Every construction company and its owners eventually face succession issues. Owners who choose to ignore succession planning until an unexpected event forces the issue may face fewer choices, little time to react and a decrease in company value.
However, proper planning can create peace of mind and increase the chances of a smooth transition that can help retain wealth and financial security.
An employee stock ownership plan (ESOP) is one of many succession strategies available. While an ESOP isn’t the right fit for everyone, it may be an attractive option for many construction companies.
What is an ESOP?
An ESOP is a qualified defined contribution plan, governed by the Employee Retirement Income Security Act of 1974 (ERISA). While it’s similar to a 401(k) plan, the primary difference is that an ESOP is designed to invest primarily in stock of the company sponsor.
According to The National Center for Employee Ownership, there are now approximately 6,700 ESOPs in the U.S., covering over 14 million employees. Of this number, nearly 4,000 are 100 percent ESOP-owned.
An important characteristic of ESOPs is their ability to borrow money to purchase company stock, referred to as a leveraged ESOP. This is similar to a traditional leveraged or management buyout but with significant tax advantages and greater employee participation in future growth. The ESOP can purchase any percentage of the company’s stock. Due to significant potential tax savings, many companies are choosing to become 100 percent ESOP owned. This can be accomplished in a single transaction or a series of smaller transactions.