Chris Fredericks discusses ESOPs and empowering employees

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This is a podcast episode titled, Chris Fredericks discusses ESOPs and empowering employees. The summary for this episode is: <p>Chris Fredericks, of Empowered Ventures and TVF, joins Tim to discuss what it's like leading an employee-owned company. He shares what it means to be an ESOP,&nbsp; how he strives to foster strong employee-owned cultures, and what it takes to build a strong leadership team. </p>
What it means to be an ESOP
01:25 MIN
The right fit for an ESOP
01:17 MIN
Investment and hard work to build a great team
00:37 MIN
Building a strong leadership team
01:26 MIN
Chris' edge in life
00:58 MIN

Tim Leman: Have you ever felt like you're on the edge of something great? You put in the work you've done the hard stuff most people aren't willing to do. And now you can just sense magical run lies ahead. This season, we'll talk to leaders across a wide variety of industries to learn what it's like to ride the edge and own it. We'll hear what separates those special teams from the more ordinary experiences. The kind, if we're lucky, we get to be a part of maybe three or four times in our life. Join me, Tim Leman, Chairman and CEO of Gibson as we discuss leading on the edge. Welcome to The Edge Podcast. I'm your host, Tim Leman. On this episode, we have Chris Fredericks. Chris leads two companies, Empowered Ventures, an employee- owned acquisition holding company and TVF, a leading international fabric supplier. I've had the opportunity to get to know you Chris through YPO and super excited to have you as our guest today. Welcome.

Chris Fredericks: Thank you. Thank you, Tim.

Tim Leman: Hey, let's start out by having you tell our audience briefly about Empowered Ventures and the unique nature of being employee- owned.

Chris Fredericks: Yeah. Really appreciate that opportunity and excited to share what I can about Empowered Ventures and what we're up to. So TVF is the company I've been leading since 2010. We became employee- owned in 2010. It's been a great thing for TVF. An awesome decade of employee ownership and that's given us an opportunity to create a holding company as well where we're to acquire and add other companies to our ESOP plan all as one long- term diversified holding company. So it's just something we're really excited about being able to create more employee- owners in the world and also kind of advance our personal mission at TVF, which is basically to empower our employee- owners to achieve their full potential. We're just really excited to be able to do that with more companies in the future as well.

Tim Leman: Hey Chris, you know I'm a big fan of ESOPs, obviously with Gibson being an ESOP company as well. And as I'm thinking about this, we might have actually first met on a ESOP CEO peer group. Would you maybe even just explain a little bit what an ESOP is and what being employee owned means as a starting point? And then I think it's a really cool way of looking at equity. What you guys have done with Empowered Ventures and we can dig into that a little deeper.

Chris Fredericks: Yeah. So ESOPs, yeah, I'm sure a lot of folks have heard of them and many have familiarity, but still kind of a black box to a lot of people. It's an Employee Stock Ownership Plan. It's a retirement plan like a 401k kind of that owns the shares of the company. And ESOPs can own a small amount, a minority position in a company, or they can own the entirety of the company. In our case, TVF, we transitioned from a founder owned company in 2010 to full 100% ESOP ownership overnight, basically. All the employees participate now as owners through essentially a retirement contribution that gets added to their accounts every year. But, it's a really powerful ownership structure for the right companies, I think, and can really produce some pretty interesting and powerful results over the long term, especially with regards to uniting... The way I love to think about it is it kind of eliminates that conflict that sometimes is there between ownership and workers where there's kind of a difference of desired outcomes in some cases. You really make a lot of progress to unite everyone around common goals. And that's not to say ESOPs create some utopia, everyone that is in an ESOP knows they don't, but it's a unique structure that can really bring alignment and unite the culture around ownership as a key part of what the company is.

Tim Leman: So Chris, so many companies who haven't struggled with retention in the past are finding the great resignation to be really tough on them. What have you all experienced being an ESOP company? The same as everyone else? Better results? What do you think about that?

Chris Fredericks: That's a great question. And we have also had the same challenges of hiring that a lot of companies have had, but we've had some nice success recently as well. And our culture and our ESOP structure has played a big part in that, in the hiring side. I'm actually really proud to say we have had no one leave our company voluntarily in over a year and a half. So yeah, we're, I'm so happy of the progress we've made over the years to build a company where people love to work here and stay for the long term. So it's been a big positive during this past two years that we haven't had to deal with that very much.

Tim Leman: Chris, I can relate to that on the, I guess on both fronts, but as we're talking about the hiring front, it's tough to explain to a new potential recruit why this is special and unique. How have you all done that to the best of your abilities to kind of help them understand? Because it is a complex thing behind the scenes.

Chris Fredericks: Yeah. We've kept it simple with regards to trying to describe what the ESOP really is and how it works and the potential. And we emphasize that it creates financial potential beyond a normal job. But especially when hiring younger people, we really emphasize the cultural side of being employee owned and how that impacts their work experience. That we have found to be maybe even more important component of the story we tell during the hiring process.

Tim Leman: What would your employees say if you talked to some of them who have worked elsewhere and now spent several years or more with you all? What do you think they would say is the difference working at, say at TVF one of the operating companies?

Chris Fredericks: Yeah. I hesitate to paint it too broadly because everyone's work experience can be really unique in their past. But, I would say one thing we've heard quite often is that they just feel like everybody here is really engaged, really cares, really engaged. Cares deeply is one of our core values, which we defined as a team once we had been an ESOP for a while. We took the time to go back and take a look at our core values and really get everyone's feedback on that. And cares deeply is probably the top one, in my opinion, that kind of applies across the board. And people that join our company almost without fail talk about that, how just engaged everyone is.

Tim Leman: It is such a neat community, ESOP companies, and once you get into that you realize how helpful everybody, the other peer companies are to help you get started and go forward. And I remember one of them saying something like, we look at how great it is for our customers because every one of our customers is served by an owner every time. I think that fits right in with that cares deeply that you just mentioned. There's kind of a secret sauce to ESOPs from a financial standpoint, there's some magic dust in there and involves taxes and so on. Can you talk about that a little bit?

Chris Fredericks: Yeah. On the front end for an owner who is looking for their succession planning solution, for many of them they can take advantage of a capital gains tax deferral if they sell to an ESOP. And it can get a little complex, but it's definitely available for many companies that would want to consider going down that path. So that's a pretty powerful, upfront incentive. And then for ESOP companies that choose to be an S Corp and 100% owned by the ESOP, it's a really powerful benefit that we don't even pay income tax to the federal government at all. It's 100% deferred until people leave the company and essentially retire and take their balance. That's when the tax would get paid, if they don't roll it into an IRA. So that tax can get deferred for quite a while.

Tim Leman: So yeah. So two points there. So kind of thinking of that S Corp example of ESOP literally doesn't have to pay taxes on all those earnings. So, however you might figure your tax rate, let's just pick a number, say 30% or something. All those dollars go back into helping pay the seller back off with kind of free money, right? That's the compounding effect then on that money then too, if you think about. It's exponentially unbelievable really.

Chris Fredericks: Yeah. That was our experience when we did the sale in 2010. It was 100% seller note on the transaction. No cash up front, which is not necessarily common for an ESOP transaction, but that just made sense at the time for our seller. We had an eight- year note and we paid it off in four and a big part of that was not having to pay taxes on the earnings during those first four years.

Tim Leman: That's incredible. And then like you said, you've mentioned 401k as an example, because a lot of the rules kind of are parallel or mirror those. So for a participant, it's really no different than the company contributions that go into their 401k. And of course down the road, whenever you start taking those funds there's some tax liability at that point in time. But boy, again, the compounding effect over the years is just absolutely massive. So, Chris, have you had anyone now that you're a little over a decade old, which is kind of an important mark for ESOP companies in terms of your ESOP history. Have you had any longer term employees retire and what was that like when they kind of cashed out at the end?

Chris Fredericks: So we've had two retirements so far during the ESOP years and one was three or four years ago and it was, of course, bittersweet because John had been with the company for a long time. Any retirement is a very bittersweet moment. But for sure the ESOP helped him get to a point where he could retire with a lot of security, which was the first moment of kind of getting that experience for us that it really made a big difference. We have one coming up that's going to be just as probably the biggest retirement we've ever had as a company in terms of longevity and just the combination of the ESOP and everything. And yeah, it's really neat to see. The person who's retiring definitely has a secure retirement ahead of him based on how things have gone so it's pretty cool.

Tim Leman: That's really great. Chris, you had mentioned a little bit earlier, it's the right fit for some companies and some founders and so on. What do you think makes the right fit for an ESOP? Are there some characteristics there that typically are a better match?

Chris Fredericks: Yeah, a few different things. Probably number one would be that there is a cultural match that it's not just being used for the mechanics and as a financial tool. There are stories of ESOP companies that convert and don't really make any other changes to the culture, or they don't really take ownership of being employee owned. And for some of those companies, it can actually be a negative from what I've heard and be a detriment to the company. Because employees who are told they're owners, but aren't treated in any way like they're owners, it's not going to feel good to them ultimately. So that's one side is that there's a real belief in direction of going employee owned from the seller themself. And then the other I would say is a long stable history tends to be a good match for an ESOP. A fast growing newer company, it's hard to value an earlier stage company with a lot of growth, maybe a lot of investment in growth going forward. So not that it can't be done, but I think it just adds complexity that can maybe make the ESOP transition less simple or less confident, I guess, that you don't want to have that much uncertainty probably to do an ESOP.

Tim Leman: Yeah. So you had a transition with your founder and now with Empowered Ventures. You're probably looking for some similar founders out there that want this. From a founder's standpoint, why would they want to choose an ESOP versus some other type of exit?

Chris Fredericks: Anything that has to do with wanting to secure their legacy, I would say it starts to get into the ESOP realm or some other similar type outcome. There are business owners out there and their number one goal is to make sure they get value out of their company, their life's work. And that's fair, it's their business. It's totally fair if that's their top priority is to get maximum dollars. There are private equity strategics, those are going to be good options for them. On the ownership side, ESOP side and other similar outcomes, caring about the employees deeply to the point that you're actually willing to maybe not get the absolute top dollar. ESOPs do pay market value, but if you were to go into an auction with private equity and strategics and also have an ESOP at the table, chances are the ESOP's not going to actually just win out totally on the financial side. So an owner that is willing to and interested in securing their employees' future, their customers' future, they want to see minimal change to the culture and they really think of it about their business as their life's work and they want to see that legacy preserved for decades. That's where the ESOP I think starts to be a great option.

Tim Leman: So, Chris, yeah, the difference between some type of internal or market valuation versus a strategic or private equity buyer, are there ways to close the gap though and maybe not 100% but to bring those a little closer?

Chris Fredericks: Yeah. There are definitely creative ways. You can add some structure in terms of additional earn outs if the company meets certain performance requirements. There's even warrants can be included in an ESOP transaction. So, they take some debt that also has some upside in terms of additional company performance so, there's definitely ways. In addition, you can start with selling only a small part to the ESOP and retain a good amount of equity for however many years. So, there's a lot of flexibility ultimately to try to bridge the gap.

Tim Leman: What's next for Empowered Ventures? Where do you see the organization going?

Chris Fredericks: We're looking for great fits. Companies to join us basically. We added our first new company in April, a precision machine shop near Cleveland. It's an awesome company called Firstar. Things are going great with them. We're looking for more similar situations. So, companies where the owner's looking for a great exit option and looking for a partner to do that. We just want to add more of those types of companies going forward.

Tim Leman: That's awesome. So, Chris, I think you in general, you've been on some teams over the years, maybe work maybe sports or other types of things. And then certainly I think culturally inside good ESOPs, very team oriented. Talk about for us, what's the best team you've ever been on.

Chris Fredericks: I played sports, mostly basketball growing up, and we had some success in high school and basketball. Won sectional a few years, which back when I played that was a big deal. It's not as much anymore. So we had some really good teams and that definitely gave me a sense for what a good team feels like. But I would say the best team I've ever been on, I'm not saying this just because it's the right answer. But the team we have today is for sure the best team I've ever been on. And by that I mean TVF's entire team like leadership team, the Empowered Ventures team that we've constructed to go forward with Empowered. I'm loving working with the teams that we have today. And obviously it's taken a long time to get here and to really build this team. A lot of investment and hard work by a lot of people. But it's really fun to finally be at a point where we're really just, I think, hitting on all cylinders and a lot of excitement about the future.

Tim Leman: What makes this current team great? What are those kind of granular things that you think make it special or unique?

Chris Fredericks: Well, we started with the foundation of the ownership culture, which is just something that's core to who we are in general now and then hiring for that. So as we've added new people, we've continued to screen for that and that's made a big, big difference. But as far as getting more granular with the leadership team, I would say, we've started, I know you're EOS and I know a lot of other companies that do EOS. We haven't fully implemented, but we've been pretty inspired by the steps and the books and the materials. So we're on a path towards a version of implementation of EOS. And the thing that's made some really big differences so far, I would say, is like role clarity. Making sure people are hired to fill really clear roles and get to own those roles and are great fits for those roles. That's led to us realigning many things. Me stepping into more of a visionary role. My CFO stepping into an integrator like COO role for TVF. He's way better at running the day to day than I am and we're right in the middle of that change and it's starting to pay dividends. And in addition to that, I think building the team. We've added five new directors and managers over the last year. And in the past we would've been hesitant to make such a big investment, but really believing in the importance of having a true leadership team with all the different roles properly filled, that's really making a big difference as well.

Tim Leman: So Chris, on a personal level, what would you say has been your edge in life?

Chris Fredericks: I think maybe like ambition combined with a sense of responsibility. I've always been really ambitious, probably honestly, like getting into the psychology of it out of a sense of wanting to achieve something to be somebody. Like out of a little bit of insecurity and deficit for much of my life. I think that's shifting now to hopefully ambition out of opportunity and a desire to fulfill my potential. But I'm still in the middle of a personal journey there trying to figure out how to embrace ambition and it be a great thing. But then the responsibility part, like I always feel deeply responsible for anything I'm part of. Back in 2010 I wasn't an owner of TVF, but I think the reason the owner gave me the opportunity to lead the ESOP transition and become the president of the company is because I was already acting like I owned the company pretty much just taking that kind of responsibility. So, I think those are probably the combination of those two things maybe.

Tim Leman: Well, thanks for sharing that too. It takes a lot to come at it that and realize where that well or source of energy comes from and the shifting of it and then that responsibility. Yeah. And I can relate to both of those a lot. In my words it's more like duty almost. And I think we're coming at it the same way of been a lot of great people come before me at Gibson that put us in this position to begin with. So I always feel that that sense of duty and responsibility to them and of course all of our current fellow owners as well. A lot of people, a lot of families depending on things going well. So yeah, I think it's both parts. A lot more responsibility, but also there's this other part to it too that you're playing for something a lot bigger. Okay. Let's shift gears to rapid fire. This is always my favorite part of the show. We'll start out with an easy one. What's your favorite color?

Chris Fredericks: Green.

Tim Leman: All right. Green. First car?

Chris Fredericks: A 1982 Camaro. My dad got it for me. When I saw it I thought I just got a sports car, but it actually was a four cylinder with a top speed of 55 and was a manual transmission. So it was quite a disappointment ultimately.

Tim Leman: Yeah, that was like the last year of the old body style. Right? A good buddy of mine's older sister had one of those. And so I know exactly about how fast those things went. But it looked cooler than it really was. What's the most memorable concert or performance you've been to?

Chris Fredericks: Metallica like around'95,'96. I was in high school. And at that time I was still really into heavy metal and rock music and stuff. Yeah, I don't know why my mom let me go to Metallica, but I did and it was unbelievable.

Tim Leman: Do you ever pull one of those songs up on Spotify or dust off your old cassette tape or anything and let it rip?

Chris Fredericks: Oh, for sure. Yeah. I can never let go of the way those songs felt growing up. Yeah, Metallica was definitely on my playlist big time.

Tim Leman: Chris, what's something about you that very few people know?

Chris Fredericks: Oh, gosh. Maybe that I've done some fair amount of hiking like long distance backpacking. That's my favorite kind of thing to go do. I've spent a week on the Appalachian Trail and done a couple other pretty hard or relatively difficult overnight multiple overnight hikes. If I could, I would love to take four months off and do the entire Pacific Crest Trail. I just can't imagine how that's ever going to happen, but it's on the dream bucket list.

Tim Leman: That's great. I've done a rim to rim in the same day a couple times at the Grand Canyon, but keep hearing some pals talk about the Appalachian Trail and I think that'd be a ton of fun. Which actor would play you in a movie?

Chris Fredericks: So I tried to think of someone that actually has the red hair, because even though it's kind of graying and browning, do kind of have red hair. So, I came up with Michael Fassbender.

Tim Leman: All right. Very good. Three people you'd like to have dinner with?

Chris Fredericks: I decided to do a theme on this. I'm kind of an NBA fan so I thought a really cool dinner would be Popovich, Phil Jackson and Brad Stevens.

Tim Leman: Yeah. I like that. I think that would be a ton of fun. Which one of those three do you like the most right now before you have dinner with them?

Chris Fredericks: Gosh that's tough. Well, I think I relate the most to Brad of course, with the Indiana and just even the age. I just feel like Brad and I would be just constantly being mentored by Greg and Phil in that conversation. I would be being mentored by all three, but Popovich is who fascinates me the most. He is just, he's also from Indiana, which a lot of people don't know.

Tim Leman: I didn't know that. No.

Chris Fredericks: Yeah. And he's a real philosopher. So is Phil, but the way Greg approaches life just fascinates me.

Tim Leman: Well he's a little more head on and a little less Zen mastery than Phil Jackson seems to be.

Chris Fredericks: True. Yeah, definitely true.

Tim Leman: I like how though you've taken the next leap on this dinner and already decided the four of you are going to be great friends afterwards too. That's awesome. And then wrapping up here, what's something big you want to do before it's all over, besides hiking that Pacific rim trail?

Chris Fredericks: That's really tough. Maybe my wife and I, we love experiencing new places and travel and stuff. So, if we got to spend a few months in Europe someday that would be pretty cool.

Tim Leman: Yeah. Do like a little mini sabbatical and let it rip for a couple months. Yeah, that would, that would be a ton of fun. The thing about Europe too, if you keep walking enough, you can work off all those calories from all the little cafes and everything. Hey, Chris, this was great. It's always fun for me to talk with other employee- owned organizations and leaders and love what you all are doing and good luck with Empowered Ventures too. I'm sure there are a lot of companies out there that would benefit a ton by having all the strategic direction and leadership and so on you all could provide along with the employee ownership experience. So, really great what you guys are doing.

Chris Fredericks: Really appreciate it, Tim. Thank you.

Tim Leman: Thank you for tuning in today. I'm Tim Leman and remember to own your edge. Subscribe to The Edge Podcast on Apple, Google and Spotify.

DESCRIPTION

Chris Fredericks, of Empowered Ventures and TVF, joins Tim to discuss what it's like leading an employee-owned company. He shares what it means to be an ESOP,  how he strives to foster strong employee-owned cultures, and what it takes to build a strong leadership team.

Today's Host

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Tim Leman

|Chairman & CEO, Gibson

Today's Guests

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Chris Fredericks

|Founder & CEO, Empowered Ventures