Breaking the Partner Model: Will Employee-Owned Firms Become the Norm?

The last decade has seen many changes to the accounting profession: the onset of the digital age, obstacles wrought by the pandemic, and rapidly changing client needs and expectations, just to name a few. Now, the industry is facing a particularly difficult set of challenges: fewer students are pursuing accounting degrees, young professionals no longer accept the profession’s promise of excessive work hours or the tedium of tax season, and long-established accountants are departing the profession at a rapid rate.

Accounting firms have struggled to find effective ways to handle the ballooning talent recruiting and retention issue. Recently, some firms, including BDO USA LLP, the sixth largest accounting and consulting firm in the United States, have decided to make drastic changes: They’ve abandoned their traditional partnership models and adopted employee stock ownership plans (ESOPs).

An ESOP is a benefits plan in which employees own part or all of the company they work for. Employers have the option of either replacing workers’ traditional 401(k)s with an ESOP or including it as an additional employee benefit on top of an already existing retirement plan (BDO opted for this latter choice).

Perhaps surprisingly, undergoing an ESOP transition doesn’t take an incredibly long time, making it a very viable option for accounting firms looking to make a talent retention change within a year.

“The normal timeline is four to 12 months,” says Aziz El-Tahch, managing director and ESOP and ERISA advisory practice co-leader of Stout, the company that acted as BDO’s financial advisor as they underwent the transition. “The first step is a feasibility analysis, where the key decision makers of the company really understand what the ESOP looks like financially from both the perspectives of corporate and individual shareholders. Once they see that, then we undertake an iterative process where we tweak the design of the transaction to meet certain corporate objectives. Once the board has a good sense of how much capital to raise, that’s when we start execution. Then, it’s a four- to six-month process.”

Why an ESOP?

Often, exploring an ESOP is triggered by either the retirement of a senior partner or by the lack of having someone in the company who could feasibly take over the business—or both. An ESOP can be an incredibly useful succession planning tool, and many business owners opt for them in order to ensure that when they retire, the business stays with its employees rather than selling to an outsider who might come in and change the company culture.

Prioritizing culture and incentivizing talent with a great benefits package are two elements of effective talent retention, and both of these were top of mind for BDO’s senior partners when they were considering buyout offers from private equity (PE) firms.

“We realized so many benefits by transitioning to an ESOP that weren’t possible with a PE deal,” says Stephen Ferrara, chief operating officer of BDO. He notes that accounting firms often experience a loss of control, becoming beholden to the PE firm, which has oversight.

By undergoing the ESOP transition, Ferrara says every employee at BDO will continue to earn their salary, bonus, matching 401(k) contributions, and, on an annual basis, now receive a 10% ESOP contribution paid on their behalf by the firm.

“To me, the ESOP is a game changer,” he explains. “With it established, every employee has a wealth-building opportunity they haven’t had in the past. It makes every employee an owner without requiring them to make a huge investment. It ties employee benefits to firm performance, and we really think that’ll help with talent retention.”

Ferrara adds that the ESOP transition was a way to make working at BDO more appealing to recent college graduates: “With the ESOP, we hope to demonstrate to new graduates that they can have more ownership over their own destiny—a talent retention tool that’s worked well in other professions.”

A Viable Solution for the Profession?

The introduction of ESOPs in the accounting space begs this question: What will other firms do? Is this a viable talent retention and succession planning solution for an industry that’s been in a state of flux for years now?

Andy Kamphuis, CPA, a shareholder and managing director at Vrakas CPAs + Advisors, thinks so. He views BDO’s decision as not only a creative one, but also reflective of the many catalysts for change tugging the accounting profession in different directions. “There are many effective ways to respond to these changes that aren’t necessarily one-size-fits-all solutions,” he says.

From his experience of working at an accounting firm that serves the needs of many clients using ESOPs, Kamphuis finds these types of structures work well for companies where people are the primary value creators. “This factor alone makes CPA firms great candidates for utilizing ESOPs as a talent retention tactic,” Kamphuis says.

If you want a comparable, profession-wide success story, El-Tahch says to look at the engineering industry. “It’s extremely similar to accounting,” he notes. “The companies that have been most successful with ESOP transitions have highly engaged workforces, very good earnings in cash flow metrics, and generally are part of growing industries—all of which apply to accounting. Both professions have educated workforces, and people are really important in terms of the value their labor creates. Decades ago, one or two well-known firms transitioned to ESOPs, then dozens and dozens of others followed.”

Just like engineering firms, El-Tahch expects accounting firms will take note of BDO’s transition and its first-mover advantage and start to explore this option at a greater frequency than they have in the past.

What Challenges Await Firms?

As accounting firms consider whether moving forward with an ESOP is right for them, it’ll be important for firm leaders to be aware of the challenges associated with the transition in order to position themselves for success. According to experts, there are a few major obstacles that company owners tend to face. The good news? They’re challenges that, by setting the right expectations and engaging in careful planning, can be avoided or overcome.

The first challenge: raising the capital. To successfully launch an ESOP, you’ll need to find a bank that’s experienced in this finance niche. Not all banks understand the structure and what’s involved in the transaction, experts caution. So, accounting firm leaders shouldn’t be surprised if they have to put extra time and effort into finding a bank that’s good at working with companies undergoing an ESOP transition—and they should expect that some lenders will simply be overwhelmed by the proposal and say no.

Additionally, firms can expect to deal with a lot more service providers when undergoing an ESOP transition. “This can be extremely surprising to companies that are previously used to it being just them, so to speak,” Kamphuis says. “All of a sudden, they have an ESOP advisor, they’re going through an auditor review for the first time because that’s required, and they have new benefit plans that might trigger new audit requirements—there’s more people looking at your stuff, and you’re paying more fees for the oversight.”

One other “surprise” to be aware of? Transitioning to an ESOP requires you to take on debt as a capital-raising function. For firms that haven’t been in debt, this can mean a shift in their mindset and in the way they do business. Of course, overcoming this challenge may require firm leaders to think about whether an ESOP is right for them.

El-Tahch encourages firms considering this transition to do a feasibility analysis. “Literally sketch out what an ESOP would look like for your firm. There are different ESOP structures you should think about—the one that worked for BDO may or may not work for your firm,” he stresses. “This is a flexible and customizable transaction, and until you sit down and do an analysis, it’ll be hard to know whether or not it makes sense for your firm.”

The good news in this regard: Doing a feasibility analysis isn’t extremely difficult, and nor does it require any detailed financial information that you don’t have readily available. In addition to setting the right expectations about finding a lender and taking on debt, El-Tahch and other ESOP experts can’t stress enough the importance of surrounding yourself with the right transition team.

“It’s absolutely crucial to have good legal counsel; get someone who understands corporate transactions, tax law, and ESOP transactions. This is a specialized niche. Work with good advisors who understand how to structure and execute an ESOP transaction,” El-Tahch advises. “With an ESOP, there are a lot of parties involved. You’ll need an ESOP trustee and lender who’ll do their due diligence. You want to work with someone who’s done it before, who knows what they’re doing, and who can help you navigate this as efficiently as possible. Remember, you’ll be doing this transaction while you still have your day job.”

Of course, another challenge firms can expect is communicating the benefits of an ESOP to other senior partners and employees. “People need to understand the long-term value they’re creating in a way that drives their behavior,” El-Tahch says. “After all, the dividends the shareholder-employees will reap are now tied directly to the performance of the firm.”

While transitioning to an ESOP is a retirement plan that can bring big benefits when optimized properly, Ferrara says it’s particularly crucial to emphasize that it’s one that requires patience. Ferrara estimates it’ll take BDO until about mid-2024 for employees to receive their first ESOP statement. Of course, it’ll demonstrate the value in a powerful way (in financial terms that are on paper). However, it does mean that about a year will have elapsed since BDO completed the transition and when employees begin seeing the first dividends they’ll receive.

So, how can employers engage and educate employees to ensure success? El-Tahch frequently attends conferences where he talks about this very subject, and he has a couple of suggestions.

1. Overcommunicate. Establish communication committees led by individuals who people respect. “Have them teach their peers about the ESOP. Peer-to-peer education is a lot more effective sometimes than command-and-control, top-down management,” El-Tahch says.
2. Be transparent. El-Tahch stresses that companies who regularly share how they’re performing and establish a link between their sales, earnings, and stock price in a clear and intentional way will be more successful in helping employees understand what they should be doing to drive value.

Take it from BDO, taking care to get partners’ buy-in and equal enthusiasm from employees was a heavy focus as they made the transition. In the end, Ferrara says, “We wanted to evolve as a firm. We wanted to create value for our partners and employees and set us up for future success.”

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• Minding Your Mid-Careerists: Slowing the Exodus of Experienced Talent: What can CPA firms do to prevent their more experienced, mid-career professionals from making a grand exit? Firm leaders, human resources professionals, and executive consultants agree that putting employees first is a necessary step to keep them in the leadership pipeline.