How a Garage Builder Went 100% Employee-Owned in Two Steps

Full Transcript

Rick Otto: What Mr. Yoder did for us was a huge blessing. He could have easily sold to private equity or to whoever. He had numerous offers. And we've all seen how that happens and how that works out. It disrupts the entire culture of companies. And a lot of times, what really makes the company is the people that are running it.

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Chuck Mazzanti: Welcome to the Construction ESOP Collective. I'm Chuck Mazzanti, Senior Vice President at Christensen Group Insurance, and this is the show where we explore the wins, challenges, and real-world lessons of employee ownership in construction. Each episode brings insights from CFOs, former owners, and employee owners who are building something bigger together. Let's get into it.

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Chuck Mazzanti: Fifty-three years, more than 27,000 garages, and today 100% employee-owned. My guest is Rick Otto, President of Coach House Garages in Arthur, Illinois. Rick shares how the company went ESOP in two steps, why they held every customer's price when lumber spiked during COVID, and what happened when their first tax return as a 100% ESOP came back with zero owed.

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Chuck Mazzanti: Rick Otto with Coach House Garages out of Arthur, Illinois. Welcome to the Construction ESOP Collective. I'm thrilled to have you on.

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Rick Otto: Thanks for having me. I'm excited to join you. We've chatted off and on at a few ESOP events, so I'm excited.

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Chuck Mazzanti: Yeah, I'm excited too, Rick. I think the first time we met was the spring conference of the Illinois ESOP Association, the CEO roundtable, which spawned a lot of good friendships and relationships for me. And then the last time, thank God you weren't part of my foursome, otherwise I don't think you would have agreed to come on this pod, was the golf outing for the Illinois chapter. So it's good to continue the relationship in this form.

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Rick Otto: It is. I really enjoy that golf event in Bloomingdale. I've done it two or three years now, and it's a fun event, a great event. I really do enjoy those roundtables, like you mentioned, where you sit down and pick other people's brains. I always feel I can learn a lot from others.

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Rick Otto: It's great to sit down in a room and find out that others have similar things they're concerned about and are trying to find a way around. And it just seems like the CEOs and presidents in the ESOP world who get together in those are very open to talking about whatever is going on, and they want to take the time to help others. I think that's wonderful.

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Chuck Mazzanti: Yeah, I think you're a perfect example of what you just talked about, Rick. The ESOP community is an open book. Everyone wants to get better. I don't care if you just formed an ESOP today or you're 25 years in, everyone's on a different learning journey. It's one of the most open, sharing communities I've ever been a part of in my career, and you're just another great example of that. So to that point, Rick, I'd like for you to give an overview of who Rick Otto is and who Coach House Garages is, if no one's heard of either of you.

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Rick Otto: Well, a little about myself. I still feel like I'm in my thirties, but I'm in my fifties, and I act like I'm in my twenties half the time. I grew up in Arthur, Illinois here, born and raised Amish. If you're familiar with the Amish, it's an eighth grade education, then you get out of school and go to work. For me, that was working with my father and my brother building buggies.

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Rick Otto: I believe the week I turned 17, I went to work in a truss manufacturing facility and worked there for right at five years. Then I had an opportunity to come to Coach House and joined the building crew. I started at the highest point in the company, and that was on top of the roof, putting on the shingles. I had a bit of a fear of heights, and it was either get over it or quit, and I'm not much of a quitter.

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Rick Otto: So I kept with it, got used to it and got comfortable with it. I spent about five years building garages, starting in the early nineties. I was a slow-pitch softball player, and we played evenings during the week. I'd leave at 3:30 in the morning and drive to just outside of Chicago or Peoria or St. Louis, help deliver and build the garage, then drive back, and twice a week play softball at eight or nine o'clock at night and get home late.

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Rick Otto: I enjoyed what I did, but with my lifestyle, I didn't get a lot of sleep. So I went and talked to Jim Yoder briefly about it and said, "I enjoy what I do, but if anything ever comes up, I'd be open to switching what I'm doing." A number of months went by and nothing really came about, and then one day he grabbed me, took me to lunch and said, "I have this opportunity. I don't know if it's something you're interested in." I said, "Yeah, sure. What will I be doing?" I'm always optimistic.

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Rick Otto: It turned out one of our franchise dealers had violated the franchise agreement and was about to be removed. I basically went in, picked up the pieces and resurrected the sales territory, and that's how I got into the sales side of things. I discovered my mother blessed me with the gift of gab, and I was able to work in sales. Of course, I had five years of experience building the buildings, so that worked out pretty well.

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Rick Otto: I did that for about a year and a half. It was a two and a half hour drive and I just wasn't comfortable moving, so I came back and worked on the crew for another year. Then Jim was looking for a sales manager. I said, "Well, I've got one year of sales experience," and I talked to him, and he put me to work as a sales manager.

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Rick Otto: But I was out there working with reps who had 20 years of experience, and here's this guy in his mid-20s showing up. They were not as receptive. Nonetheless, I did that for a year and then became one of the local sales reps in the Mattoon and Effingham areas, and did that for about 10 years. Then I became the sales manager again, so I gained 10 years of experience that was probably needed. I was probably a little in over my head originally, but I did know the product, which was a big help. I managed sales from 2006 until 2021.

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Rick Otto: That was three years after the company first became an ESOP, when Jim asked me to become the president of the company. It was quite humbling, and I was honored to get that opportunity. That was 2021, and now it's 2026. I'm currently in that role and have much to be thankful for.

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Chuck Mazzanti: Yeah, it's quite the career trajectory. And I'm very familiar with the Amish. We actually go fly fishing quite a bit up in Viroqua, Wisconsin, which is a big Amish community. I did not know that about you, Rick. It's no wonder you're so hard working. Now it all makes sense.

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Chuck Mazzanti: And it's also funny. I had Bobby Sigmon from Sessa Sheet Metal Contractors, an ESOP out in Baltimore, on the show. He started as an apprentice and worked his way up, so I coined his episode "started at the bottom, now he's here." For you, I'm going to have to say you started at the top, and now you're at the bottom.

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Rick Otto: Yeah, that's right. And that's always been Jim's philosophy for management. It's an upside-down pyramid. You're the support holding everything else up. You're there to help everyone else get there, instead of being at the top.

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Chuck Mazzanti: I like that. I never really thought about setting it up that way, but it makes sense.

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Rick Otto: Right. People will ask me, "So what's your title?" and I've always been a little reluctant to share it, to be boastful. I always say, "Well, I just work with everyone. My job is to work with everyone."

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Chuck Mazzanti: Well, you're the epitome of humble, Rick. But you're doing great things, some of which we'll cover in the episode today, and that gives a really good background on where you came from and how you got to where you are today. So what does Coach House Garages do, just a 10,000-foot view?

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Rick Otto: We're a garage builder. This is our 53rd year in the garage business. The company was started by a man by the name of Willis Miller, a local businessman here in the community. Willis had the thought of panelizing walls way back when it was uncool. Today everybody frames with panelized walls.

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Rick Otto: We've evolved from building garages that were fairly basic at one point in time to the majority being more detailed and more elaborate, sometimes with dormers and all kinds of different cladding and siding, James Hardie, LP and so on. When we go out, we're trying to match the garage to your property so it looks like it's part of the property, not a different building sitting there.

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Rick Otto: So we've been around a while. Our claim to fame, and that has changed over the years: most times with a two-car garage, the concrete's poured ahead of time, of course, and it cures for a while, and then our crew shows up to build it. Typically they would do that in one day, from start to finish, kind of like a barn raising.

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Rick Otto: That has changed over the years with the complexity of the builds. Sometimes you can't get it all done in a day like we used to. If you're putting on a James Hardie or an LP siding, there's just much more to it, so it's not always a one-day build. But one thing that comes to mind that Jim Yoder always talked about was doing what we say we're going to do, when we say we're going to do it.

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Rick Otto: And actually having a schedule. We have a build schedule. Does it change? Sure. Weather happens. But we have a schedule, we try to stick to it, and we keep everybody informed when it does change.

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Chuck Mazzanti: Sure. And is it residential versus commercial? What's the breakdown there, and what's your radius of operation?

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Rick Otto: The majority of it is residential, probably 95%. Occasionally we'll build a storage building for a church or a commercial property that needs storage. Geographically, we cover most all of Illinois with the exception of Chicagoland. We do cover the suburbs, Yorkville, Aurora, St. Charles, some of that area. We don't cover the extreme northern part, Rockford and up in there, but we cover most all of the rest of Illinois.

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Rick Otto: We cover the Quad Cities in Iowa, so Bettendorf, Davenport, Rock Island, all of that area, and we also cover St. Louis, Missouri. In Indiana we cover most of the state, basically from Indianapolis down to Bloomington. Bloomington is our newest area. We started covering it a little over a year ago.

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Chuck Mazzanti: And is the rumor true that you guys are opening up Miami?

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Rick Otto: I'm anticipating I'll have to do a lot of research to make sure. Several trips there will probably be necessary, with my golf clubs.

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Chuck Mazzanti: Of course. Especially in or around the winter months. Any good market due diligence is done from the golf course in the wintertime in Chicago.

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Rick Otto: Right, exactly.

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Chuck Mazzanti: Awesome. And top-line revenue, just so people understand. You don't have to give the exact number, but round numbers.

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Rick Otto: About $10 to $15 million a year is what we generally do. One claim to fame is we've built over 27,000 garages since our existence. Somebody used to say, "We've seen a thing or two." Well, we've done a garage or two.

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Chuck Mazzanti: It sounds like it. You know what you're doing, that's evident. And to get into the ESOP story: you've obviously been with the company well before you went ESOP, because it's my understanding that in or around 2018 is when you went employee-owned.

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Rick Otto: Yeah, in 2018 we became 30% employee-owned. Jim Yoder had been the owner since, I think, the mid-nineties. Jim was thinking about retirement, I believe, at the time. He didn't necessarily say it, but he called a meeting in late July of 2017 with the immediate admin staff to make us aware that he and his wife, Carol, were moving to Florida. He had a nice letter, and I'll just cover a few things on it, if that's okay.

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Chuck Mazzanti: Of course.

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Rick Otto: "So what does that mean for you, the employees here at Coach House?" At this point he hadn't announced an ESOP yet.

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Chuck Mazzanti: So this is the letter, just to set it up, Rick. You guys don't know anything, and all of a sudden here comes a letter from Jim to the employees. Got it.

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Rick Otto: Yeah, so he hands it out to us at our staff meeting, where we'd stand in the front room and just talk. He says, "Carol and I are moving to Florida and selling our house. This will happen in the next six months. So what does that mean for all of you, the employees here? Not much of a change, really. I will still be the president and owner of the company. I'll just be working remotely most of the time." That was before it became really cool to work remotely.

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Rick Otto: "I plan on coming to the Arthur office once a month or so as needed. We can accomplish most of what needs to happen by phone, email and conference. As far as your responsibilities, no real change. Just call me instead of walking into my office." And of course, the smart aleck in the room says, "Can I still come walk into your office in Florida?" Me, wanting to take a trip to Florida.

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Rick Otto: He talked about being intentional about sharing information about what's happening. And he went on to say, "I want you all to know that I am, and have been for some time now, working on a plan for what the company will look like in five to 10 years. That's part of my job. I'm looking for the best way to maintain the culture, the people, the jobs and the long-term health of the company, ways to make the company stronger in the future while keeping the things that make Coach House what it is."

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Rick Otto: Of course, it was a little bit of a "wow, okay." But then before the end of the year, he gathered the vice presidents together, myself, Larry and Jonathan, and explained that the company was becoming an ESOP. And I'm like, "ESOP? What's that?" So we eventually got some basic ESOP 101, and we had it all in place. It's been pretty exciting.

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Chuck Mazzanti: Okay. So it started with a letter, and by the end of 2018 you guys essentially went 30% employee-owned.

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Rick Otto: Yes. At the time, I'd never been a trustee for anything, but Larry and I became the trustees and worked on the negotiation of what the trust was going to pay per share. Of course, I always like to have a little fun, and I jokingly told Larry, "We've got to be careful. If we upset him, he could still fire us." Fortunately we didn't upset him too badly. He let us stay a little bit longer, and it's been exciting.

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Chuck Mazzanti: Okay. So in 2018, Jim and his wife sell 30% of Coach House Garages to the employees, and they migrate over to Florida. They're still involved. It sounds like he had a five to seven year runway of phasing himself out. And you didn't really know what an ESOP was, right? So you went from not knowing a ton about ESOPs to becoming a trustee to now, I presume, helping educate the other new employee owners. Can you give us a sense of what the vibe was for the first 12 to 24 months? Did anyone understand it? Did it change anything with your clients? Did it help you win work, those types of things?

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Rick Otto: I don't know that it changed us a great deal. I think we were already a company where Jim always had a lot of trust that we would do the right thing in making decisions, making smart decisions about efficiencies and not being wasteful. The entire company has always been run that way: big enough to serve, but small enough that people could be trusted to do their job and wouldn't take advantage of it.

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Rick Otto: So looking back, I feel we were a great fit to be an ESOP. In those first couple of years we were like, "Okay, I wonder how this all works." Slowly, over time, we became educated. Jim had a few sit-down sessions with us to explain it, and the thing that really caught my attention was that when I first heard "employee-owned," I expected there was something I would have to contribute financially, defer a portion of my pay or something.

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Rick Otto: And he was like, "No, no, no. All you do is continue to do what you do, and you'll get shares put into your account every year." It costs you nothing out of your pocket, which is still one of the greatest things about an ESOP. All you do is continue to do what you do, and over time you get more shares each year, hopefully, and it builds up to be a great thing.

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Chuck Mazzanti: Yeah, I was out to lunch with a guy today, and he said, "Can you help me understand how the employees get enough money to buy the company?" And I said, "That's the beauty of it. They don't. They don't contribute a penny. A portion of their W-2 income gets allocated in shares on their behalf once they enter the vesting period." It's hard to comprehend for someone who hasn't heard of it. So it's funny you say that.

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Rick Otto: Yeah, because most people are like, "Well, so you get these for free?" Well, in a sense you do. You continue to do your job, and you're still getting paid for doing your job. It's not like they're cutting your pay to do this for you. This is in addition to your pay. So I've always said what Mr. Yoder did for us was a huge blessing. He could have easily sold to private equity or to whoever. He had numerous offers.

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Rick Otto: And we've all seen how that happens and how that works out. It disrupts the entire culture of companies. A lot of times, what really makes the company is the people who are running it. Then somebody comes in with a new philosophy, and all of a sudden you've got people who have been there a long time who are uneasy, and they just don't want to perform like they did before. That's the neat thing about what Jim did for us.

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Rick Otto: We didn't realize it when he made that move to Florida. In his letter he said, "Call me anytime, email, whatever. You just can't walk into my office." And one of the things that happened is, something would come up that would normally be, "We need to go see what Jim thinks about this." Over a period of time it became, "Well, no, I think we can make that decision." It allowed us to learn to make those decisions and work through things without him.

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Rick Otto: Little did we know that was probably part of his plan, so the company could succeed without him being there. I'm guessing it may have been a little uneasy for him at times. Over time, we would call him if we had something, or send him a text or an email, and he was quick to jump on a call with us if we needed something. But we just learned to handle things, and I think that boded well for us later as he got closer and closer to stepping away from his role.

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Chuck Mazzanti: Yeah. And when you went 30% employee-owned in 2018, was it predominantly seller financing through Jim? Was there a bank involved? What was the makeup of the initial 30%?

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Rick Otto: It was all seller financing at that point.

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Chuck Mazzanti: A hundred percent. Okay.

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Rick Otto: Yeah. We negotiated an interest rate we'd be paying. We were new to an ESOP, and we've always been the type of company that doesn't like having debt if you've got a little extra cash. So the payoff ended up going faster than was set up in the original plan. I don't know whether that was or wasn't part of the plan, but it accelerated things, so by the time it was time to do the other 70%, we had used quite a few of those shares.

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Rick Otto: The unique thing about an ESOP is that as payments get made and applied, it releases shares, and the more that's paid, the more shares are released. It wasn't an issue, we were ahead of it, but if we'd gone a couple more years, it probably would have become one.

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Chuck Mazzanti: Sure. So Jim does 100% seller financing on a 30% sale to the employees. You guys pay it off quicker than modeled. And it's my understanding that he sold the remaining 70% to the employees in 2023.

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Rick Otto: Yes. In 2021 I took the role as president, and then in 2022, about midyear, Jim, who was always subtle with most everything, emailed me a link to the NCEO conference in St. Louis. He wasn't a really aggressive person, and still isn't. He said, "This is coming up. This might be something you'd want to look into and go to." I said okay and got signed up.

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Rick Otto: About three weeks or a month before that, he reached out and said, "I'd like to talk to you tomorrow morning if you've got a few minutes." So I jumped on the call with him, and he said, "Carol and I have decided we want to sell the remaining 70%. In order to accomplish that, I'm not comfortable doing seller financing on all of it. So I thought this would be a good conference for you to go to and learn how those things work. For one, we're probably going to need some bank financing, and anything you can learn will help." I'm like, "Okay, now I know why you're glad I'm going."

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Rick Otto: In the meantime, I reached out to the ESOP attorneys, Goodman and Associates in Louisville, established some contact with them and started the process there. We also looked at different banks, but ended up going with the bank we've been with for, I don't want to say, 10 to 15 years. They were able to do a portion, about 40% of it, as bank financing, and the balance was seller financing.

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Rick Otto: The original bank note was set up for, I believe, 42 months. One of the things in the ESOP agreement was that, along with making payments to the bank, we would pay interest to the seller on the seller note, just to keep that interest from getting too high. And here's something I would urge anybody doing one of these transactions to watch: that was in the agreement between the trust and Jim Yoder, but the bank failed to catch it.

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Rick Otto: In the bank notes I had signed, unbeknownst to me, we were not supposed to be making any interest payments to the seller. About eight months in, we figured that out. The bankers, who are great guys, came in and sat down with us, we talked about it, and they said, "At this point, just don't make any more, because the agreement says you're not to make any."

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Rick Otto: Jim actually paid those interest payments back to us, and we applied them toward the principal on the bank note. We ended up paying the bank note off in about 13 months instead of the 42. Part of that was just because we were able to, and we wanted to move things forward. Once that was done, we could concentrate on the actual seller note with Mr. Yoder.

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Rick Otto: There are a lot of nuances in those agreements. Jim and I have always been like, "Well, this sounds good, let's just do that." And a few times we've gone back and said, "Let's go look and see what it says we're supposed to do," because that's really why it's there. There's so much information in those transactions, and it's all fast and furious at one point. Well-written documents help you make good decisions about how you're supposed to do things. The way I've understood it, in the event of a government agency doing an audit, not having followed those documents could be a bad thing. So they're always good guidelines for us to use.

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Chuck Mazzanti: A hundred percent. And just to make sure I'm following correctly: in 2023, Jim sells the remaining 70% to the employees at Coach House. Forty percent of it is bank financed and Jim does 60% as seller financing. As part of that agreement, Jim essentially wasn't collecting any interest while the bank portion was paid down. Once the bank portion was paid down, which you did in 13 months instead of 40-some months, Jim now collects his interest, since the bank has been satisfied.

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Rick Otto: Right. Initially we were making those payments, and then the bank made us aware that we weren't allowed to. A little aggravating, but it worked out. We'd made those payments, he paid them back, and we applied them to the principal. That interest was accruing over that time, so after we got the bank note paid, we had to get the interest caught back up on the seller note before we could start the actual payments on the seller note.

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Chuck Mazzanti: Yep. And thank you for sharing that. That's probably more in the weeds than you were ready for, but I think it's important. Every structure is different, but one of the biggest misconceptions about employee ownership is how customizable the transaction is, starting with the percentage. In Coach House's case, you went 30% and then ultimately 100%. I see it often with a heavy civil contractor whose work is all bonded. They want to stair-step it so they don't flip the balance sheet, so they'll go 30%, then 50%, then 70%, then 100%.

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Chuck Mazzanti: So there's customizability there, versus selling to a strategic buyer or private equity, where the terms are dictated. It's yes or no: do you want to do it? With an ESOP, you can structure it. Do you want to hold the entire note as the seller? Do you want to do a portion of it and get bank financing? Do you want mezzanine financing? So the capital stack can look different. And you guys are a perfect use case. It was different on the 30% portion and different on the 70% portion, which highlights that these deals can be structured in so many different ways, for the benefit of the original seller and to preserve the viability of the employee-owned company going forward.

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Rick Otto: Absolutely. And that's the beauty of an ESOP. The lawyers keep it all straight and narrow, what can or can't be done. But it's very exciting, it really is. I keep saying, "Why wouldn't everybody want to be an ESOP?" And you probably know this one: I believe it's Jim O'Brien. He started his company and immediately became an ESOP, and it's pretty cool when somebody starts it that way.

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Rick Otto: But it's also a great way to do succession planning. You can have the pieces in place and not disrupt the entire culture of a company, and it continues to move forward without the initial shock of new owners. It's really a great way to go.

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Chuck Mazzanti: Yeah. Truly, when you go ESOP, the company the day before and the company the day after are exactly the same. Nothing has changed.

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Rick Otto: Right. Correct.

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Chuck Mazzanti: And the owner who sold is still able to dictate the direction of the company. They don't give up operational control to the new employee owners. Christensen Group Insurance is a 100% S corp ESOP, but I, Chuck Mazzanti, don't get to go to Charlie Christensen and say, "I want to run the company this way." He'll say, "Chuck, you've got a lot of ideas, and not all of them are good. Thanks for the suggestion, but go back to doing your job." Just because I'm an employee owner doesn't mean I get to dictate what the company does.

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Chuck Mazzanti: Now, I will say it's very collaborative. They want to hear all the employees' ideas and have all of us help steer the ship, but brass tacks, I don't get to tell top management how to run the company. There are so many nuances, and obviously we're both employee-owned companies, so we're biased, but there's just so much good to it. So I want to model the arc of Coach House. In 2018 you go 30%. About how many employees did you have in 2018?

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Rick Otto: It was about the same, probably in the upper thirties to forties.

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Chuck Mazzanti: Okay, so let's call it 40, and you have about 40 today.

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Rick Otto: Yeah, 40 to 45. We push 50 at times, and then drop back down a little bit.

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Chuck Mazzanti: Sure. And has top-line revenue stayed consistent from 2018 to today as well?

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Rick Otto: Revenue has grown since 2018, probably about 30% overall. So there's been some growth. One of the things we did as a company was offer more services. A lot of people want their garage wired and want electrical in it. Sometimes they want it drywalled, insulated and heated. So we've partnered with experts in each community who can provide those items for our customers. Some people just want to write one check. They don't want to have to go out and hire a contractor to do this and that.

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Rick Otto: So one of the ways we've grown the business is by adding services that we don't provide ourselves, working with partners who are very good at what they do and can easily provide that service.

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Chuck Mazzanti: Okay. So you essentially haven't added expense. You've kept headcount relatively flat, but you've increased your top-line revenue by 30% by acting almost as a high-end general contractor on the things you don't self-perform, sourcing the experts for the things you don't do in-house. That's awesome. And how did you guys weather COVID? What did that look like, only a couple of years into a new ownership structure, when you went into that black swan event?

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Rick Otto: We weren't sure. A lot of companies were furloughing workers and sending them home. About that time, a lot of people were spending a lot of time at home, working from home. That's when remote working really became a thing. And that's about the time our phone started ringing off the hook. Our website got really, really busy. Suddenly a lot of people were building a garage, and maybe it had an office in it so they could work from home.

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Rick Otto: Our business just went crazy with orders. Then it became even crazier trying to fill orders with the supply chain issues back then. One of the things we could get was a garage door without springs. Well, a garage door without springs doesn't do much. So our model changed dramatically from getting everything done that first day, leaving and never driving back. We actually ended up building buildings without garage doors, waiting for the doors to come, because we had all this work to do but didn't have all the parts and pieces for the entire project. A couple of times we put up the garage without siding and had to wait until the siding showed up weeks later to go back and do that.

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Rick Otto: It really disrupted our normal way of doing things. But as we always have, we adapted and found a way to make it work. We had probably some of our longest backlogs. What we call our schedule runs from when the concrete is poured until the building is actually built. A lot of times that's two to four weeks, but back then I think we got as far out as 12 to 16 weeks.

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Rick Otto: So it was managing that expectation, and that's always tough, because when the customer originally bought the building, the time frame was maybe three to four weeks. By the time they got their concrete poured, all of a sudden it's backed up. Something similar has happened this year, where we've had a tremendous amount of concrete get poured and ready, so we're working a pretty good backlog again.

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Rick Otto: But it was challenging. We had to look for a different garage door supplier. We were able to do that while keeping the one we had, and found other avenues where we could get doors more consistently. If they told us six weeks, it would be six weeks, instead of telling us six and it being eight. When we're trying to keep our schedule, we want as much of the product in-house as possible before we go build it, so we really needed the doors.

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Rick Otto: It's not too often that we change suppliers, but now we have two garage door suppliers and we order from both. A lot of different things changed back then. Of course, our revenue jumped during late 2020, 2021, 2022 and into 2023. I think 2023 was the highest year we've ever had. It helped us have a couple of really good years.

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Chuck Mazzanti: Yeah, it's funny how, if you could weather the storm, in a weird way it helped, at least for business. Obviously a bunch of horrible things happened, but from a business perspective, like you said, a lot of people were at home trying to figure out how not to kill each other, right? So it's like, "Honey, I think I'm going to work from the office, which happens to be in the garage." Courtesy of Coach House Garages.

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Rick Otto: Correct. Which is a great place to work from, if you get to. I don't want to jump off subject, but one of the models we've always used is that once we sign an agreement with a customer, their price is locked in. It won't change for a year. We'll honor that price for a year.

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Rick Otto: Well, if you recall, during COVID, OSB was $85 at the big box store. And one of the things we did was stick to it. If you signed an agreement and it was six months later, and the volatile material prices, the lumber, the OSB, all of that was skyrocketing, we stuck to it and said we would stick to it.

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Rick Otto: We had a few who said, "Well, with it going up so much, what if, by the time you build, those materials have gone back down?" What I did was agree that we would look at it, and if the price had decreased at that point, we would adjust their price. I know a lot of other builders were just saying, "Here's your contract. We agree to build this for you, but in six months, when we get there, the price could be different, and we'll refigure it at that point in time."

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Rick Otto: One of the things we've been able to do is inventory. We're able to inventory a large amount of the OSB, framing lumber, roofing, the things we use a lot of, and keep it indoors instead of sitting out in the weather. We have a facility that's able to handle that. And that was a blessing, that we had all of those materials. That's part of how we were able to maintain and guarantee that price for our customers. Nobody likes an estimate. I always say an estimate gets you to commit to me and allows me to charge you more at the end, and there's nothing you can do about it.

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Chuck Mazzanti: There's nothing better than, "Yeah, we can build a garage for 15 grand," shaking on it, and then, "Well, this changed, that changed, so actually it's 75 grand." That's obviously an extreme example, but that's pretty crazy that you guys said, "Whatever dollar amount we agreed to, as long as we do it within this year, that's what we're doing."

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Chuck Mazzanti: And as we wrap up, there was a question I wanted to ask. You guys finally got the bank portion of the other 70% paid off, and I'm assuming there are maybe a couple more years of paying Jim off. But you brought up a good point that I want to discuss, because in construction the market is very dynamic, right? You could go into a COVID, you could go into a 2007, you could go into a tariff year. You could go into a war. There are so many things that impact contractors, from materials to market confidence and so on.

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Chuck Mazzanti: You just mentioned you stock up on material to be able to level those spikes, kind of like a commodity trader: buy low and preserve yourself. I know you're maybe not getting the full benefit of the tax-free income yet, now that you're 100%, because you still have to pay Jim. But my question is, if this had happened in 2015, would you have been able to stock up on as much material as you can now with the tax-free income of the ESOP? Was there an advantage there?

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Rick Otto: Yeah, I think so, because now there's a little more cash available. Of course, some of that cash is being used to make a payment that wouldn't have existed in 2015. But we would have still done the same thing, except maybe we would have used the line of credit to buy those materials, just to have them. That's been the approach we've always had. When Jim built this facility here in 2004, the thought was to have enough room to store enough OSB, enough framing lumber, studs and truss lumber.

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Rick Otto: We also have a truss plant here where we build our own trusses. We don't build trusses for anyone else, just ourselves. But yes, the answer would be yes. In 2015 we would have been using the line of credit to buy those materials to stay stocked, and it would have cost a little bit of interest. Today we've been able to have cash available so we can stay ahead on inventory. Of course, overall material costs have gone up over the years, but we probably have about 20% more inventory than we did 10 years ago.

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Chuck Mazzanti: Well, it's hard to compare when you're jumping 11 years, but if you normalize things, there's a cost to tapping into your line of credit, and there's a cost to using non-tax-advantaged dollars. It's no different than having an HSA with your personal health insurance: it's better to use tax-advantaged money than post-tax dollars.

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Rick Otto: Right.

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Chuck Mazzanti: And especially once you get Jim fully paid off and you're 100% employee-owned, you're not paying federal income tax, and in a lot of cases you're not paying some or all of your state income tax. So that has to be a big advantage, and I'm sure you're probably licking your chops for when that materializes in the coming couple of years.

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Rick Otto: I am, and I think all of us here are, because it means there's more cash, which will add to the share price. I think it's going to help the share price climb. The unique thing with the valuation structure of an ESOP is, if the company's worth a million dollars and you owe a million dollars, the share price is now zero. With another company, you could owe 1.5 million, it could be worth one, and you could still sell it for one.

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Rick Otto: But it's definitely something in the future. And with the tax-free piece of the 100% S corp, I said, "Okay, once we see that first tax return..." I knew that was the case, but until I could actually see it... The first year was 2023, and I got to "tax owed: zero," and it's like, okay.

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Chuck Mazzanti: This is real.

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Rick Otto: It is real. It is real. It's exciting. I've been trying to work with the new people we've hired. We have a lot of young people, 19, 20, 21 years old, and I tell them, with the ESOP that's here, if you can be here as long as I've been, 36 years, you're going to have a very nice ESOP balance, along with the 401(k). Based on the way it has grown, I feel that at some point it could outdo a 401(k) in the amount of funds you could have available at retirement age. If you put a lot of years into it, it could really accumulate rather quickly.

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Chuck Mazzanti: Well, here's the thing, and then I'll wrap it up so you can get back to the books. I can speak from my own personal experience as an employee owner. We have a 401(k) as well, and I have no control over my 401(k). Is it in growth stocks? That's foreign to me. I wasn't a finance major, right? So you start getting into whatever ETF, what's the expense ratio, how old are you, so you can get more aggressive or less aggressive. I have no idea. Whatever you think, set it and forget it, which is fine, but I can't influence that.

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Chuck Mazzanti: Versus my employee ownership account: the more insurance I sell, the higher the value goes. The more cognizant I am of spending and keeping expenses low, the better the share price. The better I take care of my clients so they stay customers, the better the share price. To Jim's point when he wrote the letter to you guys: keep doing what you're doing. You don't have to change a thing. If we take care of our customers and take care of each other, everything else bears out for the better. That's very empowering, because it takes the guesswork out of it. Do right by the customers, do right by your fellow owners, and the rest takes care of itself.

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Chuck Mazzanti: So the parting question I want to ask you, Rick: I think the benefits of an ESOP are obvious. What would be the one thing you'd say about why a contractor shouldn't go employee-owned?

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Rick Otto: That's a very good question. I guess from my standpoint, if you're running a good company and doing things right, trying to do right by taking care of customers and all that, I can't think of any reason why you wouldn't, really. I think it's a great way for construction companies. I don't know the exact percent, but it seems like about 30% of the ESOP world is construction.

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Chuck Mazzanti: That's correct. It's lumped into one category, but construction, architects and engineers make up about a third of all ESOPs.

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Rick Otto: To me, I just can't see any reason why somebody wouldn't become an ESOP, particularly if you've been in business for a while and you've got good people who are able to take care of things, and you can slowly transition instead of all of a sudden just handing things off. It allows you to have some involvement, on the board and so forth, and help with the development of whoever's taking it on.

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Rick Otto: So many times you see companies that sell out to somebody, their mentality is a little different, everything just changes, and in so many years they're no longer in existence. It's disruptive to the employees you have. That's where an ESOP is really... I can't think of a better way to do it.

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Chuck Mazzanti: Yeah. And Arthur, Illinois isn't a town of a million people. You guys make an outsized impact in your community. It's not that Jim had to be philanthropic. It was his right. It was his company to sell to whoever he chose. But because he went employee-owned, and it sounds like he and his wife and his family were taken care of, and rightfully so, Coach House Garages and all those people still have good jobs, and that's the tax base for Arthur, Illinois. It makes a very big impact in every community, but the smaller the community, the bigger the impact is felt. So I think that's a very good point.

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Chuck Mazzanti: Well, Rick, I've taken up enough of your time. This was great. I'd love to have you back for a part two. I think we left a lot of meat on the bone. How can people get a hold of you? If someone wants to get a garage done or wants to network with you, how do people get a hold of Rick Otto?

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Rick Otto: Well, if you're looking at a garage, our website is coachhousegarages.com. It's plural. Just search for us and we should easily be found. My email is rotto@coachhousegarages.com, so R-O-T-T-O at coachhousegarages.com. As I mentioned, my mother gave me the gift of gab, so I'm always... It's probably why you and I got along so great.

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Chuck Mazzanti: I think so. And that's why it's a feat that we got this done in an hour and three minutes, because I think we could probably go for 10 hours. So Rick, thank you for coming on. This was a blast.

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Rick Otto: Thank you. Appreciate it. See you.

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Chuck Mazzanti: All right, we'll see you.

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Chuck Mazzanti: Thanks for listening to the Construction ESOP Collective. If this was useful, follow the show and share it with a colleague. Join the conversation with me, Chuck Mazzanti, on LinkedIn and find all episodes at constructionesopcollective.com. Until next time, keep building ownership one conversation at a time.​