Owners all: CPA firm sweetens deal with ESOP.

• Author: Potter, Jeanne A.
• Position: Glenn, Burdette, Phillips and Bryson offers employee stock ownership plan - Cover Story

What's an ESOP?

To those of us who are directors at the San Luis Obispo-based firm of Glenn, Burdette, Phillips & Bryson, an employee stock ownership plan is many things:

* An employment sweetener that attracts and keeps good employees;

* A vehicle for owner buyouts;

* A tool for corporate finance;

* A cash-flow enhancer; and

* A productivity booster.

To an individual owner, an ESOP can provide an effective way to diversify out of a large block of highly-appreciated stock without paying taxes on the gain.

TECHNICALLY SPEAKING

The technical definition of an ESOP is a qualified, defined contribution employee benefit plan designed to invest primarily in securities of the sponsoring employer. Created by the 1974 Employee Retirement Income Security Act, traditional thinking about ESOPs has restricted their use to major corporations with publicly traded stock.

However, because the potential operational and tax benefits are so favorable, smaller companies with the right characteristics should not dismiss ESOPs without a careful look. Size really doesn't matter, nor does industry. There are two characteristics which distinguish good ESOP candidates from those who need not apply--profitability and relatively high compensation levels.

WHATEVER WERE WE THINKING?

As we did our due diligence--and since we adopted the ESOP--we have been hard pressed to find other California CPA firms who have chosen this route. So what were we thinking when we adopted an ESOP in our closely held CPA firm?

We were in the midst of a three-year hiring drought and were competing with CPA firms across the state for good candidates. To make matters worse, several of our own productive staffers were hired away by clients in private industry, so just to keep a full lineup of players we were being forced to pay steeply increased salaries and benefits.

At the same time, five of our nine shareholders were in their late forties. We faced the undesirable prospect of paying for five unfunded owner buyouts simultaneously. Although we had successfully transformed into a second-generation CPA firm--we bought out the original shareholders in accordance with terms of our buy-sell agreement--that arrangement never contemplated the possibility of paying multiple shareholders during the same time period.

To solve the problem of unfunded owner retirements, we investigated insurance-backed buy-sell agreements and selling out to a consolidator. Although funding buy-sell arrangements with permanent insurance seemed realistic, the hit to current compensation to pay nondeductible premiums on policies was more than the owners were willing to bear. Essentially the time frame we were working with was too short to effectively accumulate enough dollars to accomplish our goals without curtailing the financial incentives for new owners to join.

For a time, consolidation seemed like the answer and we travelled down that path with multiple suitors. In the end, our geographical isolation in San Luis Obispo County hindered our attractiveness to outsiders and the prospect of an ever-rising...