The ESOP Advantage: Why Baker Roofing Transitioned to Employee Ownership

[00:00:00] John Matthews: Our growth and success become much more about the
whole, the consistency. It is not a strategy built upon a few individuals; it is a strategy
built upon the collective production and success of all of us.
[00:00:16] Todd Kavanaugh: Hey there, and welcome to Under the Roof, the official
podcast of Baker Roofing Company. I’m Todd Kavanaugh.
[00:00:23] Matthew Elban: And I’m Matt Elban. We’re here to connect the dots
between the field and the office, leadership and crew, values and action.
[00:00:30] Todd Kavanaugh: In each episode, we dive into the stories, lessons, and
updates that matter to our team.
[00:00:37] Matthew Elban: From safety and career growth to company milestones
and good old-fashioned storytelling, it’s all about living out what makes Baker, Baker.
Let’s get into it.
[00:00:48] Todd Kavanaugh: Hey there, and welcome back to Under the Roof.
[00:00:50] Matthew Elban: I’m Matt Elban.
[00:00:51] Todd Kavanaugh: And I’m Todd Kavanaugh. Today, we’re sitting down with
someone you all know, John Matthews, who’s here to help us unpack what it really
means to be an employee-owner at Baker.
[00:01:03] Matthew Elban: So, John, there’s been a lot of talk around the ESOP, and
today we’re going to dig into what that means, how it works, and why it matters, not
just for the company, but for each one of us. But before we do that, a question that I
always like to ask: What’s the last book that you’ve read, and what did you take away
from it?
[00:01:21] John Matthews: Oh, jeez. It’s probably one that’s relatively boring to most,
but the last book I read was called The War Below. It’s actually about rare earth mineral
mining in the 21st century, how mineral rights come about, and how that affects
geopolitical conflict. So that was the last book I read.

[00:01:47] Matthew Elban: That was different from where I was thinking that was
going to go! That’s awesome.
[00:01:51] John Matthews: Hey, it had a lot to do with copper. There’s your tie-in to
the roofing industry.
[00:01:54] Matthew Elban: That’s a great tie-in. We’ve all been getting the emails
about copper prices going “through the roof,” no pun intended. For people that haven’t
seen your office in the new building in Cary, there’s a huge line of books sitting right
behind you, I’m guessing maybe 30, on military history, strategy, and biographies.
[00:02:13] Matthew Elban: John, what draws you to these different topics?
[00:02:15] John Matthews: Anecdotally, the books exist here because they were
pushed out of my house. My wife didn’t want boxes sitting in the corner, so they
appeared here and now they just create this nice backdrop. But look, I think history is a
subject worth studying, albeit at times boring because it’s the study of past events. At
the same time, it gives us insight into why people act a certain way, how in-depth
information goes to really understand the “whys” behind things, because they’re not
always as they seem on the surface. There may be different motivations for making
certain decisions at certain times. The more we understand about that, the better we
can apply it to our current situation.
I happen to have a master’s in history with a focus on war studies and peace and
conflicts. That’s why those books are what they are. That’s also why they’re here:
because my wife said, “Get them out of the house.”
[00:03:09] Matthew Elban: Understood. My wife has given similar comments to me,
that I need to remove the 17 piles of books I have at home about sales topics and all
this stuff. Anyway, we’re looking into finding ways to give away a few copies of a book
each month that we do this podcast. We’re still fleshing that out, but I’m looking
forward to that in the future.
[00:03:28] Todd Kavanaugh: If anybody’s interested in rare earth minerals in The War
Below… In fact, I think, if I’m not mistaken, that orange book I can see behind your right
shoulder is Sun Tzu’s Art of War, right?
[00:03:41] John Matthews: It is. That’s how you apply 4th-century B.C. strategy. They
always laugh and say how applicable it is to corporate America. I don’t think so. I think it
was pretty applicable to 4th-century B.C. strategy, but it’s an interesting read

nonetheless and certainly has some applicability to modern warfare. But I don’t know
about business; it’s kind of ruthless.
[00:04:07] Todd Kavanaugh: So you brought up business. Let’s get down to business
a little bit. John, you were part of the ownership team that made this ESOP decision.
Give us your background a little bit, what experiences have you had that shaped how
you think about business?
[00:04:26] John Matthews: You brought up history, and I would say my exposure has
been varied. I think that’s a key point. My exposure to business has been both from an
institutional perspective, that is, the government doing business, but then also private
business. The latter has certainly been a whole lot of fun. The reason for that is the
sheer interaction and ability to communicate with people who care, who share a
common mission, a common goal, and a common sense of character.
This is anecdotal, but a couple of the books on my shelves are about a businessman in
Costa Rica in the mid-1940s, José “Don Pepe” Figueres. He eventually led a rebellion in
1948 that dramatically changed the constitution and the trajectory of Costa Rica.
Within about a 19-month time frame, he propelled it to be the most stable and
economically viable country in Central America. A lot of that had to do with his
philosophy on people.
In his business, he was one of the few at the time that actually distributed food
resources to his employees, ran a daycare center, and had benefits that were
unparalleled during that time or in that region. He chose to do that because he knew
that the most important aspect of his business was not necessarily the product or the
relationships in the capital city, but the employees. He saw the company and the
employees’ lives as synergistic.
I think those thoughts feed into my philosophy on business: it’s all about people. It
doesn’t matter what widget you produce. If you aim to produce the highest-quality
widget in the best interest of the customer and you take care of the people engaged in
that, then everything moves forward in a positive direction. Not all businesses assume
that philosophy because, at the end of the day, it’s probably not the most profitable
way to run a business in the short term. But when you look at the holistic picture,
training, professional development, and growth, they are an important part of the story
of success for any institution.
[00:07:16] Matthew Elban: That was a fantastic answer.

[00:07:17] Todd Kavanaugh: Can you share with us the name of that businessman
again?
[00:07:20] John Matthews: His last name is Figueres. Anybody who knows the history
of Costa Rica knows José Figueres was president and then a sort of behind-the-scenes
“godfather” of politics. He was all about Costa Rica. He was all about a socialist and
capitalist approach to the betterment and stability of the country. If you read about
him, I think you’ll find him to be a very interesting character.
[00:08:03] Matthew Elban: John, you come from a sales background, and you’re used
to explaining complex things in simple terms. Today, you’re basically our ESOP
salesperson, helping everyone, from the field crews to the executives, understand what
it actually means to own a part of Baker Roofing. How do you approach that?
[00:08:40] John Matthews: You mean from a sales perspective?
[00:08:42] Matthew Elban: Yeah. How do you share insight into what this transition
and change looks like?
[00:08:50] John Matthews: I think there are two ways to look at it. One is externally.
The opportunity for the company to be employee-owned in the current industry
environment is unique. We talk about our fundamentals, character, quality, and pride.
Now we can say to the industry, “We are the only company in the top 10 commercial
roofing and sheet metal contractors that is actually an ESOP.”
We’re competing against companies that are either “roll-ups”, where an entity acquires
companies to create a larger one, or they are focused on private equity for mergers or
transitions. It’s very unique that we are the only one in the top 10 that fits that moniker.
I think there’s a lot of weight here with the industry in terms of consistency and buy-in.
For us, all those things align now.
From an internal perspective, it’s a unique opportunity to take a company that was
privately held and expand that shareholder membership to the employees. Our growth
and success become much more about the whole. It is not a strategy built upon a few
individuals; it is a strategy built upon the collective production and success of all of us.
It’s a way for all of us as individuals to feel like we are really contributing to something
of value that has a return to us.
[00:11:31] Todd Kavanaugh: One of the things I’ve realized is that you’ve been looking
at this for a long time, but for many people, this is a brand-new concept. Starting from

the very beginning, when someone asks you, “What actually is an ESOP?”, how do you
explain it?
[00:12:01] John Matthews: This is a blend of socialism and capitalism. You’re taking a
capitalist structure, a company in a free market, and converting its ownership to a
collective group of individuals who share in the profits through share value. It allows for
a corporate structure that pursues growth and profits while allowing every eligible
employee to participate.
“Charging the hill” isn’t just because we need to; it’s because that is how you grow
shareholder value. It provides increased motivation for all to deliver the best quality for
the customer, knowing that, in turn, will produce the revenue and profit we want to
achieve. In a way, it makes all of us investors in the future progress of the company.
[00:13:43] Todd Kavanaugh: That’s really good.
[00:13:44] John Matthews: I certainly like the idea of looking at it as each employee
being an,
[00:13:47] Matthew Elban: , investor in our collective business. I’ve heard it described
as similar to a 401(k), but designed to hold company stock. For someone who maybe
doesn’t participate in a 401(k) or hasn’t thought about owning stock, can you break
that down?
[00:14:10] John Matthews: The structure is somewhat similar to a 401(k) regarding
vesting and the intention of a long-term benefit. However, the methodology differs
when it comes to contributions and growth. Think about the current company match in
a 401(k); this supplements it. The ESOP match comes from the company at no
additional cost to the participant.
In the case of ESOP shares, the growth is predicated on the success of the company
rather than outside capital markets. We have a lot more control over the outcome than
we might in a conservatively invested 401(k). I want it to resonate loudly that this does
not replace the 401(k). The 401(k) remains the anchor and the foundation of your
retirement planning. Your ESOP share values will supplement that, creating additional
savings because of your hard work or “sweat equity.”
[00:16:41] Matthew Elban: That makes sense.
[00:16:42] Todd Kavanaugh: I love what you said about having “collective control as a
team.”

[00:16:58] John Matthews: The word “collective”, there might be some people out
there shuddering because they’re hearing “socialism” and “collectivism.” But think of it
as the “light” version. It’s a way to enhance capitalism rather than creating a different
form of governance. It’s not what you might read in the Communist Manifesto!
[00:17:23] Todd Kavanaugh: You could also liken it to an NFL team, right? They have
collective control over how well they play on the field. We have collective control as a
team over how well we perform, which directly impacts the value of our company.
[00:17:41] John Matthews: It does. And not to be confused with collective bargaining,
which is something else. This is really about collective participation in the increasing
value of the company.
[00:17:55] Matthew Elban: I like how you said that.
[00:17:57] Todd Kavanaugh: So here’s the big question: “What is this actually worth
now?” How do you value a company that is not traded on the stock market?
[00:18:11] John Matthews: That’s a good question. It’s not easily defined because
many factors go into determining company value. In a scenario like this, an
independent evaluator values the company based on factors like earnings (EBITDA),
market trends, backlog, cash on hand, debt, and the trailing three years of growth. They
look at how repeatable the business is and how profitable the book of business is.
Any valuation like this is done by an independent third party following best practices
and standards. Ideally, they have knowledge of the construction industry to understand
construction accounting and “work-in-progress” schedules. We do a version of that
each year to assess progress.
How do share values increase? We have to take into account macro and
microeconomic cycles, material supply costs, customer buying interest, our debt
structure, and our expense structure. And, as is always a factor in our business: cash
flow. How frequently and effectively are we billing?
It’s important for everyone to understand that you’re essentially starting at “ground
zero.” You’ve acquired the asset, but now you have to improve those things, reduce
debt, improve cash flow, and improve profitability. As you do that, that “zero” turns into
a value of one, four, or eight. That is how share value grows. Essentially, when you start,
you’re starting at zero, and the ESOP trust works its way up the ladder from that point
forward.

[00:23:09] Matthew Elban: That makes sense. What resonated with me is that the
things we do every day, billing, collecting, performing work, are directly related to
building value in our business.
[00:23:45] John Matthews: To use billing as a case study: if we perform work in week
one and don’t bill it until the end of the month, and then the customer has 45-day
terms, we’ve added unnecessary days to our receivables. The quicker we can move to
same-day or same-week billing, the better we improve cash flow and month-to-month
profitability. Hopefully, that resonates with every employee.
[00:25:25] Matthew Elban: There is a push for those things, and I recognize people are
working hard at making them more efficient.
[00:25:33] John Matthews: That’s why people hear about automation and process
implementation. It’s a difficult process given our volume, but it’s a worthy one. I’m really
grateful for Aviatron because it has an impact.
[00:25:54] Todd Kavanaugh: Let’s talk about the day-to-day employee-owner
experience. What has actually changed? We don’t have voting rights in the traditional
sense, so what does ownership actually mean at Baker?
[00:26:26] John Matthews: One of the good things about this shift is that we maintain
our management and operational consistency. Our philosophy on how we do business
and handle customers doesn’t change.
Regarding “Do I really own this company?”: participants own shares held by the ESOP
trust. The trust is the entity that owns the company. Individual shares are not
considered voting stock, nor do they carry the personal liability of traditional
ownership, you don’t have to sign for equipment loans! Instead, it acts like owning
nontransferable, privately held shares.
Our shares aren’t subject to the whims of Wall Street or wild fluctuations. It adds
stability. While this isn’t a “get rich quick” program, it is an opportunity for shareholders
to collectively build value. Factors like debt repayment and expense controls are going
to make individuals feel like they have a stake. You have a say in the daily operations
and how efficiently they run.
[00:30:33] Todd Kavanaugh: I love the point about organizational continuity. I’ve seen
friends at companies that were acquired by outside entities, and it was incredibly
disruptive. The fact that we can transition while maintaining our leadership and culture
is a good thing.

[00:31:18] Matthew Elban: John, why was employee ownership the right choice
compared to selling to private equity or going public?
[00:31:33] John Matthews: We were concerned that any outside capital would want to
influence our culture and trajectory. We are extremely excited about our current
corporate culture and management teams. We didn’t want to infuse an outside
influence that would suggest any change there. We want to remain nimble enough to
shift strategies based on market demands without being bound by an outsider’s
preference.
If you go to Wall Street, others pull the strings on perception. If you go to private
equity, someone walks in with a bag of money and wants to control things, and they
may not share our philosophy on people. Merging with another company risks
upsetting the “apple cart” with personality differences. This option made a lot of sense.
Our confidence was also predicated on Mark Lee’s knowledge of other successful
ESOPs. It wasn’t a “let’s try this and see” situation; it was, “let’s do this because we have
seen it work elsewhere.”
[00:35:14] Matthew Elban: I’m excited for what it means for us as individuals and as a
company.
[00:35:23] Todd Kavanaugh: Final question: What music, podcast, or audiobook is on
heavy rotation for you right now?
[00:35:36] John Matthews: Silence makes me nervous! I’m a classic listener of
old-school U2 and Dave Matthews Band. I still listen to the same music and read the
same books as I did 25 years ago. For podcasts, they vary from business-related to
absolutely not, but I encourage everyone to take advantage of them, they are so
informative.
[00:36:20] Matthew Elban: Nothing wrong with some DMB.
[00:36:22] Todd Kavanaugh: I’ve got one of my favorite albums back here: Before
These Crowded Streets.
[00:36:29] John Matthews: You can throw the Eagles in there, too. I still remember the
first 8-track I ever had was an early Eagles album.
[00:36:40] Matthew Elban: That’s awesome. Well, guys, that’s it for this episode. Big
thanks to you, John.

[00:36:50] John Matthews: Thank you for having me.
[00:36:53] Todd Kavanaugh: If you’ve got questions, we hope to continue bringing you
information in the coming weeks, including a town hall. Stay tuned.
[00:37:12] Matthew Elban: Thanks for listening. Don’t forget to follow the podcast and
share it with your crews.
[00:37:17] Todd Kavanaugh: And remember: “We shall do good work at a profit if we
can, at a loss if we must, but always good work.” See you next time.