The rise of employee ownership: Why construction companies are choosing ESOPs
More than half of U.S. businesses with employees are owned by people at or near retirement age, making succession planning an increasingly important priority.
When it's time to exit a business, owners typically choose from a few paths: keeping it in the family by passing it down to the next generation, selling to a strategic buyer looking to expand or pursuing private equity. But each year, a few hundred companies take a different route: the use of an employee stock ownership plan, or ESOP.
The team at insurance brokerage Holmes Murphy has seen rising interest in ESOPs, particularly in the construction industry. Today, construction companies represent approximately 16% of all ESOPs, according to the National Center for Employee Ownership (NCEO). In 2022 alone, more than 292 new ESOPs involving over 31,000 participants were created. These plans now cover nearly 15 million employees nationwide.
"When an owner wants to prioritize taking care of employees and continuing the company culture they've built, an ESOP becomes a really good fit,' said Ross Ingersoll, a client executive with Holmes Murphy who specializes in working with ESOPs.
'You have heavy civil construction firms that have large equipment fleets,' said Ted Jorgensen, a client executive in the surety area for Holmes Murphy. 'To have a small group of people try and buy a company with a large equity position is nearly impossible. Because an ESOP goes to a larger group, it can be a viable fit for having enough equity to transition the firm efficiently.'
To establish an ESOP, a trust is created that serves as a retirement benefit plan for the company's employees. The trust buys the business from its existing owners and gives employees ownership shares over time. By taking this route, company founders can create a financial exit for themselves while ensuring their business continues to live on — stewarded by the employees who helped build it. ESOPs also come with a significant tax exemption for the company.
Keys to ESOP success for construction companies
Shifting all or part of a company's ownership to an ESOP is a complex transaction that requires careful planning to create a successful outcome.
While he has worked on ESOP transactions that were completed in eight months from start to finish, Jorgensen said most such moves require years of careful planning and a team of professional advisors, including attorneys, CPAs and trust specialists. One client's CPA even recommended members of the selling family work with a therapist to ensure everyone was on the same page regarding how the shift would impact them and their futures.
'It's going in eyes wide open and making sure you're having all of the tough conversations,' Jorgensen said.
There are many nuances when it comes to establishing an ESOP, including navigating ERISA law, unlocking tax-advantaged mechanisms, optimizing the debt structure the company will take on, and education for the new employee owners on what becoming an ESOP means.
'To have long-term sustainability with an ESOP, it's critical that qualified professionals are being engaged in various aspects of the initial transaction and moving forward,' Ingersoll said. 'You want to make sure that the next generation of leadership is set up for success when taking over from the selling shareholders, that the company will continue to perform at a high level, and that everyone is rowing in the same direction.'
With the cyclical nature of construction, it can be helpful to work on diversifying the company's revenue stream ahead of a transaction, Jorgensen said.
'If current market conditions change for a specific sector, that can be detrimental to the company's ability to pay off the debt incurred through the ESOP,' he said.
Finally, employees need to start thinking like owners. The selling business leaders can help cultivate this perspective ahead of the transaction by working with employees to develop the leadership and financial skills they will need under the new model.
'They're good employees, but are they good entrepreneurs and leaders?' Jorgensen said. 'Do they have the right leadership and mindset to make sure they can deal with the challenges of a construction firm in 2025 and beyond?'
Beyond the buyout: Securing a legacy and building long-term value
When done correctly, an ESOP creates a solid financial exit for the business owner and sets the company's new employee owners up for future financial success.
According to the NCEO, ESOPs paid out more than $175 billion to participants in 2021. Some have even created significant windfalls for employees.
When the private equity firm Warburg Pincus bought the software company Vermont Information Processing for approximately $1 billion in February, for example, workers who were part of the company's ESOP received distributions based on their tenure in the plan. An estimated 300 people received more than $1 million, while 50 people received approximately $10 million.
Like traditional stock options, the opportunity of an ESOP can help a business attract and retain top talent in a competitive labor market. The programs give employees a long-term stake in the company's success, often boosting productivity and organizational culture. A 2023 study by the NCEO, for example, found that employees in an ESOP are about three times less likely to quit than the average U.S. worker.
'It bolsters employee recruitment and retention and rewards those employees and communities,' Ingersoll said. 'It's a powerful tool of perpetuation that is lesser known, but for the right company, it makes a lot of sense.'
ESOPs provide many financial and personal opportunities for businesses and its stakeholders, but the structure itself creates risks that must be proactively managed. An insurance partner who understands ESOPs is essential to align risk management philosophies and insurance programs to tailor safeguards for your protection so that your ESOP does not turn into a liability. Learn more about how Holmes Murphy can help.
Lauren Lawley Head is a freelance writer with The Business Journals Content Studio.
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More than half of U.S. businesses with employees are owned by people at or near retirement age, making succession planning an increasingly important priority. When it's time to exit a business, owners typically choose from a few paths: keeping it in the family by passing it down to the next generation, selling to a strategic buyer looking to expand or pursuing private equity. But each year, a few hundred companies take a different route: the use of an employee stock ownership plan, or ESOP. The team at insurance brokerage Holmes Murphy has seen rising interest in ESOPs, particularly in the construction industry. Today, construction companies represent approximately 16% of all ESOPs, according to the National Center for Employee Ownership (NCEO). In 2022 alone, more than 292 new ESOPs involving over 31,000 participants were created. These plans now cover nearly 15 million employees nationwide. "When an owner wants to prioritize taking care of employees and continuing the company culture they've built, an ESOP becomes a really good fit,' said Ross Ingersoll, a client executive with Holmes Murphy who specializes in working with ESOPs. 'You have heavy civil construction firms that have large equipment fleets,' said Ted Jorgensen, a client executive in the surety area for Holmes Murphy. 'To have a small group of people try and buy a company with a large equity position is nearly impossible. Because an ESOP goes to a larger group, it can be a viable fit for having enough equity to transition the firm efficiently.' To establish an ESOP, a trust is created that serves as a retirement benefit plan for the company's employees. The trust buys the business from its existing owners and gives employees ownership shares over time. By taking this route, company founders can create a financial exit for themselves while ensuring their business continues to live on — stewarded by the employees who helped build it. ESOPs also come with a significant tax exemption for the company. Keys to ESOP success for construction companies Shifting all or part of a company's ownership to an ESOP is a complex transaction that requires careful planning to create a successful outcome. While he has worked on ESOP transactions that were completed in eight months from start to finish, Jorgensen said most such moves require years of careful planning and a team of professional advisors, including attorneys, CPAs and trust specialists. One client's CPA even recommended members of the selling family work with a therapist to ensure everyone was on the same page regarding how the shift would impact them and their futures. 'It's going in eyes wide open and making sure you're having all of the tough conversations,' Jorgensen said. There are many nuances when it comes to establishing an ESOP, including navigating ERISA law, unlocking tax-advantaged mechanisms, optimizing the debt structure the company will take on, and education for the new employee owners on what becoming an ESOP means. 'To have long-term sustainability with an ESOP, it's critical that qualified professionals are being engaged in various aspects of the initial transaction and moving forward,' Ingersoll said. 'You want to make sure that the next generation of leadership is set up for success when taking over from the selling shareholders, that the company will continue to perform at a high level, and that everyone is rowing in the same direction.' With the cyclical nature of construction, it can be helpful to work on diversifying the company's revenue stream ahead of a transaction, Jorgensen said. 'If current market conditions change for a specific sector, that can be detrimental to the company's ability to pay off the debt incurred through the ESOP,' he said. Finally, employees need to start thinking like owners. The selling business leaders can help cultivate this perspective ahead of the transaction by working with employees to develop the leadership and financial skills they will need under the new model. 'They're good employees, but are they good entrepreneurs and leaders?' Jorgensen said. 'Do they have the right leadership and mindset to make sure they can deal with the challenges of a construction firm in 2025 and beyond?' Beyond the buyout: Securing a legacy and building long-term value When done correctly, an ESOP creates a solid financial exit for the business owner and sets the company's new employee owners up for future financial success. According to the NCEO, ESOPs paid out more than $175 billion to participants in 2021. Some have even created significant windfalls for employees. When the private equity firm Warburg Pincus bought the software company Vermont Information Processing for approximately $1 billion in February, for example, workers who were part of the company's ESOP received distributions based on their tenure in the plan. An estimated 300 people received more than $1 million, while 50 people received approximately $10 million. Like traditional stock options, the opportunity of an ESOP can help a business attract and retain top talent in a competitive labor market. The programs give employees a long-term stake in the company's success, often boosting productivity and organizational culture. A 2023 study by the NCEO, for example, found that employees in an ESOP are about three times less likely to quit than the average U.S. worker. 'It bolsters employee recruitment and retention and rewards those employees and communities,' Ingersoll said. 'It's a powerful tool of perpetuation that is lesser known, but for the right company, it makes a lot of sense.' ESOPs provide many financial and personal opportunities for businesses and its stakeholders, but the structure itself creates risks that must be proactively managed. An insurance partner who understands ESOPs is essential to align risk management philosophies and insurance programs to tailor safeguards for your protection so that your ESOP does not turn into a liability. Learn more about how Holmes Murphy can help. Lauren Lawley Head is a freelance writer with The Business Journals Content Studio.
