How an Owner’s Unconventional Exit Strategy Boosted Agency Success
Do you want your eventual exit to benefit many instead of a few? Want to motivate and empower the team by making them personally invested in the agency’s success? Have you thought about employee shares or stock options? Learn what you should do and what to avoid in this situation from the CEO of an employee-owned agency. It was an unconventional exit strategy by its owner. However, it the new ownership structure offers many benefits for all involved and is a very interesting way to positively ensure that everyone at the agency has skin in the game.
Leeann Leahy is the CEO of VIA, a full-service advertising and marketing agency based in Portland, Maine. They are an award-winning team and one of the largest independent agencies in the business. How did they do it? Many years after its creation, the last remaining original partner decided to build a very interesting ownership structure that would benefit all employees instead of a select executive team. Leeann discusses the process of putting such a structure together, the challenges, and the many benefits it creates for the business culture and overall employee commitment.
In this interview, we’ll discuss:
- How to set up an employee-owned agency and mistakes to avoid.
- Finding the right agency employee ownership option.
- Why successful ESOPs start with a foundation of good culture.
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Create Something Larger than Yourself with an Employee-Owned Structure
In a sense, Leeann grew up in the agency world. She was a child actor in several commercials, so she grew up around the business of advertising. At one point in her life, she swore off that world. However, she fell right back into it with account planning. Since then she has had a successful career working at both large and small agencies. Ten years ago she moved to Portland, Maine and became the CEO of a very interesting employee-run project.
When the agency was created, its three owners had a vision of creating something larger than themselves. This is why they named it VIA (Vision, Instinct, and Action) instead of something tied to the founders. Over the years, two of the partners left and, as the last one prepared to step away from his active role, the agency got a lot of acquisition offers. With Fortune 500 clients and awards for best culture, the agency was a valuable asset for any buyer. Instead, the remaining partner had something very different planned for his exit strategy. He set up an agreement whereby he would give the agency to the employees.
This was not a typical employee-ownership program. It was completely bespoke, with lawyers and accountants advising against it. However, they started a program measuring the agency’s performance each year and if they reached certain metrics, the owner would gift a portion of his ownership in the form of options.
The program, which they called VEEP (VIA’s Employee Equity Program) was meant to last for ten years. Fortunately, they were actually able to do it all by year seven.
Finding the Right Agency Employee Ownership Structure
Seven years after starting VEEP, employees could convert their earned “options” into shares. This is when they realized the lawyers and accountants were right.
The original agreement had the best intentions; however, it didn’t take tax implications into consideration. The problem was that the conversion from options to shares was prohibitively expensive because of the agency’s growth over the years. As a result, they were forced to reevaluate their situation.
They looked at many different types of structures that didn’t involve giving up their independence. In the end, they landed on an ESOP (Employee Stock Ownership Program), a program overseen by the government. It has huge tax exceptions, so there are benefits for both the employer and employees. It is basically set up as a qualified retirement plan.
Now everyone at the agency is given more shares every year at no cost to themselves. That grows over time and, by the time they leave the agency, they’ll have something they can roll over into an IRA or cash out. This way, they’re actually earning as the agency grows and everyone is invested in the agency’s success.
3 ESOP Models Depending on the Owner’s Future Role in the Agency
Does the owner get paid out in an ESOP structure? The short answer is yes. Of course, they had to find a way to make it work both for him and the employees.
In VIA’s case, the owner was paid out in two segments with a down payment and the rest over time. Technically, it was all done through a trust. They set up a trust that “bought” the agency and allocated shares to the employees. This way, the Board of Directors would still govern operationally while a Trustee Committee oversees the Board.
It was a complicated feat to pay out the owner and recognize the value he had gifted employees over the years. It involved a lot of legal math and the collaboration of many lawyers and accountants. Depending on how you structure it and what the owner wants their future role to be, they can still have residuals or be completely out.
The owner payout in an ESOP can work in 1 of 3 ways:
- The owner receives 100% of the buyout through a note with an interest rate or participation in the ESOP.
- It could be through a down payment to the owner and a note for the remainder.
- Funding can be sourced from an outside, third-party.
Pros and Cons of an Agency ESOP
To take a similar route with your agency and have successful results, the first key is having the desire for everyone to benefit, as opposed to just the founder and a small executive team. This doesn’t mean they’ll all benefit equally but rather in an equally fair manner based on their contribution and compensation.
People get nervous around ESOPs because it generally involves taking on debt to buy out the founder. This debt gets paid first, even before the owner’s note, so the government knows you’re repaying it. Furthermore, you have to hold a certain amount of cash in reserves for when people redeem shares.
At Leeann’s agency, they set up the ESOP so only employees can hold shares, but this also means the agency needs to be ready to buy people out when they leave.
There are some ties to it for the employees, like paying a penalty if you decide to take out the shares before reaching a certain age. Nonetheless, the big benefit for the business is the ability to operate as a tax-free organization.
Investing in Good Culture and Commitment to the Agency’s Success
Being in a creative industry, it’s important to provide a work environment where employees feel motivated and inspired. The key to achieving this is keeping them happy. This agency invests in its happiness factor by providing its team the opportunity to work for themselves. It’s an interesting approach to the problem of employee engagement by offering benefits linking the overall agency’s performance to the team’s personal gain.
Of course, this structure is not without risks. It’s built in a way in which, if you maintain a good culture and an engaged employee base, they’ll be invested in the agency’s success. If people are not engaged and it’s just a job to them, then it all falls apart. On the contrary, if they understand the agency’s success is their success, then odds are it won’t fall apart.
To ensure they give a space where employees can voice their concerns, VIA introduced VN Voices. It’s a new figure apart from the Board of Directors and the Trustee committee called the Associates’ Panel. They’re a group of seven volunteers who represent the employees. They raise issues affecting the team and bring them to the Board and Trustees.
A Successful ESOP Starts with a Foundation of Good Culture
If you’re interested in creating something similar to the model Leeann’s agency came up with, she recommends having a well-established culture. “It’s just not something you can create on top of it,” she says. VIA already had a culture of investing in happiness, people, and fun. They invest a ton in mental health and creating an equitable environment to introduce diversity. Investing in your culture is a good way to invest in your agency’s future. “No matter where you land, you’ll be passing on something more complete if you invest in the culture,” Leeann assures.
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