EP13 - Randy Macho Man Savage - Bring Down or Take Down Call For An ESOP Transaction

 [0:10] 

What's going on everybody this is the SOP guy we are on a journey to an ESOP and Beyond enjoying season 5 we have so much to talk about and so a little time and I want to kick off so we can use our time wisely right now with this.

 [0:26] 

Just sour grapes WrestleMania 2 is history and this band is still,

the Intercontinental Champion he's from Sarasota Florida what's with the broom wait a minute what is the professional wrestling completely clean oh yeah doing the thing yeah like nobody ever does before.

Yeah do you send tenants been around since I saw you in the Boston Garden.

And I think that you believe that even though your head hunting that you can't beat the Macho Man Randy Savage and you know Hulk Hogan.

Yeah if he wants to keep an eye on me don't look behind you Hulk Hogan know don't look in front don't look to the side look straight up cuz I'm right on top of you yeah,

oh yeah oh oh Elizabeth,

my dear how are you you look gorgeous as usual thank you very much well you're more than welcome how are things going for you oh great everything's super when you get into New York City you have an opportunity to do a little shopping,

oh yes I really enjoy that excuse me just let me interrupt this for a second I'm just standing here I'm holding a.

You're kind of in a heavyweight championship film I'm only the champion,

you guys got a conversation going you're talking about a few things it's like uh it's like the most important man in the world standing here and you got a conversation going with each other know we can talk about you put that thing down.

 [1:50] 

Don't degrade the champion at any time a man in my position could never afford to look ridiculous he understand that oh yeah Tito Santana this is the Randy Macho Man Savage Oh Yeah.

Let me tell you something brother it's coming down all right so all right I just have to confess that I.

 [2:13] 

Watched wrestling when I was a kid and Randy Macho Man Savage was 1 of my childhood.

Heroes um my mother probably wanted to just kick us out of the house because me and my brothers would literally break furniture and.

Um yeah that's what happens so you know once I realized this was actually not real,

um I don't know I don't know how I dealt with that I can't really tell you but I will say that it is 1 it is like the most entertaining like,

sense of thing so why would we be talking about Randy Macho Man Savage on the journey to an ESOP well the reason is is because.

 [2:57] 

There's this thing that happens with every ESOP closing and it's called a take down or bring down call and I've talked about this for for,

a little while now with ESOP deals and the first off is like what is what does it take down bring down call so it sounds like a wrestling move.

When you're in wrestling so that's why it's so appropriate so we're going to talk about what this part of the ESOP transaction.

You know really is so people that don't know about it maybe can know about it um but there's there's an element here that I think is really important so let me let me,

just Define it real quick as we go and then we'll talk about you know what to prepare for for the bring down call and I'm going to just apologize over and over again if I keep going back to trying to do Randy Macho Man.

 [3:44] 

Impersonation I'm sorry I just have a hard time not doing it it's just part of my thing but anyway so please bear with me in that so.

The takedown bring down call happens at the end of the transaction so really is scheduled around the time where we're we're all the documentation has been.

Um reviewed we've worked through all of the pieces parts and pieces of the closing and whether you have you know a bank involved you know you're going to have the bank attorneys doing their thing you're going to have.

The trustee and the valuation firms doing their thing in terms of of documenting everything that needs to be documented and then the sell side team,

you know with their East opportunity doing all the documents on their side so you have all this this culmination of things that are really really pretty busy and and nuanced and detailed and there's a lot of back and forth and and so that's,

important to understand like that's really the closing itself is going to be dominated by that but right at the very end there's this this call that happens with,

the trustees valuation firm and the trustee where they're really investigating,

up into the time of the closing is are in been any kind of change to the company um and when we talk about that we're going to get into the idea of what the changes might be.

 [4:59] 

Um just so you understand that that's like it's a part of the final finish line and.

You know and what happens is it's not like a major thing um.

If most of the time it's not a major thing because you don't have like major changes happen if you do you kind of want to bring those up anyways you know through the whole process which would be part of what we want to talk about so segueing into that we're going to get into that that a lot more if you.

Don't know what the ESOP is all about it's not a wrestling podcast it's not a movie podcast.

It's a podcast that's really designed to help people.

 [5:37] 

A better listening hopefully they are um that understand that want to understand Employee Stock ownership plans in a way that is a lot more,

to me just very streamlined and and hopefully just layman's terms like that's 1 of the goals here is just to make this super super accessible so that it's not you don't have to have a PhD in in ESOP,

whatever college that you might have doesn't exist but you don't have to do that you have to just kind of understand like that how do we break this all down,

So today we're going to do that again please go to our website at journey to ESOP calm if you have an interest in anything else or other topics because we have a lot,

lots and lots of different topics and interviews with different people and hopefully that you can find answers to what you're looking for on the podcast so,

if you like it please share it with a friend rate and review the podcast if you can give us a 5-star rating um some people don't know how to do that I'm 1 of them to be honest with you so I've really struggled with how do you get to the,

whole rating thing so don't feel guilty if I keep asking and you can't do that but either way thank you for joining today and we're looking forward to um going through this topic.

The Boston Garden yeah we're Larry Bird plays basketball yeah and the Boston Celtics are a real tough team.

But uh.

That if I played basketball man the way I am in the super half leak that I am I would overshadow Larry Bird because in that particular night in Boston I was the greatest.

 [7:06] 

Personal wrestler in the world all proud yeah I'm proud you know a couple of things you don't talk about the fact that you're a former professional baseball player and also.

All Year brother I'm better than Larry Bird so anyway just you can't not.

Honestly like Randy Macho Man he's phenomenal um you know you younger people maybe not recognize him but check him out on YouTube because he's really cool,

so what um what is this all about so when we think about the bring down call the takedown call what we're talking about um is the continuation of due diligence when you go down to it now when we think about,

the whole ESOP process and we're going to widen that out a little bit as we started off with you know that normal process of doing a transaction is going to kind of finish with this idea of of the bring down call.

 [7:57] 

At as the process develops in the company decides like I want to be an ESOP you go through the valuation model feasibility model,

determining like what is the actual amount you're going to sell is it 100%,

then you figure out from there like you're going to have to hire you know the company's going to have to hire a trustee valuation firm for the buy side.

That's going to include an attorney and then on our side we're going to have an attorney as a sell side and then eventually you might have a bank.

 [8:27] 

Uh participant in it as well with their attorney so so what happens is you go through the whole process of of kicking off due diligence and then getting into a lot of the questions that are going to come now these are predominantly going to come from the valuation firm,

that represents the trustee.

And their job as we've do as we talked about I mean we've interviewed different valuation firms their job primarily on the buy side is to help the trustee determine what is it adequate consideration for the business,

which basically just means what's the fair market value that they're they're um willing to pay

in terms of the being the buyer and so the process of them getting through the due diligence is really making sure they've you know answered all the possible questions that might exist for the company

you know as they go through all the historical financial data and other other documents of course there's a lot there's a lot of different documents for due diligence.

And so it gets them up to a certain point and so what happens is they eventually get to a point where they they are ready the trustee and evaluation team and the attorney are ready for the seller,

to make the offer,

and what happens is the seller makes the offer the trustee and the valuation firm and the attorney on their side the buy side reviews the offer,

they come back with they're going to come back with a counter offer.

 [9:51] 

And this process goes back and forth so just kind of giving you a little bit of context when it comes down to the bring down call so the idea is that they're they're in now with this process of negotiation of hey we we're

willing to accept this price you know and there's other aspects of negotiation that we're going to want to talk about at a later time but.

 [10:11] 

They're willing to accept this price so what happens really is the trustee and their valuation firm and the attorney that go off and they have like this range of value that they're going to go back and forth on now all of that,

presupposes the information that they have so far which means that they have already documented everything they've gotten history and everything else so we have what is known and knowable and that is like,

from their perspective what they know about everything right at that up to that point but now as we go through the process they're still going to be a couple months,

that are going to go through sometimes not maybe a couple months but it may be shorter than that but there still can be months and months added on,

from the time that we start negotiation depending on whatever happens you know there might be some,

other issues so the main thing to keep in mind is that their job the valuation firm with the trustee and the attorney on the buy side their job's not finished until they until the deal is closed,

and so when we think about due diligence it really does start with everything being sent over initially,

and it doesn't end for the transaction until really the final bring down call so keeping that into the idea of what is due diligence for an ESOP transaction it's really,

making sure that they have all the information,

that they need to have that is that is according to the the process to make sure that if they didn't know about it then there would be a problem um.

 [11:37] 

In terms of what they've offered and now you have this idea of an exposure.

For the selling shareholders and everything else as as if they don't do this correct on both you know on their side for the trustee and evaluation firm so it is really there to make sure that everything is kind of really been buttoned up.

Up to the point of closing.

Now in addition to that after the closing there's going to be other follow-up things which are going to be truing up the working capital and those kind of things so it is it is a.

Full-on process that starts kind of goes through this whole process and as you get into it so what I want to get into.

 [12:14] 

Is this idea of what exactly what areas that can change in a company's uh maybe it's the financial statement side or whatever but what is that what are some things specifically that can change.

That will affect the potentially could affect the.

 [12:31] 

That breakdown call and so what you can be aware of maybe just making sure that you're not walking into that not knowing that that's still something that it's not just done at the term sheet stage there's,

there's this formality that happens so so that's what we're going to get into is this idea of all the specific areas that can change and and how how you should be thinking about them.

 [12:51] 

Sentimental heavyweight champion of the world the video of scope there yes.

Look into the video scope and see how proud you are to be the manager of the Macho Man I am proud to be the manager of the Macho question you told me I can't talk to her Randy you told you that,

time to time yes sir here would you like to ask her a question right at this particular time would you like to do that may may I oh yeah what kind of a question you want to ask,

well Elizabeth you wouldn't give her that flower would you oh if you did that you know what would happen,

I've got a good idea you know what would happen if okarin gave a flower to Elizabeth Elizabeth do you know what would happen

don't don't get her in the middle of this she doesn't oh yeah that your time is done I love this scene anyway I I'm sorry if somebody's like uh what are you doing Randy Macho Man so

it's just so funny would you like to ask her a question.

So let's ask a question so as we get into this what could change so we're in the spring down call if you fast forward and and envision this idea that you're going to bring down call it's basically the trustee the valuation firm

the obviously the selling shareholders and the client were getting you know we're kind of at the end of the closing.

 [14:10] 

And they're going to ask you you know these questions um.

 [14:15] 

Revenue what has changed like let's talk about Revenue if you know 1 of the things about Revenue would be you know you're you're you know depending on what time of the year you've closed right so but what's happening is you're kind of your your refreshing the financials as you go to the,

trustee and evaluation team meaning that you're refreshing the interim monthly financial statements so,

hey are we tracking 1 of the questions in that as they look at it from a pure due diligence standpoint are we tracking um with the forecast that we submitted for that particular year so if we're in 24 you know are we on track to hit the 24,

Revenue estimate,

and so could be like hey have you lost any major customers or you know is there any potential to lose a major customer or have you um it doesn't have to be just negative news it has you know it could be positive have gained any new customers or.

 [15:05] 

Um it's always nice to come in there and say hey we actually are ahead of the forecast you know and here's our results and all that so when it comes to revenue.

Depending on the customer itself like.

Are the client the the makeup and the composition of that Revenue obviously is pretty important if there is a situation obviously where there's a there's a significant amount of concentration,

this makes this a much bigger issue right because you have you know the potential for if I if I had a 10% client or customer my my makes up all my Revenue 1520,

30 go on and on that would be material and as as we start thinking about these levels of,

you know questions regarding the breakdown take down call it's it's material versus not material and so what is material mean like in in an accounting audit reference is more about is it even worth our time,

to worry about it and so I think in in.

You can always kind of in in you know interpret that materiality in a lot of different ways but

you know kind of is is part of like the size of the transaction would be something that would be notable to be thinking about the size of as we talk about the adjustments that could happen um.

 [16:20] 

What if you had a big you know if we go from revenue we go to the balance sheet real quick and we look at what if we had a big.

Account receivable that we thought we were you know we're on track for as we've edged to the closer to closing that's moved into the aging and

well it's pushing in the Aging in from 90 to 120 days and like something's happening what if you know if you've got that going on there might be a material change when it comes to the balance sheet or you might have um.

You know something that you didn't think about you know that's going to be represented in the balance sheet that that might have been um missed in the first wave of things so there'll be questions regarding that revenue and.

Um balance sheet issues there might be questions regarding you know the idea of um any specific structural change in the company so if you go non-financial and start thinking about.

 [17:09] 

Um we had say for instance we have a a group of key people and.

You know when you when you I'll just jump back a step a little bit when you start thinking about what has been presented in the ESOP to the trustee and the valuation firm,

is is hopefully a pretty good leadership team right I mean and I say that like I and I don't want to be I want to be careful um not to say it has to be this,

comprehensive completely leadership team and I think some people get into this um.

Issue when they're planning their ESOP and I think it's a very valid issue it's going to be something we'll we'll get deeper into.

Um this season of the podcast because I think it's it's definitely some.

Things I've seen push esops out a little bit which is hey I don't have all the exact people I need on my leadership team at this particular moment.

So should I just keep waiting and building my leadership team and that's a tough question because it may be yes.

And it really made me know and it depends on what the owner the shareholders are wanting to do after the closing.

It depends on whether or not the key leadership is really going to bring up you know build a void

or or or Bridge a gap that we need that we have right now that we don't actually haven't really addressed and because of that we have a week of material weakness in the in the company so it really kind of depends.

 [18:35] 

So as you as you think about that the company has contemplated and and really presented hey this is our leadership team so by this point by the bring down take take down call,

at this point they're trusting evaluation firm already have in their mind like this is who's running the running the company right this is who's really who's really going to be um part of how they think about,

the per the future performance of the company.

 [19:02] 

And so obviously if we lost a key person and this has happened and I've had that happen on on closings before um maybe maybe a month before closing we lost a key person and I mean the first my first go about on this,

forget to bring down takedown call if it happens.

I'm going to be like the first 1 to tell the the client on my side hey we need to just tell them what's going on keep them informed,

and then let's kind of move through that issue and talk about the impact of that with the trustee so as long as you do that I mean it's really about.

You know being transparent and sharing information as you go.

 [19:40] 

So as long as you do that I think it's totally cool but the the main thing is like in this this scenario we lost a key person it was the number 2 person actually the person that was going to take over.

The role of the principal like the main shareholder and.

Um fortunately for him he had some people that that he had known known another person had actually worked for the company that he had been in contact with and actually in this in that story we were able to actually place somebody,

even before the closing um and and where it it was kind of not funny but it was kind of like,

um the silver lining of it all was that that actually was a better person than what he had before which who knows if that can happen for some people I do know there's a tremendous amount of anxiety,

in with key people in part of the reason we're doing an ESOP is to really address some things for the key people so they can feel you know like hey I've got a good.

 [20:37] 

Opportunity going forward when it when the ESOP gets laid out and.

 [20:43] 

We want them to feel like they're that we're not actually taking a step back in their career but that actually we're taking a step forward,

and then here are the reasons why so so really you know if you do have a key person issue that we want to we want to be careful um to disclose that.

Now other there's other areas that we could talk about now if you think about some of the things are just common sense like anything that's that has just.

 [21:08] 

Of risen in the next you know that that nobody really knows about that you feel a significant I think it's going to qualify like if I.

If the trustee if I was the valuation firm for the for the trustee I might ask the question like.

Anything and everything that you might want to disclose that you feel like is significant that has changed that we didn't know about I would kind of capture everything there but so things like like for instance.

You know we've been tracking some some of the political legislation that affects our business and they just voted.

To pass this 1 bil and we think that's going to have an impact that could be obviously pretty material and something if you knew about you'd want to you'd want to disclose that,

um other things that are like not not necessarily as,

obviously legislative but maybe even just you know litigation or pending lawsuits which you're going to want to.

Deal with that initially in your due diligence anyways but let's just say in the last you know 2 weeks before the closing some you get some.

Filing of some lawsuit against the company obviously that's going to be brought up in this bring down takedown call so it's now what happens is.

 [22:20] 

You know as you go through this right you're not you're not.

Trying to like you definitely don't want to like not disclose something that could be discovered later and found to be a problem,

you know even if it's a minor thing but what you do want to do is is have that that internal conversation with your advisor.

And start making a list of anything that you believe might be material as you get closer and closer to the closing and start bouncing off Hey would this affect.

The with how what would this affect have on the deal itself right um what material change to cash flow could there be for instance what material change to the risk of the of the profile risk of the company,

um what Pro what potential change could could really come at the company where um.

You know they they thought they were doing this and they have to kind of you know change courses and nobody likes that really and so if I went backwards a little bit.

 [23:20] 

1 of the things I think an advisor sell side advisor would do um you know I don't want I want to kind of put this into its its proper place because I really think the bring down takedown call,

it for me it should never be an issue right and the reason I say that and it's and it's really for me it's much more of a formality than it is anything because.

If you do your work correctly at the front end of the deal you should be as an adviser.

 [23:47] 

Your adviser whoever you're you're using right um should be really preparing you for those types of questions way early in the process.

 [23:56] 

And so I was going to take a a little bit of a step back at the B to the beginning of things because I think it's important for.

You to be thinking about this as you as you you might be in a position where you're hiring somebody to do your ESOP transaction sell side advisor.

And you've working through you're working through that core and trying to figure out like is this the right provider um and depending on what your you know what your uh.

 [24:21] 

You know decision-making factors are and how you're choosing them just keep this in mind I mean 1 of the things I think they should bring up.

Early in the process as you interview them is this this idea of like how do you.

If you're the the client right and you're asking the question to the adviser how do you help prepare us as a company for.

This potential of the you know the not the potential but the the inevitable.

Due diligence and questions and bring down calls so so some of that might have something to do obviously with you know as they come up with your number right when I mean by that number is like your valuation number.

 [25:05] 

Which would include not only Enterprise Value it would also include the the the target working capital number.

Um and you know some level of of evaluation regarding the the.

Financial um probability of your forecast as it relates back to the.

 [25:28] 

Review whether it's a formal business plan,

or an informal business plan but the review of the business plan the Strategic plan and all the things that go into that and so really 1 of the things about,

hiring the right advisor is that you should not have the breakdown takedown call really should be just to check the box to be honest with you if you are if you're kind of going into your closing and this is a surprise to you well.

Um that's not good right that's not something we want you you to be facing you should have dealt with all those things and know also that anything that does pop up the advisor should be saying to you like look.

Tell us what's happening make sure you're communicating changes in the company um 1 of the things I look for in my first like you know I think sometimes every client has a different perspective on you know this process right and I think a lot of times.

There's a there's a sense that you know for what I do for uh a client as a sales side advisor um.

 [26:32] 

They might think hey you know you're just lucky to get this this opportunity to be our Southside advisor and I'm like well I get I get that and I I am thankful to work with really cool clients and,

um

all of that I mean that's I'm not going to kind of like say that it's not true but I also am looking for things in that first 2 phase phases of work to make sure I want to be representing them.

You know and 1 of the things I'm looking for is is what's the character of the client you know in terms of um.

 [27:03] 

Are they telling me everything right I mean the worst thing I can I can imagine is like and this is 1 of the things I like about the process that that.

I go through which is to you know go through it's really for the client for the most part but it's for me too is to see how they're going to,

function and react when we're talking about very important things like,

like the valuation and like the impact of the ESOP on their company and their key people and their employees you know I'm looking to see is this really.

 [27:34] 

In terms of character and I don't want to try to make somebody sound like they're a bad guy or not a bad guy but sometimes,

an ESOP is not right for a company because their their minds are so fixated on 1 of these elements and not all of these elements and so um but like let's just say that that's kind of like.

That's here nor there but the main thing I'm trying to point out is that if the client's not disclosing to me their advisor on on things that they're thinking or have have going on in their company.

 [28:06] 

I'm out of there you know because I'm not going to be sitting in a closing call and be like,

you know sitting there thinking wow if I didn't know that from my client you know what else haven't they told you know the trustee because I feel very even though even though this is so true like as I say this I don't have any.

Risk when it comes to putting a transaction together as a sell side advisor know sell side advisors for ESOP transactions have any type of risk when it comes down to it.

The people that have risk are the trustees as fiduciaries to the trust.

The valuation firms that work for the trustees so writing fairness opinions and being you know this is their their part of what they have to do to to prove out that's their documentation and that's going to be.

What the Department of Labor is going to look at so if if that's you know for me I don't it's not that I I'm worried about the risk part I just,

think it's wrong you know and I don't want to lead somebody into an ESOP if that's the way that they're going to be thinking you know and I don't want to be honestly I don't want to have them as client.

And so that comes to like some of the things about.

Client selection process some of the things that make make a really healthy company a really healthy business you know incorporate some of these ideas of of what is a good company what is a healthy company um client selection is very important.

 [29:30] 

So I think that.

If we go through this whole idea of the bring down takedown call the main thing is is just prepare to know that you're going to have these this very final call at the end and it should be a formality.

Should be pretty to say 15 maybe 15 minutes tops to be honest with you,

um and that just gives the everybody the assurance that they've asked those questions and verbally you have disclosed whatever that is so that that basically is part of part of the way they protect themselves,

in the process so hopefully that that helps you I I haven't seen to be honest with you a lot of information on the bring down takedown call so.

 [30:09] 

Um in not to say that there's not information out there but it's probably something that people don't really think about um but I do think it's important for you to understand and know about it just like other topics that we have on the podcast thank you so much for listening today.

And I I hope that as you go forward on your journey to an ESOP this is helpful to you,

and again check our website at journey to an ESOP cam share this with a friend if you think it's going to be helpful and have a wonderful day and we'll see you on our next step on this journey to an ESOP.