Previously posted on the Beyster Institute Blog by Martin Staubus.
Several years into a career with a large financial company, Jeff Lopez came to the realization that the corporate life just wasn't for him. He was ready to leave the bureaucracy behind and strike out on his own, as his own boss. He was all set to go into business for himself, except for one detail: he had no idea what his new business might be.
But when you're truly in a state of mind to be open to new ideas, they can come from anywhere. Says Jeff, "I was sitting around with my roommate and a guy comes on CNN promoting a Christmas lighting business. 'Work just three months a year and make enough money to take the rest of the year off!' claims the guy." That sounded good to Jeff. So he tracked down the TV fellow via CNN and discovered he was based not far from where Jeff Lived in Orange County, Calif. Before long Jeff had become the fellow's first franchisee – the guinea pig for an untested business idea.
The customer pitch was that, for just $135, Jeff's "company" would install Christmas lights on the front roofline of your home – and best of all, they would provide the lights "free" for the customer's use over the holidays. With clipboard in hand, Jeff donned a coat and tie and went house to house as the sales representative of his new venture. Once a customer had thumbed through Jeff's little product list and made a selection, Jeff assured the customer that "my brother, who handles the installation side of our business," would be back later that day to install the lights. Jeff then went home, changed out of his coat and tie, and returned in workman's coveralls to handle the light installation.
It was a great pitch, and the money seemed good at the time. But try as he might, Jeff couldn't generate enough revenue over the holiday season to support himself for the entire year. As Jeff puts it, "Great pitch, lots of customers, lost all my money the first two years." So much for TV claims. There just wasn't enough money in the residential market to make a true year-round business of Christmas lighting.
But the entrepreneur in Jeff wasn't done. He bought out the failed franchisor and took the holiday decorating idea to the commercial real estate market, providing sales and installation services to shopping centers and cities (ever wonder who puts up all those decorations along Main Street every holiday season?) Within a year or two he dropped the residential market entirely, and in 1994 he incorporated his business as "Dekra-Lite," which today is one of the most reputable and successful providers of commercial holiday decorations in the U.S. Still located in Orange County, Calif., Dekra-Lite is a leader in commercial Christmas decorating. Bringing a fresh and innovative approach to holiday lighting, they provide the holiday decorations for hundreds of commercial properties, theme parks and cities across the country. Deck the malls indeed!
Of course, Jeff has always recognized that he hasn't accomplished all of this by himself (or with the help of his "brother"). Dekra-Lite today is a team of 60 people (swelling to more than twice that number this time of year as seasonal installers come on board). So, over the last couple of years, as Jeff contemplated his own path to retirement, he gave a good deal of thought to his true-blue team, many of whom have been with him for 20 years or more. When he learned that an arrangement known as an ESOP might provide a way for Jeff to sell his company to his team, so that they would have the opportunity to keep the business going when he was ready to exit, he knew that was something worth seriously considering.
When a local attorney he knew told Jeff about the Beyster Institute, Jeff asked the attorney to set up a meeting. Following the meeting he engaged the Institute to guide him through the process of investigating and then designing and implementing a well-tailored ESOP.
As it turned out, Jeff faced a pair of challenges that are very typical of business owners in this situation. First, there was the matter of how much of the company he should sell to the ESOP, and the valuation of that interest by a professional business appraiser. By law, an ESOP cannot pay more than fair market value for any interest it may buy, as established by an independent business appraiser who advises the ESOP trustee. If Jeff sold less than 50 percent of the company, the pricing of the sale would be subject to a "minority interest discount." If he were to sell more than 50 percent (but less than 100 percent), he would get a full, undiscounted price for that sale, but if he later decided to sell the balance of his stock to the ESOP, he would once again face the prospect of a minority interest discount on that sale.
The second challenge he faced concerned the question of senior leadership and management if and when Jeff were to retire and leave the company. While he knew he had loyal employees, who were generally smart and capable, none of them had experience in taking full responsibility for leading and managing a business like Dekra-Lite. The company's senior group certainly had the potential, but they would need some further training and experience before they would be ready to run the company without Jeff.
The solution to both the challenges was to develop the Dekra-Lite "five-year plan." Step one of the plans would be for Jeff to sell exactly 50 percent of his shares in Dekra-Lite to the ESOP. Since 50 percent is by definition not a "minority" of the ownership, and assures the ESOP that no major changes can be made without the ESOP's approval, the minority interest discount dropped dramatically.
Step one was completed on November 1, 2014. Now, Jeff and his company are focusing on two tasks. First, they are applying themselves so that Dekra-Lite can earn the income that will enable it to fund the ESOP – so that the ESOP can in turn pay off the debt it incurred in buying the stock from Jeff. Second, they are working to provide the senior management group with the mentoring, training, and experience needed to prepare them so that they will be able to run the company on their own in five years – when Jeff expects to sell the remaining 50 percent of the company to the ESOP and retire from the business.
If you ask Jeff, he'll tell you "it's a wonderful life." And of course, being the entrepreneur he is, he will also remind you that Dekra-Lite offers a full range of services including an in-house design team, year-round installation, and an in-house printing department. Their staff of installers is ready to handle any job year round. In addition to design, installation, and removal services, they provide storage facilities to keep the property owner's items properly packed, clean, and safely stored. So if your local mall is looking a little drab this season, send them to Dekra-Lite. The elves there are now employee owners, and they'll make any facility twinkle!
The Beyster Institute at UC San Diego’s Rady School of Management works to advance the understanding and practice of employee ownership as an effective and responsible business model. It focuses on education, research and consulting to promote employee ownership and the creation of effective ownership cultures. The institute serves companies interested in the employee ownership business strategy, business owners looking to transition out of their companies and professional advisers who want to better serve their clients by gaining employee ownership knowledge.