Unlocking Wealth and Legacy: Why ESOPS Are Growing In Popularity In AEC
Welcome to Thrower Marketing Group Guest Blog Series! Drawing from our experience in the AEC industry, this series goes beyond marketing to explore key business challenges in many leaders in the industry face. With insights from expert contributors, we aim to share information that empowers and shapes the AEC community.
In today’s rapidly evolving AEC industry, many business owners are exploring innovative exit strategies that benefit both themselves and their employees. One such strategy growing in popularity is the Employee Stock Ownership Plan (ESOP). In this Q&A, Eric Kreimer of Applied Economics shares insights on how ESOPs provide a powerful tool for AEC firms looking to foster long-term sustainability, enhance company culture, and create financial opportunities for their employees.
Q: Why are ESOPs growing in popularity in AEC?
A: Over 6,500 companies in the U.S. have implemented ESOPs, covering more than 14 million employees. The number of ESOPs has been steadily increasing particularly in industries like AEC, where employee retention and engagement are critical when competing for talent. They also offer many additional benefits that we will explore.
Q: So, exactly what is an ESOP?
A: The acronym stands for Employee Stock Ownership Plan. At its most basic level, it is an employee benefit plan similar to a 401(k), but better!
Q: Why is an ESOP better than a 401(k)?
A: An ESOP can be more advantageous for employees because they receive company stock in their ESOP account at no cost to them. In an ESOP, each employee gets an allocation of company stock for each year they work for the company, without having to contribute any of their paycheck. This stock simply accrues each year in their retirement account. Studies show that in companies that perform well, ESOP participants can often retire with stock worth up to 10 times their annual salary.
Q: What additional benefits does this type of plan afford the business and its employees?
A: Studies show that employee-owned companies have a 4% to 5% higher productivity on average, with employees often more motivated and invested in the company’s success. According to the National Center for Employee Ownership (NCEO), companies with ESOPs grow about 2.5% faster than non-ESOP companies. Moreover, employees in ESOP companies have on average 2.2 times the retirement assets compared to those in non-ESOP companies.
Q: How do the employees afford to buy out the owner?
A: ESOPs buy out the owner through a combination of a bank loan and seller notes. The bank loan and seller notes are the responsibility of the company and are paid off with the company’s profits. Most companies pay off all of the debt within five to seven years.
Q: Ok, that sounds good, but are ESOPs better for anyone else, like the owner or the company?
A: Absolutely. ESOPs benefit owners by allowing them to sell their stock (as much or as little as they want), cash out their shares, and still maintain their role at the company or retire, depending on their preference. Unlike selling to a competitor, the owner does not have to relinquish control. Furthermore, unlike a 401(k), an ESOP allows employees to own the company stock, which typically enhances company performance.
Q: Why would employee ownership improve company performance?
A: Clients report that once employees own stock in the company, they become more engaged in cutting costs, growing sales, improving efficiency and increasing profits. Employees understand how their efforts directly benefit them.
Q: Are all companies good candidates for an ESOP?
A: The best candidates for an ESOP are typically service firms, such as architects, engineers, and contractors, because these companies’ primary assets are their employees, and ESOP’s were originally designed to benefit employees. AEC firms often emphasize teamwork, collaboration, and long-term relationships. ESOPs foster a culture of ownership and responsibility among employees, leading to increased pride and commitment to the firm’s success. ESOPs can also enhance employee retention by providing a tangible stake in the company’s success, aligning employees’ interests with shareholders, and boosting motivation and productivity.
Q: What other reasons make AEC companies well-suited for an ESOP?
A: Offering an ESOP can help differentiate an AEC firm from its competitors in the job market. Potential employees may be more inclined to join and stay with a company that offers ownership opportunities and potential financial rewards tied to company performance. ESOPs can also be used to finance growth or provide liquidity to owners without needing to sell the company outright or take on external debt, which is particularly attractive in capital-intensive industries like AEC.
Overall, ESOPs are increasingly seen as a strategic tool for AEC firms seeking long-term sustainability, a positive workplace culture, and a competitive edge.
Q: If I am an owner, why would I prefer selling my company to an ESOP instead of a competitor or private equity firm?
A: There are many reasons. First, selling to an ESOP is typically much easier and quicker, with most transactions taking 3-4 months versus a year or more for traditional sale. Second, transaction costs are typically much lower for an ESOP, often less than half as expensive as a traditional sale. Third, a sale to an ESOP is private so there is no need to share the company’s financials and other confidential information with competitors. Last, and maybe most importantly, selling to an ESOP allows owners to preserve their legacy, remain involved and retain control over company decisions, without the risk of drastic changes from a new owner.
Q: Are there any other advantages to selling to an ESOP?
A: Yes, there are tax advantages! For the business owner, there is an opportunity to sell shares to the ESOP and potentially defer their capital gains tax obligation indefinitely. For S-corporations, the percentage owned by the ESOP is exempt from federal and most state income taxes, allowing the company to avoid taxes altogether. ESOPs provide a double tax-advantaged exit strategy.
In Closing
As the AEC industry continues to evolve, finding the right exit strategy can make all the difference in preserving your company’s legacy and ensuring its long-term success. An ESOP offers a unique opportunity to align the interests of owners and employees, fostering a culture of ownership that drives performance and growth. Whether you are considering retirement or looking to secure your business’s future, exploring the benefits of an ESOP could be the strategic move you need.
About the Expert:
Eric Kreimer is a seasoned advisor at Applied Economics, specializing in ESOP strategies for businesses in the AEC industry. With a deep understanding of the financial and operational aspects of employee ownership, Eric has helped numerous firms navigate the complexities of ESOP implementation. His expertise lies in guiding business owners through the transition process, ensuring that both the company and its employees thrive under this unique ownership model. Connect with Eric on LinkedIn or explore the Applied Economics website for more information:
