Why Contractors Should Consider an ESOP for Their Succession Plan
Many construction company owners and contractors grapple with the challenge of succession planning, particularly for those with ownership of a closely held business. They’ve poured their heart and soul into building a successful business, and ensuring its legacy can be a major concern. One increasingly popular option for contractors is considering an Employee Stock Ownership Plan (ESOP). An ESOP is a tax-qualified retirement plan that provides for employee ownership in the company for which they work through allocated shares earned each year. ESOPs offer a unique solution that can address several key objectives for a construction company owner looking to exit the business.
Building a Stronger Team Through Shared Ownership
According to the National Center for Employee Ownership, employee ownership through ESOPs leads to increased productivity and profitability, and employee-owners are four times less likely to be laid off during economic downturns. They are also likely to earn five to 12 percent more than those at non-ESOP companies. When employees have a stake in the company’s success, they are more invested in its performance. Overall, ESOPs lay the foundation for building loyalty among employees, increasing assets for retirement, and providing more ways for the founder to exit from the company while transferring ownership gradually. This can lead to improved decision-making, greater efficiency and a stronger commitment to quality.
Preserving Your Legacy and Company Culture
One of the biggest concerns for contractors with company ownership is the continuation of the company legacy upon leaving the company. This can become an even more significant issue in succession planning for closely held family businesses when the next generation does not plan to take over the business. An ESOP allows you to ensure the company’s core values and culture are carried forward through your employee-owners even after your exit. By selling shares to a trust that benefits employees, you can maintain some control over the company’s direction while bringing in new leadership. This can be particularly important in construction, where a strong company culture is essential for attracting and retaining top talent.
Tax Benefits and Liquidity for the Seller
ESOPs may offer a structured and tax-advantaged approach to succession planning, acting as tax-exempt financial vehicles, which can be a valuable part of a larger company-sponsored tax strategy. Selling shareholders of C-corporations may elect to defer capital gains when selling at least 30 percent of their shares to an ESOP. This particular tax benefit is not available for S-corporations prior to 2028, however, the pro-rata earnings of the S-corporation on shares held by the ESOP Trust are exempt from federal income taxes.
When you sell your shares to an ESOP, you also gain valuable liquidity that can be used for retirement or other ventures. Furthermore, ESOP transactions offer significant tax benefits for both the seller and the company. You can read more about the tax benefits of ESOPs in this article from our Resource Center.
Maintaining Control and Influence After the Sale
A common misconception regarding ESOPs is that you must sell the entire company to transition, when in fact, an ESOP doesn’t have to mean a complete severing of ties for the owner. The structure of the ESOP can be designed to allow you to retain control over the company’s operations during a transition period, which can contribute to maintaining leadership influence and ensuring a continuation of the current culture of the company. This can be helpful in ensuring time to groom and mentor the future leadership team. A gradual transition in leadership can be far more appealing than a sudden sale to an outside entity, which can disrupt operations and lead to employee uncertainty.
Choose Windham Brannon When Considering an ESOP
An ESOP can be a powerful tool for construction company owners looking to secure their legacy, reward their employees and ensure the continued success of their business. Windham Brannon’s professionals can help you if you’re considering your exit strategy through the possibility of an ESOP. Our construction industry and ESOP expertise and our established relationships with other ESOP professionals (trustees, third-party administrators, attorneys, etc.) means you get access to crucial resources and advisory support. For more information about establishing an ESOP for your construction business, contact your Windham Brannon advisor today, or contact Bobby Vercoe and Donna Caruso.
