Full transcript9 chapters · 8,682 words
00:00Working on his dad’s trucks and watching techs walk out
Chris Buttenham: The contractors winning right now aren’t the ones offering the highest wages. They’re the ones giving their best people skin in the game, and we’ve proven it works at scale.
Tyler Martin: Welcome to Profit and Grit with Tyler, where blue-collar owners and insiders spill the real story behind their hustle, building businesses that thrive through sweat and smarts. We’ll dig into their journeys from scaling chaos to growing the bottom line with lessons and grit that pay off big.
Tyler Martin: Here’s your host, the blue collar CFO, Tyler Martin. If you’re building a trades business and you’ve ever had that gut level fear, and we all have, that losing two or three key people could knock the wheels off, this one’s for you. I’m joined today by Chris Buttonham, co-founder and CEO of Rains.
Tyler Martin: This is a platform that was built to help owners keep their core team locked in by giving them real upside. And this is without having to worry about the legal mess of giving actual shares out. Chris’s perspective is grounded in the real world.
Tyler Martin: He worked inside his dad’s contracting business. He watched retention and succession challenges up close. He saw what it takes to create options, whether that’s selling to employees, selling to an outside buyer, or simply getting the company to run without the owner carrying everything.
Tyler Martin: We get into phantom equity, profit sharing, performance incentives, and why keeping it simple is what actually drives the behavior. Let’s get into it with Chris. Hey, Chris, welcome to the Profit and Grit Show. How’s it going today?
Chris Buttenham: Very good, Tyler. Thanks for having me.
Tyler Martin: Yeah, thanks for being here. I’d love to start out just learning a little bit about you, what you do professionally, and then maybe if you can, a tidbit about yourself personally.
Chris Buttenham: Yeah, for sure. I am the co-founder and CEO of a company called Raines. I guess a tidbit about me is I live in Las Vegas, but I’m from Canada. So couldn’t be the most opposite place on the planet to move to.
Tyler Martin: That is pretty extreme. Awesome. So I’d love to just start out just setting the table here. We’re going to get more into what Raines is all about. But before we do that, I’d love to just learn. So your dad, as I understand it, he has a home service business, I believe.
Tyler Martin: I think he’s around 65-ish now, but at the time, I think he was having some challenges in terms of growing his company, some probably personnel issues. Can we kind of start there, like talk about your dad’s business a little bit and then maybe what were some of his struggles that I think are going to be very comparable to probably some of the listeners of things they face?
Chris Buttenham: Yeah, for sure. Yeah. So he’s a small commercial contractor. Actually, he’s had the business for 35, maybe even 40 years at this point. Actually just sold it. But I worked for him for a number of years after college. I was on the trucks.
Chris Buttenham: And so I got to see, you know, under the hood in the business. And he always struggled with personnel. I think just in the sort of trades, blue collar space, the supply and demand imbalance of skilled workers is really tough. Also tough to just align their interests with ultimately the goals of what you’re trying to do and accomplish with the business.
Chris Buttenham: And like most businesses, most business owners, my dad didn’t have a formal succession plan and I wasn’t going to take over the business. It was just something we decided on really early on. And that is like, there aren’t really many family businesses anymore. And so you start to think about, well, who’s going to either take this over or how am I going to sell it? And my dad’s in a not, not, wasn’t a not so dissimilar position for a lot of owners where, you know, it’s a small business, a lot of institutional knowledge built up in his head and, and it limits your options.
Chris Buttenham: You know, it wasn’t a massive business, you know, probably 20, 25 employees on average went up and down over the years. And so you start to look at the employees, the key employees, you know, not just to potentially sell the business to in the future, but, you know, my dad is like, can I play golf on a Tuesday?
Chris Buttenham: You know, and in order to do that, you need people that are, you know, have some skin in the game or have some reason to care so that the ship stays afloat on Tuesday afternoon. afternoon. So that’s a little bit about my dad’s business and that story.
Tyler Martin: Did he have problems at times retaining people that he had trained and then they’d go off
Chris Buttenham: somewhere else? Really? All the time, all the time. Yeah. And actually in his industry, it’s not a, like a red seal trade. So, um, his challenge was like, there’s a, of even smaller talent pool of folks who are already doing the thing. And so to your point,
Chris Buttenham: He did spend a lot of time training people in order to do it. And then when they left, like the cost is just astronomical, right?
Tyler Martin: Yeah, I think that’s one thing, like as a small business owner, and I’m sure there’s like numerous people out there listening, feeling the same way. There’s nothing worse than you spend, whether it be a one year, two, three or three years, you train the person, get them up to going.
Tyler Martin: You’re finally at a point where you’re like, oh man, I’m starting to build a good team. And then someone else steps in and pays them double or who knows what they’re eating. They’re moving out of state. And you feel very stung.
Chris Buttenham: That’s right. Yeah.
Tyler Martin: Like, what was your dad thinking like in terms of, or what were the conversations that you had? Is there a point where he’s like, hey, I just want to get out of this business.
05:39His dad’s MS diagnosis and the scramble for a succession plan
Tyler Martin: It was ever so bad where he’s like, I just want to get out of it.
Chris Buttenham: Oh, several times.
Tyler Martin: Really?
Chris Buttenham: So he actually got sick. So 2020, he got diagnosed with MS. Oh, wow. And it just quickly became more difficult. you know, the company his size, you know, somewhat owner operated, it just got too much on him. And so he really started to get serious about, okay, what’s the plan here?
Tyler Martin: At what point do you go like, where does Reigns come into this? Where you go like, oh man, you know, there’s some other better ways to do that. Like, how’s that all come together? And kind of give me the story of how that played into your dad’s business. And I think you mentioned
Tyler Martin: you sold it, he sold it. I’d love to just know how Reigns factored into that. And then of course, in our other topics, we’ll kind of get deeper around details of that.
Chris Buttenham: Yeah. So, I mean, in the case of my dad, it’s really in part a large inspiration behind Reigns. And so at Reigns, what we’ve done is we’ve made it really simple for small business owners to be able to grant equity and other incentives to their key employees, usually for the purposes
Chris Buttenham: of succession in some way, shape, or form, but not always, you know, growth alignment is always a good use case as well. And it’s kind of multifaceted, but all true. So I left working for him and I actually started and eventually sold my own software company. And in that process learned
Chris Buttenham: the value of traditional equity and how it can be used to retain an online employees, of course, through a sale. And so kind of looking in the rear view mirror at my dad’s business, I was so kind of taken aback by why that isn’t accessible to businesses like his. As of course,
Chris Buttenham: you know, they make up the most of the GDP in the US and they are the backbone of our economy. And I learned it’s for innocent reasons. Historically, the tools and legal frameworks have really only been accessible to private equity and venture capital and big corporations.
Chris Buttenham: No one really thought to bring it to the masses and to these small business owners. And so my dad actually did eventually sell his business to employees. And he did that through equity, meaning the key employees were buying into the business over time, eventually to take over the company, which is now a more viable option for owners
Chris Buttenham: than it was previously. But there are a lot of challenges and some of those challenges are what we’re in pursuit of solving here at RAINS.
Tyler Martin: Yeah, that’s awesome. The sale that he made, I know it was part of it, was because of his health. Do you feel like RAINS had an impact in terms of the ultimate valuation or drove value in a way because of having some type of established plan
Tyler Martin: and retention? I mean, I know that’s hard to quantify, but what does your gut say and maybe if you had any type of data, say, in terms of how that played out.
Chris Buttenham: Yeah, yeah. So, I mean, my dad’s sort of the guinea pig, but what I can tell you is on mass, like, you know, in terms of what we see, companies are 25% to 50% more profitable when they implement alternative equity incentives like profit sharing or phantom equity.
Chris Buttenham: So, you know, what are the things you need to adequately sell your business on the terms that you want to sell it on? it’s got to be profitable. It’s got to be growing. Those things have to be reliable. You have to have, you know, honestly, good books and your financials in order. And
Chris Buttenham: part of setting up these incentives is to get valuations for the business. And so that is a forcing function there. And then of course, last, but certainly not least, but it’s, do you have the right team in place to pass the reins to? And it’s not just about the people
Chris Buttenham: that are buying it, I think more than not, people will sell their business externally. We are not ideological that we feel like employees need to, employee ownership is the only way. But what we are, you know, opinionated about is giving the owners options. And the best option
Chris Buttenham: is to have an incredible core team who’s incentivized to, you know, be there through a sail and keep the ship running because a lot of, especially external buyers that come in, they lack so much context. And so by retaining the key employees with incentives,
Chris Buttenham: it will lift the valuation and obviously create that continuity so the business continues to grow
Tyler Martin: and not falter when it changes hands ultimately. Okay. That opens up, I want to kind of unravel
10:25Which three to five people you’d be devastated to lose
Tyler Martin: that because it opens up a couple of questions for me. You said if a company has to have good books. Just out of curiosity, when a new prospect comes to you to work with you, how often do you find a client does have books to the level that they need? And what is exactly involved in that
Tyler Martin: for them to get their books? Is that like a quarterly, a monthly reporting? What’s that
Chris Buttenham: look like? Yeah, that’s a good question. I’d say 50-50. Okay. Yeah. A lot of folks raise their
Tyler Martin: hand and be like, ah, they’re a mess. And the other folks, it’s not a problem at all. And it’s
Chris Buttenham: really like a tale of two worlds. What we’ve had to do, because we’re not really experts like you in this area, we’ll either partner with someone like you to help us clean them up. But in most cases, it’s good enough for us to get the data. We’ve built some tools just to get the raw data
Chris Buttenham: so we can give it to our valuation partner to perform the valuation and at least understand
Tyler Martin: what that business is worth. Got it. Now, but there is still a component of probably that maintenance has to happen to continue to be able to drive the change in the valuation. Is that a
Chris Buttenham: fair statement? Yeah, for sure. For sure. Absolutely. Got it. Interesting. And then the
Tyler Martin: other thing I wanted to just get better clarity on, you use the term key employees, which we hear that term a lot. I own an HVAC business. I’ve got 20 technicians, a couple leaders, we’ll say. What does that key lead employees look like?
Tyler Martin: Are we talking three people? Is that also all my producers on the technician side that are performing? What do you typically see?
Chris Buttenham: That’s a good question. So without a doubt, anytime we talk to particularly contractors, but anyone, everyone’s got like three to five people that they can name, you know, that they would be really upset if they lost. That’s the question. Who would you, if they left, be really upset if they did?
Chris Buttenham: And those are usually the folks that you want to incentivize. And you need to do that before they ask, because when they ask, it’s usually too late. And so usually that’s like general manager, operations manager, could be some key office staff. It’s often one or two lead technicians who are often the trainers of new technicians
Chris Buttenham: or whoever’s in the trenches, depending on industry, obviously. but it’s it’s also so so there’s it’s always that but then it’s a bit philosophical and there’s different personalities some people will give incentives to everyone equity included and then others are are a lot more they have a lot you know tighter purse strings and there’s no right or wrong
Chris Buttenham: question there i think there is depending on the type of incentive a requirement of communicating how these things work effectively and what needs to be done in order to drive the value or earn the share of profits. And that’s part of what RAINS does is everything is implemented through technology.
Chris Buttenham: And those updates are in plain English, communicated in real time at the fingertips of anyone involved. But that’s really like the calculus is like, if you’re not going to understand this, then you’re not going to appreciate it. It’s not going to elicit the behavioral change that you’re looking to elicit when you grant an incentive, effectively.
Tyler Martin: Right. So let’s say you got five key employees and you put them on a plan. Does it change the way the owner thinks about or when a business is being, someone makes an offer to the owner? Is that more of like open dialogue with the key employees, would you say, as it’s happening?
Tyler Martin: or is it more like, you know, I’m thinking back when, you know, I sold a couple of businesses, when I sold one of ours, it honestly, it was kind of pretty private. It was just me and the majority owner. And we were very confidential about it until it was pretty much a done deal.
Tyler Martin: Do you find that’s the same thing that happens in this phantom equity situation or, and I’m sure it’s case by case to some degree, but, or are they brought more into those conversations early on?
Chris Buttenham: What are you seeing? That’s a good question. I think it’s the person out of the owner, But by and large, what I’m seeing is it’s the same as what you described. And I think in part, in part, that’s just the reality of the situation.
Chris Buttenham: Well, we specialize in alternative equity and alternative equity doesn’t grant the same legal rights to those employees as traditional equity. And that seems to be a feature that the owners like. They’re like, look, I want to I want I want these employees to participate in the upside.
Chris Buttenham: I want them to be paid and compensated like an owner. But I don’t want another vote hanging out there. I don’t want to have a legal obligation to have to share this information. Now, I will say the most successful owners that I’ve ever met are the ones that are most transparent and communicative.
Chris Buttenham: Okay. Yeah. I do agree with you. There’s something to be said for that. I think from an owner standpoint, you know, in a small business, you know, obviously like in a startup environment where it’s venture backed, I think there’s a certain mentality like you’re, especially in the tech world where I’m at, you know, you’re geared up.
Chris Buttenham: So every little potential sale that can’t, to the level it can be to scale, oh, this is exciting. But when you’re a small business, you’re like, you know, are people going to leave? Are they, you know, obviously if there’s-
Tyler Martin: That’s a big risk.
Chris Buttenham: Yeah, obviously, there’s some type of equity plan that’s less of a concern because it actually could benefit them. I’m going to jump ahead a little bit because I think it’ll help for the audience. So you have this MARE framework, M-A-R-E framework, and it’s more than just phantom stock, albeit that in itself is cool.
15:57The MERE framework of phantom stock, profit share, and bonuses
Chris Buttenham: Can you kind of talk through the framework and maybe just help the audience understand how you guys approach this alternative way of doing things? And it’s more than just at the point of sale, which is what I want to make sure I don’t give that impression.
Tyler Martin: Totally. Yeah. I appreciate that. I mean, my challenge is like educating and like trying to make this stuff like coherent and digestible, which I don’t know if we’re doing a great job at. But yeah, the mayor framework like me aren’t helpful.
Chris Buttenham: No, no, no, no. It’s a challenge. So the merit framework had to exist because none of the small business owners we talked to had existing incentives and they didn’t have access to fancy compensation and benefits attorneys to be able to sort of draft up these bespoke
Chris Buttenham: programs. So the merit framework gives them access to that without the headache or cost because we’ve done it for them, basically. And within that, what we’ve learned is there’s kind of like a correct cocktail of incentives that are designed to achieve retainment, alignment,
Chris Buttenham: and an angle on recruiting, attracting the right talent. And so you mentioned Fandom Stock, that would be the long-term incentive in the alternative equity umbrella, usually designed to pay when the business sells. And so aligning them, their interests with long-term outlook. But because it’s most often set up when a business sells, not a lot of feedback in the interim.
Chris Buttenham: And so that’s where profit sharing comes in, where on a quarterly or an annual basis, we can set aside a pool of profits for the benefit of employees. But if and only if certain goals or performance conditions are met. So everything we do is incentives, meaning no entitlements.
Chris Buttenham: You know, it’s a rising tide lifts all boats. If we’re winning, you’re winning. Then you’ve got that the profit share typically is based upon high level company goals. We also have a performance bonus component that is designed kind of for everything else. It’s usually more frequent.
Chris Buttenham: So on a monthly basis, let’s say, and that is geared more towards what that employee can individually contribute to. So that may be for a salesperson, it’s that, you know, how many sales for, you know, and depending on the role, they will have different performance conditions.
Chris Buttenham: And it’s something that they’re working on every day.
18:27Docking a $10k bonus to $7k for five callbacks
Chris Buttenham: And that is the correct cocktail to retain them for the long term, get them excited about high level company goals that you’re probably screaming into the wind about. And then changing that day to day behavior because they see what’s in it for them when this outcome happens.
Tyler Martin: So in that bonus environment, though, I’ll call it the first level, what level of granularity are we talking? I mean, like a salesperson is kind of easy. Let’s say a technician. What level of detail? Like if there’s a callback, is that going to impact in their bonus potentially? Or what would that look like, that level of detail?
Chris Buttenham: It absolutely can. So we try and integrate with the source of truth, wherever that source of truth may be. For contractors, it’s Service Titan, for high-level profit shares, probably QuickBooks. So we integrate with those tools and then pull in the data. Hey, you were supposed to get a $10,000 bonus, but you had five callbacks. So we’re going to reduce that down to $7,000 because of this formula.
Tyler Martin: The key there, like practically speaking, is everyone wants to overcomplicate these things. And so we are a platform essentially, but we do sort of insert our opinion in how these plans can be designed. And we’re okay if it doesn’t fit into our design.
Tyler Martin: It’s not a fit for us generally. And there’s a lot of ways you can customize it within our framework, but the framework is designed to help you get out of your own way because people just want to add, oh, callbacks and reviews. And once you get past four, five, six performance conditions,
Tyler Martin: the employee has no idea what they can do to control this. Even if you have the best app in the world that can communicate these things, it’s the simpler the incentive, the more effective it is. And it’s actually really difficult to make it simple.
Tyler Martin: And that’s part of our job, we think.
Chris Buttenham: So sometimes there’ll be incentives that are, I don’t want to say vague, but they’re open to interpretation. So I’m just trying to think, oh, here’s one. You kept your truck clean the whole month. Let’s use that as an example. Like, where do you stand on like, dude, it should be numerical, something verifiable
Chris Buttenham: versus something that’s a little bit more touchy feely?
Tyler Martin: Yeah, that’s why we keep humans in the loop to try and add some of this consultation. We do have this concept of binary goals, meaning like yes or no. but the more subjective they are, as you alluded to, like the more they just are not effective.
Tyler Martin: And like, what’s the point, right? So yeah, we definitely coached in the sense of like quantifiable better than anything. And to the extent that it’s subjective, do you have some clear way of determining true or false with the stakeholder on this?
Chris Buttenham: Yeah, okay. So now tier two is the profit sharing. Is everybody in on that profit sharing?
21:19Why profit share pays on margin, not top line
Chris Buttenham: Are we still talking about where the bonuses, I believe, are probably almost everybody, if not everybody. The profit sharing, is that key employees or is that everyone?
Tyler Martin: Yeah, that’s a good question. Again, kind of philosophy has changed on this. I’d say the lion’s share is a little bit more than the stock and a little less than the bonus. So what we’ve seen really effective for the profit share is all management and office staff, at least as it relates to contractors, which we’re specialists in.
Tyler Martin: And the reason for that is obviously managers are going to be able to control a lot of those high-level metrics. And then office staff often have an incentive gap. They’re often not on a bonus or some other variable compensation. And this is a way to loop them into the broader success of the business and keep them aligned with what’s important for the company.
Chris Buttenham: Okay. And I know if I was listening to this and I was out in the audience, I’d be like, oh, man, it means I’m going to spend more money. It’s going to come out of my bottom line. I don’t really get that. I mean, I love the thought of retention, but I don’t want to see my profit go down.
Chris Buttenham: What would be your comment to that? Would your comment be it’s going to drive more revenue? Or what would be your comment?
Tyler Martin: Yeah. Good question. I mean, certainly, yeah, I have done correctly. Incentives are meant to boost these metrics. I think that’s part of the reason we are opinionated in and of ourselves because the profit share specifically bonus can be the wild west. And, you know, honestly, profit shares is structurally much more effective.
Tyler Martin: And the way that works is you don’t pay unless you hit a particular bottom line gross margin. And so in the design, there’s there’s margin discipline. So you’re not, you know, I’ve seen people bonus on top line and like, that’s crazy. Like that’s when you’re going to get yourself into trouble.
Tyler Martin: So margin discipline built into the plan, at least it should be. And you can do this with or without, you know, platform, you know, and yes, the outcome should
23:20What phantom stock actually is and how vesting works
Tyler Martin: be growth. Ultimately, the other kind of just like quick little comment is that at least the way our incentives are structured is they’re an expense. So they’re right off. So you would have otherwise just paid it to the tax man.
Chris Buttenham: Okay. And then last component, because I don’t want to gloss over this, is now when we get to the equity part, I think it’s really important to talk about what phantom stock means. And you alluded to it a little bit, but because I know a lot of times as owners, we think, oh my gosh, I’m going to have to give up ownership.
Chris Buttenham: Could you kind of talk through me with me like I’m like one year old or something in terms of like how that’s different?
Tyler Martin: Yeah. Yeah. See my job, difficult to education. There are all these things moving parts, right? Yeah, so in simple terms, Phantom Stock, Phantom Equity is a contract between employer and employee that grants a bonus if certain conditions are met in the future. So usually it will say, hey, Tyler, you’ve got 10% for simple math of the value of underlying business.
Tyler Martin: you’ll earn it over the course of four or five years and it doesn’t get paid until we sell the business which effectively means you get 10 of the proceeds of a future sale sure usually set up to be forfeit if that employee leaves prior to a sale but doesn’t have to be and for the
Tyler Martin: utmost key employees can be structured that once they’ve vested they’ve earned it they can take it as long as they don’t leave on bad terms and everything in between. You can add performance conditions instead of time for vesting and all the rest of it.
Tyler Martin: But that’s kind of a general overview.
Chris Buttenham: What do you typically see in terms of if they fully vest? Is the clause that they could potentially keep it? Or is it if they leave, they kind of lose it? Because isn’t that part of the retention part of it?
Tyler Martin: Yeah, exactly. So the lion’s share is that it’s forfeit if the employee leaves. Now, it’s usually where that changes is usually the top two or three people, GM maybe, and not always, but if there’s an expectation that once it’s vested, they’ve earned it and they do get paid on that when they leave.
Tyler Martin: The rub there usually is I would always encourage adding a performance condition. So that’s fine, but it’s not just time. Now we have to grow 10% year over year. I have to maintain this level of profitability each year, and that will determine whether or not you’ve actually vested it for that year.
Chris Buttenham: Got it. And then from the employee standpoint, if an event happens where there’s a sale, are they getting basically, they’re just getting basically W-2 income. Is that correct?
Tyler Martin: Correct. That’s correct. Yeah.
Chris Buttenham: Okay. And then the employer is just taking compensation expenses and a deduction.
Tyler Martin: Correct.
Chris Buttenham: Got it. Okay. Okay, cool. So it’s not really like, and you said this basically, I mean, it’s a bonus, but there’s no element of like long-term capital gain treatment or anything along those lines like it would be for the owner potentially.
Tyler Martin: Yeah. Unfortunately, that is the only drawback. What you’re getting in exchange for that is a tax deferral because employees don’t pay for it and they don’t pay tax on it when it’s granted.
Chris Buttenham: Right.
Tyler Martin: And that is a really key component to this, which is usually a non-starter.
Chris Buttenham: Right. It’s on the event, you mean.
Tyler Martin: That’s right.
Chris Buttenham: Okay, got it. Okay, cool. Okay, good. I do think it’s more elegant than actually giving equity. I think when you give real equity, it depends. There are a lot of answers. It depends how key the employees are. I think if they’re key to the whole growth of the business and literally being gone would have a very large impact on the business, then I can see a real equity possibility if that fits for the owner.
Chris Buttenham: But, you know, when we’re talking key people, definitely a non-stock type, a non, I don’t know what the right terminology is. A phantom stock seems to lean as a way better, elegant solution. And you could probably capture more people to give them the feeling of ownership.
Tyler Martin: Right. And true alignment.
Chris Buttenham: I think that’s a really good point, Tyler, that I don’t often make and I should, which is we’re not necessarily anti-traditional equity. It’s just that 99 times out of 100, it’s not the right fit.
27:50The handshake equity promises that turn into lawsuits
Chris Buttenham: If you really want that sort of partner-esque person to have 5% of your business and they have the funds to buy in and or pay the tax bill if that equity is granted, fine, by all means. I don’t like paying more taxes myself.
Chris Buttenham: So I get that. I get the benefit of that. But just know the difference and know the drawbacks.
Tyler Martin: But here’s the challenge with that, though, because I’ve seen this probably hundreds of times, at least a hundred times in my career. People don’t do it correctly. So what they do, they’re trying to do the right thing. They’re trying to like make, you know, they don’t want to lose a really important person.
Tyler Martin: So they say, hey, I’m going to give you equity. You got, you have 5% of my company or whatever that number is. And then they never really formalize it or do it the right way or whatever. And so not only do you legally have now a mess, and then that employee decides they’re going to leave or something falls apart.
Tyler Martin: You got potential lawsuits. You’ve got non-paid taxes. You’ve got, it’s just yucky. And it just, I mean, I’ve got-
Chris Buttenham: Basis issues, the whole nine.
Tyler Martin: Yeah, I mean, I have literally a client right now that is going through that. He tried to do the right thing, but didn’t dot his I’s and cross his T’s and it’s nasty. So this kind of sounds like it bypasses all that potential,
Tyler Martin: but still gives people a certain level of feeling of ownership.
Chris Buttenham: That’s right. And even folks that may be sitting here thinking, oh, well, can I just give them a bonus when I sell? Well, A, they don’t know that you’re going to do that. Like you said, there may be a back of the napkin promise that you’ve got legal issues.
Chris Buttenham: It doesn’t cost that much to draw this up, make it legal, make it formal and have it still be safe where, you know, let’s say like they leave and it’s forfeit, you know, like it’s worth the time.
Tyler Martin: Yeah, no, I’m with you. Okay, I wanted to spend a little time talking about if you can do this. $5 million HVAC company calls you up today, says, Hey, I want to, I want to, a mirror plan with 15 employees. Let’s say 20 employees. What would that look like? What are you thinking when
Tyler Martin: you hear that as you start to talk with them? Could you kind of walk me through maybe some
Chris Buttenham: things that might come up? Yeah. Yeah. So, I mean, we really like to roll up our sleeves and understand. So what is the succession plan? You want an exit in three years? You want an exit in
30:02Never selling is not a plan, and what buyers think of the plan
Chris Buttenham: five? Do you have any prospects? How do you think you want to go? You think you want to go the private equity route. You think you want to sell to your employees. Maybe there’s a private buyer that you think you have. Maybe you have no idea. Well, we can help with that. We’ve got partners
Chris Buttenham: that can help with that. Tell me about the team, right? Who would you be devastated to lose? And why are they critical to the team? Are there any existing promises? This is very common. There’s almost always one or two handshake, like you said, back in the napkin type agreements. And
Chris Buttenham: And so we usually start there. Okay, well, let’s try and satisfy that. Make sure that we’re not spending any more time than you probably have been kind of sitting on this. So we can paper that up, make sure that’s good. And we start to form our plans.
Chris Buttenham: We always start with the equity because it’s that, believe it or not, it’s actually simpler than the profit sharing and the bonus side, because then you get into the performance conditions and all those opinions. So we start with the equity. And I would say on average,
Chris Buttenham: there’s usually two classes, right? your key utmost employees who may get one arrangement and then another class that with sort of the knowledge of how easy this is, they’re like, oh, you know, I could grant quarter percent. Like you said, if it’s 20%, 5 million, maybe I grant a quarter percent to everyone.
Chris Buttenham: And I know some of that’s going to get returned to the pool when folks leave, but those who stick around with me and are there when we sell, I’d be happy to pay that out. It’d be an exciting check to write. And then we work into, okay, well, that’s how we retain.
Chris Buttenham: That’s first, let’s first retain and or support. Maybe they’re trying to bring on someone strategic at 5 million. Maybe you’re hiring your GM for the first time. Maybe you’ve been doing that. And so, okay, do we need to put together a package for this key employee that you want
Chris Buttenham: to bring on? Then we say, okay, what’s the budget? What are the goals for the fiscal year? And how can we back into a profit sharing plan that supports those goals and helps you hit those goals with good margin discipline and everyone understanding how to actually affect change here?
Tyler Martin: A lot of good questions there, man. It’s my mind kind of streaming. I can see the value because I’m sure there’s other people thinking like, oh, I’m not really thinking about my succession plan or I don’t really have a clear cut. So a lot of good stuff to think through.
Tyler Martin: Do you think if someone came to you, if business came to you, because I have this pop up occasionally, hey, man, we’re a family-owned business 50 years. I’m not even thinking about selling. I don’t think I’ll ever sell. We’re a family-owned business. My kids will take it over or uncle or whoever.
Tyler Martin: What would you say if someone came to you that? Would you still do the phantom stock or would you just go down the chain of the bonus and the profit sharing?
Chris Buttenham: Yeah. So it’s one of the most common comments I get. And I always laugh. someone told me once, there’s really two outcomes for a business. You either sell or you shut down eventually. So that’s number one. Think about that for a second. And then the other thing is
Chris Buttenham: the folks that maybe don’t want to sell often. I can’t tell you how many contractors I’ve worked with where they’re like, I’m never selling this business. And then they get an LOI and they’re like, maybe I will. I’ve seen it too. And honestly, it happened to us. So I totally get it.
Chris Buttenham: Yeah. Or, or, Hey, like when I talked to years, the years going great, I’m loving running this business next year. Not so great. I don’t want to deal with the stress anymore. Right? So I would say hearts and minds change and the employees don’t know where your head is at. And honestly,
Chris Buttenham: they probably don’t trust what you’re telling them. And so at the very least, it’s an insurance policy, the phantom equity. I also say that it’s free to give someone a promise to pay a future cash bonus, especially linked to a sale that you think is never going to happen. It’s free,
Chris Buttenham: but it makes them feel comfortable. Like there’s a story, one of the contractors we were helping, we were communicating the program to the team and this woman, she sort of spoke up and said, this is great that this owner is doing this because I just came from a company that sold
Chris Buttenham: to private equity and the owner told me that they were never going to sell. And so she’s like, like, I know you said you’re never going to sell, but at least I have some insurance that if you do and I’m around, I’m in, I’m in good shape. So sorry for the diatribe, but like, I actually like
Chris Buttenham: think that phantom stocks, the best incentive that no one’s ever heard of. So I do, I do kind of double click on, on the actual trying to understand that. But then in terms of profit
Tyler Martin: Yes, for sure. I mean, like a lot of people that never want to sell still need to live through the business. And so the best way to do that is to make sure the business is profitable and growing. In order to do that, you have the incentives to align the employees with those outcomes. And so maybe you don’t want to sell, but always be in a position that you’re sellable is kind of my take.
Chris Buttenham: Very cool. Yeah, that’s good stuff. I think you guys have had at least three transactions of companies that have sold that had one of your plans. What’s been your experience like so far in terms of, you know, just from an employee perspective, did it have any impact on the sale one way or another? Any dialogue or experience in those three particular experiences?
Tyler Martin: Yeah. I mean, anecdotally, I think from what I heard, each owner had so much more leverage. They felt very confident because all these employees, they knew we were going to stick around. They were proactive about it. Data suggests, I mean, I don’t have a before and after because these folks all sold with
Tyler Martin: plan, but great valuations from what I saw. In one case, the gentleman sold to roll up private equity type and sold a portion of the business and employees. It was actually, I was actually surprised at how, how good the sentiment of employees were. And so they got a payment on the first tranche and now they’re
Tyler Martin: going to be able to participate in the upside going forward because the owner is granting a new incentive. And so that actually just made it more real for them, more real than it already was. And, and so, yeah, I’ve seen nothing but sort of positive implications of this. And I think one
Tyler Martin: thing that maybe folks are nervous about is, oh, like what will the incoming buyer think? Right. And in our experience, they love it because they know that the key team’s already locked up. They don’t have to do it retroactively, which is very difficult to do. Like you said,
Tyler Martin: most people aren’t going to communicate ahead of a sale. And so if you’re proactive about this and the employees are already locked up, when the topic of a sale does eventually come to the surface, they’re incentivized to stay. So there’s no knee-jerk reaction,
Tyler Martin: oh, screw this, I don’t want to work for that new owner or what have you. Right.
Chris Buttenham: What does that look like on the front end? Like when you introduce this phantom stock, phantom equity, what does it look like from an employee sound like? Like what’s their reaction? Like, do they go, are we going to be sold? Is there generally more of a like,
Chris Buttenham: oh, this is cool, I’m going to share in it? Or is there a certain educational process you have to do to make sure that it comes across in the right way? or what’s that look like?
Tyler Martin: Yeah, that’s a good question. At least the way we do it is we actually help the owner communicate the plan with the employees. That’s one of the reasons. We haven’t seen any major pushback. There certainly are questions. And I think each owner has their own philosophy.
Tyler Martin: Like I said, there’s a good number of owners we work with. They say, I’m never going to sell. Just setting this up proactively and hoping that, you know, you guys know how important you are. And this is an example of that. But no, we haven’t seen any major pushback or concerns.
Tyler Martin: If anything, it’s like, oh, thank goodness I have some safety here.
Chris Buttenham: Yeah. I’ll tell you on the back end, it makes that conversation a lot easier because you’re like, hey guys, congratulations. You’re just like, you’re about to get XYZ or whatever that number is. Instead of like, what’s in it for me.
Tyler Martin: Exactly. Because that’s what, truthfully, real world experience. When we were going to sell our business, we got a pretty healthy offer. And, you know, the first thing we’re doing is like, okay, well, what do we allocate to the employees? What do we give back to them?
Tyler Martin: What’s that conversation going to look like? Which, by the way, we may have done that anyway, even if we had some Fanta plan, but it would have made the conversation a heck of a lot easier.
Chris Buttenham: But I’ve told, I got to tell you, this is not great, but I’ve met some owners where we’re actually in the process of setting something up. and then they actually get an LOI and they’re like, I don’t need to do it anymore.
Tyler Martin: Yeah. They’re in diligence. And like, look, I can’t change the fact that there’s different, different philosophies out there. Right. Yeah. And so the proactiveness, you know, well before you’re going to sell, sell is, is really, is really how you’re going to, you, the owner going to benefit.
Tyler Martin: And then the employees are actually going to feel, you know, good about it.
Chris Buttenham: Yeah. I mean, It is a very nice way of treating hopefully long-term key. And I use the word probably key a little bit looser than I would with true stock ownership in terms of equity. That’s right. But it’s a way to make them feel part of something.
Chris Buttenham: So I really do see the value.
Tyler Martin: In terms of wrapping up here, because we’re getting, as usual, I’ve kind of taken this probably too long. I’d love to just get into, like, who’s your ideal client? Who do you guys work with? Take me through a little bit of that. Like if there’s out there people, people out there listening, they kind of want to just
Tyler Martin: chat about your different offerings.
Chris Buttenham: Yeah, for sure. And by the way, we, you know, I’m an advocate for these incentives. Like we’re not the only way to get it done. And, and I’m happy to, you know, have a conversation with anyone that is just trying to explore these things. So for us, it’s, you know, anyone from a couple million bucks in revenue to 50, hundred million
Chris Buttenham: dollars in revenue. You know, there’s no really too small other than the fact that if you’re too small, you probably you’re on the truck yourself and you don’t have time to deal with it. But, you know, 10 employees is a good place to start, you know, over 250 employees.
Chris Buttenham: You probably got different options and maybe you want things to look more bespoke than than the average the average business. someone ideally who is looking to sell three, five, 10 years down the line, or just like be fit like someone who was selling their business, you know, like growth goals,
Chris Buttenham: philosophy around compensating employees like, like owners, that would be sort of our key, key company that we work with. And we do focus in the blue collar space, but that’s not the only companies we work with. We just tend to have more expertise with home services,
Tyler Martin: commercial construction, that sort of thing. So I do have one more question and I can’t really think of why this would apply, but I’m curious. What if you wanted to terminate the plan? Like, what if you, I mean, I just, I don’t know why you would want to do that, but just hypothetically,
Tyler Martin: you know, you decide halfway in, like, I don’t know if it’d be family succession or what could make you want to change your mind on that, but could that come up and any reasons why someone would want to do that? And is that even an option?
Chris Buttenham: Yeah. So structurally in this may be in the weeds, but we actually separate the long-term and mid-term incentives partially for this reason. So you can always cancel the profit sharing and bonus plans. They are more discretionary in nature. The Phantom Equity long-term incentive, generally you can’t cancel an award. I am not an attorney,
Chris Buttenham: but I sort of play one on TV these days. And generally it’s all contract law. So you have a contract with that employee. That said, I think for the reasons that you may want to terminate a plan, you kind of alluded to a couple.
Chris Buttenham: There are features built into our framework that support some of those options. So a lot of my customers will say, if we sell 51% of the business, this triggers a phantom stock payout. Anything less doesn’t. And by the way, here are these exclusions.
Chris Buttenham: If I sell to my child, if I move the business into a trust, that does not trigger a phantom payout. So these are all ways to kind of circumvent some of those circumstances that may arise.
Tyler Martin: Okay, that makes a lot of sense. And yeah, I was really more thinking the long-term components. That makes total sense that it would be a contractual agreement. And there might be, if you were going to enter into one of these, think about what could be some exclusions.
Tyler Martin: Family transfer, I guess, could theoretically be one. Trust is an obvious one. So that’s good. That’s really cool. Okay, awesome. So in terms of, I got two websites. I’ll put these both in the show notes. Your main webpage is myreins.com. Reins is R-E-I-N-S dot com.
Tyler Martin: If you’re a guy like me and you always have to go I before E unless it’s C type thing. And then the one where there’s a free book, you’ve written a book. It’s a little bit longer domain. So once again, in the show notes at profitandgrit.com,
Tyler Martin: it’s myreigns.com forward slash alternative hyphen equity.
Chris Buttenham: Yes. Is that right? I got that right?
Tyler Martin: Yeah. Okay, cool.
Chris Buttenham: It’s a completely non-promotional free guide on how these incentives work and how you might be able to stand them up within your business.
Tyler Martin: Awesome, man. And then LinkedIn, just I’ll put your LinkedIn in the, are people welcome to reach out to you if they want to talk to us LinkedIn, the spot probably.
Chris Buttenham: Yeah, I’m not huge on social media, but LinkedIn I’m on.
Tyler Martin: Okay, cool. Well, I can’t thank you enough, Chris. I think what you guys are doing, especially given in the blue collar space, is super duper cool. Because as you started the show with that, there’s a deficit of really quality people. And making sure those folks are known that we’re taking care of them and trying to retain them and doing it in creative ways is just awesome.
Chris Buttenham: Yeah. No, thank you so much, Tyler. great questions and excited to keep the conversation going. Thanks, man. Take care.
Tyler Martin: Okay. So my biggest takeaway from Chris is that retention isn’t a pep talk and it isn’t just throwing more money at payroll. The real unlock is creating a structure where the people who keep the place running can see the scoreboard, understand the rules and share in the upside
Tyler Martin: when the business wins. Chris also made a point owners really need to hear. Even if you say you’ll never sell, life changes. Offers show up, health changes, stress piles up. So the move is to build a business that’s always ready. Clean financials, clear targets, incentives tied to margin, not just
Tyler Martin: revenue, and a core team that doesn’t bolt the second an LOI hits. If you want a second set of on your numbers, your cashflow, or what would actually make sense for your business to become sellable and less dependent on you. You can book a no pressure intro call at cfointrocall.com.
Tyler Martin: That’s cfointrocall.com. As always, thanks so much for listening. I will catch you on the next episode.
Related Episodes
- The Real Reason Growth Gets Harder After $5M – Lance Bachmann
- Become Your Own Private Equity in HVAC and Plumbing – Dillon Caraway
- The Pay System Top Home Service Companies Use to Double Revenue – Ryan Shank
- The $2.2 Million Lesson Every Home Service Owner Should Hear – Chris Lee
Tyler Martin works with owners on the numbers behind these stories: a fractional CFO for home service contractors.
