Spreading ownership
across the advisory firm keeps employees happy and engaged while offering a
clean exit for the owners
As succession strategies
go, the employee stock ownership plan
might be the ultimate twofer.
For Joe Reeves and
Ron Butt, co-founders of Louisville, Kent.-based ARGI, the pursuit of a viable succession plan
for their $2.6 billion financial planning firm was the original objective, but
the ESOP provided the added bonus of giving all employees a potential stake in
the RIA's ongoing success.
"Stock
ownership ties everyone to the same common goal," Mr. Reeves said.
"We were
running into the situation that as we were growing, it was good for
shareholders, but it was just more work for everyone else," he added.
"Once we added the ESOP, people started to get excited and thinking like
owners."
The ARGI ESOP,
which is structured like a profit-sharing plan, was set up in 2015 to enable
the company and its employees to eventually buyout Mr. Reeves and Mr. Butt, who
co-founded the firm in 1997.
Mr. Butt, 60,
retired last year, but Mr. Reeves, 48, plans to work for another dozen years
and gradually sell down his ownership stake to the employees.
Prior to the ESOP,
the ownership was split evenly between the two co-founders. In creating an
employee stock ownership structure, Mr. Reeves and Mr. Butt each sold 10% of
their ownership to the ESOP, which was financed through a bank loan and paid to
the co-founders.
Over the past four
years, Mr. Butt's shares were gradually distributed to employees, with his
remaining 8% stake acquired by the ESOP upon his retirement.
Currently 15 of
ARGI's 155 employees own stock in the company directly outside of the ESOP, but
every employee owns shares inside the ESOP through annual share distributions
equal to about 6% of individuals' salaries.
Currently the ESOP
owns 28%, Mr. Reeves owns 32%, and the remaining 40% is spread across the
employees who have been issued or acquired shares.
Mr. Reeves compares
the distribution of the company shares to a partnership structure, but admits
"it's not an exact science."
"It's based on
reaching a certain level in terms of quantity of time and quality," he
said.
Share ownership inside
the ESOP comes with a vesting period that starts at 20% ownership of the stock
after the first year and proceeds to full ownership after five years.
Once an employee
retires or leaves the company, the shares are paid out.
Also, employees who
own shares are eligible to buy shares that become available, but they are
limited to buying the percentage equal to what they already own. For example,
if an employee owns 5% of the company, she would only be able to buy the
equivalent of 5% of what is for sale.
This is designed in
part to prevent any single employee from becoming a disproportionate
shareholder.
George Tamer,
managing director responsible for strategic relationships at TD Ameritrade Institutional, described
ESOPs as a rare but increasingly popular succession strategy.
"The biggest
hurdle generally for internal succession is financing the succession to the
next generation of advisers," he said. "An ESOP is a great way to
make sure the company stays employee owned, without putting them in financial
straits just to buy in."
Another potential
benefit of an ESOP, is that it can make the company more attractive to an
external buyer if the owners opt for that route, Mr. Tamer said.
Mr. Tamer added
that ESOP models work best when the ownership succession is many years down the
road.
"For older
advisers looking to cash out in the next five years, an ESOP won't be the best
option," he said.
Mr. Reeves
describes the ESOP as "100% successful" on several levels.
Beyond the
succession plan and giving all employees a stake in the company, the ESOP has
introduced a more tangible value for the advisory firm, which Mr. Reeves said
is worth about $60 million.
He estimates that
it costs about $50,000 per year to maintain the ESOP, but that comes with
regular valuation calculations that show the company shares have doubled over
the past four year to $32 each.
"We analyzed a
lot of different options and this has been great for us," Mr. Reeves said.
"It helps morale, everybody wins together, and now when we find a new
opportunity or new acquisition it also creates a legitimate stock price."
Mr. Reeves said one
key to a successful ESOP is that the company should be in growth mode.
"Make sure
you're doing it for the right reasons, because the ownership has to want to
incentivize the employees," he said. "The ESOP doesn't always
maximize wealth, but it does create an environment where everyone is on the
same team. Nobody gets left behind, which is really important to us."
No comments:
Post a Comment