, and they just are not in a position to go out on a limb, unless there’s somebody to sign or put up collateral for a line of credit. So that means that we have to be a lot more prudent in our reserves, and be more self-sufficient. And there are risks to that.

Loren Feldman:
You sold 100 percent of the business. You got paid for half of it from the impact investor. You took a note for the other half. How do you feel you did, in terms of that price compared to what you could have gotten had you decided to sell the business on the market?

Laura Anderson:
I felt good about it. I felt like the third-party business valuation that we did contract for was a fair assessment. And that was the number that we used for the sales price. And I think that was required by the impact investor. They did want that third-party independent assessment, so I did feel good about it. There were other options available to me through the trust ownership, which was a partial sale, or sell over time. I went with a one-and-done. I personally felt we would be more successful with going all the way through with a 100-percent sale of that stock rather than parceling it out over time. But that is also an option for businesses, particularly if the financing piece necessitates that.

Peter Koehler:
I just want to underline, the point here is that this is not charity. And most businesses, most clients that we work with, they do realize a fair market value on their sale of their business to the trust. Now, how that is financed really varies, but the value they’re getting is typically going to be a fair market value. Now, there are exceptions to that, most famously it’s going to be Patagonia’s exception, where you had an already wealthy founder who was willing to basically gift the business. But that’s not the situation most people are in.

Loren Feldman:
Sure. My guess is that you end up talking, Peter, to businesses who are intrigued by this idea, who might get a little wary about it once they start hearing about the financing aspect of it—the fact that banks are not on board with this concept yet. Not every business, I imagine, is going to be able to find an impact investor who’s willing to do what Laura’s did. How do you deal with that? What do you tell businesses who are concerned?

Peter Koehler:
So, the flexibility of the outgoing owner, outgoing shareholders, is very important. If you’re looking for a big liquidity event upfront, say 100-percent buyout or something close to that, then there’s a good chance this structure won’t work for you, unless you’re an exceptional business. Because a bank is not going to finance 100 percent, and a seller note won’t give you the upfront liquidity. So by definition, you’d have to bring in an equity partner. And you’re right, it is hard to find good equity partners for these sorts of things, unless you’re an exceptional business, and so many businesses just aren’t. Either they’re not investable in that sense, like, they’re not going to be able to attract that sort of capital, or they maybe just aren’t willing to put up the work that it would require to raise that money.

But that said, most of the owners we do work with happen to be flexible. And my theory on this is that our typical client is going to be someone who’s at a later stage in their career, because they’re trying to design their succession plan, their exit, their retirement. So that means they’ve already worked for multiple decades. They’ve built up some level of wealth, or some nest egg, where they don’t necessarily feel urgent about getting all the money at once. So maybe they want a partial liquidity event, like the example Laura just gave at Local Ocean. So maybe we can find anywhere from zero to 50 percent to be financed by a lender. And whether that lender is a traditional bank, which we do see, or whether that’s an alternative lender, like someone who came in, in Laura’s case. That can provide upfront liquidity, and then the rest we can do with the seller note.

We also see 100 percent seller-note deals fairly frequently. That’s the most flexible way to do it. If you are okay getting paid out over 5, 7, 10, 15 years, depending on how you design it, then great. That’s so easy. You get to negotiate with yourself. You don’t have to bring in external financing. And you can still realize fair market value of the company. You just get paid out over time with whatever interest rate you attach.

So the equation for us, the question for us is: What are the goals and the needs of the owner or the shareholders? What are the goals and the needs of the company? And then, what are our hopes and dreams for the stakeholders, such as the employees? And how do we find a financing plan? Or, how do we design a financing plan that meets that Venn diagram of good for the owners, good for the company, good for the stakeholders? And so that’s the work we do. But yes, it works best if you’re a profitable company with a flexible owner.

Loren Feldman:
Laura, what’s the mechanism by which the employees get paid under the trust?

Laura Anderson:
We’ve set up an equation that allows for profit-sharing when there are profits to share. In our first year, we had profit-sharing, and that was pretty exciting. So we have a pool, and in our case, it was $110,000 last year that we allocated for profit-sharing. So basically, we looked at what our net income was at the end of the year. We ensured that we kept enough for a prudent reserve. In fact, we should have kept more, but we didn’t know that, in November, it was going to be a really tough winter. So we’re taking that lesson pretty seriously into this next year. So part of this is learning. And we also had to make sure we had enough to do any facility equipment and upgrades and make sure that we, of course, service all of our debt.

So after that, we allocated $110,000 for employees. We take all of the hours—hours are capped at a maximum of 40 hours a week. And every individual is in that pool, and they get a 5 percent bonus for every year that they’ve worked up to 10 years, and then that also caps out. So you have a weighted pool that distributes those funds for a very part-time employee who maybe only worked for a few months, but left on good terms. We would hunt those employees down even if their payout was $50 or more. But for max-tenured employees working max hours, the payout was a little over $3,000. And so that constitutes what we think is meaningful patronage.

Every year is different and there’s no guarantee that there will be that large of a pool for profit-sharing, or that there will be any profit-sharing at all. But we do have that formula in place. We have some flexibility about being able to work with that formula over time. The trust just ensures that we have a profit-sharing mechanism. It doesn’t dictate exactly how it works. But through the experience of other businesses that AOA brought to us, like Organically Grown Company, we thought that was pretty fair.

One of the questions I do get often is, “Do you weight it for performance or for people who are in higher-responsibility positions?” And the answer is no. That’s what their pay band is for. And that’s what the compensation plan is for. So if you’re in a high-responsibility position, or you’re a high performer, your pay reflects that. But when it comes to profit-sharing, it’s a bit more evenly distributed, with the exception of a small bump for tenure.

Loren Feldman:
I know it hasn’t been that long, but have you seen an impact on hiring and retaining of employees?

Laura Anderson:
It’s a little hard for me to answer, Loren, because I’m not in the operations. And day to day, I’m not on the floor anymore. I go in the restaurant, and sometimes the hosts just look at me and greet me like I’m another customer. That’s how a little out of touch I am. But my gut sense says that we have 80 employees. There’s always been a certain number of employees that have treated the company as if they own it—even before this, that employee who just really wants the company to succeed and feels vested in that. This is probably enhancing that for them.

And there are always employees in my kind of work where people just come in. They want to clock in, clock out, do a good job, and they don’t really think too much about the bonus structure. They’re just more in the day-to-day, what I need to do right now. So it’s a little soon to call, but we do have incredible tenure rates compared to the national average. Our tenure is off the charts compared to the national average for restaurants. But we were enjoying that kind of tenure rate even prior to employee ownership—just because we are a values-based business and have always taken a lot of care with employee satisfaction.

One of the questions that I do get a lot is, “How do you know if you’re a good fit for this kind of an ownership model?” Or, “How would I prepare our company to be a good fit?” And I think what I learned through the process is there are four main things that I think set us up for success in a trust-ownership model. One was that we already had a really strong management team in place that allowed me to exit the operations of the business without disrupting the flow of the business. I still stay involved from an overarching fiscal management purview and some brand management things that will be transitioning over the next year or two. But we had strong operations in place.

Also, I had been sharing our financial picture with employees for probably, I think, four or five years prior to the transition. Every year I did—and still do—a full monty presentation where I share with all employees: What’s the income, the expenses, and the financial health of the organization? So they had some financial literacy going into it, which I think was really useful.

The other is the financing part. We did not have debt. And I would imagine it would be—and Peter would know more than I for companies that do have debt—but I have personally signed every loan agreement that company ever had. And I think it would have been hard to turn that debt over to trust ownership. I probably would have had to have kept those notes, or paid them off. So having low or no debt service and positive cash flow, because as an outgoing owner, I want to know that the company has enough funds to make the loan payments to me and to the impact investor over time.

And then the fourth thing, I think, is something that a company really has to think about: Do you have a purpose? Is there a legacy rationale for your business? Do you have a strong why? Because that’s really the focal point to which this all revolves around. Purpose ownership requires purpose. If your business is just processing equipment, and not really doing purpose-driven work, it might not have the traction that’s needed for this kind of model. So those four things, I think, were reasons why Local Ocean was really well-poised for this.

Loren Feldman:
Peter, do you have anything to add to what makes someone a good candidate for this process?

Peter Koehler:
I mean, like I said, it helps to be a profitable business. A low debt load, I agree, helps—although we do see companies go through this transition that have a number of loans on the books or debt on the balance sheet. And they make that transition. And then the specifics of how that happens really varies—whether or not they had personal guarantees before, whether or not those need to carry forward. But we have seen, for example, banks finance transitions where they will accept—the one asset the trust does have is the stock of the company.

So for most deals, I would say: Don’t expect a bank to accept the stock of the company as acceptable collateral for a term loan to finance these transitions. But we have seen that happen in certain circumstances. But I think as long as you’re profitable, and the owner has some flexibility, then it’s really more of a cultural purpose question and what your goals are. So if you’re an owner, and you’ve been looking for a succession plan, and you’ve been struggling to find one that’s aligned with your values, this may be a good option because it’s so flexible. You can sort of design it yourself. You can design your ideal buyer to come and buy your company so that you can exit your business in a way that allows you to not compromise the integrity of this beautiful thing that you’ve built. But it also allows you to realize a fair value on your life’s work.

And it’s becoming more popular because so many companies who have grown with a purpose, they look at the alternatives. They look at selling to private equity. “Okay, I’m worried about my employees or my purpose if I do that.” They look at ESOPs, and they say, “Oh, that’s administratively burdensome.” It’s also basically purpose agnostic. And like Laura said, “Maybe retirement benefits are not the way I want to incentivize my employees.” And they look at co-ops, and co-ops are great for some companies, and they’re just not a good fit for others. So this is kind of this fourth option that I predict will become much, much more popular over the next decade.

Loren Feldman:
Laura, when you sold the business to the trust, did you include ownership of the building?

Laura Anderson:
No, Loren, I did not. So I still retain ownership in the building, which actually keeps me vested in the long-term interest of the company, far beyond what many owners would really even need to be, because of course I want to retain them. We have seven-year loans with myself and with the impact investor. It’s going to be an interesting thing in five years as we really think about, when that debt service is paid, how that additional capital can be activated throughout the company, either just through enhanced pay, distributions, what have you.

But purchasing the building has been considered. It’s an interesting thing for us to think about. And, it’s like: What’s the purpose of owning a building? If you have a beneficial landlord, like myself, that has a long-term interest in just keeping you there, is there a benefit in owning the building? And I think that’s something that we’ll think about. It’s really changing the nature of ownership for me, in my mind, from kind of a winner-takes-all. I’ve benefited quite a bit from being a business owner. I went all out on huge risk. I’m not abashed to say I was $3 million in debt at one point between purchasing stock, purchasing the building, putting in improvements. And you know, I had a lot of skin in the game and had it all on the line. And we’ve set up this kind of winner-takes-all approach where, you know: big risk, big reward.

Yeah, I’ve been really benefited by the company, and I’m grateful for that. But I don’t think any particular employee is ever going to be able to benefit nearly like I was. Really what we’re talking about is distributing those benefits in very real time to push the edge on living wages, which in the restaurant industry, it’s very difficult to achieve living wage standards for all of your employees. But this is where we can really make a difference: living wages for all, paid time off for all, excellent benefits for all. Not many restaurants, outside of large corporate chains, perhaps, are really in a position to provide that for employees. So it’s changing the dynamic of risk and reward in the business, and I think that’s really exciting.

Loren Feldman:
That all makes sense, and I’m certainly very glad that your putting it all on the line paid off for you. I am curious about the building ownership from one perspective, which is: The trust that owns the restaurant may be immortal, but there’s a chance that maybe you are not. Which would mean that there’s going to be a transition there at some point, which introduces some element of risk for the business going forward—not knowing for sure who might end up owning that building, if it’s not the trust. Was that a concern for you? And I’m curious, then, how Peter views that element of the deal.

Laura Anderson:
Yeah, Loren, I don’t know that I have a definitive response for that at this time. But maybe I’ll be working with Peter and his associates more as we consider some of the next steps of securing the long-term interests of the trust.

Peter Koehler:
I think it’s an astute question, Loren. It’s not unique to Local Ocean, either. We work with a lot of businesses that have a piece of real estate that is integral to the company operations, whether it’s a manufacturing facility, or a kind of a marquee retail location, or whatever it is. And often they’re separate businesses. Like, the real estate is an LLC that’s owned by, say, the owners, separately from the business. So this question does get raised: What to do with that?

And there’s no right answer. The right thing to do is, raise the question. And so I think, how much of a risk is it to Local Ocean? I’m not sure. I mean, obviously, the restaurant is a great tenant, regardless of who owns the building. And I don’t think any owner would be eager to boot them out. But that said, the most conservative thing you could do would be to include real assets in the trust, or in a sister trust, to kind of secure that legacy.

Loren Feldman:
Have I missed anything? Is there anything that you feel compelled to mention?

Laura Anderson:
I would just say from an owner, just an emotional perspective, I really had to face some of my own fears about what it would mean to sell this company in this way or in any way. And, “What if they fail?” was something that I thought a lot. And it wasn’t just me. I had employees on our leadership team who would say, “Laura, you’ve built a successful business. What if we can’t keep it going without your leadership?” To which I said, “Well, there’s never any guarantees in business. I mean, even under my leadership, in the future, we could fail.” There’s so many ways a business can fail. And you have to know that.

So what if the business fails? If the business fails, then all the assets get dissolved. The debts get paid as much as they can. If there’s anything left over, it goes to a prescribed charity that’s written into your trust agreement, and you go find other jobs. But nobody’s coming after your house. Nobody is taking you to bankruptcy court. A lot of those risks are averted. But there’s no guarantees that you’re going to succeed. You’ve just got to show up and do the work. And we have to do the best that we can at making this a success.

Loren Feldman:
My thanks to Peter Koehler and Laura Anderson—and of course to our sponsor, the Great Game of Business, which helps businesses use an open-book management system to build healthier companies. You can learn more at greatgame.com.