ESOPs help some CPA firms with retention, succession

Employee stock ownership plans can boost a firm's productivity and growth.
By Teri Saylor

Image by DigtialStorm/iStock

In 2000, the California accounting firm of Glenn Burdette was facing a crossroads. In the midst of a hiring drought, the firm was having trouble recruiting and retaining staff. Five of its nine shareholders were in their late 40s, and the prospect of buying out all of them simultaneously seemed daunting. The firm's principals began investigating consolidation and looked for opportunities to merge with another organization, knowing such a merger or a sale would forever change the culture the now 50-year-old firm had cultivated for two generations.

Around that time, managing director Daniel O'Hare, CPA, was helping a client research the feasibility of forming an employee stock ownership plan (ESOP). It occurred to him such a plan might work for Glenn Burdette, too.

An ESOP is a type of retirement plan that often is used as a vehicle for succession planning. It provides a company the flexibility to buy out its existing owners either gradually or all at once, while allowing employees to own all the stock in the organization. ESOPs also can help businesses attract and retain good employees and offer tax benefits to businesses that are established as S corporations and C corporations.

After considering all these benefits, O'Hare proposed to his fellow shareholders that an ESOP might be good for their firm. Subsequently, the firm hired an ESOP consultant to help the organization work through the labyrinth of legal and practical issues, performed a feasibility study, and hired an independent appraiser to do a preliminary valuation.

The study revealed that an ESOP was a good fit for Glenn Burdette, so the shareholders agreed to establish a plan and to sell 85% of their shares to it. The ESOP, in turn, issued a promissory note to the shareholders, payable with interest, over 10 years. The firm provided an annual ESOP contribution, which funded the payment plan. The firm continues to fund the ESOP for all of its employee-owners, paving the way for those who plan to retire in the future.

Today, Glenn Burdette is 100% employee-owned, and four of the five original shareholders have retired. Employees are engaged with the firm's operations, and O'Hare likes to think the firm attracts the best and brightest professionals.

"Our ESOP allows effective retirement for the senior CPAs and staff at our firm," O'Hare said. "The account balance grows every year, and our employees see value in it."

ESOPs were created by the Employee Retirement Income Security Act of 1974 (ERISA), P.L. 93-406, and have long been used as a vehicle for ownership succession planning. According to The ESOP Association, there are approximately 10,000 ESOPs in the United States, covering 10.3 million employees. While ESOPs exist in a broad range of industries, they are most prevalent in manufacturing and construction companies, as well as engineering and architecture firms. (For a look at the types of firms that have chosen to implement an ESOP, see the sidebar, "CPA Firms With ESOPs: A Sampling.")

With CPA firm leaders in the Baby Boomer generation retiring at high rates, mergers will be one way that firms try to handle succession challenges. But an ESOP is an alternative to a merger that can keep a firm intact and maintain an environment that has been favorable to both clients and employees.

"An ESOP works well if the firm is profitable and growing, if ownership likes the company's culture and wants to preserve it, if owners wish to reward their employees and retain them, and if the owners want to realize significant tax benefits," said Gregory Hogan, a director at employee-owned SC&H Group, who leads the ESOP advisory practice for the consulting, audit, and tax firm based in Sparks, Md.


ESOPs can help CPA firms attract and keep good employees. Employee ownership can also improve a firm's performance by increasing productivity, sales, and growth. It also provides job security, a significant retirement benefit, and a positive work environment, according to Ronald Causey, CPA, the CEO of SC&H Group.

According to statistics from the National Center for Employee Ownership, productivity improves by as much as 5% on average during the year a firm adopts an ESOP. Further, a 2000 Rutgers University study by researchers Douglas Kruse and Joseph Blasi found that ESOPs appear to increase overall sales, employment, and sales per employee by about 2.3% to 2.4% per year over what would have been expected without an ESOP.

In 2010, The ESOP Association and the Employee Ownership Foundation surveyed the association's members and found that 84% of respondents agreed that their ESOPs improved staff motivation and productivity. Further, a 2012 working paper published by the National Bureau of Economic Research reported that having a majority ESOP increases employee engagement scores by about 5% over what they would be without the ESOP.

Causey and others use their employee ownership structure as a marketing tool, demonstrating to clients and potential clients that their employee-owners are focused on customers.

"In my experience, having an ESOP creates below-average employee turnover. It also adds a layer of accountability for employees," Causey said. "Our business model dictates we hire talented, highly motivated, bright employees, and we provide them with tremendous growth and leadership opportunities."

In the right situation, the cultural payoffs can be substantial for an ESOP firm.

"An ESOP can create a team approach to running a business," O'Hare said. "At Glenn Burdette, because of our ESOP, each team member has a vested interest to go beyond for our clients, for our firm, for each other, and for our community. Everyone wins."


ESOPs are qualified retirement plans, so amounts allocated to a participant's account are not included in the participant's gross income in the year contributed. Instead, tax on the amount is deferred until it is distributed from the employee's account, either in stock or cash. This generally occurs when the participant retires, dies, becomes disabled, or terminates employment. If the distribution from the ESOP account is rolled over into a traditional IRA or a qualified plan of another company, it is not taxed until it is withdrawn from the IRA or qualified plan account.

The general qualified retirement plan rules regarding such things as nondiscrimination, minimum participation, and vesting apply to ESOPs. The company's contributions to the plan are tax-deductible, but the company's annual contributions are limited to 25% of the total compensation of eligible participants (excluding compensation over $270,000 per participant for 2017). Also, dividends paid on ESOP shares are deductible in certain cases.

ESOPs must be created in a corporation. If the company is operating as a limited liability company, partnership, or sole proprietorship, it must convert to an S corporation or a C corporation before setting up the plan.

In a C corporation, sellers can receive a deferral of gain recognition for sales of qualified securities to an ESOP so long as the ESOP owns at least 30% of the outstanding stock immediately after the sale and the seller reinvests the proceeds of the sale in qualified replacement property.

If a company is an S corporation, the owners cannot take advantage of this gain deferral, but any profits attributable to the ESOP-owned shares are not subject to federal income tax.

"This leaves more after-tax dollars to work with and invest back into the firm," Causey said.


Although ESOPs are designed to invest primarily in securities of the sponsoring employer and are exempt from ERISA's investment diversification requirements, when employees reach age 55 and have at least 10 years of plan participation, they have the right for the following five years to diversify up to 25% of the shares in their account by selecting investments suitable for their anticipated retirement. During the sixth year, they are permitted to diversify up to half the shares, minus any shares that previously were diversified.

The National Center for Employee Ownership reports that the average ESOP contribution ranges from 6% to 10% of an employee's pay, and over 80% of all ESOP participants are also in another company-sponsored retirement plan, often a 401(k) plan.

Shares in the plan are held in a trust fund and allocated to individual employee accounts. As the employer makes contributions to the ESOP, shares are allocated to each participant, generally based on salary. In 2017, the amount of employer contributions allocated to an employee's account and any other employer contributions or employee deferrals into a defined contribution plan (such as a 401(k) plan) is limited to the lesser of $54,000 or 100% of compensation. Vesting must be either "cliff vesting," where the participant is 100% vested after not more than three years, or "graded" vesting, where participants become vested 20% per year in the second through sixth years of service. Distributions are generally made after the employee leaves the firm, Causey said.


A simple way to establish an employee ownership plan is to create a seller-financed ESOP through which the ESOP acquires the owners' stock in exchange for a note from the seller and then uses the company's cash contributions to the ESOP to pay off the ESOP's debt to the seller. Another way to establish an ESOP is through a leveraged plan in which the company borrows the funds needed to buy the owners' shares from an outside lender. This way, larger amounts of stock can be purchased all at once, up to 100% of the equity.

At Glenn Burdette, it took about nine months to create the firm's ESOP, according to O'Hare. It can be costly to go through the steps of finding an ESOP consultant, attorney, or specialist; doing a feasibility study and getting your firm appraised; and finding a third-party administrator to administer the plan, similar to the way a 401(k) provider would maintain the account balance and oversee allocations. The 2015 ESOP transaction survey conducted by the National Center for Employee Ownership found that about one-third of ESOP transactions between 2013 and 2015 cost between $75,000 and $200,000; about a third cost more than that, and another third cost less.

"You'll face fees for conducting your feasibility study, getting an initial appraisal, hiring a plan administrator and an attorney," O'Hare said. "After your ESOP is in place, the annual appraisals become the most expensive aspects of the plan."

According to O'Hare, a firm that is a good candidate for an ESOP has certain characteristics including strong cash flow, the ability to work through the intricacies of establishing the plan, and a willingness to invest in and manage the maintenance of the plan given the complex rules and regulations associated with ESOPs.

Hogan agreed.

"For an ESOP to work, its parent firm needs to be profitable. ESOPs seem to fit best in steadily growing companies with good cash flow," he said. "If you are in a volatile business climate, or your company's cash flow is characterized with peaks and valleys, an ESOP may not work as well."

But for CPA firms that have adopted ESOPs, the managers and retiring owners have discovered a beneficial mechanism to retain their best employees, maintain their company's culture, recognize significant tax benefits, and allow their firm to continue into the future with no disruption.

"Setting up our firm up as a 100% ESOP was not in the original strategic plan, but over time we realized the value behind transitioning to an ESOP," Causey said. "We are proud of who we are, and we pride ourselves on our culture. Our ESOP will allow SC&H Group to maintain our culture into the future."

CPA firms with ESOPs: A sampling

These 3 CPA firms are among the more than 10,000 organizations across the United States set up as employee stock ownership plans (ESOPs).

Glenn Burdette

  • Headquarters: San Luis Obispo, Calif.
  • Founded: 1965.
  • Started ESOP in: 2000.
  • Employs: 65.
  • ESOP tale: While Glenn Burdette was looking into the possibility of creating an ESOP for a client, the firm was facing the prospects of buying out its retirement-bound shareholders. That's when the feasibility of an ESOP for the CPA firm first became evident.
  • They said it: "An ESOP is a wonderful mechanism to allow a company to continue on when shareholders retire. We have found it also makes our workforce become a real part of the team by making them owners."—Daniel O'Hare, CPA, managing director.

Redpath & Co.

  • Headquarters: St. Paul, Minn., with second office in White Bear Lake, Minn.
  • Founded: 1971.
  • Started ESOP in: 2003.
  • Employs: 150.
  • ESOP tale: The firm created an ESOP when many mergers were occurring in the CPA profession. The firm's leaders saw the ESOP as an opportunity to help secure the future of Redpath & Co. by sharing the firm's success with all employees and by providing a vehicle to easily pass the firm to the next generation of owners—outside of the typical partnership buyout. Being an ESOP has proved beneficial for Redpath's employees and has contributed to a below-average employee turnover, which benefits clients, too.
  • They said it: "The ESOP provides a financial stake in the company for employees, meaning they are personally impacted by their ability to deliver a high level of service and attention to our clients—and ultimately are held accountable for the success, growth, and future of Redpath & Co." —Brian Sweeney, CPA, partner and leader of the firm's ESOP practice.

SC&H Group

  • Headquarters: Sparks, Md.
  • Founded: 1991.
  • Started ESOP in: 2006.
  • Employs: 253.
  • ESOP tale: Fifteen years after a group of entrepreneurial tax managers decided to start their own firm, SC&H Group provided one-third of its stock to its employees when it set up its ESOP. Over the next 10 years, employee ownership grew incrementally until last August, when the firm became a 100% ESOP.
  • They said it: "Our business model called for us to develop an employee-centric firm, focusing on providing intellectually stimulating service offerings. We give our employees tremendous growth and leadership opportunities."—Ronald Causey, CPA, CEO.

About the author

Teri Saylor is a freelance writer based in Raleigh, N.C.

To comment on this article or to suggest an idea for another article, contact Ken Tysiac, editorial director, at or 919-402-2112.

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