Accounting

The ESOP alternative for CPA and accounting firms

Published

6 months ago

December 17, 2024

Private equity’s run through the ranks of the accounting professions showed no signs of slowing in 2024. But recently, employee stock ownership plans have emerged as an alternative succession strategy for middle-market firms. Long-viewed as a tax-advantaged transition tool for accountants’ business clients, CPAs are now embracing ESOPs for their own firms.

Why? Because leveraged ESOPs circumvent deferred compensation dilemmas. At most firms, new partners must pull in revenue and generate profits to gradually pay departing partners. Paradoxically, departing partners are generally among a firm’s biggest producers. As a result, a single ownership transfer period can last as long as 10 years and is often completed below fair market value.

ESOPs enable new accountants to earn equity without having to fund a deferred compensation arrangement and without having to pay out of pocket to buy-in. Instead, an employee ownership transaction can provide for a seamless, rolling transition of ownership. Partial ESOP transactions are common, enabling firms to sell targeted blocks of retiring partner stock to an employee trust. But CPA firms can only unlock the utility of an ESOP when they fully tap into the relative flexibility of these strategies.

Creating supplemental incentive opportunities

Anyone who has advised an employee-owned client knows that ESOPs are ERISA-based, non-discriminatory benefit plans. All eligible employees receive stock based on the same egalitarian formula. That makes sense for a typical business, where tangible assets are created and monetized at an organizational level. But an accounting firm’s value creation rests largely on the shoulders of its tenured partners. A standard employee ownership structure may not offer enough upside to entice or retain high-performing talent.

Instead, CPA ESOPs are generally formed in tandem with nonqualified plans for firm leadership and top producers. These complementary structures are commonly used to create meaningful, discretionary phantom and synthetic equity opportunities.

Add-on benefits still need to be ERISA-compliant and negotiated as part of an ESOP formation. Nonetheless, supplemental plans are common fixtures at employee-owned professional service firms. These two-tiered strategies deliver short-term incentives to a firm’s established value creators, and long-term equity opportunities for all employees and future hires.

Normalizing EBITDA

Many broadly held accounting firms zero-out their net income in any given year. Meanwhile, ESOP valuations are often rooted in adjusted EBITDA multiples. To bridge this gap, firms often perform compensation scrapes, a common staple of private equity deal transactions. The resulting retained earnings will drive pre- and post-sale enterprise values.

Scrape calculations generally factor in a partner’s overall performance, productivity and tenure. A thoughtfully constructed scrape offers valuable trade-offs for impacted team members. Senior partners may take outsized reductions in their income to generate that excess retained earnings, with the expectation that they are near-term ESOP buyout targets. Junior partners can expect additional warrant or phantom stock grants that offer greater mid-to-long-term economic upside.

In addition to formalizing a firm’s valuation, EBITDA normalization and the resulting earnings retention creates a durable funding source for firm modernization and expansion. These investments are critical to continued competitiveness in an ever-consolidating industry.

In a properly structured ESOP, these earnings are also tax-advantaged. Employee-owned firms can receive corporate income tax deductions equivalent to the value of stock sold to an employee trust. In other words, a $50 million ESOP sale should yield a firm $50 million in deductions. Furthermore, a 100% employee-owned accounting practice can effectively operate income tax-free in perpetuity.

Understanding the big picture

So, let’s study these lessons in a practical context. Consider a 300-member, $50 million revenue accounting firm with a broadly held ownership group. Thirty percent of the partner base are senior members of the firm, eyeing retirement within five years. An ESOP strategy is developed to acquire equity from these senior partners at a fair market valuation.

First, a firm-wide compensation scrape (weighted toward senior partners) is performed and yields $10 million in EBITDA. Based on prevailing industry multiples and adjustments, the firm’s assumed valuation is set at $100 million. So, there’s an expectation of a negotiated $30 million ESOP sale price for 30% of the firm.

Next, commercial financing is secured so that senior partners receive up-front cash for the equity they’ve sold. These partners will have the opportunity to defer capital gains on their sale proceeds, thanks to an ESOP-exclusive tax benefit — the 1042 rollover. Over time, the firm will pay down the bank loan on the employee trust’s behalf, using pre-tax dollars.

Steps are also taken to make younger partners whole post-scrape. A stock appreciation rights plan is developed to deliver formal equity-sharing opportunities to established team members with longer time horizons. They’ll also have opportunities to sell their retained equity to the firm’s employee trust in the future, potentially with rights to exchange some of their shares for warrants. New partners will receive standard ESOP allocations and consideration to take part in the firm’s supplemental incentive program (at leadership’s discretion).

Either through retained equity or ESOP shares, the firm’s next generation of leaders will have concrete opportunities to monetize their stake in a more efficient, employee-owned firm — one that is retaining earnings for internal investment or potential acquisitions and realizing enhanced cash flow, fueled by the ESOP’s tax incentives.

From initial conception to final negotiations with an independent trustee, the transaction takes roughly six months to finalize. An experienced ESOP investment banking advisor and knowledgeable ERISA counsel help keep everything on track. In the end, retiring partners gain liquidity while remaining team members earn broad-based equity upside and additional incentives in a firm that’s primed for greater competitiveness — one in which all staff are rowing in the same direction to grow the practice over time.

What makes a good CPA ESOP candidate?

ESOP strategies are generally geared for top 500 accounting firms that aspire to sustainable, long-term growth. There must be an appetite for broad-based ownership and a willingness to build internal capacity. To build an employee stock ownership plan is to bet on yourself.

It’s not the right shareholder liquidity solution for every firm. But for forward-looking firms with leadership teams that seek market leadership for the foreseeable future, employee ownership represents a powerful tool. ESOPs take the industry’s greatest challenge — attracting, retaining and rewarding talent — head on, while aligning all staff behind a common goal at independent, CPA-led firms.

Accounting

XcelLabs launches to help accountants use AI

Published

2 days ago

June 6, 2025

Business Finance News

Jody Padar, an author and speaker known as “The Radical CPA,” and Katie Tolin, a growth strategist for CPAs, together launched a training and technology platform called XcelLabs.

XcelLabs provides solutions to help accountants use artificial technology fluently and strategically. The Pennsylvania Institute of CPAs and CPA Crossings joined with Padar and Tolin as strategic partners and investors.

“To reinvent the profession, we must start by training the professional who can then transform their firms,” Padar said in a statement. “By equipping people with data and insights that help them see things differently, they can provide better advice to their clients and firm.”

The platform includes XcelLabs Academy, a series of educational online courses on the basics of AI, being a better advisor, leadership and practice management; Navi, a proprietary tool that uses AI to help accountants turn unstructured data like emails, phone calls and meetings into insights; and training and consulting services. These offerings are currently in beta testing.

“Accountants know they need to be more advisory, but not everyone can figure out how to do it,” Tolin said in a statement. “Couple that with the fact that AI will be doing a lot of the lower-level work accountants do today, and we need to create that next level advisor now. By showing accountants how to unlock patterns in their actions and turn client conversations into emotionally intelligent advice, we can create the accounting professional of the future.”

Katie Tolin

“AI is transforming how CPAs work, and XcelLabs is focused on helping the profession evolve with it,” PICPA CEO Jennifer Cryder said in a statement. “At PICPA, we’re proud to support a mission that aligns so closely with ours: empowering firms to use AI not just for efficiency, but to drive growth, value and long-term relevance.”

Accounting

Accounting is changing, and the world can’t wait until 2026

Published

2 days ago

June 6, 2025

Business Finance News

The accountant the world urgently needs has evolved far beyond the traditional role we recognized just a few years ago.

The transformation of the accounting profession is not merely an anticipated change; it is a pressing reality that is currently shaping business decisions, academic programs and the expected contributions of professionals. Yet, in many areas, accounting education stubbornly clings to outdated, overly technical models that fail to connect with the actual demands of the market. We must confront a critical question: If we continue to train accountants solely to file tax reports, are we truly equipping them for the challenges of today’s world?

This shift in mindset extends beyond individual countries or educational systems; it is a global movement. The recent announcement of the CIMA/CGMA 2026 syllabus has made it unmistakably clear: merely knowing how to post journal entries is insufficient. Today’s accountants are required to interpret the landscape, anticipate risks and act with strategic awareness. Critical thinking, sustainable finance, technology and human behavior are not just supplementary topics; they are essential components in the education of any professional seeking to remain relevant.

The CIMA/CGMA proposal for 2026 is not just a curriculum update; it is a powerful manifesto. This new program positions analytical thinking, strategic business partnering and technology application at the core of accounting education. It unequivocally highlights sustainability, aligning with IFRS S1 and S2, and expands the accountant’s responsibilities beyond mere numbers to encompass conscious leadership, environmental impact and corporate governance.

The current changes in the accounting profession underscore an urgent shift in expectations from both educators and employers. Today, companies of all sizes and industries demand accountants who can do far more than interpret balance sheets. They expect professionals who grasp the deeper context behind the numbers, identify inconsistencies, anticipate potential issues before they escalate into losses, and act decisively as a bridge between data and decision making.

To meet these expectations, a radical mindset shift is essential. There are firms still operating on autopilot, mindlessly repeating tasks with minimal critical analysis. Likewise, many academic programs continue to treat accounting as purely a technical discipline, disregarding the vital elements of reflection, strategy and behavioral insight. This outdated approach creates a significant mismatch. While the world forges ahead, parts of the accounting profession remain stuck in the past.

The consequences of this shift are already becoming evident. The demand for compliance, transparency and sustainability now applies not only to large corporations but also to small and mid-sized businesses. Many of these organizations rely on professionals ill-equipped to drive the necessary changes, putting both business performance and the reputation of the profession at risk.

The positive news is that accountants who are ready to thrive in this new era do not necessarily need additional degrees. What they truly need is a commitment to awareness, a dedication to continuous learning, and the courage to step beyond their comfort zones. The future of accounting is here, and it is firmly rooted in analytical, strategic and human-oriented perspectives. The 2026 curriculum is a clear indication of the changes underway. Those who fail to think critically and holistically will be left behind.

In contrast, accountants who see the big picture, understand the ripple effects of their decisions, and actively contribute to the financial and ethical health of organizations will undeniably remain indispensable, anywhere in the world.

Accounting

Republicans push Musk aside as Trump tax bill barrels forward

Published

2 days ago

June 6, 2025

Business Finance News

Congressional Republicans are siding with Donald Trump in the messy divorce between the president and Elon Musk, an optimistic sign for eventual passage of a tax cut bill at the root of the two billionaires’ public feud.

Lawmakers are largely taking their cues from Trump and sticking by the $3 trillion bill at the center of the White House’s economic agenda. Musk, the biggest political donor of the 2024 cycle, has threatened to help primary anyone who votes for the legislation, but lawmakers are betting that staying in the president’s good graces is the safer path to political survival.

“The tax bill is not in jeopardy. We are going to deliver on that,” House Speaker Mike Johnson told reporters on Friday.

“I’ll tell you what — do not doubt, don’t second guess and do not challenge the President of the United States Donald Trump,” he added. “He is the leader of the party. He’s the most consequential political figure of our time.”

A fight between Trump and Musk exploded into public view this week. The sparring started with the tech titan calling the president’s tax bill a “disgusting abomination,” but quickly escalated to more personal attacks and Trump threatening to cancel all federal contracts and subsidies to Musk’s companies, such as Tesla Inc. and SpaceX which have benefitted from government ties.

Republicans on Capitol Hill, who had — until recently — publicly embraced Musk, said they weren’t swayed by the billionaire’s criticism that the bill cost too much. Lawmakers have refuted official estimates of the package, saying that the tax cuts for households, small businesses and politically important groups — including hospitality and hourly workers — will generate enough economic growth to offset the price tag.

“I don’t tell my friend Elon, I don’t argue with him about how to build rockets, and I wish he wouldn’t argue with me about how to craft legislation and pass it,” Johnson told CNBC earlier Friday.

House Budget Committee Chair Jodey Arrington told reporters that House lawmakers are focused on working with the Senate as it revises the bill to make sure the legislation has the political support in both chambers to make it to Trump’s desk for his signature.

“We move past the drama and we get the substance of what is needed to make the modest improvements that can be made,” he said.

House fiscal hawks said that they hadn’t changed their prior positions on the legislation based on Musk’s statements. They also said they agree with GOP leaders that there will be other chances to make further spending cuts outside the tax bill.

Representative Tom McClintock, a fiscal conservative, said “the bill will pass because it has to pass,” adding that both Musk and Trump needed to calm down. “They both need to take a nap,” he said.

Even some of the House bill’s most vociferous critics appeared resigned to its passage. Kentucky Representative Thomas Massie, who voted against the House version, predicted that despite Musk’s objections, the Senate will make only small changes.

“The speaker is right about one thing. This barely passed the House. If they muck with it too much in the Senate, it may not pass the House again,” he said.

Trump is pressuring lawmakers to move at breakneck speed to pass the tax-cut bill, demanding they vote on the bill before the July 4 holiday. The president has been quick to blast critics of the bill — including calling Senator Rand Paul “crazy” for objecting to the inclusion of a debt ceiling increase in the package.

As the legislation worked its way through the House last month, Trump took to social media to criticize holdouts and invited undecided members to the White House to compel them to support the package. It passed by one vote.

Senate Majority Leader John Thune — who is planning to unveil his chamber’s version of the bill as soon as next week — said his timeline is unmoved by Musk.

“We are already pretty far down the trail,” he said.