Engineering Inc. - May/June 2006 - 15

ticularly tax favorable to the employee, with the money to buy These
individuals become more aggressive in achieving success the shares coming
out of the employees' net income. for their firm, and as they rise through
the management ranks, But for very successful firms that pay large salaries
or their attitude is passed along to the next generation, he says. bonuses,
there would exist a cash stream to provide enough However, broad-based
ownership of a firm can make it more after-tax money to employees to
enable them to pay a fair price difficult to achieve consensus on major
decisions, he adds. for the shares being purchased from the original, or
retiring, More benefits accrue to firms that base their ownership struc-
owners, Flicker says. ture on the corporate model, rather than on More and
ESOPs also have pros and cons. The biggest the law or accounting firm
paradigm, accord- advantage is its tax treatment. The firm can i n g to
Matheson. The law and accounting more firms are fund the purchase of the
shares with both prin- firm model is predicated on maximizing the cipal
and interest that is deductible from the income distribution to the
individual partners, realizing that company's tax burden. In addition, the
money while mid-size and larger corporate-structured professionals paid to
the selling shareholders may be totally A/E firms seek more balance in
compensation tax deductible. And the seller could defer capi- between
short-term income and longer-term should have tal gains tax as long as the
profit is invested in capital gains achieved through reinvesting in
qualified securities. the business, he says. a stake in the The case
against ESOPs is that an employee The law firm model, traditionally
organized business, and it's might not feel as much of an owner as he or
as a partnership, tends to make management she would with the direct
ownership option. of capital and other operational decisions more been
successful For small firms in particular, the transaction difficult,
Oberman believes. We have found costs required to establish an ESOP may be
pro- that this model tends to perpetuate a cultural because when hibitive.
For many employees, investing in the orientation that is individually
driven, rather they do, they company's ESOP may be their only investment,
than focused on the interests of the entity as and, therefore, carries the
risk of non-diversity, a whole. This can get in the way of the func-
benefit beyond McMahon says. tional, team-based approach engineering firms
And Oberman cautions that an ESOP can require. salaries. potentially
provide an opportunity for broad- B u t whatever reason firms may have for
eric flicKer based ownership and potentially assure buy- altering their
ownership structure, one thing PennOni assOciates, inc. out funding.
However, the plan itself is not a remains a constant: They should plan for
the guarantee of capable, committed leadership or transition as early as
possible. capital for a successful continuing enterprise. T h i s is
especially true in small- and mid-size firms, or younger firms, where the
longer one waits to begin, the harder the law firm model it will be to
design an exit strategy or implement any plans that In some cases,
engineering firms have started to create owner- change the ownership
structure, Lurie says. n ship structures that reflect those of law firms,
with a high pro- T here is a portion of partners and a broad distribution
of ownership. The trend toward goal is to broaden ownership so that the
founding partners can sell their shares to a larger number of people,
making it more consolidation in likely that there will be enough funds
from enough people to the industry, with a ensure the transfer of shares
at a fair market price. McMahon believes the trend stems from the simple
reason lot of larger firms that with each generation in a successful firm,
it takes a greater buying smaller ones proportion of new owners to pick up
the financial obligations to further increase of the retiring owners.
Broadening ownership distribution provides increased their technical
liquidity for everyone, and it's an attractive model to younger competence
and workers, who are demanding ownership rewards faster than the preceding
generation did and who want to diversify their invest- geographical
diversity. ment portfolios, he says. A broad-based ownership structure
also creates an entrepre- Paul lurie neurial spirit in the middle
management ranks, according to schiff hardin, llP Lowell Getz, a CPA and
financial consultant based in Houston. 15 MaY / JUNE 2006 ENGINEERING INC.
Engineering Inc. - May/June 2006

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