How to Choose Employee Ownership Consultants
2. Gauging Someone's QualificationsOnce you have gotten over the natural instinct to find a way to do it for less money and with less complexity, it is time to get down to the serious business of finding the right team to set up your plan. There are some general considerations to keep in mind for everyone:
Some Key Indicators to Look ForInsist on demonstrated experience and expertise. First, it will save you money down the road. It makes no sense to hire inexperienced people and pay them to learn how to set up an employee ownership plan. Second, you will be much more likely to avoid the much larger cost of a bungled plan. Your experts should be members of one or more of the relevant professional organizations, such as ours (the National Center for Employee Ownership), the ESOP Association, and the National Association of Stock Plan Professionals. They should be willing to give you lists of clients (many more people claim experience than have it). It is a plus if they have written or spoken on the subject in various professional forums; that likely means an outside source has reviewed their qualifications and their professional reputation.
Interview more than one person for each area of needed expertise and find people who are not just qualified but whose philosophy toward the employee ownership plan matches yours. You don't need to argue with a lawyer about why you want, or don't want, employees to have full pass-through voting, for instance, or with your options plan design expert over whether you should give options to part-timers, or with your valuation consultant about why you want to be cautious about giving the ESOP too much credit (or not enough) for the impact of the put option on value, or your options consultant about whether the options value formula should be on the conservative side, or with your administrator about why you want reports sent in a computer-readable format or just on paper.
In the case of an ESOP, ask for recommendations from ESOP trustees: Ask ESOP providers to provide recommendations from institutional trustees (unless, of course, you are interviewing trustees; in that case, ask for recommendations from other service providers they work with). At least two references should be provided. These trustees work closely with ESOP experts and may be able to provide useful feedback.
Question pricing structures that are unusually low or high. Some consultants will give low initial estimates to get the contract, but costs escalate later on. Check with references to see how much prior clients actually paid rather than relying solely on the estimates of the providers. If proposed transaction fees are unusually high, get a detailed explanation of why the fees are so much higher than those for other reputable providers.
Look for Red Flags
- Ask whether the firm has been involved in litigation or audits that were resolved unfavorably for its clients.
- Make sure your appraiser is independent. If your main provider wants you to use only its appraisal firm, this may raise independence issues. Make sure that the appraiser has no stake in providing a appraisal that moves the deal forward.
- Be careful about aggressive deal structures, especially those that promise substantial executive equity on a post-deal basis. This can trigger a Department of Labor investigation and/or a lawsuit.
- Along the same lines, be careful about proposals to make a buyout work by transferring employee retirement funds from diversified accounts in another plan to employer stock in the ESOP; too large a percentage can both put employees at risk and invite litigation in the event the company experiences a downturn or fails.
- If an appraiser promises you will get a good price in advance, find another appraiser.
- Be skeptical about percentage-of-transaction fees, investment banking fees for seller notes or bank loans you can get on your own, or for bringing the deal idea to you.