When should an agency go the ESOP route, and what are the risks?

ESOPs have gained some favor in the media agency community since the pandemic, for a few reasons. For one, it’s a way of literally giving employees a stake in the health and future of their shop. It’s a way of trying to ingrain whatever culture has developed, as well as a retention and hiring tool. And for private owners, it’s a means of succession — a way of selling the agency without selling out to PE or a holdco. It can even be used as a shield against an unwanted acquisition. And it can have tax benefits too for the owner looking to cash in.

Firms including Collective Measures, Butler/Till, Evergreen, GS&F, Mower and Barkley have gone the ESOP route.

Collective Measures Founder Nina Hale took it in 2014, a move that Allison Bakken, co-president and managing director of Collective Measures, said employees were “deeply appreciative of,” adding, “there’s a kind of spirit of generosity that she has always had. And in order for a founder to go the ESOP route, that has to be a big part of who they are.”

There can be other motivations too. Steve Boehler, founder of agency and marketing consultancy Mercer Island Group, noted that it’s also an exit strategy for an agency founder whose shop hasn’t been growing necessarily.

“This becomes a really plausible exit, especially for an agency that hasn’t grown a lot in the last five or 10 years — because agencies that have sort of plateaued aren’t super attractive to P.E. money,” said Boehler.

There’s no shame in it, in Boehler’s mind. “They’re nice businesses that are sustainable,” he noted. “They’ve got decent cash flow, a nice employee base … This is a really valid outcome for the the owner getting paid, for the employees being able to continue the kind of culture that they’ve built.”

The original owners of Butler/Till, a female-founded full service agency in Rochester, N.Y., moved toward an ESOP in 2010, to leave the legacy in employees’ hands, said current CEO Kimberly Jones. “There was a matter of leaving on their own terms … They wanted to maintain a bit of their own legacy and not just hand it over to a competitor or a strategic buyer or even a private equity firm.” Being an ESOP has helped to ward off prospective buyers because buying them out could make for a complex acquisition, added Jones. 

Can it have its drawbacks? Absolutely, especially when it comes to educating employees or for them to reap the benefits of the stake they’ve been given — that payback can take up to years for agencies struggling to turn a profit. It doesn’t help if the exiting owner takes a chunk of available cash too, said Boehler.

But culture and giving employees skin in the game are the main reasons most ESOP agencies offer for taking that path.

Barkley (before it merged with OKRP) went the ESOP route in 1997 when its founder sought an exit from ownership, but in 2019, CEO Jeff King essentially bought out the shareholders and ended the ESOP. (That ESOP had been structured differently, allowing vested employees who left the agency to still keep their stake — at one point, said King, 61% of shares were outside the shop, so he led the move to change the structure.)

Independent full-service shop GS&F in Nashville had been giving some employees stock in the company but in 2021 decided to go all the way into ESOP as a means of preserving the culture — in part because larger agencies and holding companies had come calling, explained Evanne Lindley, evp of client growth and partnerships at GS&F. 

“The main impetus was to be able to protect both the company culture, but also the employees themselves,” said Lindley. “If the company were to be acquired by a holding company or just even by another agency, there’d be redundancies, the company culture would almost certainly, you know, disappear. And so they really wanted to protect their legacy ultimately. They want to be able to see what they built live on. It’s a really unique gift to the employees as well.”

As for the drawback, Lindley said it’s important to not only be transparent about the financial condition of the agency, it’s also vital to educate staffers on financial literacy. “At the beginning, we were like, ‘You’re an owner! Our success is your success.’ And now we realize we really have to back that up with some education … How can we improve their financial literacy in a way that’s meaningful and helps drive their participation and our success.”

Barkley/OKRP’s King cautioned that agencies considering the ESOP option might want to think about an 80/20 split rather than a full ESOP, leaving some equity available to attract senior-level talent with a stake. “You can use it to be a little more entrepreneurial and aggressive when it comes to recruiting and attracting talent,” said King.