An ESOP introduces unique opportunities for construction companies, especially when surety bonding, financial structure, and succession planning intersect.
Why Should Construction Companies Consider ESOPs?
An Employee Stock Ownership Plan (ESOP) is a great solution for owners of construction companies looking to diversify their personal wealth, develop a succession plan, and/or seek an avenue to reward their employees.
Other benefits include:
- Operate as a tax-free entity and sell tax-free
- Employee engagement
- Attract and retain top talent
- Preserve company culture
- Flexible ownership transition
However, there are many factors to consider when a company that utilizes bonding is exploring or undertaking an ESOP. Because the surety relationship is vital to the operations and long-term success of many contractors, it is important to partner with the surety early in the ESOP process.
Key Considerations for Contractors Exploring ESOPs
The following items should be considered for construction companies with surety relationships during an ESOP formation.
Assemble a Team of ESOP and Construction Advisors
Surrounding the company with knowledgeable advisors who are well-versed in both the construction industry and ESOP transactions is key to ensuring a favorable transaction structure that maximizes benefits for the company owners, while maintaining flexibility for the company post-closing.
Involve Your Bank and Surety Early in the Process
Running a parallel track with open communication to understand each stakeholder’s concerns or needs (i.e., “giving a seat at the table” early in the ESOP transaction process) leads to:
- S structure that provides adequate financing to consummate the transaction
- Significant flexibility to support future working capital and capital expenditure requirements of the company
- Maintains ample balance sheet strength to support ongoing bonding needs
Evaluate Your Current Bonding Program
Evaluating the following items of a company’s bonding program is important to aid in the surety’s analysis of bonding needs moving forward, which can have a significant impact on the surety’s comfort level regarding balance sheet changes and financing proposed in the ESOP transaction:
- Individual and aggregate project bonding limits
- Accounts receivable and projects currently bonded (remaining work to be completed vs. total contract value)
- Makeup of bonded vs. unbonded projects in backlog and pipeline
- The timing and phases of bonded projects (planning/design phase vs. true construction underway)
- Current and future working capital and equity levels (as adjusted for specific components found in an ESOP structure)
Understand and Manage Personal and Corporate Guarantees
With owners of the company transitioning their ownership to the ESOP trust, special consideration to current and future guarantees required should be discussed during the transaction. An understanding of expectations of the bank or surety regarding guarantees and changes to these requirements (and the timing of these potential changes) is key to mitigating personal exposure for owners who may no longer have an ownership stake in the company.
ESOPs Can Offer Long-Term Value for Construction Companies
Overall, a surety is focused on the continuity of the business, with particular attention to adequate financial strength and liquidity and management retention post-ESOP transaction. When structured correctly, an ESOP can be a powerful tool to aid in the long-term succession plan for construction companies and make an extremely positive impact on the lives of employees, key management, and company owners.
Additionally, an ESOP-owned company can provide productivity improvements, tax benefits, and a clear competitive advantage in the labor market, all of which can be expected to drive financial performance.
Let’s Talk
Our ESOP professionals are here to advise you on structuring a favorable transaction with lenders and your surety, while maximizing benefits for selling company owners. Contact us to start the discussion.
