ESOPs are becoming an increasingly common tool for succession planning among AEC firms.
Undergoing an ownership or management transition is no easy task. It is important to understand one’s goals and objectives prior to selecting a path to succession. An employee stock ownership plan is one of only a handful of succession alternatives. This article serves as the final part of our Understanding ESOPs series.
Utilizing an ESOP as a part of the succession plan is a common tool in the AEC space, as it aligns well with the culture and objectives of many well performing companies in this space. Because it is not uncommon for AEC firms to have broad-based ownership within the management team, the employee ownership mindset is already embedded into this sector. Given that a 100 percent ESOP company (S corporation) is exempt from federal and most state income taxes, utilizing an ESOP allows the company to spread the economic benefits of ownership to the employee base in a tax efficient manner. If the ESOP transaction is structured for a C corporation, the selling shareholder(s) may have the ability to defer capital gains tax, significantly enhancing the after-tax cash proceeds from the stock sale.
Additionally, the benefit of participating in an ESOP could be used as a significant employee recruitment and retention tool. It can also help in the “she has ownership and I have no ownership” issue that exists in many AEC companies. If not addressed, this can become a significant distraction to those with no ownership. Finally, an ESOP transaction does not require a financial contribution from the employees, thus eliminating the economic challenge that faces many key employees who might otherwise buy into an ownership position.
There has been significant ownership transition activity in recent years, with an increase in firms transitioning to ESOP ownership. This has been driven by a number of factors including: continued business transition from an aging baby boomer population; strong economic conditions; robust valuations/multiples; and strong capital markets which are creating liquidity in the market. Even given the common viewpoint that a recession is likely within the next two years, ownership transition is expected to continue at a higher than normal pace. When comparing an ESOP to other transition alternatives, an ESOP remains as one of the most flexible business transition alternatives.
As in any significant business transition event, it is important to plan accordingly. This includes making sure your books and records, management team, and professionals are ready for this undertaking (especially as it relates to ESOPs). If you would like to gain a better understanding of ESOPs, or are interested in discussing the next steps as it relates to implementing an ESOP in your company, please connect with Pat Stoltz or Jim Swabowski.
Wintrust Financial Corporation is a $34 billion financial services company headquartered in the Chicago area. With our national niche lending groups, including Wintrust ESOP Finance and Wintrust Construction, Engineering & Architecture, our experts have the knowledge and expertise to provide a business owner in the AEC space with a relationship-focused partner and key trusted advisor. Pat Stoltz and Jim Swabowski can be reached at pstoltz@wintrust.com and jswabowski@wintrust.com.