Twice the Profits, Double the Customer Satisfaction Scores, Highest Employee Satisfaction Scores Ever.
All since Kevin Clegg transitioned Clegg Auto to an Employee Ownership Trust.
He sees it as a new form of capitalism – one that justly rewards all stakeholders. It was a significant upfront gamble compared to a traditional sale, but his bet is paying off. Now post-payout, he and all employees enjoy a growing profit share based on percentage of payroll.
This at a time when, based on Gallup polls, over 70% of employees nationally are not satisfied in their jobs.
Common Trust helped them through the process of selecting and implementing a Perpetual Purpose Trust. It’s a structure less common in the US, but with a longer track record in Europe. It’s not an ESOP and is actually better positioned to serve employees and customers for the long-term, not just the short-term tax advantages for the sellers.
Kevin walks through their journey and what he’s learned along the way.
Podcast Transcript
Jacob: [00:00:00] I’m here with Kevin Clegg with Clegg Automotive
Kevin: Glad to be with you, Jacob.
I started first with running small businesses while I was going to college. So I worked full-time working with my brother. He was a part owner in an automotive shop. I ran the front counter and he did the back office.
And left that automotive business and spent about 10 or 12 years with large companies doing human resource consulting.
Strange circumstances had us back in Utah and my brother asked me if I would partner back up. I asked him if it would be alright if we sold to employees, I’d seen enough in the business world that I’d want to do something different than what the typical owner would do and see if we couldn’t transition to employees.
And it wasn’t a long conversation. He’s basically yeah, that sounds great. And that kicked off the journey for employee ownership for us.
Jacob: What was the impetus for that? Why shift it to employees?
Kevin: When you recognize that the most important part of a business are the people inside of the [00:01:00] business and you care about them and you care about their successes. And when you focus that way, then that natural outcome is you’re impacting the lives of your customers in a more significant, authentic way. And when they feel that they tell other people because it’s a surprise right now in the world today when you experience great customer service. And when they tell other people, then your business grows.
Let’s do things differently treating every employee as an owner, as a partner in the business, and caring for them and if we could create a world where most employers chose to go that direction, then you would have a place where most employees are generally happy and satisfied in their jobs. As opposed to what we have today when you look at Gallup surveys and everything else, you’re getting 70% – 80% of the world that’s saying, I’m not satisfied. I’m not happy with my job. And if you’re not satisfied or happy in your job, how can you deliver great customer service?
Maybe capitalism could be reimagined, reinvented in a way [00:02:00] that was focused on creating opportunities for everybody, but sharing those opportunities with everybody.
When my brother and I chatted and said yeah, the time’s now, let’s do this, let’s transition to something employee-owned. Door number one is not transitioning to employee-owned. Looking for a buyer in the marketplace that would give top dollar and maximize profits for us as we would exit. That typically happens in the marketplace and you’re seeing a lot of private equity or venture capital stepping in and acquiring lots of small businesses. The problem with door number one is when that happens and you’re maximizing for yourself. Then you’re not maximizing for your customers and your employees. And I think also sometimes you’re saying I started this, I took the risk, I’m the most important thing here I need to be taken care of.
You start to forget that I couldn’t have done this without all my employees, all my customers, everything. And so if I start thinking and recognizing that it’s the collective whole of all of us that built this, then door number one’s not the best door. I watched that happen over and over again as [00:03:00] businesses are bought and sold again and again everybody’s trying to extract a value and those that get hurt the most are the employee and the customer.
Door number two Is looking at some sort of employee-owned structure and the most common form of employee ownership in the U. S at least right now is ESOP, employee stock ownership plans. And as I pursued that a little bit further, I didn’t get excited about that option. And some of the biggest reasons why is an employee stock ownership plan, while there’s incredible benefits for the owner as they sell and the ability to defer taxes on the sale and also for the ability for that entity to grow tax-free.
And those are massive benefits of an employee stock ownership plan. But the big drawback for me is you could lose control of your company because an ESOP is a risk of governance. The government can say, Hey, look, if you receive an offer for your company X percent above its value in the spirit of what’s best for all of your employee owners, you have to accept [00:04:00] that offer.
And to me, I’m like, I’m not going to build something only to see that somebody could step up and pay above market value. And I’d be required to sell because it’d be for the benefit of all the shareholders. And I’m like, I don’t want to create that. So I truly want to build businesses that are built to last forever.
It needs to be protected with this idea of something that’s going to take care of customers and employees and have staying power. And so the idea of a steward owner as opposed to being a traditional owner with shares was intriguing and that model is a model that is way more prevalent in Europe and in the form of employee ownership trusts.
So as we did our research and on this journey of employee ownership, that got me excited to hear about this model that had been in place for 100-plus years in some companies in some parts of the world. And they’re really successful and they’re staying power. And I went, that, that sounds better.
Door number two of an ESOP was a no go and the door number three was Employee Ownership Trust.
Jacob: [00:05:00] What are the tradeoffs with an employee ownership trust?
Kevin: If you’re going to look at the downside, you don’t have the same tax treatment as an ESOP. And so there’s no tax protection where you’re able to roll your dollars from the sale into something else and not be taxed on it.
So as you transact a deal into an employee ownership trust, currently you would be as an owner and selling your shares, you would have immediate tax obligations as opposed to those, and then as you grow the business in an ESOP, you can grow tax-free. So any dollars that you retain inside the company are not taxed on them and you can use them to grow the business. And so we don’t have those benefits and those are real negatives. Like it would be really nice if we had those benefits, but the downsides of an ESOP were significant enough that a trust was the ideal way for us to go.
Jacob: If an owner’s considering taking similar steps, what does that journey look like?
Kevin: You can structure it in a lot of different ways. So for us, that was conversations with all the owners that said, Do we believe that our employees helped us get here [00:06:00] or do we believe that this is all us and collective we all said no, we wrote, we clearly recognize we wouldn’t be in the place we’re in if it weren’t for the employees that helped us get here. And so at the outset, we said, let’s make sure we structure this in a way that it’s favorable for employees and to reward them for what they’ve done to help us build where we got as well.
And so what we chose to do is the majority of the sale was in an earn-out instead of an upfront payment lump. There’s a lot of different ways you could do this. It could be with interest or without interest We chose without interest again, because we wanted to create a favorable circumstance for employees, but what we said is so here’s the value of the company from an earn-out standpoint we’ll take our payment over time and these shares are worth X dollar amount for each person. And when that is paid off, it’s paid off and it’ll come in the form of 20% of the profits of the company that are generated until you hit that earn-out amount, and then once it hits our amount, then you’re paid off.
And so by structuring it in that [00:07:00] way, it opened up additional profit dollars to be able to share with employees immediately. I really wanted to see we created something like that so that as we talked with our employee team, we could say you’re a part of the success with this and how we’re structuring this, instead of us receiving a hundred percent of the profits until we’re paid off, we’re structuring this deal so that you’re sharing in profits immediately from day one. The chances are that’ll accelerate the earnings for all the owners, which is what’s been happening.
Jacob: In post earn out how then are you compensated?
Kevin: As before where I’m the owner with whatever shares at this point now I’m an employee owner like everyone else and in our world and how we structured it, we share profits through profit sharing. And so I’m no different than anybody else in the company, I get a paycheck and they get a paycheck, whether hourly or salary and then I share in the profits like everybody else. And the way we structured the profit payout is everybody’s a partner from day one. So there’s not a wait period as you join the company then you’re considered and treated as a partner. And then at the [00:08:00] end of a quarter, we calculate the profits in the company that were generated and then we look at the total payroll and then we look at your pay as a percent of the total payroll and that’s the percent of the profits you get. And we figured that would be the best way to differentiate who gets what payout.
So everybody matters, everybody’s important, everybody’s contributing, and based off of how the market rewards, different positions determine what your pay is, and then as you perform inside the company and move along that pay scale and you increase in your abilities and your outcomes, the higher percent of the profits that you’ll share in.
Jacob: Is there any evidence that this approach is actually a better long-term strategy for the business as a whole versus just, like morally or like principle based wise, it’s a better choice.
Kevin: We started in 2020. It wasn’t effective until mid-year 2022. Our profit that we generated in our business prior and our profits that we’ve generated so far, we’re close to double the amount of profits now, compared to [00:09:00] before. Our customer SAT has never been higher. We measure customer SATt by the number of Google reviews that we receive, and we’ve almost more than doubled the number of five-star reviews that we received on Google since that time frame. And our employee SATs have never been higher and so those are the metrics that we’re looking at as far as profits generated, cash flow, and employee sat and customer sat. And all of those metrics are better than they’ve ever been since we made the change and those in my opinion those are the metrics that most companies should be tracking to say whether or not it’s successful. The work that they’re doing, the outcomes they’re getting, so we’re feeling great about it.
There’s a clause in our trust that says if it’s ever to be sold at all, the profits would go to charity and so our intent is to really build a company that’s built to last. And we want to now see how we can accelerate this. If we’re getting these kinds of results, then why wouldn’t most companies want to adopt similar principles, those things generate way better results. We’re seeing it, so why can’t we teach and share this with more people [00:10:00] and whether they join us or we teach them what we’re doing and they adopt similar principles, let’s live in a world where people are more excited to go to work, more excited to help each other out, more excited to serve and do good.
Jacob: It’s fantastic. And I think any business owner would love to double their profits and their customer satisfaction and their employee satisfaction.
What tends to be the biggest pushback you hear from people when you bring up this idea?
Kevin: Most people are actually super curious. They’re like, you’re just doing things differently. What are you doing? This is weird. What’s, is it working? And a year and a half in and the results that we’re seeing, we can tell people it’s working.
We’re just taking care of our people and they’re taking care of our customers. And when that happens, good stuff happens. It’s still a meritocracy of you’ve got to carry your own weight, you got to do your own part and if you do your own part, then you can be rewarded. And if you’re going to give more, then you’re going to receive more of the rewards that are here. So it’s just a, I would say it’s a different form of capitalism, a better form of capitalism.
Jacob: What is your vision for where this could go [00:11:00] so both of you have your companies that you already have transitioned, but also like this idea and this movement. What’s your vision for where that can go?
Kevin: Yeah the world right now is ripe for something different, there’s a lot of people that are looking at the way they’re treated and they’re saying it doesn’t feel right. There’s all this focus on who’s going to be the next unicorn, but when you look at a lot of those unicorns and these big exits most of the dollars aren’t going to the people who helped build the companies.
What I’m hoping happens is that there’s a lot more employees that will stand up and say, we want to know that we matter. I hope that consumers recognize that they have a choice and that they start paying more attention to the services they receive and if they don’t feel like the people serving them really care, expect more. Start calling out when you see that you’re not treated right. We get better results and the entire community wins because now all the dollars stay local. We don’t have investors that are putting dollars in and the majority of the profits are going to investors that don’t even live in our community. We, [00:12:00] the employees of the company are the ones that are vested in this business, and we receive the dollars and we put them back into our local economy.
It’s a win all the way around. If more people would consider that, then we could accelerate this movement and help a lot more individuals see the benefits of what we’re trying to do.
Jacob: If there was a business owner who was interested in learning more about this journey, what resources would you point them to?
Kevin: Yeah, I’m happy anytime to connect, that’s one of the purposes of our company that’s in our trust and documented is that we will share what we learned with the world. There’s really nothing secret about what we do. So we have open book management, and we share all of our financials with everybody. We’ll share our best practices with others. The point should be: let’s help everybody lift and raise their game a little bit. So I’m an open book. I’ll share it, and meet with anybody, anytime.
We worked with a company called Common Trust to set up our trust they’re designed to help transition as many businesses as possible into something similar to what we’ve created. And so they’re an incredible [00:13:00] resource that could be tapped into as well.
Jacob: You can’t flip a switch and have this happen. What’s the time frame to set expectations?
Kevin: I think a half a year to a year of spending some time to really figure out what it is that you’re doing and to be real about it and set it up in a thoughtful way is realistic. And then there’s a lot to the journey setting this up is one thing, but then how do you create the culture where you’re empowering and treating everybody, as an owner, and teaching what that means and building that culture is an ongoing thing.
Jacob: If you were to give an elevator pitch to your peers, what sort of is that, a succinct little sales pitch for rethinking the way that they approach their business?
Kevin: If we really care about outcomes, then we should look at the outcomes we should measure them. And if the things that matter most are running a profitable business that generates cash, caring about our customers, caring about our employees, then make the changes in your business that maximize those things.
I would [00:14:00] argue that when you start to choose to treat everyone as a partner in the business when you really do care and build all of your systems and processes in your culture to support your employee first, that those things will all flow and follow.
Jacob: Is there anything that you are looking for right now or hurdles that you’re facing?
Kevin: Our mission right now is to be the most sought-after employer and service provider in Utah by the end of 2026. And we set that as an aggressive stretch goal because we want there to be enough traction with what we’re doing that people are forced to pause and say, who are these guys and what are they doing? We’re looking to find individuals that when they hear about what we’re doing, they’re curious enough to say, tell me more.
Our biggest need right now is to get the word out. Get people excited about what we’re doing.
Jacob: Thank you so much excited to see where you’re going next with this and good luck with all the good you’re doing in the world.
Kevin: Thanks Jacob.
Learn more about ISSIMO Story Agency Here