An Employee Stock Ownership Plan (ESOP) is a tax-advantaged qualified retirement plan that provides owners with a unique succession planning opportunity that keeps employee and shareholder interests aligned. If you were to Google the top 100 ESOP companies and browse the search results, you would find that almost 20 percent of the companies on that list are Architectural & Engineering (A&E) firms. So why does the marriage between A&E firms and ESOPs work so well?
Here are four reasons why A&E firms should consider an ESOP:
- Succession Planning Tool. An ESOP can serve as an effective succession plan for a firm’s owners and shareholders. A&E firms can benefit from a potential ESOP transaction for the following reasons:
- Provides the owner/shareholders liquidity and diversification
- Allows the legacy of the firm to stay intact
- Limits disruption to employees, clients, the company’s business plan, and governance
- Provides an option to retain control
- Presents major tax advantages to the seller and the company
- Natural Culture Fit. Architects and engineers are typically described as intuitive, analytical, and hardworking individuals who thrive in a collaborative setting. An ESOP structure could be considered the ultimate team setting in which all employees are owners and team members are striving toward a common goal of increasing firm value and profitability. This natural culture fit is a major reason that so many A&E firms are ESOPs.
- Employee Recruiting and Retention. In speaking with owners at A&E firms, we are consistently learning about the struggles of finding and keeping good people in this job market. An ESOP serves not only as a tool to attract top talent, but also can be a culture differentiator and a great way to retain employees. As an ESOP participant, an employee has an immediate opportunity to build equity in the company. Not only does this opportunity lead to potential financial gain for the employee, but it also provides a retention tool for the company as there is an opportunity cost for the employee to move to another firm. A recent report released by Rutgers Institute for the Study of Employee Ownership and Profit Sharing noted that ESOP companies have been much more successful than their traditionally owned counterparts during the pandemic in retaining employees and maintaining hours and salary levels.
- Firm Tax Advantages. An ESOP structure can provide a range of tax benefits including the following:
- Potential deferral of capital gains for the seller on the sale of a business
- Reduction or elimination of income tax burden to the firm
- Cash contributions and contributions of stock which are tax-deductible
- Potential tax deductions for dividends paid to ESOP participants
- Tax-deferred growth on the retirement benefits for employees
ESOPs offer significant and unique advantages. Please contact Thomas Yankanich or any member of our Architecture & Engineering Industry Group if you have any questions or would like to find out if an ESOP strategy is right for your company.
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