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Employee Ownership For MSPs 

Up until recently, I assumed there were largely two schools of thought when it came to building an MSP business; The first is a lifestyle business, which is optimized for the amount of income that it can distribute to its owners. These businesses don’t necessarily have to grow revenue, as long as they are able to sustain enough margin to keep the owner fed and happy. They also don’t require any specific formula for revenue and offer a ton of flexibility as to how the company makes its money. While it’s possible to exit a lifestyle business, that is not often the goal and therefore the valuation would often reflect that. 

The second is a growth asset, which is when the business is optimized for its value upon exit. These businesses are less concerned with short term distributions, as they attempt to keep as much cash in the business as possible to keep feeding more growth. EBITDA margins, revenue mix, specialization and customer density all play a factor, as they are what contributes to the multiple that gets applied to the earnings. This is all for one singular purpose of growing an asset that owners will eventually exit to Private Equity or another buyer, maximizing wealth creation for the owners. 

While uncommon, I now realize that there is a third school of thought emerging. Rather than optimizing for income or exit value, one MSP in particular is optimizing for “legacy.” In short, legacy is about the business’ ability to have a multi-generational impact for its members and employees. While it does look to create wealth, it does so through employee stock options which distributes that wealth among all of the employee stakeholders, both present and future. The mechanism upon which this is executed is called an Employee Stock Ownership Plan (or ESOP). 

One MSP that is leading the way in employee ownership is called WEBIT and the man behind this mission is Eric Rieger. I recently sat down with Eric to better understand his vision for a fully employee-owned MSP and the story that inspired it: 

The Why 

A Sense Of Purpose

Before we jumped into all of the details regarding the process, I wanted to first understand Eric’s intent. While he shared his initial ‘why’ in a blog article as they were kicking off the transition to employee-owned, I thought it would be beneficial to hear it directly from him. As he described, “I kept envisioning the classic ‘creeping out the back door with the bag of money’ scenario, and that just didn’t sit right with me. I knew there had to be a better way—one that didn’t just benefit me but also took care of the people who built the business with me.”

Eric’s conviction came as a result of his ability to answer a series of rather complicated questions; “I kept asking myself, ‘And then what?’ A big payout sounded great, but after the money runs out, what’s left? Why did I start this business in the first place?”  He went on to suggest that “the answer wasn’t to maximize my payout on exit. I wanted to build something that actually made a difference for the people in it.” This sense of purpose is the ‘legacy’ that we spoke of earlier, which has been his singular focus from that point forward. 

Choosing Your Path

While Eric’s choice is a noble one, it was obvious that an ESOP is not for everyone. When asked about company fit, Eric replied, “You have to dive deep into why you started the business in the first place. If you’re building a company just to maximize a big payout on exit, an ESOP probably isn’t for you. But if you want to create something lasting for your employees, this could be the right path.”

“If it’s a lifestyle business—where you’re running it for personal income rather than long-term growth—then just be upfront with your team. An ESOP requires a mindset of reinvesting in the company for the benefit of the employees.” He went on to suggest that it should be looked at as a repeatable cycle that perpetuates for generations, as opposed to a straight path to an exit. “If you’re just doing an ESOP to eventually sell to private equity anyway, then you’re missing the point. The goal should be to build something sustainable—an evergreen company that can carry on beyond you.”

The Benefits

Company Culture

For those considering employee ownership, there are many benefits. However, achieving these benefits is not always as simple as it may seem. As Rieger explained, “You can’t use an ESOP as an ‘easy button’ for culture. If your company culture isn’t strong before, flipping the switch to employee ownership isn’t going to magically change that.” The impact on culture also varies by generations in the workforce. “The younger generations have different priorities. It’s not just about salary anymore—they want flexibility, time off, and to feel like they’re working for a company that’s making a difference.” While they may appreciate the privilege of employee ownership, they won’t overlook a toxic workplace as a result. 

While the impact on existing employees and team culture is difficult to measure, Eric has observed a direct correlation between the company’s mission and the type of talent that they now attract. As he noted, “One thing I’ve noticed is that employee ownership attracts people who are more community-focused and purpose-driven. They want to contribute and be part of something bigger, rather than just clocking in and out for a paycheck.” This makes sense, as it would appear as though the true and lasting culture is built with each new employee owner that is brought on, as opposed to just flipping a culture switch that suddenly inspires the existing team. 

Tax Advantages

At first glance, I was unsure of the tax implications of transitioning to an ESOP. One of the common myths that I had read was that while the company taxes were reduced, the employees had to pay the price upon receiving their shares. According to Eric, this is not entirely true. “The tax burden for employees is often misunderstood. They don’t pay taxes on their shares year over year. It’s only when they retire or leave and cash out their shares that they pay capital gains tax.”

He went on to explain that, “Right now, we’re 30% employee-owned. That means only 70% of our profit is taxed. Once we hit 100%, the company will never pay federal tax again under the current structure. That’s a massive financial advantage.” While the tax benefits may take a lot of pressure off the organization, they shouldn’t be solely relied on as a means of profitability. “The tax savings don’t mean much if you’re not running a profitable, well-managed business. You still have to focus on operations, sales, and growth because the ESOP structure only works if the company remains financially strong.” 

Market Differentiation

While there are many internal benefits to employee ownership, it would appear as though there are external benefits as well. One of which comes in the form of market differentiation. To this, I asked Eric Rieger if converting to an ESOP has helped his company earn new business. As he replied, “In Illinois, there are only 270 employee-owned companies. We’re one of just two IT companies that I know of, and the other one is more project-focused than an MSP. Nationally, there are only about five MSPs doing this that I’m aware of. That makes us unique right away.”

He went on to recall specific sales scenarios where this had been a factor. “When we’re up against three or four other providers in a sales process, we’re often competing with private equity-backed MSPs that have offices in multiple cities. That’s where our narrative is different. We’re not just another big corporate IT firm—we’re locally owned, community-focused, and employee-driven. I’ve even had prospects in sales meetings ask me about our employee-ownership journey. It immediately separates us from the competition. People are curious about it, and it leads to deeper conversations about values, culture, and long-term partnership.” This unique brand positioning is a clear ice-breaker that signals to prospects who you are and what you stand for. 

The Challenges

Debt 

The process of converting to employee-owned is not without its challenges. According to Eric, the debt-load that the company must take on is at the top of this list. As he describes it, “An ESOP is essentially a leveraged buyout, meaning the company takes on debt to fund the transition. That debt gets paid down over time, but if the company isn’t financially stable, it can be a major burden.” This reiterates the earlier point as to how important profitability is when undergoing this process. With tighter margins, servicing the debt becomes even more difficult. 

This debt also can have an immediate impact on the valuation of the company, which can come as a surprise if it’s not well understood ahead of time. “The first year after the ESOP transaction, your valuation will likely go down because you’re taking on debt to fund the transition. You have to educate your employees on this, so they understand that as the debt is paid down and the business grows, their shares will increase in value over time.” Rieger brings up a good point as a shrinking valuation can lead to poor optics among employee shareholders if they do not fully understand the underlying cause. 

Communication

This also reiterates why communication is key in this process. I shared with Eric a link to a thread on r/msp where many MSP community members shared their take and experiences. As we discussed the thread, it became apparent that there was a lot of misinformation there (to no one’s surprise). While there was no ill-intent, it was obvious that the majority of participants in this conversation did not have a clear understanding of the process and how it impacts the business and its employees. Unfortunately, this thread was one of the most in depth resources that I could find on ESOPs for MSPs, which became even more motivation for me to do my homework and write this article. 

As we discussed this problem, Eric pointed out that, “Not every employee will immediately understand what it means to be part of an employee-owned company. It takes ongoing education to make sure they see the long-term value and understand how their role impacts the business’s success.” He takes this very seriously and makes a point to involve employees in as much of the process as possible. This transparency and communication is ultimately what will convert this challenge into an opportunity and build the foundation for a great culture among employee owners. 

Governance

Another significant risk comes in the form of corporate governance. “If you’re stepping back from ownership, your leadership team and board have to be fully aligned with the company’s mission. If they don’t share your vision, there’s always a risk of the business losing its identity over time.” Part of building a legacy is constantly establishing and reinforcing the values so that the next generation is not left to fill in the blanks. If they are, you run the risk of the company heading down the very path you set out to avoid. 

Rieger warns, “If you’re not careful, the company could still end up selling to private equity down the line, which defeats the purpose of setting up an ESOP in the first place. The goal is to create an evergreen business, not just another acquisition target.” He went on to express the realization that, “At some point, I won’t be majority owner, and I can be fired. That means you need leadership in place that can run the business without you. If your company depends on you to function, it’s not ready for an ESOP.”

The Process

Trusted Advisors

When I asked Eric about the most important step in the process to converting to an ESOP, he didn’t hesitate. “We spent six years researching employee ownership and talking to tons of people. The hardest part was finding an advisor who wasn’t just looking to close a deal but was actually willing to guide us through the process the right way. A lot of the advisors I talked to were more interested in the transaction—getting the deal done and moving on—rather than truly advising me.” Given that this was part of the long term vision he had for his legacy, Rieger found no need to rush through the process, which was beneficial for the purposes of shaking out the advisors that were in it for the wrong reasons. 

He even recalled probing them to see how different advisors would respond, “I tested advisors by throwing them scenarios—like potential tax law changes. Most of them said, ‘We need to hurry and close before this happens.’ The one we went with said, ‘It doesn’t matter, because you’re taking a seller’s note over five years.’ That’s when I knew they actually had our best interest in mind. The biggest red flag is someone pushing you to do it right away. The advisor we ended up choosing actually told me, ‘No, you’re not ready.’ And that was exactly what I needed to hear.”

Qualifications

One of the key roles of the advisor is to also to make sure that company is fit enough for the process. According to Eric, this really comes down to five key quantitative factors. “You need to check some key boxes before considering an ESOP:

• At least $5 million in revenue
• Year-over-year profitability
• No major outstanding debt
• At least 20 employees
• Taxes fully paid and in order”

“The most important qualification is being debt-free before taking on the ESOP transaction. We had to get debt-free first, so we weren’t stacking debt on top of debt.”

On top of these key quantitative factors, the company must also meet qualitative standards as well. In short, “The business has to be sound. It needs to have a strong leadership team, stable growth, and a solid operational structure. If your business is chaotic, an ESOP won’t fix that—it just adds more complexity.” 

Test Valuation

After establishing your core team of ESOP advisors, accountants, and CPAs, and ensuring that all qualifications are met, “the first step before structuring an ESOP is a test valuation. You pay around $10,000 to $15,000 to get a ballpark of what your company is worth. If the numbers don’t align with your expectations, it might not be the right time.”

There are some nuances that are important to point out, as this isn’t just any valuation. As Eric Rieger explains,”ESOP valuations will be different from a private sale. You’ll likely get a lower valuation compared to selling to private equity. But the goal isn’t a one-time cash-out—it’s long-term wealth creation for employees.” A good metaphor for this is your car’s value upon a trade-in at the dealership versus a private sale to an individual. You can’t walk into a dealership looking to trade and expect to fetch a private sale valuation. It’s a different value for a different purpose. 

Including the cost for the test valuation, Eric estimates his total cost to set up an ESOP as roughly $75,000 to $100,000. This appears to be on the low end, as one source states a minimum cost of $125,000, with annual administrative costs of around $35,000 on average. It appears as though the cost scales with the size of the company, as larger entities could pay upwards of $400,000 to convert.

The Legacy

Building Wealth

When you really step back and look at it, this initial cost is minimal for the lasting impact that it can have. While Eric is gradually divesting his ownership, more value is also being created in the process. For employees, they earn these shares on an annual basis at no cost to them, which is a massive benefit to working at WEBIT. As he explains, “The way we structured it, employees get shares issued every year for free. They don’t have to buy in or invest their own money—just by being part of the company, they’re building wealth over time. The longer you’re here, the more shares you accumulate. And if the company is growing and profitable, those shares become more valuable over time. That’s how employees see real financial benefits.”

While this may seem like a pipe dream, Eric suggests that “in some larger ESOP companies, long-term employees have retired with millions in their ESOP accounts. That’s life-changing money—money that would have gone to a single owner or private equity firm in a traditional sale.” One example is Alliance Material Holdings, an industrial equipment company, where 25 employees now hold at least $1 million in stock ownership through their ESOP program, with 76 more on track to reach that milestone. “This is how you change things generationally. Instead of the wealth being concentrated in the hands of one person, it gets distributed among the employees. Over time, that creates real financial impact.”

Educating Others

For Rieger, wealth creation for his own employees is an important part of his legacy, but he’s not stopping there. He is also compelled to share his learnings throughout this process, in hopes to inspire more ESOPs along the way. This allows him to extend his impact beyond the limits of his own corporation and fulfill what he has found to be a dire need. “The biggest challenge with ESOPs is that there’s so much misinformation out there. Most people—including business owners—don’t fully understand how they work, and the advisors who do are often focused on the transaction, not the bigger purpose.”

“The only people really talking about ESOPs are accountants and lawyers, and they tend to describe everything in a purely technical, transactional way. Nobody is talking about the bigger picture—how this creates long-term wealth for employees and keeps businesses independent. I eventually started thinking beyond just my own company. How do we teach others to do this? How do we create a movement around it? That’s where the real long-term impact is—helping other business owners see this as an option.” This realization has now led to larger ambitions. “My long-term goal is to start a division of our company that helps other business owners set up ESOPs. That’s how we create a movement—not just by doing it ourselves, but by showing others how to do it right.”

Conclusion

While every article that I write sends me on a journey, those experiences have a tendency to feel all too familiar. This one however, led me to a place that I’m certain I’ve never been before. This idea of “optimizing for legacy” is nowhere to be found on the map of outcomes for MSPs. I can’t help but come to the conclusion that this is because—as it pertains to the market—your legacy is in no one’s best interest but your own. Therefore, there is very little gravitational pull in this direction. This is where the market gets it wrong, as your legacy is in the best interest of everyone who calls your company their own. They may just not realize it yet…and neither may you.