Firm ownership can take many forms: sole proprietorship, partnerships, and corporations to name a few. But some design practices are opting to divide firm ownership into shares to distribute to employees based on compensation and tenure, thus creating an employee stock ownership plan (ESOP). Below, several leaders discuss their decisions to change their firms' ownership models.
Taking the Leap
With more than 100 years in operation, Baltimore-based architecture firm Ayers Saint Gross (ASG) has had its share of ownership transfers—and they have not always been pretty. “Someone got ill, someone died, or someone just wrestled control from the previous owners,” says the firm’s chairman and former president Jim Wheeler, AIA. “It was kind of the law of the jungle.”
Around 2013, ASG’s leaders decided to look for a long-term solution. A recently hired chief financial officer suggested an ESOP, in which everyone at the firm is an owner, and no one has to die to instigate a leadership change. If an employee leaves or retires, the firm buys back their shares at market value and adds them to a pool for redistribution—an appealing prospect for ASG’s leaders, most of whom were over 50 and starting to think about their own exit plans.
ASG’s ESOP was finalized in 2015. “It’s very well suited for design firms,” says current president Luanne Greene, FAIA, president. “[We have] a long-term vision that’s very aligned with the ESOP.”
Beyond being an effective mechanism by which to transfer ownership, ESOPs offer other benefits. Ownership of a firm can make employees feel more responsible for the quality of its work, according to Donna Zdanis, director of human resources at U.S.–wide JCJ Architecture. She says the firm’s ESOP has helped many of its employees to see their work more holistically: “They feel the responsibility to speak up, to understand the project, to understand how much time they have.” Because employees now have a direct stake in the financial success of the business, they are more eager to make projects better.
They are also more attentive to the firm’s value—and to inquire when the stock pile drops. Instead of pointing to the executives in the room, everyone is now responsible for answering the tough questions. Together the firm takes the time to seek better solutions, develop new strategies, and assess the results. “It’s a great time to do some lessons learned,” Zdanis says. “We’re constantly reflecting and learning and improving.”
Transitioning to an ESOP can take months and involve consultants, financial advisers, accountants, and lawyers; a valuation of the firm; and then the gradual buyout of current owners by the ESOP’s trust, which distributes the shares—and it can get rocky. For the Mankato, Minn.–based firm ISG, which transitioned from a mostly family-owned firm to an ESOP earlier this year, the firm’s leadership took nine months to educate themselves about ESOPs before they decided it was the right way forward. And then it took another nine months to educate the employees and handle the paperwork. “The work you do internally to get ready for the valuation, to understand the transaction itself and all of the moving parts associated with it, and to get comfortable with it takes a tremendous amount of time,” says ISG president and CEO Chad Surprenant. “You’re certainly going to be paying consultants quite a bit of money.”
Operating under an ESOP instead of the traditional owner-based model can also require an adjustment period. ISG is still figuring out how to shift its business strategy. What was once a roughly 20-shareholder company is now collectively owned by 230 employees, and Surprenant says that’s caused the leadership to be a bit more cautious about taking risks or making acquisitions. “We need to figure our new metrics of success as an ESOP firm, and probably for period of time, maybe, we’re not as aggressive,” he says.
Still, Surprenant is confident about the ESOP’s long term prospects because the company’s culture was conducive to the change. Overall, he adds, the time spent was worth it. “We felt going ESOP was a decision without any compromise to it whatsoever,” he says.