Hall of Fame - William O’Brien

Interviewer: Please give our readers a brief history kind of an overview of your career.

My career began as an intern at what was then Dean Witter in 1986. I was fortunate to work for some of the larger and better-known producers at the time. I graduated from college in 1988 and was immediately hired by Dean Witter to do my training on the 63rd Floor of One World Trade Center, which was their main Training Center at the time. From there, I went into the financial advisory business and really gravitated towards the qualified plan side specializing in 401Ks. whole team left in 1997 and went to what then was the old Kemper Securities, the largest investment firm headquartered in the West. There, I was made a Director of Corporate Executive Services, and my specialty was in business transition work.

I came from a family that owned a trucking company. Unfortunately, my mother had passed away rather young, and our family was looking to dispose of the trucking company. I had investigated all types of succession planning or liquidity options for the company and had discovered ESOPs. It wasn't a perfect fit for what we were trying to do as a family unit and we wound up selling the corporation to a strategic buyer, but my thought then was “Why is this ESOP transaction idea not out there more?” ESOPs have so many benefits, not only to potentially the selling shareholders but also to the employees going forward. Why aren't there more of them and why is the process so shrouded mystery for most business owners?

So, at that point in time, focusing on business succession planning and transfer, I really started to focus on ESOPs. What was ironic was that from 1998 to 2000, working at Severen Severen, which was purchased by First Union National Bank, the fourth largest bank in America at the time. The heads of the bank had asked me and our team if we'd be willing to assist in design implementation and oversight of ESOPs for what was the fourth largest bank in America. We agreed to that, and from 2000 through the rest of my 10 years at the organization, we oversaw design implementation and oversight of all things ESOPs.

Unfortunately, everybody is aware that First Union wound up taking Wachovia's name and then subsequently failing, partnered with Wells, and was purchased in 2008.

We were being recruited and asked to join Morgan Stanley Smith Barney. We assembled the team here at Morgan Stanley Smith Barney in 2009 with the same charge, design implementation and oversight of ESOPs at the organization, assisting advisors and their clients who were looking for information, education and the ability to execute in and around those strategies. That brings us to where we are today as The ESOP Group at Morgan Stanley.

Within the organization of Morgan Stanley, I am a Managing Director part of the Chairman's Club, the highest Club ranking one can achieve.

Interviewer: What individuals have most helped or influenced your career?

Outside of my immediate partners, without question the biggest influence have been attorneys. Dave Ackerman was a friend of mine and a tremendous mentor when I first started focusing on ESOPs in the 90’s. I learned a lot from David.

I was also close friends with Greg Brown and Greg would always be a great voice and an ear to listen to any questions I had. He was able to give me objective advice on transactions and matters related to ESOPs.

Interviewer: What ESOP transactions in your career have been extraordinarily different or unique?

I'd say that there are really two aspects that we see. One is when an ESOP is created and there's a liquidity event for direct shareholders. The reason there are over 6,500 ESOPs in America has a few factors that play into it. 10,000 people a day turn 65. All those 65-year-old business owners need to decide how they're going to gain liquidity out of this asset that they've spent their entire life building. Invariably they look to running a process looking at private equity. These companies are generally receiving one or two unsolicited offers a month, then eventually the timing is right, and they look out and say, “If I'm going to look at private equity or running a process selling to a strategic partner, tell me more about this ESOP thing.”

These owners fall into three different buckets. Bucket one would be transition from generation to generation where maybe one of the shareholders wants a retire and the remaining shareholders want to stay in the business and continue running it. We see a lot of transactions like that. We see a lot of minority (less than 50%) transactions where it's individuals who are generally, I would say, in their 50s. They started a business, ran it very successfully. They want to diversify their net worth, but majority of their assets are tied up in the business. So, they're looking to take some chips off the table, and a lot of them will go down the path of an ESOP, realizing if they can design a system that allows them to recruit and reward the best talent, that's exactly where they want to be. Then we see majority, up to 100%, transactions. A lot of those are individuals who really care about their employees and see the of the legacy aspect of doing an ESOP versus just selling it to the highest bidder. They want to take care of those who have helped create this business to whatever level of success they currently enjoy.

On the other side as far as unique, I would say the biggest thing that you need, that is really underreported and under discussed in this country, is when ESOPs our sold. We generally will see up to five existing clients a year sell their ESOP company. The reason for this is that ESOP companies generally outperform their non-ESOP counterparts, and it makes them attractive to private equity strategic buyers. We've seen all kinds, and I'd say the uniqueness there is seeing the real, potentially life-changing wealth that's created for individual participants of an ESOP when there's a liquidity event.

When an ESOP is put in place and runs for five, ten, twenty, thirty years and gets sold, that the individual workers who might have made $30,000 to $50,000 a year receive life-changing sums from a successful sale. That's what I would say is very unique about the ESOP transaction versus individuals who sell to private equity. Non-ESOP company employees get their jobs, and they have a place to show up to each day, but they don't have any equity participation.

Interviewer: Can you tell us about any ESOP transactions you have encountered that were particularly challenging?

Generally, the challenges arise on the front-end structuring transactions. We see them in all shapes and sizes. A business might be worth five million dollars, and the owner(s) want to do a transaction. There are obviously a lot of professionals who are coming together to structure a deal and make it successful. It's not inconsequential from a cost perspective. That's usually the largest challenge we face.

The next part of the challenge, when I look at a transaction, is whether the revenues and profitability of a business suffer during a transaction. We've had transactions that completely unwind because a company faces something like losing its largest client.

Interviewer: What do you see as trends in ESOPs that are growing or waning currently?

Opportunities are growing. One reason for that, as I reflect post-Covid, is having business valuations going up to levels we haven't seen previously, even during a lower interest rate environment. As interest rates have risen, we've seen deal flow cool a little, but there's still a tremendous amount of interest.

There were a lot of business owners who reached out to us and their idea was, “I don't want to run this thing any longer than I must. I've worked my whole life to create whatever level of success this company's enjoyed. I want to spend the remaining time enjoying it.” One day, they sort of have to pivot and put on a different hat and say, “Okay. Now, I'm going to put on this business transition strategy hat and decide where it goes next. Who should own it, and how should that look”? That's really our side of it, providing the information, and education. That’s we've seen the demand just explode since Covid. This silver tsunami, I believe, is real. 10,000 people a day turn 65, and if you own a business, you have to figure it out. Every privately held business in this country must be sold, transferred or if nothing's done, the company is liquidated upon death.

Interviewer: How is the ESOP advisor community evolved since you started?

It's gotten a lot bigger, and I think it'll continue to expand as there are more and more opportunities and more and more ESOPs being done. We're seeing more enter the space, not less, and you see the same with attorneys and other advisors. There just seems to be a wider bench in the ESOP speciality space now.

Interviewer: Can you provide the readers with any thoughts you may have about the future of ESOPs?

Yes, I think we'll continue to see more and more. With 10,000 business owners a day turning 65, I just think there will be more and more activity. There will be more private equity. There will be more ESOPs. I think you're going to have more of every type of transaction. We've seen the studies on the Baby Boomers. That generation influenced everything from diapers to swing sets, automobiles, and home purchases. I think now we're seeing it on the other end where those baby boomers want to retire, and if they own a business, they've got to figure out what they will do with it. It’s going to raise the number of private equity deals done, the number of strategic sales is going to increase, the number of going public transactions as well as number of ESOPs.

Interviewer: What about the “lightbulb moments” you see when a business owner realizes what an ESOP transaction can do for him/her and the employees?

We've seen a number of companies that are larger in nature. The business owner looks at it and says, “I understand that it's more complicated than a general sale to private equity or a strategic buyer, because I'm going to have so many more parties involved. But I'm going to have an attorney just as I would if I did a sell side. I'm going to have a corporate financial advisory firm. I probably would want that even if we're going to run a process. They would be integral in that anyway.” But now, selling to the employees, that owner is going to have their own valuation firm. The trustee is also going to have their own law firm. After all that, the ESOP still has to be administered. This is a living, breathing thing that is going to live on into the future and, hopefully, in perpetuity.

A lot of business owners look at the complexity and say that it is the deal killer. They say, “I want to sell this thing, and I want to be done two weeks from now.” A lot of other business owners look at it and say, “You know what? It's worth the extra level of involvement so my employees can be the economic benefactors from this day forward after we sell to the ESOP. I'd like that. I want to do that.” So really, it is the education to the business owner around doing an ESOP will be something that lives on into the future, and they have to manage that. You have to go into that process with your eyes wide open.

Interviewer: What are the key elements you see in the success or failure of an ESOP? What makes a successful one in your books?

I think a successful ESOP is one in which there is proper communication to the employees when it's installed and ongoing. What we've seen that has the best results has generally come from more of an open line of communication, trying to make the employees feel empowered. Telling them, “You now have an economic incentive to do good, to manage costs, increase revenue, etc.” That has been the biggest benefit driver we have seen.
ESOPs that suffer are those where somebody just does an ESOP and doesn't really communicate to the employees. The employees don't know what an ESOP is. They don't understand. That is where you run into issues.
Like everything else, I think the more you communicate and the better your communication, the better the result. I've always used the analogy, and I use it a lot. I have travelled every week for just about the last 25 years. I have probably rented 2,000 cars in my career. I have never washed a rental car. Why? Because I have no equity incentive in that car. It is strictly there to get me from point A to point B, and I think that's the way individuals could look at the jobs. They show up every day, but, if you say, “Hey, this is part yours now, you have an equity incentive to cut costs and increase profit.” I think you can get a lot of buy-in.

A great example, one of our clients had done a transaction in the medical services industry. They did a great job communicating the employee role and benefit in the ESOP. One of their lower-level employees who ordered all the bandages went to the senior position and said, “I was doing research and I found there are these bandages that are higher rated and cost less. I figured since I'm part owner now or have an economic interest in it, it could only help the company if we switched to these bandages.” And they did it. I think that's what those are the sort of heartfelt stories business owners hear and are hoping to hear when they implement an ESOP. But again, it will only happen if they communicate it well and empower their employees. There's a difference between a job and a career. And I think that's what an ESOP offers. If you go to work at a company that has an ESOP, you can look at it as a career. You're going to know people have worked there (especially if it's long-standing ESOP) that have retired with a lot of money from just doing a good job, working hard at a company that shares some of the economic benefit of the share value downline to the employees.

Interviewer: Any concluding thoughts you’d like to share?

My belief is that ESOPs will continue to grow as knowledge and education gets out, especially on the political side. I think as more politicians learn about ESOPs, it's only going to help. We've done transactions where business owners were offered more money by somebody who wanted to buy their business, come in, and move it. I can tell you, there are business owners who say, “I don't care about getting the last dime out of this business. I'm more concerned with helping those people who help make this business successful. That's what an ESOP does versus any other type of transaction.