BDO USA established a landmark employee stock ownership plan on August 31 that gives its 10,000 U.S. employees a stake in the nation’s sixth-largest accounting firm. Its ESOP became the country’s 10th largest plan measured by employees, National Center for Employee Ownership data indicates.
Motivating BDO, explains CEO Wayne Berson, was the desire to unlock the firm’s value today with a “strategy that sustains a strong, caring and resilient business for tomorrow” and an ESOP “to invest in each other so everyone who contributes to our success has the opportunity to benefit from it.”
While groundbreaking in its size and visibility, BDO’s ESOP isn’t in terms of its structure since there are hundreds of similarly organized plans in the U.S. But its size and scale marks it as attention-worthy and it embodies a trend we’ve seen the last couple of years: Professional services firms (PSFs) are using ESOPs as a way to sustain their culture and provide growth capital without selling to a larger strategic buyer or a private equity firm.
Like many successful PFSs, BDO needed to solve its succession and ownership dilemmas. Its growth raised the financial hurdle facing new partners whose capital contributions provide the funds to buy out existing partners. Especially in the last year with the sharp rise in interest rates, the attractiveness to prospective partners of borrowing large sums to acquire their ownership stake has greatly diminished.
Creating the ESOP addresses these problems by providing liquidity to existing partners and a means for employees to acquire an interest in the firm. Two other benefits accrue from the ESOP structure:
1. Legacy partners who cash out can defer taxes using the section 1042 exemption of the Internal Revenue Code provided they reinvest their proceeds in U.S. stocks and bonds.
2. As a partial C Corporation, BDO USA can deduct the cost of its annual non-cash contributions to the ESOP, which then allocates shares to the plan’s participants.
Professional services firms are particularly well-suited to ESOPs because their educated, partnership-oriented workforce understands what ownership represents. Many PSFs already operate as partnerships, so a deep understanding exists of the wealth opportunity that proprietorship confers. From the firm’s perspective, the prospect of business ownership is a proven way to combat high turnover.
No wonder, then, that CEO Berson considers the ESOP a multifaceted strategic advantage. “We are providing a benefit that no one else in our industry is providing,” he notes. “This is effectively a big increase that people are getting by working at BDO. It’s transformational. But the beauty of it is we keep control of our firm.”
The financing source for BDO’s ESOP – an affiliate of private equity firm Apollo Global Management – underscores another recent trend; namely, the presence of noncommercial bank capital providers in funding ESOPs. Apollo recognizes that an ESOP company’s highly committed and motivated employees represent an excellent credit risk. Significantly, while Apollo will provide the $1.3 billion line of credit, it will not get any kind of ownership stake. As Berson explains, Apollo is “effectively acting like BDO’s bank in providing the money. This is not a private equity deal — it is private credit.”
The week before BDO announced its transaction, Verit Advisors led an ESOP for Chicago-based EA Collective, a professional services firm needing to transition to the next generation. The 100-person brand experience agency’s cofounders Fergus Rooney and Gabrielle Martinez wanted to withdraw their capital, built over more than two decades, while ensuring the company’s growth trajectory and continued ability to attract the best talent; maintain the integrity of its culture and brand; and secure a bright future for its employees.
The cofounders considered different transition and sale approaches, but found that none achieved their objectives so well as an ESOP. Verit worked with them to structure a plan that allowed them to sell their stake in the business while enabling the firm to retain its identity without selling to a larger advertising and marketing agency or PE firm not aligned with its long-term objectives. The ESOP underscores they are relying on the proven skills of a longtime employee, now-CEO Lucy Stratton.
As for professional service firm ESOPs, construction and engineering firms historically have been in the forefront. Like BDO and EA Collective, they possess highly educated and talented workforces essential to achieving their mission and who understand employee ownership’s benefits. In the last decade and especially since the pandemic, we’ve seen consulting, marketing and financial services firms move to the lead and become interested in establishing ESOPs. I believe this signals these firms’ maturity and need to transition ownership and management to their next generation – challenges that successful C&E firms faced in the past.
The BDO and EA Collective transactions, among many others, affirm my belief that this is the Decade of the ESOP. I am encouraged that a new class of professional services firms recognize that ESOPs possess powerful motivational as well as financial benefits. People now grasp the importance of culture in sustaining business continuity and success. Plus, they recognize how ESOPs support these all-important human factors in ways often lacking in M&A and private equity solutions to the ownership transition and capital infusion challenges successful professional service firms often face.
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