A successful construction company owner is no stranger to tough times. Consider the ups and downs baby-boomer-owned construction businesses have weathered over decades: market volatility, inflation, high interest rates, supply chain disruptions, global pandemic, regulatory changes, and a shortage of skilled tradespeople all come to mind.
But you’ve proven your mettle and built a resilient, enduring construction company – and now that you’re finally looking forward to retirement, just one vitally important detail stands in your way: finding a buyer that’s willing to pay fair market value for your business.
That’s one reason an employee stock ownership plan (ESOP) deserves serious consideration as you formulate an exit strategy. Unlike third-party sales, such as mergers and acquisitions or private equity buyouts, federal law requires an ESOP to compensate the selling shareholder for the company's full fair market value.
But construction can be a complex industry, and ESOPs seem pretty complex (especially at first glance) … so is it really advisable to sell your construction company to an ESOP?
In this article, we’ll explain why the answer is yes — you can sell your construction business to an ESOP without sacrificing value. We’ll also answer 5 of the most pressing questions selling owners often have about succeeding as an ESOP-owned construction company.
Why Construction Company Owners Owe It to Themselves to Explore the ESOP Option
At the moment, forces from all directions are coalescing and making it tough for private construction companies to see their companies’ values reflected in their sale prices. First, the tide of boomer retirements, especially among entrepreneurs, is still on the rise — so you’ve got plenty of competition. Second, high inflation and a high interest rate environment are increasing pressure on would-be buyers to make lowball offers.
If that’s not off-putting enough, consider that private equity investors don’t often understand the intricacies of the construction industry. For that matter, they don’t know or necessarily care about your employees, either. So the next time the market sneezes, what happens to the people who helped you grow the business?
Speaking of people, an ownership transition can be a stressful time, and when employees sense instability, they often flee. That can put projects at risk and send business value into a downward spiral as leadership struggles to fill vacancies and complete work on time … making it even harder to get fair compensation for your decades of investment and hard work.
Along with fair market value, an ESOP can also give the selling business owner more control over the transaction, the ownership transition, and leadership succession planning. That can translate into a sense of stability and security for workers. Combine that feeling with employee ownership and a valuable, wealth-building retirement benefit, and an ESOP has a lot to offer.
That said, the intricacies of the construction industry deserve attention, as do the most common questions about becoming an ESOP-owned construction business.
- Will it Be Harder to Secure Surety Bonds as an ESOP?
- How Does Our Approach to Accounting & Financials Change?
- How Should I Manage My Company’s Property and Assets When I Sell the Company to an ESOP?
- What About Collective Bargaining Agreements and Employee Unions?
- How Can I Help Strengthen the ESOP’s Chances for a Successful Future?
1. Will it Be Harder to Secure Surety Bonds as an ESOP?
It doesn’t have to be. Companies that issue surety bonds are cautious, and an ownership transition combined with the debt of an ESOP loan can raise questions from a bond issuer. That’s why it’s key to make sure your bond issuer understands the implications of an ESOP’s tax advantages and their impact on the ESOP loan debt.
That’s where a proactive team of ESOP professionals can make all the difference. A team of ESOP experts can help you explain the nuances of an ESOP’s financial benefits to increase your success in securing the surety bonds your company needs to secure critical projects.
2. How Does Our Approach to Accounting & Financials Change?
Anticipate a transition from cash accounting to accrual accounting, and prepare to manage works in progress with attention to detail. Why the change in accounting? Because they’re regulated by the Internal Revenue Service and Department of Labor, ESOPs use Generally Accepted Accounting Principles (GAAP) to ensure regulatory compliance. GAAP standards are used in company valuations before and after the ESOP sale transaction.
GAAP principles provide transparent financial information to ESOP stakeholders, which helps cultivate trust and strengthen ownership culture. How to get there? Engage a certified public accountant among your trusted advisors through the transition—and look to your experienced ESOP consulting team for help.
3. How Should I Manage My Company’s Property and Assets When I Sell the Company to an ESOP?
Don’t rule out an ESOP just because you’re in an asset-heavy industry. You have options. Many selling business owners choose to spin off a new business entity that owns and leases property and assets to the ESOP-owned construction company. This enables you to maintain control over the assets while protecting the ESOP transition, and conserves an income stream into the future. Your consultant team can certainly help you work through the details moving forward.
4. What About Collective Bargaining Agreements and Employee Unions?
Unions’ perspectives on the ESOP benefit have evolved. Historically, union employees have been excluded from ESOP participation, but this is changing as more people come to understand the wealth-building value of the ESOP as a qualified retirement plan. Today, many labor unions may be receptive to agreements to exclude ESOP benefits from collective bargaining.
Many construction companies wouldn’t be able to meet nondiscrimination rules by offering the ESOP only to administrative employees — they simply don’t have enough people in the office. On the other hand, they likely have many employees working on project sites, and proactive communication with union leadership can help promote a successful ESOP transition that benefits all employees.
5. How Can I Help Strengthen the ESOP’s Chances for a Successful Future?
Tap into the expertise of an experienced team of professionals from the moment you consider an ESOP sale. They can help you get a clearer picture of your business value, plan for transitioning asset ownership, and navigate conversations with lenders, bond underwriters, union representatives, leadership employees, and your trusted business advisors.
When you’re working with a team of experienced, trustworthy experts, determining your company’s long-term feasibility as an ESOP is baked into the discovery process. Your team should be looking out for you and your employees.
Learn More About Becoming ESOP-Owned
There’s really no shortage of learning opportunities. You can reach out to former business owners, many of whom choose to stay on as leaders after the ESOP transaction for a slow, controlled handoff that preserves business continuity. Our One-Stop ESOP Blog is also a rich resource.
Our ESOP Quiz can give you a more personalized answer to your questions about feasibility for your particular company as a starting point. But if you prefer talking to a seasoned ESOP professional from the get-go, it’s quick and simple to sign up for a no-cost ESOP Readiness Assessment. How quick? Just click the link below to get started.