BDO chose an ESOP as an alternative to private equity funding

Though many accounting firms have looked to private equity to raise capital in recent years, others have decided that’s not the route for them. BDO, the nation’s sixth-largest accounting firm, made headlines in 2023 when it announced it was starting an employee stock ownership plan (ESOP).

The plan, financed with $1.3 billion in private debt from Apollo Global Management among others, gave all of BDO’s 10,000 employees a stake in the firm. BDO also changed its legal structure from a partnership to a professional services corporation.

Around a year and a half later, CFO Brew spoke with BDO’s longtime CEO, Wayne Berson, about how the firm is faring, and about what changes he’s seen as a result of the ESOP.

An alternative to private equity: BDO periodically reevaluates its business model and, a few years back, was looking to revamp itself to “support continued growth, help with investment, and also long-term sustainability,” Berson said. Private equity investment was one option it considered. PE firms were calling at the rate of about one a week, Berson said, and BDO had noticed that PE-backed accounting firms were outcompeting it for acquisitions.

But BDO leadership decided that PE wasn’t the right option for the firm. “We thought [PE] did offer a lot, but it offered a lot for leadership” and not for employees below that level, Berson said. “Once you get outside of, let’s say the partnership group, there wasn’t really much left.” He and BDO leaders also didn’t want to cede power to a PE firm that would “flip,” or cash out, in a few years’ time, leaving the firm’s future beyond their control.

An ESOP, on the other hand, proved an appealing option because it would allow BDO to give back to its employees, Berson said. “There’s more than enough money to go around, and we felt it was imperative that every person, no matter their position, who helps you grow” should be “rewarded,” he said. Under the ESOP, which works as an entirely employer-sponsored defined contribution retirement plan, employees become fully vested after six years, and receive 10% of their salary for each year they stay with the firm. That’s on top of their traditional 401(k) retirement plan. “This is a new benefit for free,” Berson said.

ESOP participants have significantly higher retirement savings than employees of non-ESOP firms, Corey Rosen, founder of the National Center for Employee Ownership (NCEO), told CFO Brew said, citing an NCEO study. The average private-company ESOP participant had about $132,000 in retirement savings in their ESOP account prior to the pandemic, versus $64,000 for an employee with just a 401(k).

ESOPs also come with tax benefits, both for companies and employees. The money in staff’s ESOP accounts is tax-deferred, and they only pay taxes when they take the money out, Rosen said. C-corporations can deduct some types of contributions to the ESOP and deduct dividends on stock held by their ESOP.

But company owners often cite nonmonetary reasons for starting ESOPs, Rosen said. When he asks owners why they want to start ESOPs, “they actually don’t talk about finances,” he said. “They talk about legacy. They want to feel good about what they’ve done. They feel like they have an obligation to the people who helped them generate all that wealth.”

How the ESOP has fared: BDO was motivated to start the ESOP, at least in part, to attract staff in the face of an ongoing accounting shortage. “We’re dealing with a much more severe situation today than five years ago in this industry, which has not attracted enough people into the firms,” Berson told the Wall Street Journal around the time the ESOP was announced. “The younger generation wants a piece of what they are helping build.”

The firm has already seen recruiting and retention benefits from the ESOP, Berson said. Before the ESOP was implemented, BDO’s turnover rate was 18%. (The average turnover at an accounting firm is 15%, according to Inside Public Accounting.) Now, it’s fallen to 14%, he said. Recruits have joined the firm because of the ESOP and former employees have “boomeranged” back so they can take part, he said.

The firm’s governance has stayed largely the same since the ESOP, Berson said. “That’s the beauty of it,” he said; “it didn’t change our day to day operations in any significant way.” BDO’s board and management guide firm strategy, while a trustee “represents the interests of the ESOP participants” and a committee “oversee[s] the ESOP’s administrative functions.”

BDO’s partners, Berson said, were almost unanimously on board with the ESOP. The change did mean they needed to sell about 42% of their shares to the ESOP trust, take cuts to their compensation, and give up their pensions. But the ESOP brought them some financial benefits, he said: Principals are “not responsible for certain costs that partners typically would pay in a partnership structure, so this results in significant savings,” he said.

Potential drawbacks: That said, the ESOP was “very difficult” to implement, Berson acknowledged, more so than taking on private equity money would have been. Because ESOPs have heavy compliance costs, they’re expensive to convert to, Rosen said. An ESOP can cost $150,000 to $500,000 to set up, he said, and large and complex deals can be even more costly. He estimates that 15%–20% of ESOP candidates could make more by selling to a competitor or PE firm.

And before converting to an ESOP, a company must first have its value appraised by an independent evaluator. That can introduce risks: In fact, BDO is facing a putative class-action lawsuit brought by an employee charging that the firm inflated its value prior to the ESOP.

But Berson believes that ESOPs remain a viable path for accounting firms that want to raise capital, or move away from the partnership model, which he thinks has “probably run its course.”

“I believe that when you compare an ESOP to a partnership model, the ESOP will win hands down,” he said.