Darren Gleeman Of MBO Ventures On Why ESOPs Are the Future of Business Succession
An Interview With Chad Silverstein
Getting the ESOP culture to take root takes about a year. At first, many employees don’t really understand or care. But there’s always one or two employees that start to ask questions — especially when they see their equity report. Like wildfire, the other employees begin to ask questions, and then the fun begins.
In a business landscape increasingly marked by employee entitlement and corporate greed, Employee Stock Ownership Plans (ESOPs) stand out as innovative outliers in business succession. ESOPs not only secure business continuity but also spread the wealth, tying a company’s success to employee well-being. This approach shifts the corporate success narrative towards participation, engagement, transparency, and collective prosperity.I had the pleasure of interviewing Darren Gleeman.
Darren Gleeman is the Managing Partner of MBO Ventures, the cannabis industry’s premier ESOP investment bank. The firm provides ESOP (Employee Stock Ownership Plan) expertise and will also invest its capital alongside company owners and/or management teams. In 2023, Darren received a patent pending for his ESOP methodology used in completing the cannabis industry’s first ESOP, alleviating tax implications of 280E for a plant-touching multi-state operator, Theory Wellness. Darren was also awarded the Green Market Report 2024 Top Financial Advisor Award.
Thank you so much for joining us in this interview series! Before we dive in, our readers would love to “get to know you” a little bit about you. Can you tell us about your ‘backstory’ and how you got started?
I ran a hedge fund for 18 years and I sold the company to one of the largest High Frequency trading companies in the world. Due to trade secrets and NDA’s, I was out of the hedge fund business for life. And that’s when I learned about ESOPs. I was absolutely floored. The concept sounded too good to be true. An owner can sell the company to the employees, defer their cap gains taxes on the sale, the IRS subsidizes the entire buyout & the company runs completely tax free! When you hear that in one sentence, it does sound unbelievable.
How would you describe the culture at your company and what has been the biggest contributor?
Our culture is all for one and one for all. Being part of the ESOP world changes your mindset. It takes capitalism to the next level. Once fully embraced, culture changes rapidly.
How would you explain what an ESOP is to someone who has never heard of it before?
To a business owner, I describe it as another way to sell your company. You can sell your firm to a private equity firm, you can sell to a strategic buyer, or you can sell to the employees via this structure called an ESOP. It costs the employees absolutely nothing. It’s a gift from you and from the IRS.
The IRS incentivizes the owner to sell to the ESOP by giving them a tremendous package of incentives and subsidies..
Looking back, what was the catalyst that made you start thinking about transitioning to an ESOP?
It was actually deal specific. The former owner of the company wanted out, and this structure made complete sense. He was able to pay zero capital gains on the sale of the company, and as an ESOP, the company pays zero income tax. Literally zero!
Was there ever a point you doubted the ESOP route? What kept you motivated to push through those challenges?
There was no doubt at all. It made financial sense for everyone, with a kicker that the employees would have complete skin in the game. The longer they stayed, the more stock they would accumulate. The harder they work, the more valuable their stock becomes.
ESOP companies often have a distinctive culture and operational approach. What makes your company stand out from others, thanks to the ESOP structure?
It’s hard to be lazy or take a shortcut when all employees are owners. Once there is “buy in” to the concept, and the employees fully understand that this is their company, the attitude changes for everyone.
Great. Now, let’s dive into the heart of our interview. The transition to an ESOP involves a lot of challenges and opportunities to learn. Could you list the top “Four Things You Need to Successfully Leverage the Power of ESOPs”?
- If you recall earlier, I mentioned that a company owned by an ESOP pays zero income tax. This is the biggest opportunity. Being completely tax free allows the company to substantially increase its cash flow. With the additional money, the company can increase its capital expenditures, marketing, salesforce.. It can also acquire other firms making them tax free.
- The biggest challenge would be the process to become an ESOP. This is an actual M&A deal with attorneys, accountants, valuation firms, & trustees. It is an actual arms length negotiation between the company owner and the ESOP trustee. It’s not as difficult as selling to private equity, but it can still take about 6 months to complete.
- Getting the ESOP culture to take root takes about a year. At first, many employees don’t really understand or care. But there’s always one or two employees that start to ask questions — especially when they see their equity report. Like wildfire, the other employees begin to ask questions, and then the fun begins.
- Retention — An ESOP has a retention rate that is 300% greater than non-ESOP owned companies. If you step back and think about it for a minute, this makes sense. Each year that an employee stays at the firm, they are allocated more stock in the company.
Financial literacy is crucial in an ESOP for employees to understand the value of their shares and how their actions impact the company’s success. What initiatives have you taken to educate your employees about financial aspects and the workings of the ESOP?
I think you are describing something called, Open Book Management, where the employees become educated on the company and the financials — this is completely different from an ESOP.
I happen to love Open Book Management, but we did not use this in our 100% owned ESOP. It’s costly and it takes a long time to reap the benefits. Looking back… maybe we should have implemented this strategy.
Open Book Management goes hand in hand with ESOPs, but most companies structured as ESOPs do NOT do this — thought they probably should.
Employee ownership often changes the dynamics of engagement and participation. How have you seen employee involvement evolve in decision-making and daily operations since transitioning to an ESOP?
Engagement is huge. They are not engaged in the decision making process, but productivity per employee has substantially increased.
Company culture and the ability to attract top talent are critical factors for business success. How has adopting an ESOP model impacted your company culture and your approach to recruiting and retaining employees? Do you believe the ESOP model has given you an advantage in the labor market?
Most of the employees here are blue collar workers. They work hard and stay at the company because they understand what is important to them — money.
By staying at the firm, they keep collecting more equity every year.
Hiring new employees becomes much easier. Wouldn’t you rather work at a company where you have an actual piece of the company?
How can our readers further follow you or your company online?
They can come to my website, www.mboventures.com or interact with me on LinkedIn.
This was great. Thanks for taking time for us to learn more about you and your business. We wish you continued success!
About the interviewer: Chad Silverstein is a seasoned entrepreneur and thought-leader. With over 25 years of business experience, Chad’s entire career has been dedicated to creating a positive social impact in all of his enterprises. His entrepreneurial journey began while in college at The Ohio State University, where he founded Choice Recovery, Inc., which earned national recognition and was twice ranked as the #1 company to work for in Central Ohio. Chad is now a strategic advisor for Authority Magazine’s thought-leader incubator and an Executive Leadership Coach with Built to Lead, where he recently launched an online community for leadership development.
To learn more and connect with Chad, visit www.chadsilverstein.io
