Alternative Exit #56 | The Intersection of ETA and Employee Ownership w Geoffrey Easterling

Hi there, my name is Andy Falkerson and I'm your host on Alternative Exit. The podcast dedicated to educating small business owners about the possibilities, benefits and challenges of transitioning to an employee ownership model. Did you know that there were over 200 million SMEs around the globe with an owner that will be retiring within the next 10 years? Many of these owners will never actually find a buyer for their business, forcing them to close their doors, wreaking havoc on their employees and the communities. There is an alternative. This show will explore different forms of employee ownership and the best practices for a successful transition. Each episode is going to feature interviews with experts on employee ownership, business owners who have successfully made the transition and consultants who help facilitate these changes. Okay, now let's get on with the show. Hello everyone and welcome back to another episode of the Alternative Exit. Today's guest, we've got a slightly different perspective coming to us. So today's guest is Jeff Easterling. He is the CEO of ART and Associates. Now he comes to us with a very much a dual perspective as an operator of an employee own business. But Jeff comes with a really unique angle. He comes, he came into ART through an ETA or an entrepreneur ship through acquisition lens, stepping into the leadership of this established company and then taking it through an ESOP transition. So this puts him in a unique position to talk about where like ETA and employee ownership can overlap and then what you need to look at when you're looking to acquire a business to take that to employee ownership while also ensuring that you're setting yourself and the business up for success. So Jeff, welcome to the Alternative Exit. Hey, thanks Andy. Really excited to be here. Man, it's such a unique perspective that you're going to be bringing to this conversation. I mean, ETA is obviously on the rise everywhere. I mean, you can't really, if your police are aged like us or got hair a little bit like us, your Instagram feed is probably going to be filled with people looking to be able to buy businesses. But a lot of it is not, ETA isn't really associated very strongly with employee ownership. A lot of the sort of the leading sort of people out there talking to them at home, you've got to give your employees a little bit of skin in the game to help them stay engaged. But that's very, very different to employee ownership. I mean, what attracted you to looking to find a sponsor, go through that ETA process with the lens of becoming the CEO of a holy employee on company? Yeah, I think the mix of the moral imperative, the future-looking aspects of entrepreneurship through acquisition, and then the great team that I was able to assemble and be a part of with Southeast acquisition capital, sponsored the deal. But as I look out, I've been very blessed to have some really fantastic experiences in my career. My life has a wonderful career. So this huge upside that is largely levered towards me or investors, although exciting for many people, was not something that was necessary for me as I started my entrepreneurship through acquisition journey. I was really looking at, you know, I'm not an artist, I'm not a designer, the great work that we do here at ART and Associates, I'm not even a project manager, my skills are leadership. But those people's skills are equally valuable and deserve a long term bit of safety and puts an increasingly up and down economic world, having that last retirement benefit, that they can say, "Hey, the value of my work is getting delivered to me, just spoke to who I am as a person, who I am as a leader, coming from a military, I believe we all have an equal shake in the success of any mission that we're working through." So it worked well with me, and then the sponsor team at Southeast acquisition capital, I actually approached them after reading their website and saying, "Hey, I'm looking to make an ETA acquisition, y'all seem to be investing in the Southeast based in Atlanta." And they were already fired up about employee stock option plans, ESOP plans. And I felt aligned with them as leaders, I felt aligned with the sellers, it kind of all came together really beautifully. Yeah, that's awesome. So, a lot of people want to listen to this podcast, they understand ESOPs, they understand employee ownership, they may not really understand sort of ETA, the ETA space. So when you talk about Southeast capital coming in as your sponsor for this acquisition, could you just talk a little bit, talk to them a little bit through what that process looks like? Yeah, this is probably a pretty new model to your point, not a lot of people probably seen a ushernorship through acquisition ESOP. Yeah. My approach with them was, "Hey, I'm looking to do an ETA model acquisition. I had spoken to my wife about it." She was like, "You can acquire any company you want, just don't spend our money." I kind of think. And I was looking for that traditional search, meaning search for the investors provide either the equity or the debt structure and financing so that I don't carry the personal guarantee. The model that Southeast acquisition capital kind of developed is like, "What if we help structure the entire deal to get rid of that personal guarantee by either using an SBA loan or new private credit levers so that you can bring in talented young people, you know, as they call me, to run a company, while at the same time applying the ESOP strategies and ESOP employee benefits, that traditionally only come from an owner deciding out of his or her free will to pass on the company. And it kind of becomes this three-sided benefit. They have a lower risk investment. Most ESOPs are pretty steady, long-term hold risks. The sellers can say, "Hey, I like the deal." And you've brought me the CEO. I don't have to find this person in house. I don't have to trust this person that may or may not have been chosen already for a reason or may not want to be the CEO. They like their role. They'll find somebody on the market which can be expensive to them. And then for me, no personal guarantee, I'm picking up a established brand and I have this wonderful team of sponsors and investors that are already excited about the project and looking for a long-term strategy versus that five-year build-then-sell kind of model. Yeah, look, that's awesome to hear those, I guess, those three sides to that benefit of me because in most, ETA-style deals. I mean, you mentioned there that the SBA or the small business administration is programmed. Like, in the US, they've got these amazing loads. They do provide to ETAs, but they do require a personal guarantee which can limit a lot of people from not actually going to put that much risk. So that was awesome. The southeast actually was able to orchestrate a deal with you so you didn't require. Yes, and there is a way of structuring this deal through some ESOP and this is probably get above my head into the investor sponsor. When you do 100% structured ESOP, there's a way to use the SBA. We ended up not using it because everybody is an owner-not-one person has to take on that personal guarantee. It's held by the ESOP itself rather than an individual. So we were looking through that as a possibility, but we ended up going with private credit. Okay. Jeff, this may be a little bit personal, so you can tell me where to go if I go to ask this question. You talked a little bit earlier about obviously the moral imperative being super. It's like a super strong driver for you partnering with the team in Southeast because a lot of people, when you hear about people going into ETA, like looking to be able to buy a company, a lot of it, how do I maximize my own wealth? A lot of the success stories comes about, hey, look, I was able to go and execute a buy-build strategy. Hey, look, I'll buy this business company. I'll tell tune it up for next three to five years and then go look for it. It's probably a private equity style buyer. So you would have, with your career, like obviously military, McKinsey, executive, you've got sort of leadership capability, you could have gone down that path, but you've gone down the path of really sort of focusing on, as I said, building that moral imperative. I mean, was that, obviously, would they able to structure a deal to make it sort of financially competitive for you when you're looking between those options or do you see yourself as, like, hey, the moral imperative comes with a sort of a significant benefit that I can sort of go that huge gross opportunity. Yeah, absolutely. Total financial upside is nowhere near the same, you know, that 3X, 5X exit where you're looking at, you know, a master turnaround, but it's also, you know, it's also more demanding on me, my family, and most importantly, the employees, to say, hey, you were doing a wonderful job, but now we're, you know, a million dollars in debt, we need to get 35% out of it. Yeah, you got a high five. So now you need to go faster, even though you were doing a wonderful job before. That works for some people, that works for some organizations, and, you know, other companies besides ART that may have even been a wonderful fit, for me and the way that I want to run my teams, run companies that I'm excited about and be a leader of, and for the employees that I want to lead, I think they have a right, excuse me, my dog is in the office, they have a right to some of the equity that they created, and that has a value to me that doesn't show up on the dollars sheet, that doesn't show up on my tax return, is looking at the people in the eye who have created this business and the sellers felt the same way, and I speak extremely highly of them as people and business leaders about, hey, I deserve some compensation for my time in my effort, but I am not the only person who deserves compensation or security for my time in effort, and that I think it's going to become more and more resonant as we move forward into the future. So I'm glad to be one of the first movers in this ETA ESOB kind of opportunity. Yeah, fantastic. Well, I'm definitely hoping that we get more of them. That like your story is one that we can amplify, because I think it's said that that Silver the tsunami does provide this huge opportunity for people. And look, I think, as you've pointed out, not all every company is ready for growth. There are so many examples where forcing the growth and driving that actually ends up breaking the business. Absolutely. Hyper growth is great. It's built a lot of wonderful industries, but to your point it's broken a lot of specific companies, the broken loss specific people. Even if I want to see as many esophage as possible, but even if we're moving the needle by 1%, that's tens of thousands of jobs that will be more secure, greater equity. Share, and greater ownership and excitement for the employees. Myself, Southeast acquisition capital, all the team here at ART and Associates are beating the German employee ownership and how it can be a great opportunity for hundreds of thousands, if not millions of people, we've just a couple companies start to consider it in their options set as they consider how to exit and how to grow. Yeah, I like that framing in their options set because it is part, like of an overall set that you can do to think about how to compensate. So I want to take a step back as we think about from the acquisition lens. You're obviously coming into this with a lens of, we're going to be turning this into 100% employee owned. But with that in mind, how do you think that that shaped your due diligence? Was there certain things that you were looking for over indexing on having a look when you were looking at other companies other than ART? Or if you could just talk us through that, that would be great. Yeah, absolutely. When I came into Southeast acquisition, Capital already had a target in mind, which was ART. Okay. I helped finalize the diligence that they had already begun. And I felt lucky to be a part of that and have some more experienced investors along with me. But as we were running the diligence, one of the things that was not as important was digging down that cost expense line and where are we going to be able to cut and you know, Nicolid and I'm our way into an EBITDA growth model immediately. And also the revenue and the customer concentration, all those are incredibly important and we looked at them consistently. It wasn't looking for how can we drive prices up as soon as we get there. Some of those simple, how do you drive the revenue, drive the EBITDA immediately? Because there is this long-hold strategy of, and that allows, the longer the clock gets the less urgent, the number is to go up quickly. The goal is to hold this company within the ESOP holding company that we created, but then find another target acquisition that fits alongside the portfolio and have this group of long-hold reliable companies where the employees are gaining equity, the sponsors and investors are gaining equity. And I'm helping stabilize, grow, install the ESOP culture, fit and education to each one of the employees. And then finding, you know, maybe one of them to run it, an outside general manager, and finding the next target because I think there's a lot of room to grow, particularly in this industry with experienced professionals who are creating. And I think giving them some value for the things that they literally create isn't true, but important. Yeah, very cool. Talk to you about how your, I guess, your value creation approach post-disacquisition differs from these other companies. Like, I'm not looking just to cut budget straight away, I'm not looking to sort of them on the extra growth, but I'd love to let it sort of what is the, like, what were the business-focused value drivers. And then how did you align that with also the cultural value driver that you needed to do to change the company to be employee? Yeah, the, well, start with the culture. The culture is probably because the employees were being led by the type of leaders who would say, hey, I want to sell my company into an ESOP, that culture had already permeated. Yeah. And then I grew, both through the culture that was created here by the one for teammates that we have and by the sellers and former leaders. So me coming in and explaining that, I think they're very excited to hear, you know, that I may earn and own more of the value that I create. The thing that I've started to do now is like, hey, how can I be more transparent? We're going to have our first employee, owner's committee meeting later this afternoon, which I'm really excited about. How I can get rid of, like, what will make you feel like an owner and what will make this ownership journey feel really important and impactful to you? The drivers on the more on the revenue side, we have a wonderful team that has found incredible ways to grow and hold customers. We are not recurring revenue based for project based here. So we have to sell and then do a good job and then sell and do a good job over and over again. And we've found some incredible, reliable vendors, partners and most importantly, customers. I come from Centennial Yards where I was the chief of staff, which is a wonderful real estate project here in Atlanta. And my network has grown pretty comfortably through that and through my time in the military. And it's reaching out to the former leaders that I had, reaching out to some of the connections that I've had, pointing my sales team who was so talented and so unbelievably great in their direction and saying, hey, you know, y'all have a wonderful network. I have a wonderful network. How can we make most of these create a flywheel effect for more people know about ART and associates? And we're more people excited to buy from ART and associates and there's some big projects coming down the pipeline and finding more and more ways to grow that top line revenue. While at the same time, I am reviewing the expenses that are in the non-human capital expenses and saying, hey, can we get a vendor management software here? Can we get a new cleaning crew for that matter? Whatever it takes to help drive some of the costs down the revenue up. How much are you leaning on the team to identify those opportunities for both to reduce cost and also drive growth? Oh, an incredible amount. I'm new here. I've been here for 45 days now. Yeah. Every single day I realize there's something else that I don't know about project management, about design, about implementation. And that's my job to come in with that humble mindset of, hey, I know project management, I know leadership, but I don't know this business. And I have an open door policy. Please come to me every day that you can with anything that you have. Thankfully, I'd say we probably have 20 colleagues and all 20 of them have been to my office with, hey, here's how you can fix this. Here's something that could be better. Here's something that I've always thought about. And that's my job to rack and stack those things. I have a huge excel with every issue that they've told me with the level of urgency, the speed of execution, the difficulty of execution and the return to the company. And I'm working my way down that based on its urgency now. And then creating that employee ownership culture where people are proud to be employee owners and they recognize the more revenue, the lower the cost, the more the value of their experience here. And that's the whole. The ownership committee later this afternoon. But as well as some of those events we're looking forward to our first valuation day in July, all the things that start to build that community. Yeah. So 45 days in. What's been the biggest challenge for you? Well, the biggest aha moment in coming out of previously sort of non-EO, E-O-N business into this 100% employee. Can you give me one second by the way? Yeah, yeah. No, I just apologize. Oh, good. Can you restate that? I was just asking. It's been 45 days in the role. And you've obviously had a lot of, you've probably seen how you need to lead differently. So as there been a moment that's so really highlighted that, hey, look, how people, like how are you all leading in a non-employee on business really needs to change in an employee on business? Yeah, I think the biggest things that I've noticed are in an employee on business. Like, I think the second that I, the former CEO and leadership team told them that it was employee on to me taking over, they do feel a lot of that ownership. And they're like, hey, here's this thing that we could be working on. And finding a way to say, yes, and really listen, and really sometimes have people say, hey, here's what I need. I'm coming from the military. It's, there is a collaborative culture that's probably greater than people recognize on the outside, but it's still not the same. People weren't knocking on Captain East Jillings' door with ideas about how to run things better every single day. And that's a learning adjustment for me. And one that I think is really fantastic. I don't need to be the smartest person in the room and the only person that anybody can rely on. I'm an employee owner. As are they, and we can rely on each other. My job is to steer the ship, but I am not the only person who knows how to steer, row, or raise the mass around here. So that's been a big growth moment. As well as, you know, people have questions about this employee ownership thing. And I am not a lawyer, a tax attorney, nor a policy expert. I've had to say, I don't know more than I ever have. And last, I'm falling into a system that's not mine. I came military and McKinsey. Those places have structures. I'm going to talk how to run them and everybody is all operating on the same structure. I'm taking over a company that was ran by two amazing leaders and a CFO who also left her in the exit, who was also an amazing leader, but it was ran their way rather than the way that I would run things. And I have to learn how to, hey, this is why they built the system that way. And that's fantastic. And fall into that. And here's a system that I would have implemented. And how am I implementing that into a ship that's already in flight, into a kind of build the machine as it's going. And that's just a new learning. Well, at the same time, I can't fail because all the employee, all the equity belongs to the employee. So I got to make sure I keep this thing afloat while I'm doing it. Yeah, I suppose the beauty of it, it's not all in your shoulders. It's on their shoulders too. I think that's, there is that, obviously, that added element that you've got of sort of bringing people in on that journey to be part of employee. And she compared to other ATI players, but you've also got more people to share that load. - Yeah, absolutely. - Yeah, very cool. So why do you think more people in ETA are not thinking about the whole employee ownership place? 'Cause it's something I've always struggled with. Like why are more people thinking about sort of engaging more people to be owners with them on their ETA journey? - Yeah, I think like most problems, it's a matter of dollars and knowledge. I think a lot of times people see the, first I think most people don't know what an ESOP is or if they do they don't think that it's something that's a part of an ETA journey and how that could be kind of mesh together nicely. And not everybody can find the kind of sponsors that I found at Southeast acquisition capital. - Yeah. - Which as much as I reached out to them, it was a shotgun approach. They weren't the only people I reached out to, but I'm so happy that they were the ones that responded and that they had that same mindset and shared value. So when you have to know as the ETA entrepreneur, then your investors and sponsors have to know and accept that and that's where you get into the other side, knowledge and then the other side of course, the capital. It's lower upside, it's more complication, it's more expense on the front side. And I think that can shy people off. I disagree, especially as I've gotten to know ESOP more, just because there's not that grand exit on the back end does not mean that it's not valuable, does not mean that there's not money to be made for investors, employees and entrepreneurs here. I think there's a great number of wonderful ways to make money either with long-haul strategies or with buy bill strategies or even kind of creating a port co, a hold co strategy. But there's also ESOPs that acquire other ESOPs. - Yeah. - And that's it. - I think that's an amazing thing. - They're all valid. - Yes. - All three of those. Yeah, I love that Jeff. I think that's a really big point as well. I think that obviously the knowledge and capital, like knowledge, there's also awareness. I put in that sort of knowledge bucket. Like ETA is just people, it's just not prevalent within the space like ESOPs. And a lot of people think it's just not viable. So having the team of South East, championing that and providing the capital with you, obviously makes it a lot easier. - Yeah, absolutely. So when you were doing that shotgun approach, reaching out to potential sponsors like South East, you said that there was obviously something in your profile that stood out for them. I've talked about, hey, look, this person is gonna be a great fit to run an employee-owned business. What do you think it was? - I think there's a mix of my pedigree. I don't think that, you know, where people went to school and what they did for work is always the best indicator. But sometimes when you're sending that call, it email, it does help. - Yeah. When you have that conversation about why you want to do, what you want to do, I think being very vulnerable and very real, which I have been as much as possible, to every extent possible, with the two sponsors and leaders of Southeast acquisition capital. I am looking for an opportunity to lead teams. My background is leadership, and I'm passionate about leadership more than any thing that you can find on a spreadsheet, I share about the human beings that I work with. I was coming from being a stay-at-home parent after I had quit corporate America as a whole. And I think a mix of my vulnerability there, I've worked in the industry of the acquisition that they had in mind. You know, although this is an art and design company, they work mostly with corporate clients, and they work mostly with corporate clients and builders in Atlanta, which I had the opportunity to work with at Centennial Yards, and my network is pretty related. And I also spent the time to tell people in my network, "Hey, this is what I'm looking to do." When I'm interviewing, do you mind if I say, "Hey, I know this person that works at XYZ Company, and we'll be sharing their, some of their ideas from their book of business when I take over?" It was a real family affair between my network and myself, and Southeast acquisition capital, and the sellers, to be honest, because they could have met me and seen the kind of person that was looking to, kind of scrape and sell their company and walk away. Yeah. But I spent a lot of time getting to know the previous owners who were, like I said, absolutely fantastic people, and seeing if I had alignment with them as well. And I think that gave greater credence to my sponsors and investors of like, "Hey, he meshes well with the team that's already there that he's been exposed to, which is great." Yeah, that's awesome. So, Jeff, as we sort of come to the end of the part, I like to ask, well, my guess, sort of three, sort of a fast round of three questions. Yeah, absolutely. You up for it? Let's do it. Okay, awesome. So, who is the leader that you most admire in employee ownership? The leader, honestly, I think it's an easy homeer here to name Southeast acquisition capital, but I respect Michael Morosi and Jim Ward tremendously. And I know I've spoken about them throughout the podcast, but they come from a more traditional finance and private equity background, and to find a hole in the market that's being overlooked at, under-resourced, under-looked at, that would actually make them less money than finding another way to do some financial innovation. Takes an incredible amount of trust, respect and belief in other people in their value. And then to think of a new way to get people like me who want to lead companies into the market and not say, "Hey, we're gonna acquire this and we're gonna run it. We're the only people that can figure this out." Saying, they answered an email from me. I have a two-year-old, he was up at 5 a.m. I fed him, put him back down and I would just be emailing people at 5 a.m. And a couple people responded, a couple of people said, "Yeah, but no thanks." And a couple people said, "Yes, we believe in you." And no one did it more than Southeast acquisition capital and they didn't have to. So I don't think that's a great. Yeah, that's amazing. A great story. So the second question is, what is your favorite resource on employee ownership? Yeah, I've been digging deep into the books. The National Center for Employee Ownership, I think has some really fantastic resources. I actually just became a member a few days ago and I've been digging through all their backlog. I'm looking forward to their event in Milwaukee, I believe in April. And there's no paid advertisement. I just, all this stuff is really complicated and they have a lot of resources that can take pages and pages of legal jargon and get it down to one or two pages to read. So I at least know where to ask the question if I need that depth, but I can start to get myself and my team spun up really quickly. So that's been really helpful. And then podcasts, of course. I started to get familiar with your podcast as I've prepared for this. And then even some of the traditional ETA podcasts I've seen ESOPs coming up on acquiring minds as well now. And that kind of information is invaluable because just hearing about it breaks down that knowledge barrier I spoke about earlier. Awesome, I actually haven't heard the modern acquiring minds episode. I need to go back, I need to listen to some of the more recent ones that I think. And then finally, that the last question is, is what would you say to a business owner who's sitting on the fence regarding a transition to employee ownership? And also, we could even think about like a slightly different length. Like what would you also say to an ETA, a surcharge who's sitting on the fence about acquiring an employee own. Yeah, I'll tackle both sides because I've been lucky enough to have the conversations with the seller and I'm living through the ETA side. For the seller, I say, just add it to your option set. The very least, you know, even if you don't think that the expenses are worth it or you think your employees aren't ready. Ask your lawyer, ask your broker, ask the people that you're looking to sell the company too if you're looking to sell. And spend the time listening to this podcast, listen to, I went on YouTube and got like the quick explainers. And I think you'll find that one, there's still pretty great exits for a lot of sellers that either sell to another ESOP or do a similar ETA model. But there's also some really great upsides for the employees that will create a legacy for your business. And legacy, it's again, one of the things it's not on the balance sheet. But it's one of those things that will carry on a legacy that you and your family built and that the employees also built and deserve to carry on. So at the very least, consider it. The answer may still be no, but if 50% more people consider it, 5% more people action it, we're doing a lot better in the country. For in ETA, searcher, anybody trying to consider this journey, reach out to ESOP funds as well. I think they're trying to find ways to be creative when I reached out to Southeast acquisition capital. I saw on the website that they were looking to do employee owned and ESOP led opportunities by and fully understand what it meant, but it turned out well. There's still so much capital flying around. The systems of traditional ETA, because less people are going to traditional consulting and traditional banking. Instead of, and for going them for ETA, those systems are becoming more and more similar to normal jobs and the upsides for the searcher are actually going down in traditional search. So if your upsides going down, you have an opportunity for much more control, a much more robust spread of the equity, even if it all doesn't go to you, it's going more to the people who create it. So it's worth at the very least considering, and at the end of the day, you need one yes to be an ETA entrepreneur, one investor to say yes, so why take any off the table. Yeah, I love it. I love it Jeff. I'll look out. Where can people go if I want to learn more about you or follow your journey or learn more about IAT? I'm on LinkedIn as well as ART and associates. When you're looking for us on LinkedIn, we're A-Hyphen R-Hyphen T and associates. I'm Jeffrey with a G, which sometimes a little bit hard to find, but I live by the motto, pay it forward, pass it on, lift it offline. Feel free, email, all. Shoot me a LinkedIn message. I will make time for anybody who's trying to gain knowledge in any pursuit. So I'm excited. Yeah. Well, Jeff, thank you. I'll put some of those links in the podcast show notes as well, including the Southeast acquisition capital. If anyone is looking to reach out to them or to you, but Jeff, thank you so much for being one of the sort of pioneers in the ETA, E-Sub space. And hoping that some of your leadership can really drive, enable more people to go through that journey as well. So Jeff, thank you very much for joining us in the alternative exit. Yes, thank you and thank you for spreading the good word as well. Thanks. Here's, man. We hope you enjoyed this episode. If you want to continue learning about employee ownership as an alternative exit, head across to abettermunday.me for additional links and resources. You can also make sure to subscribe or follow along in your favourite podcast app and be sure to leave us a five-star review.