As a construction company owner, you’ve weathered some of the toughest economic storms. From market volatility, inflation, and supply chain disruptions to regulatory shifts, high interest rates, and the pandemic, you’ve successfully navigated it all.
Now, as you approach retirement, one significant challenge remains: finding the right buyer who will offer you fair market value for the business you’ve built with hard work and resilience.
This is where an Employee Stock Ownership Plan (ESOP) comes into play, providing a powerful solution. Unlike third-party sales—such as mergers, acquisitions, or private equity buyouts—federal law requires that an ESOP compensate selling shareholders at full fair market value.
However, the construction industry is intricate, and ESOPs may initially seem complex. Is selling your construction company to an ESOP the right move?
At Lazear, we believe the answer is yes. You can sell your construction business to an ESOP without compromising its value or your legacy.
Let’s explore the key reasons why, and address five crucial questions construction business owners often have about transitioning to an ESOP structure.
Why Construction Owners Should Seriously Consider an ESOP
Currently, a number of external factors make it challenging for construction business owners to see their companies’ true value reflected in offers from traditional buyers. As baby boomer retirements increase, especially among entrepreneurs, competition for buyers is rising. Additionally, high inflation and steep interest rates put pressure on buyers to lower their offers.
Private equity firms may not fully grasp the complexities of the construction industry. Moreover, they might not prioritize the well-being of your employees—the very people who’ve contributed to your company’s success. What happens to them if market conditions change under new ownership?
Employee retention is a key concern during ownership transitions. When employees sense instability, many leave, which can put ongoing projects and your company’s overall value at risk. This leads to delayed timelines, additional costs, and a potential drop in business valuation. An ESOP, on the other hand, can offer stability by providing fair market value for the business and allowing the selling owner to have a significant role in guiding the transition.
ESOPs empower employees with ownership, offering a wealth-building retirement benefit. This combination of financial security and a sense of continuity makes ESOPs a compelling option for construction company owners.
That said, the unique nature of the construction industry calls for thoughtful planning. Below, we answer the most common questions owners ask when considering an ESOP transition.
1. Will Securing Surety Bonds Become More Difficult with an ESOP?
Not necessarily. Surety bond providers are understandably cautious when it comes to ownership transitions, especially when ESOP loans are involved. However, an experienced ESOP team can explain how ESOP tax advantages impact loan repayment. Proactively educating bond issuers on the financial benefits of ESOPs can make securing bonds much easier.
Working with a team that specializes in ESOP transactions can help you ensure that bond issuers are fully informed, thereby smoothing the path to securing the bonds your company needs to take on key projects.
2. How Will Our Approach to Accounting and Financials Change?
When transitioning to an ESOP, expect to shift from cash-based accounting to accrual accounting. This change aligns with the Generally Accepted Accounting Principles (GAAP) required by the IRS and Department of Labor for ESOPs. GAAP ensures transparency and builds trust among ESOP stakeholders, which is crucial for fostering a strong ownership culture.
To manage this transition smoothly, engage a Certified Public Accountant (CPA) who specializes in ESOPs. Their guidance, along with support from your ESOP advisory team, will be invaluable.
3. How Should I Manage My Company’s Property and Assets in an ESOP Sale?
An asset-heavy industry like construction has specific considerations, but don’t let that deter you from pursuing an ESOP. Many construction owners set up separate entities to hold property and equipment, which can then be leased back to the ESOP-owned company. This approach allows you to maintain control over your assets while generating an income stream post-transition.
An experienced ESOP consultant can help you navigate the logistics of setting up these entities and structuring the sale in a way that protects both your interests and the ESOP’s success.
4. What About Collective Bargaining Agreements and Unions?
Unions have historically been cautious about ESOP participation. However, that perspective is evolving as the wealth-building potential of ESOPs becomes clearer. Today, many labor unions are more open to excluding ESOP benefits from collective bargaining agreements, provided the retirement plan benefits are clearly communicated.
In construction, where the majority of your workforce may be in the field, engaging union leaders early in the ESOP process is crucial. With proactive communication, you can promote a successful ESOP transition that benefits all employees, regardless of their union status.
5. How Can I Set My Company’s ESOP Up for Long-Term Success?
The best way to ensure your ESOP’s long-term success is by surrounding yourself with a trusted team of ESOP experts from the very beginning. This team should help you assess your business’s value, manage asset ownership, and handle key conversations with stakeholders like lenders, bond issuers, and unions.
A successful ESOP transition requires a thoughtful, detailed discovery process. By working with seasoned professionals, you’ll not only safeguard the future of your company but also protect your employees and the value you’ve built.
Ready to Explore Your ESOP Options?
At Lazear Capital, we’ve helped hundreds of business owners navigate the complexities of ESOP transitions, with deep expertise in the construction industry. Whether you’re looking for a gradual handoff or a more immediate exit, our team is here to help you make informed decisions.
Start your journey by scheduling a complementary ESOP exploration call today. Let us guide you through the steps to securing your legacy while ensuring a smooth transition for your employees.
