Randy A. Schwartzman, CPA, MST
Mr. Schwartzman is a contributing editor for PTAB and a Retired Partner, National Tax Office, Corporate and Mergers & Acquisitions, where he served as the technical tax practice leader for BDO USA, PC, New York.
This spring, our Practitioner’s Tax Action Bulletin® provided a comprehensive series on Employee Stock Option Plans (ESOPs) offering valuable insights for practitioners on this tax planning option. In Parts 1 and 2, we explored the motivations behind establishing an ESOP, outlining the steps required to create its structure, and examining the operational cash flow within an ESOP framework. Parts 3 through 5 delved into the income tax advantages that ESOPs offer to businesses, selling shareholders, and employee participants. Part 6 addressed succession planning considerations for selling shareholders involved in ESOP transactions.
We concluded the ESOP series by providing the thoughts and visions of two very important leaders who shared some real-life examples of how they made ESOP transactions so successful for their business and clients respectively.
Interview with BDO USA Leader – Wayne Berson
We interviewed Wayne Berson, the CEO of BDO USA, PC, one of the nation’s leading accounting and advisory firms, whose organization recently went through an ESOP transaction in 2023. Wayne shared with us how the BDO ESOP transaction helped to foster a thriving environment for its more than 12,000+ employees in the U. S. He explains how the ESOP aligns employees’ contributions to the firm with the firm’s success, making every member of the organization an integral part of the BDO family.
How does an ESOP help BDO’s 12,000+ participating employees thrive?
Wayne Berson – It takes our purpose to a whole new level as it gives everyone in the firm an opportunity to share in our success. To put it simply, an ESOP is a qualified retirement plan with assets held in a trust for the benefit of its participants. The ESOP offers participants a stake in the firm’s success through beneficial ownership and a unique opportunity to enhance their financial well-being.
The ESOP stands as a compelling addition to our comprehensive compensation and Total Rewards offerings. An annual allocation to the ESOP is fully funded by BDO through contributions to the ESOP. This allocation grants employees the chance to significantly grow their wealth over time as their accounts vest and grow in value with the firm’s success, with no employee contributions.
“The average ESOP account balance is double the average 401(k) account balance at a non-ESOP company.”
We believe this is truly a differentiating factor for choosing to work at BDO and will help our people thrive as the benefits of this retirement plan will compound over time.
The median tenure of an employee at an ESOP company is 46% longer than it is for companies that are not employee-owned, according to the National Center for Employee Ownership, and turnover is three times lower, according to Rutgers University.
How does the ESOP align with BDO’s broader strategy of retaining top talent and exceeding client expectations?
Wayne Berson – The ESOP helps us maintain a stable workforce, reducing turnover and ensuring that our clients benefit from a consistent, knowledgeable engagement team. The culture of accountability fostered by the ESOP also encourages innovation and improvement. Our people are empowered to contribute ideas that enhance our offerings, ensuring that we continue to meet and exceed client expectations.
By giving each of our employees a stake in the firm, we foster a culture of engagement and motivation. This means our team is more committed than ever to delivering exceptional service to our customers, ensuring that every client interaction is marked by dedication and care.
Do you believe that other large accounting firms will follow BDO’s transition to ESOP ownership?
Wayne Berson – We are the first major firm to adopt an ESOP. As a trailblazer, we want to help educate other firms that might be considering a new business model. Many firms are wrestling with how you take a 100-year-old business model and update it in a much more fluid, dynamic, financially oriented market.
The ESOP speaks to the wants and needs of today’s generation and offers advantages in attracting and retaining talent. All of this translates into a competitive advantage for our business.
In time, I expect even more firms will explore the benefits of ESOPs because the model supports higher employee engagement and longevity, wealth-building opportunities for employees, operational control, and tax advantages.
How does BDO help its clients that are considering an ESOP transaction?
Wayne Berson – BDO USA, through its investment bank BDO Capital Advisors, LLC, assists clients considering an ESOP transaction by providing comprehensive guidance and analysis. If an ESOP is determined to be an ideal course of action, a detailed feasibility study is conducted. This involves preparing models to evaluate the transaction’s feasibility, determining the potential range of fair market value, analyzing necessary restructuring steps, and assessing debt capacity based on the transaction’s objectives.
Raising the necessary financing, negotiating the transaction, and financing terms with the trustee team and lending group are included in the transaction execution. Throughout this process, BDO professionals review the transaction to ensure the intended tax outcomes align with the financial and strategic goals of all parties involved.
Interview with Morgan Stanley’s The ESOP Group, Devon McLochlin
We also interviewed Devon McLochlin, a Wealth Management Associate with The ESOP Group at Morgan Stanley. Devon explained how his team helps clients through the ESOP process by providing thorough planning which adds tremendous value. Note, the views expressed in the interview with Devon are his alone and may not necessarily reflect the views of Morgan Stanley Smith Barney LLC, Member SIPC. [www.sipc.org].
How does The ESOP Group at Morgan Stanley assist clients with business succession?
Devon McLochlin – We are entirely focused on finding the best solutions for our clients as we have no financial motivation tied to the business transaction itself. This allows us to remain unbiased and provide truly tailored solutions, helping to ensure both the owner and the company benefit in the long run.
Morgan Stanley’s commitment to security, innovation and technology enhances the way we serve clients. Our firm continuously invests in tools and platforms that allow us to create more efficient and effective strategies. This focuses on staying ahead of industry trends, combined with our team’s deep understanding of business transitions, positions us to serve the complex needs of business owners and high-net-worth individuals.
What is the typical fee structure a selling shareholder can expect relative to the tax benefits of an ESOP conversion?
Devon McLochlin – Our fee structure is typically tied to the ongoing management of the assets, post-sale. This aligns our interests with the long-term success of the selling shareholder and the company. Our fees are usually structured as a percentage of assets under management, and they can vary depending on the complexity and size of the assets involved.
In terms of contrasting tax benefits, the key opportunity for a selling shareholder lies in the deferral of capital gains taxes through the IRC Section 1042 election. This tax deferral can be particularly compelling when compared to selling the business outright and paying capital gains taxes immediately.
For example, a shareholder who sells their business for $50 million and opts for the Sec. 1042 election could defer paying capital gains on the sale by reinvesting in Qualified Replacement Property (QRP), potentially saving millions in tax liabilities. Even after accounting for ongoing management fees, the tax savings can vastly outweigh the cost of those fees, especially over the long term. On the other hand, a traditional sale without the Sec. 1042 election would result in immediate capital gains tax liability, reducing the net proceeds significantly.
Additionally, by leveraging tax-efficient wealth transfer strategies such as trusts or charitable planning, we can further enhance the long-term financial benefits for the shareholder and their family. The overall value we bring is not just in managing the assets but in structuring the transaction to help maximize both immediate and future financial outcomes for the selling shareholder.
How do brokerage firms, like The ESOP Group at Morgan Stanley, manage QRP for ESOP trusts?
Devon McLochlin – When it comes to identifying, diversifying, and managing QRP for new and existing clients, our team takes a strategic, tailored approach to help ensure that the investments align with the seller’s financial goals while adhering to the specific requirements of Sec. 1042. QRP includes common stock, preferred stock, fixed rate bonds, convertible bonds, and Floating Rate Notes (FRNs) of “operating companies” incorporated in the U. S.
Once we’ve identified appropriate QRP options, we work to ensure that the portfolio is well-diversified. We typically avoid concentration risk by spreading investments across different asset classes, industries, sectors, and geographies while remaining compliant with the QRP rules.
We provide guidance on creating custom solutions that not only meet the technical and legal requirements of QRP but also integrate into a comprehensive financial plan that helps our clients achieve their goals post-sale such as gift and estate planning.
Editor’s Note: For the full interview and references to all of the articles in the ESOP series, read the Practitioner’s Tax Action Bulletin, National Tax Advisory (NTA-1313), ESOP Interviews, Issue 9, first published May 13, 2025. Contact Our Sales Team for a Subscription to Checkpoint’s bi-monthly Practitioner’s Tax Action Bulletin, which is available in print, and online or to add other valuable Thomson Reuters products to your advisory toolkit.
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