As a small but growing contingent of accounting firms adopt a range of alternative practice structures and the profession learns the implications, Katz, Sapper & Miller is distributing bingo cards to employees filled with the terminology common to these arrangements, backed with the wisdom gained from over 20 years of operating under an employee stock ownership plan.
The acronym "ESOP" takes up at least one square on the cards the Top 50 Indianapolis-based firm sends to its roughly 600 employees operating under this structure, which is still rare among accounting firms but was practically unheard-of when KSM established its plan back in 2001. Under an employee stock ownership plan, employees are given ownership interest in the company through shares of stock, often based on employment duration.
KSM hosts the virtual bingo game to keep employees educated on the topic while also celebrating the firm's history — an opportunity it has every October during Employee Ownership Month when the Top 100 Firm participates in ESOP educational and celebratory events internally and through its membership in trade associations.
Those associations have grown in numbers recently, noted KSM executive committee member Mike North and Andy Manchir, leader in the ESOP services group, reflecting that the recent rash of accounting firms adopting alternative practice structures, accepting private equity, and shifting to other operating models actually harkens back to the climate when KSM first became an ESOP.
"In the late 1990s, kind of like today, there was a consolidation of accounting firms in the industry," explained North. "The decision back then, the best decision was for the firm to sell, around 2000. But it didn't work out the way we thought it would, so we purchased ourselves back, and we used an ESOP as a vehicle to do that."
Founded in 1942, KSM was nearly 60 years old at that point, and decided on the ESOP after evaluating its options.
"When we looked at ways to purchase ourselves back, an ESOP had a couple of big advantages," North continued. "The continuation of ownership — a lot of firms today are struggling with ownership transition, passing down from one generation to the next or purchasing from each other. Broad employee ownership solves these challenges. The culture we believe an ESOP would provide us — and that we have ultimately seen play out — is collaboration and a sense of unity, aligning the firm with a common purpose … . It provides a sense of unity."
Before joining KSM in 2007, Manchir was familiar with these structures.
"I'm a true believer; I've seen it over and over in practice, and worked at an independent evaluation firm," he shared. "Our ESOP plan was why I wanted to join [KSM]; I knew they had an ESOP plan but weren't very active in the ESOP professional community, so I saw an opportunity to grow in that area and practice what we preach."
Walking the walk
Clearly already ESOP evangelists, KSM was just missing the practice, which it established as its ESOP advisory services line when Manchir came on board in 2007.
Manchir, KSM partner Mark Flinchum and their team have developed a big advantage from walking in the shoes their clients wear, or aspire to try on.
"I can't imagine being a consultant for an ESOP company without being an ESOP owner myself," Manchir explained. "I refer to it so often, and it helps make my analogies make sense … . We're coming at it as, we've lived it, really for us, we've lived it firsthand, and it's more authentic for us, who we are and the firm is. One of our values is unity, focusing on employee-owners of a firm, not a siloed firm."
Specifically, KSM's ESOP advisory services include annual valuation updates; entity and transaction structuring; ESOP plan audits; financial statement audit, review, and compilations; M&A due diligence; and tax structuring and planning/preparation.
The ESOP practice's clients span industries, but see a higher concentration in construction, professional services, manufacturing and transportation, as well as multiple valuation practice firms, Manchir reports, which has KSM "uniquely positioned to evaluate the evaluators."
Across all sectors, the first step for a new ESOP client is a feasibility study.
"Over a month or two, we look at the valuation of the company, financing options, and help them understand how big is the employee benefit, can they pay for it with the debt they may borrow … . Then they would create an ESOP plan, hire an ESOP trustee, an individual or group or company that represented the interest of the employee-owners as a fiduciary."
Through that initial analysis of the feasibility study, KSM guides the client in deciding whether an ESOP is even right for them. "One of the challenges is it's a very niche way for businesses to sell," Manchir explained. "One of the challenges is educating professionals. So many business owners turn to trusted advisors, increasingly their accountant or attorney. If that professional hasn't had ESOP clients or that experience, there is fear of the unknown or misconceptions … ESOPs don't work in every case; there are advantages and disadvantages. You have to look at it with other options."
"We've obviously been thrilled with the results of the ESOP, financially for the firm and the firm owners, and the cultural impact," North shared. "But the process of becoming an ESOP and managing an ESOP is complicated. It's not something to take lightly, and they need people like Andy to guide firms through that process."
Ownership culture
KSM's own ESOP has been a selling point for firm recruitment at a time when all firms are struggling on the talent front. "We talk about [the ESOP] a ton on campus, and with lateral hires," shared North. "There is a sense of ownership that most wouldn't get at that point in their careers, a sense of collaboration and unity that culturally sets us apart, having the youngest employees as owners in the firm."
To understand the allure, however, the concept still often has to be explained, Manchir acknowledged.
"Many don't understand it at first; it takes time," he said. "We often joke that a good part of ESOP communication is repeating yourself. We have a new base of employees each year, and some deeper in their career, and they are more attuned now than the day they started. Maybe they heard Susie retired and got a good payout, or are seeing the wealth-building that occurs over time that cements and reinforces that benefit. Retirement can be so odd a concept for a Gen Z or millennial … Instead of using the word retirement — I don't want to avoid it, but I emphasize wealth-building, a way of wealth accumulation. It doesn't come out of a paycheck, it's not like a 401(k), but it's allocated to employees every year as long as they stick around."
New employees are onboarded with "ESOP 101," North explained: "What KSM means, what it can mean to you, and what being an employee-owner can mean to you."
Positive elements of an ESOP also checker those KSM bingo cards, from "Ownership culture" to "Sustainability" and "Cash flow."
This kind of education is necessary on a broader level: Although there are currently under 7,000 ESOPs in the U.S., according to Manchir, many factors are converging to make them a more popular business choice.
"The baby boomer generation of business owners are already at retirement age," he said. "Maybe they held off because of the pandemic, but now it's time to sell. The ESOP creates a succession plan for ownership for a closely held company, as an alternative to selling to a competitor or some strategic buyer."
"There's cultural reasons an owner may want to sell, and the idea of selling to their own employees is particularly interesting," North added.
With both Manchir and North expecting the swell of ESOP activity to continue, as they and others in the industry watch for the Department of Labor to finally release long-awaited ESOP regulations, KSM's practice will only get busier — and the bingo cards more complex.
"2023 was an active year for ESOP formations," North continued, "even in the midst of some headwinds, with a year of higher interest rates that had some effect on the overall statistics for M&A. But we didn't see that put a clamp on ESOP formation. That continues."
His forecast is the same within the profession.
"We will continue to see more," he said. "There's been consolidation around accounting firms … and private equity firms entering the space for the first time in a real way. We will see a lot of consolidation and alternative practice structures in the future." AT
