Interview with Dennis Long
The beginning of BCI Group
BCI originally stood for "Benefit Consultants Inc.," later DBA (doing business as) "BCI Group" in all 50 states. The company began in Appleton, WI, in 1978 as a consulting and administration firm. From those beginnings, we grew it into the largest ESOP administration firm in the country, with offices in 14 cities and 120 employees at the time of its sale t to Principal Financial Group in 2003, after owning the company for 25 years.
I was the only original founder – I was literally a one-person entrepreneur back in 1978. I grew the company organically, one person at a time, except for a couple of small acquisitions. One of my key hires was in 1980, a gentleman by the name of Pete Prodoehl. 32 years later, Pete is still at Principal Financial Group, still doing many good things in the ESOP world.
He was literally a year out of school when I hired him; he came in as an administrator with a finance background. He was a quick learner, so sometime around '83 he became a consultant, and is considered today one of the top consultants in the business.
What makes Pete stand out among the crowd as a consultant is his capacity to learn and to remember like few others. I remember he's had 3-4 back surgeries in his career, and after his first surgery, the doctor told him that he would be out of work for one or two weeks at minimum, and he was in the office two days later, lying down on a conference table reading the Internal Revenue Code on his back. That's dedication and tenacity. You could ask him a question about something he dealt with in 1981 and hasn't looked at in fifteen years, and he would tell you – he has a really good memory.
He's dedicated, tenacious, he's smart, and he has empathy – he can look at things from a client's perspective, which a good consultant needs to do.
Your early career and becoming an ESOP advisor
When I started out, I moved to Appleton, Wisconsin from Palm Springs, CA. It was my home town, but I hadn't lived there since grade school and didn't know anybody. I moved back, incorporated, hung a shingle out, and knew that I didn't have any clients. I had a new baby son, and that was my motivation. For me, the opportunity to start a new business has to be viewed in the context of the industry in the '70s.
At that point, insurance companies dominated the retirement landscape, controlling about 70% of the business, and banks held another 15%. 401(k) plans hadn't been invented yet, there were only about 100 mutual funds, and not the 10,000 there are today. The bull market of the '80s hadn't occurred yet, and there were no indexed mutual funds. It was a different time, and the small-company market was very underserved, primarily through bundled group annuities contracts and such with insurance companies.
I started this company in 1978 based on 4 1/2 years' experience working in California with high-income individuals. I had more of a tax-shelter orientation, worked on a fee-for-service basis, did complete customization and plan design for high-income individuals. I would create retirement plans that would benefit wealthy people who could invest large amounts of money in tax-deductible contributions. I did no ESOP work in those early years.
Tax laws started to change in the early 1980s, and I had less ability to do what I did in the early years. I had, by then, built a pretty good network of lawyers and accountants who would refer clients to me, and a pretty good track record for local service and fee for service. But with these changing tax laws, we came upon a second opportunity, and that was ESOPs.
Unlike any other retirement plan, ESOPs primarily don't involve liquid assets – just company stock. All other financial institutions that were in the bull market which was starting to take off in the early '80s weren't too interested in ESOPs – they were more interested in asset-based fees, mutual funds, 401(k) plans (which were created in 1981).
Banks, insurance companies and mutual funds had their full attention focused on those asset based plans. I built my practice on high customization and fee for service models, like a law firm, so ESOPs were perfect – they were complicated, they sat at the cross between employee benefit law and corporate finance. There were fewer than a thousand in existence in the nation at the time, and there wasn't a lot of competition.
The problem was that I was in Appleton, Wisconsin. If you got every ESOP that was going to be created in the state of Wisconsin, it wouldn't have made for a great business model, so we were committed in those early years to building a national practice, growing and traveling. You spend a hundred nights a year in hotel rooms, constantly on airplanes – that's the price you have to pay.
We did expand into a national practice and ended up with 14 offices. In the early '80s, a lot of the law was being created – ERISA was already passed, but a lot of the case law and regulations that we now deal with were being developed. Those of us in the early days, on one hand, had little guidance, and on the other hand, had the opportunity to create the landscape and influence regulation and case law.
It was a good time. I guess, any time you're on the ground floor of a movement or industry is a good time.
One of the early ESOPs we were involved with, in about '82-'83, was a local company in Wisconsin called Badger Northland. They were a subsidiary of British Tire & Rubber – they had made some acquisitions, and Badger Northland was a Christmas present under the tree. They didn't really want the company, but ended up with it when they bought its parent.
The company employed about 265 people in a little town of 14,000 called Kaukauna. I read that the employees were going on strike against British Tire & Rubber. By then, we had done about half a dozen ESOPs already, so I called the local union guy leading the strike, whose name appeared in the paper, and asked him if he'd ever thought about buying the company. He thought I was nuts. Then I called the top management guy at the local office and asked him if they'd ever through about buying the company, and he thought I was nuts.
We ended up getting together the union employees and the management team, and talking about a way they might be able to buy the company with an ESOP from this foreign owner that didn't want them anymore. The company was in need of capital reinvestment, and the new owners didn't want to put in the money – they were willing to just close the plant and get nothing for it. 13 months later, with a lot of participation from people in the community, we had a successful ESOP. For example, 13 local business owners each put up 50,000 dollars – the guy who owned the feed store, the guy who owned the grocery store, the guy who owned the local bank... They put together a down payment to get the state of Wisconsin, which had a block grant program, to make a loan to the city and provide some bridge financing.
Then, we got senior financing from what was then First Wisconsin, and are now U.S. Bank. 13 months after the initial discussion, they closed the ESOP transaction and purchased 100% of the company from British Tire & Rubber. The union employees were participants, in fact we negotiated with U.S. Steelworkers a requirement that the ESOP allocate 57% of its stock to union employees. I was proud of this because it was complicated, it took a long time, and we preserved some of jobs. At the same time, I was disappointed, because 10 years later the company still succumbed to its demise.
It simply couldn't stand on its own two legs. The ESOP put it on life support, but it never had what it took to withstand and survive in the long term. I don't consider that transaction to be a failure – employees kept their jobs for 10 years; they had pension benefits in addition to their 401(k)s, which we also ended up creating under the ESOP.
What was difficult, and which added to its demise, is the way the union employees viewed ownership. They owned 57% of the company, but they went on strike against themselves three times. This isn't common in ESOPs, but they really shot themselves in the foot. There's a reason unions exist, and there's a reason to look at unions as a group that could participate in an ESOP, but they were still trying to negotiate against the “bad guys” - and there were no bad guys, British Tire & Rubber was already gone, and they owned the company themselves.
It was a bizarre life after the ESOP... ESOP is not a panacea, it's not going to make a troubled company healthy, and it's not going to put a healthy company in trouble. It's just a capital structure that can really help employees accumulate significant wealth and participate not just as a wage earner, but as a capital owner. But it requires a lot of work on the culture, and not just the corporate finance side of the structure.
If you want to see successful ESOPs, they are the ones that worked really hard and for a long time on getting employees to think and act as owners.
What I learned as an ESOP Advisor
I sold BCI in 2003, I agreed to stay on for 3 years and lead the integration effort. Principal Financial Group bought us, they were the nation's leader in 401(k) and defined benefits plans, with 40,000 corporate retirement clients – but they had done about 10 ESOPs, so they were trying to buy competency in ESOPs when they bought our group.
Our job was to integrate that competency in the fabric of the rest of the retirement plan offerings that Principal made for employers. It didn't take 3 years – we pretty much accomplished instant integration, and I took over another part of Principal's non-qualified executive deferred compensation group in Raleigh, North Carolina, about a year and a half later. At the same time, I continued to manage the ESOP business, and then took over consulting practice within the company for non-ESOP 401(k) defined benefits, as well.
I was still having fun, because I had answered a question about myself. Having worked for small boutique firms and having then started my own, I didn't know if I could work for a Fortune 250 with a founder/entrepreneur attitude, survive and actually succeed. I was still having fun after three years, as I found that it was not that much different from small business – just a lot more committees, a lot more deliberate decision making, a little less nimble, but the opportunity for individuals to exert influence still exists.
One thing I learned is that when I owned a company – and I owned a majority but there were 33 other BCI employee owners – when I make a decision, I can execute it. But clearly, you don't want to be sailing in the face of all your other colleagues, so there is a lot of collaboration and agreement on direction – but in a big company, there is no majority shareholder, no one can make a decision and execute it. The only common currency that anyone has in this situation is influence. One thing that a founder has to do when he sells his company, is exchange power for influence, and I encouraged everyone else who was with me on the BCI team and was now on the Principal team. We had a lot of influence – everyone has a printing press of influence on their desk, and I encouraged them to print as much as possible, exert as much as possible, and make Principal a better company after their acquisition of our team, and I think we did that.
People tend to think in big companies, "Why fight City Hall," "I'm just one of 15,000 employees," "What can I do, I'm the low man on the totem pole, I've never even seen the president," blah blah blah. Well, 15,000 people all have the opportunity to work beyond the scope of their job description, to think broadly, to act in an influential and positive way. That's what I'm talking about – you print your currency, and your currency is influence. You go to any meeting, don't sit in a committee meeting to reach consensus – you go there the best prepared, the best read, you've looked at everything 15 ways, and you're going to go to any meeting, any interaction with any person, and exert influence in a positive way, just by living every day in a productive way. Creating consensus rather than joining one.
There are examples where know I exerted some influence. From the moment I sold BCI Group, I spoke like I was Principal, buying BCI Group – there was never a “we” - “they” in my vocabulary. When I made the announcement to my employees on Day 1 of the acquisition, I spoke as a long-term Principal employee, not as a long-term BCI employee. I also happen to be Catholic and Irish, and I've been to a lot of good wakes – so we did have a wake for BCI Group, we talked about good old Uncle "BCI", and the nice parties we had, an all the good times.
But on Day 1, we traded in all of our logo materials for new materials, donated all of it, we took a couple of tons of rock that had our logo on it off the front of the building, ripped up hardwood floors that featured it as well. We did all this in one day, and changed our name immediately, and people asked us why we did it – we had been around for 25 years, and in the world of ESOPs, the name BCI meant something. I said yes, but I have 4 boys and 1 girl, and someday my daughter is going to get married. When she does, she's going to change her name, and I'll love her just the same. Life goes on – it's not about the name, it's about what we do.
We kept the cachet of BCI and effectively transferred it within 90 days to Principal. If you're a big company that's buying an add-on to your business and fail to integrate it, you're not doing yourself or your shareholders any favors.
I stayed for 3 more years after my agreement. When the "financial difficulty" began to arrive in spades in 2008-2009, it arrived for every company in the financial services industry, and Principal was no exception. We collectively laid off about 1500 employees. I figured that if I retired, I would probably save three or four jobs for people on my team, and it was my game plan to retire around that point anyway, so that is what I did. I was very pleased to have done it that way.
Some of my associates
Of the people that started at BCI, only one didn't stay on at Principal, and that was Tim Regnitz. He left within a few weeks of the effective date of the sale and went to work for Crowe Chizek [now known as Crowe Horwath], a CPA firm, in their Chicago office that does ESOP administration. He and I had a great personal relationship, he was a shareholder; he didn't, however, have the same faith in a big company that I did, and made up his own mind. He's changed his job once since then, but he's still in the ESOP community.
Tony Matthews is someone I recruited in 1998. He was the president of one of my biggest competitors, a company called BSI in Los Angeles. After a failed attempt to purchase the firm we ended up hiring Tony. Tony worked for us from 1998 until about 2006.
Two guys that were key players in the company are still there – Pete Prodoeh, who I mentioned earlier is still there as is Kim Blaugher with 17 years of service after joining us from Mercer where he ran the ESOP practice out of their Kansas City office. So we ended up with an office in Kansas for a while before Kim relocated to Appleton, and now in Boise, Idaho.
One of the things about office locations was my philosophy of hiring talent. I didn't care where the individual consultant lived; I certainly didn't want everyone to be in Appleton – that would have been a financial disaster when it came to visiting clients, since it's always two flights to get anywhere. I let people live where they wanted to live, where they would be happy and engaged, knowing that they would have to get on a plane and travel anyway, since our clients are spread all over the 50 states. When Kim suggested Boise, which is not on my list of the top 50 best locations for an office, I said to him, "Kim, I'd rather have you on my team in Boise, than on someone else's team anywhere."
How Technology has changed the ESOP Industry
It would have been so much easier if we had, back then, the technology that we do now – iPhones, and video conferencing, and such. We're all wired to everybody now, and everything is instant, but that has its own negatives – we're all on our Blackberries and smart phones all the time, to an obnoxious level, I would suggest. Back when I still worked, I would look at my Blackberry on the way to church, and on the way back from church, and in bed... you never turn it off. It was a lot easier to have some lights-out time back in the day, but it was also a lot more difficult in a way, because you had to work much harder to be as productive.
Today, with technology, you can do things so much faster... you also can't hide today. Clients are with you all the time electronically, you can give them progress reports, access to your chart and show them where things are as the process continues. Back in the day, when the fax machine was introduced, I thought it was a great invention. Now, you can't even sell it as an anchor. You do still need a good scanner, though.
A tool like ESOP Marketplace has the opportunity to make the community more accessible, connect companies and advisors, and connect companies with each other. The difficulty is having the data speak to all the relevant issues that you might want to have when making a decision. When we grew our company, we got a lot of requests for proposals, and we basically didn't complete any of them. I don't like them; I would ask these people, if I complete a request for proposal, will you invite me in for an interview if I'm the most expensive one on the list? We didn't want to be the low-price leader; we wanted to be the quality leader. Our services were more expensive than many other firms, but they would be worth it, and pay for themselves in the long run.
But the problem with spreadsheets is that they don't give you the benefit of a good discussion. This is why, in many respects, I'm kind of old fashioned with eyeball-to-eyeball stuff, and even as our company grew, and technology improved, we physically traveled to a single location every couple of months and got everyone together, so we could have a nice dinner, productive face to face meetings, good arguments and agreement on strategy.
When you have small offices, you can get isolated. With the growth of technology, you have a lot of virtual offices, and you lose the benefit of fellowship and camaraderie and being a single team. I think that one of the reasons we had very low turnover as a company was that we didn't take face-to-face contact for granted. Flying everybody in for a meeting may cost 50,000 dollars out of pocket on air fare and hotels, as well as taking everybody out of production, but it was worth it. It's an easy thing to cut if you're just thinking about cutting expenses, but I firmly believe that it was more of an investment than an expense.
Stories from the ESOP sector
I was not involved with the start up of The ESOP Association but have been a long time member and supporter. Bob Smiley was really the guy who formed it. He's in Nevada, and his company is called Benefit Capital.
In 1997, the law was passed that would permit S-Corporations to have ESOPs. The first one of those was a Minnesota company called Liberty Check Printers. They filed their ESOP documents with the IRS shortly after midnight on January 1, 1998, in order to be the first.
In 1997, Bill Clinton had just been reelected and he introduced a budget bill that put a target on ESOPs. While ESOPs were being expanded in 1998 to S-Corporations, no one anticipated the growth of S-Corp ESOPs at that time. People just thought, let small companies that are incorporated as S-Corps get ESOPs – it wasn't viewed as a big revenue loss. But Clinton, in his budget bill, started to look for ways to raise revenue, and there was a shot across the bow to ESOPs, and S-Corporation ESOPs in particular as a revenue loss.
However, this was such a great benefit to companies, that many corporations thought they could just become S-Corps and not pay taxes, this was almost too good to be true. Several years earlier, we had started a group at BCI called the Employee Ownership Institute. This was a non-profit organization that did employee education, and it existed so we could run programs for our clients. To encourage our larger clients that were converting to S-Corps, we encouraged them that if they wanted to preserve the tax benefits that were recently created, they should become a little more aggressive in protecting this, since this won't be the last time that a budget is going to take aim at ESOPs as some kind of loophole.
This was the beginning of the early discussions that led to the creation of ESCA – Employee-Owned S Corporations of America. At that time, there was an S-Corp Association, and there was a group of people involved with this association that met with me and a small group of others to talk what this offense/defense strategy should be, and we actually considered a name that was different than the one we settled on, something like “Committee to Preserve and Protect Employee Ownership.” At the Chicago Hilton in 1998, we held the initial meeting that could be considered the birth of what is now ESCA, and one of the ladies you should talk to who is now the president and executive director of ESCA is Stephanie Silverman, she owns a political strategy firm in Washington D.C. called VENN Strategies, and she was very instrumental in the growth of ESCA.
ESCA is controlled by company members, not by professional staff or advisory members like me. The early members were mostly BCI clients, with 90% of the advisory boards and 65% of the membership. Now, membership is much more diverse and widespread but the BCI Group/PFG support is still strong and I believe our influence still important. ESCA is, in my opinion, the strongest lobbying and advocacy voice for ESOPs. We have the ESOP Association that sponsors really good communication and education programs and has a broad-based membership and holds a wonderful technical conference in Las Vegas every fall. The National Center for Employee Ownership in Oakland, California, is also an excellent educational resource on ESOPs and other forms of employee ownership. ESCA, in contrast, is a high-cost organization, with companies paying $50-60,000 in membership dues, with different classifications of membership. They are smaller, more nimble and highly effective in their efforts to influence and protect the tax benefits associated with S Corp ESOPs. It is where serious ESOP companies put their money where their mouth is, and mount a very focused lobbying effort, not just in Washington, but also in the home districts of just about all congressional districts.
The creation of Repurchase Liability Software
At BCI, we created the first repurchase liability software in 1988. The way an ESOP company calculated the repurchase liability before that would be by hiring us or, Mercer or Wyatt or some other consultant. We would forecast the year by year cash outlay to pay off ESOP participants when they retire, die, terminate or become disabled. In order to do those calculations, we would ask for a hundred assumptions that would go into our "what if" scenarios.
I always thought that, while this was worthy of a $30,000 fee, it seemed kind of backward – you, as the employee-owned company, had all the data that would go into this calculation, and all we had was the computer program that would do the actuarial calculations and come up with the right projections. It seemed to me that if we took the actuarial science part of it, made it into a computer program, and let our client enter all the required data t to make assumptions, and incorporate this into the company's strategic planning would be a much more effective process. Instead of doing one repurchase liability study for 30 grand under one scenario, and having to pay another 4 grand to investigate a different scenario, a company could run 150 "what ifs" and do it pretty quickly.
We created this software and sold it at the initial price $5,700. It was called PERLS (Professional ESOP Repurchase Liability Software). I hired a guy named Mark Collings for, I think, the world's worst job, to put a bunch of these programs in the trunk of his car and drive around the country selling them. There could have been an easier way to distribute it, but in 1988 there weren't that many ways to sell software.
This didn't produce enough revenue to make much of an impact on us, but every once in a while, a firm does something where the impact isn't measured directly in terms of profit, and for us, PERLS was one of those. It created an image of us in terms of leadership that I couldn't have bought. In some ways, the name of PERLS became better known than BCI group – many people knew our software, but had never heard of us.
We sold the software directly to CFOs of ESOP companies, and it was designed specifically for their use. It required only that the CFO have a good understanding of the sponsor's own ESOP. We also sold a number of programs to about 30 of our competitors, who used the software to do studies in the old-fashioned way for their clients.
Some people in our office asked why we're selling this software to our competitors, and I said that we did it because it was a commodity product. I would sell it to anybody who would write us a check for $5,700. It doesn't distinguish us as a consultant - it was just a commodity but an important tool for the ESOP community.
When we sold to Principal, I started formulating another strategy - how to give away the software for free. Anybody who becomes our client for administration just gets it, but instead of a stand-alone software package that you install on your own computer, you just get an access code, and you can draw on all the data that we have on our mainframe for all the ESOP records enabling a client to do what-if scenario planning online. As soon as you're no longer our client, you don't have access.
This, I thought, was recognizing that the program was just a commodity on one hand, but it's also a service that we could use to enhance the overall product offering administration and consulting. This way, the cost went from $5,700 to $0, as the service was included in the cost of our plan administration fees. The result was that it created another differentiator for us in the market.
We became widely known for our expertise in repurchase liability consulting. In the early days, if you went to an ESOP Association meeting, I might be giving the presentation on repurchase liability studies, and there would be 12 people in the room. Now, there is an entire conference just on repurchase liability. As the ESOP concept matured, the fact that companies have huge and growing emerging liabilities for rebuying stock from terminated employees became something that everyone paid much more attention to.
I've been gone for a few years now, so it's hard for me to even venture a guess, but it would be north of 500 million dollars a year that is distributed from ESOP accounts to terminated employees just from our old block of clients. That's a big enough number to keep track of and predict with some accuracy.
On the Future of ESOPs
The future looks bright for ESOPs, because we are going to look at a fairly significant wealth transfer in the United States over the next 10-15 years, as 10,000 people a day reach the age of 65. That includes a lot of business owners, and the tool that ESOP represents in business succession planning is pretty special. There is a lot of room for growth. ESOPs are still under the radar screen. I know of a company that created their ESOP three weeks ago, and they never heard about the concept from their accountant or attorneys. The owner is a pretty sophisticated guy, but he just hadn't heard of the ESOP concept.
The way he was introduced to the ESOP idea was by being the client of a small boutique investment banking firm in Chicago called Verit Advisors, where I am proud to be an investor and on the board since my retirement.
The majority owner of Verit, is a lady by the name of Mary Josephs. I have known her for 25 years - she was the leading lender to ESOP companies when she managed and grew the ESOP lending group at Lasalle Bank in Chicago. They were then bought up by Bank of America, where she led the ESOP group until she left to start Verit. Verit is in its third year and growing quickly in size and reputation. It is unique from other Investment banking firms because of its deep ESOP expertise. Even though I'm retired, I'm on the boards of Verit and a few other ESOP companies - it's my way of still being able to be engaged and staying in the game.
Now, with this wealth transfer and the tax benefits associated with ESOPs, as well as the non-tax benefits associated with employees having something at stake in the company besides a paycheck - when you look at the pressure on 401(k) plans, since companies don't offer anything aside from them these days, and there are no new defined benefits plans being created, we're on a self-serve basis in this country when it comes to saving, and people are grossly unprepared for retirement, financially as well as mentally.
We have one client – a former Principal/BCI client – who has produced close to a thousand millionaires so far, with their ESOP. I think there is going to be continued growth in ESOPs for these reasons; and when you look at short-term economics, at the present, we are coming out of the years of 2009-2011 when business valuations were depressed and corporate earnings were down. Now, valuations are up, earnings are up, multiples are up, banks that in 2009-10 couldn't lend and had a frozen credit market are now able to lend; there are other sources of capital, like insurance companies and private equity firms.
I think ESOPs will continue to grow, but I would also say that some people get kind of religious about ESOPs, like employee ownership is everything, it's the end-all. I'm not on the "religious end of the spectrum" - I think it's a good corporate finance tool, but at the end of the day, capital is capital. I get a little defensive when people say, "well, that company was in an ESOP for 15 years and they sold out, that's another example of an ESOP failure." Well, wait a minute – when the newspaper Peoria Journal Star sold to Copley of L.A., and the Chicago Truibune said that the ESOP failed, I think the employees that were paid something like 600 million dollars would beg to differ. They got four times more than what the ESOP originally paid for it.
Ownership changes hands every generation. That's what happens. That's why there's going to be a future for ESOPs, but that's why it doesn't mean that every ESOP that's created should stay as one. ESOPs offer a tool to facilitate transition, but not necessarily the final corporate structure. However, both the tax and the non-tax benefits are significant, and you can use ESOPs to grow and to enrich the lives of the employees, and you can create a wonderful environment for customers and employees. But like anything good in life, it takes hard work and effort, and everything is always subject to change.