Why ESOPs Work for Professional Services Firms

Over the past 15 years, I’ve been involved in hundreds of ESOP transactions – as both an attorney and a selling business owner. I am a strong advocate for ESOP transactions and the benefits they can provide to businesses from a wide range of industries, including professional service firms.

As I recently told Inside Public Accounting, “When you’ve got people businesses, using [an ESOP] for the sale of a company is a very effective strategy to provide the exit to the owners and then have a legacy moving forward without just blowing up the firm and shutting it down.”

However, until recently, accounting firms have shied away from ESOP transactions – but accounting powerhouse BDO’s successful ESOP transaction may be changing the tide. “Usually when somebody like BDO does something, the industry tends to follow and I think we’re seeing a lot of interest there right now.”

You can read the full article in Inside Public Accounting here: Breaking Tradition: BDO’s Stock Ownership Plan

Listen to Russell Shapiro’s engaging conversation with Steve Ferrara, Chief Operating Officer of BDO USA LLP, regarding the firm’s ESOP transaction: What Does an ESOP Look Like for an Accounting Firm?

What makes an ESOP the right exit strategy?

1. ESOPs avoid the “all-or-nothing” approach of most sales.

Most sales of a company are an “all-or-nothing” deal where a third-party purchaser acquires 100% of the company (either its assets or stock), the new management group assumes control of the company, and, in most cases, the prior business owner ceases to be employed by the company immediately or shortly after the deal closes. With an ESOP, however, the business owner is dealing with a friendly group of employees who are familiar with the former business owner’s leadership and, consequently, are more likely to facilitate the transaction on a timetable acceptable to business owner.

2. The business owner helps facilitate the transition.

Most ESOP transactions are contingent on the owner assisting with the business transition, which gives employees time to take more initiative and control over the business. For this reason, ESOP transactions are especially appealing to business owners who want to extract liquidity from the company but aren’t quite ready to retire and still want to be involved in the business.  In addition, in most ESOP transactions, the Seller provides some or all of the financing for the transaction.  Since business owners who are willing to consider selling to an ESOP have a high degree of trust that their employees will be effective in running the business after the transaction, the business owner is more willing to take on the risk of being the creditor of the company after the sale.

3. Business owners can sell less than 100% at a time.

Some business owners don’t want to sell their entire company at once, especially if the company’s value is depressed due to economic conditions. With an ESOP, the business owner can sell less than 100% of company stock to launch an ownership succession process. Then, when the economy improves and valuations rebound, the business owner can do another transaction with their company’s ESOP to complete the transition.

If you have questions about ESOPs, please don’t hesitate to reach out. LP’s ESOP attorneys are here to help. For additional information on how ESOPs work and the ESOP journey, listen to David Solomon’s interview on the ‘Intentional Growth’ Podcast.