Laying the Foundation for a Contractor’s Exit

Construction is a cornerstone of America, as are the individuals who devote their careers to this vital profession. In an industry characterized by fragmentation, high turnover, and volatility, the exit options for a business owner are often limited. Proactive planning is crucial and careful consideration should be given to all transition paths, even if they appear unconventional.

Consider an ESOP

All infrastructure needs a foundation, just like all business owners need an exit plan. What if there was a path to exit that met substantially all of your objectives – one that created an immediate liquidity event, allowed you to remain at the helm and step down on your own terms, preserved the company’s independence, and enhanced retention and employees’ financial well-being?

This is where an employee stock ownership plan (ESOP) comes into play. An ESOP is a qualified retirement plan designed to invest primarily in employer stock. It is a buyer of your company that allows employees to gain beneficial ownership over time and cash out following separation. ESOPs are becoming increasingly popular across the construction industry, because ESOPs:

1. Give the owner the option to sell all at once, or in bites over time;
2. Keep the leadership team intact, including the owner if they choose;
3. Improve recruitment, retention, and employee morale which enhances productivity;
4. Provide tax benefits for the owner and company, increasing sale proceeds and cash flows;
5. Promote organizational stability and longevity; and
6. Yield, on average, above market retirement benefits with no out-of-pocket contributions required from the employees.

The industry’s sheer volume of skilled labor pairs well with an ESOP. Higher headcounts generally provide more value distribution among participants, and therefore more cash flow flexibility for the company. This helps drive sustainability, and the plan itself promotes cultural alignment with proper messaging – a necessity for team-oriented environments.

Consult with the Experts

Business transitions come with a host of complexities, and selling a construction company to an ESOP is no exception. An ESOP must be properly implemented to be compliant with legal and regulatory standards, properly managed, financially viable, and understood by plan participants. This lends itself to building a bench of well-versed advisors and integrating a clearly defined corporate governance structure. But first, a feasibility study should be conducted to determine whether your company is the right fit for an ESOP. This includes a valuation and determining how the deal would most effectively unfold.

Contractors commonly yield thinner profit margins and experience more revenue volatility compared to other industries, making it paramount to understand the affordability of a transaction that commonly requires debt financing. If the company maintains a limited asset base (e.g., equipment and receivables), seller financing may play a larger role and it might also be limited to securing capital through cash flow lenders or more creative means.

The financial accounting and planning for construction companies can also be intimidating. Balance sheets commonly contain industry-specific accruals; projects are often treated as individual profit centers; revenues are recognized through the percentage of completion or completed contract methods; and work-in-progress schedules, job cost reports, and backlog reports all help drive performance and expectations. Not to mention companies may execute projects that require bonding, utilize unions, or have complex legal structures. Financial accounting attributes unique to ESOPs add to this list, albeit to a lesser extent.

Using an advisor with improper experience leaves your business exposed to sustainability issues, being misvalued, having covenant violations materialize with third party lenders, getting stonewalled by bonding companies, and other transaction roadblocks.

How Adamy Can Help

The importance of consulting with experts in this space cannot be overstated. Our team draws on decades of valuation and financial advisory experience with ESOPs and construction companies. If an ESOP might help meet your objectives, we welcome a conversation and are here to make your transition process go smoothly.

For more information on our ESOP services, please visit our ESOP webpage.