Succession planning for your business can seem like a complex and time-consuming process. For many business owners, including construction company owners, succession planning takes a back seat to the day-to-day business operations. However, it is important to plan for an exit strategy to ensure continued success for your construction business and employees.
There are a number of options for passing on your company, including selling the company or having your children take over the business. However, for many construction companies, an employee stock ownership plan (ESOP) may be the best option both for the owners and employees. With proper planning, an ESOP can provide a smooth transition from a family-owned business to an employee-owned business.
An ESOP is a unique type of qualified retirement plan that can own stock of the corporation that sponsors the ESOP. In other words, the ESOP itself becomes part owner of the corporation. One benefit of an ESOP is that the company can be sold to the ESOP without the owner having to find a buyer or deal with the hassle of negotiating the price and terms of the sale. The business owner can also decide what percentage of company stock will be sold and how much control of the business they want to retain.
ESOPs provide a number of benefits to both business owners and employees. For example, employees who take an ownership interest in their job tend to be more productive and are more likely to stay with the company. ESOPs can also help a construction company increase their cash flow. However, many in the construction industry are wary of transitioning the business to an ESOP due to the cyclical nature of the construction business which is subject to boom and bust building cycles.
An ESOP-owned construction company also has the benefit of stability and continuity. This is because an ESOP allows a company to continue on even after the founding members of the company retire, move on, or sell their shares. This stability can be important when competing for large building projects or public construction projects.
Furthermore, by issuing company stock to an ESOP, the company can greatly reduce their corporate income taxes and increase cash flow. In a traditional business sale, the company may not see the same tax benefits as using an ESOP. For example, the company may be able to deduct the transaction costs associated with buying the company stock, even where the purchase money was financed. Reducing corporate tax liability and increasing cash can help a construction company finance new projects, purchase new equipment, and stay viable in times of reduced business.
Business owners benefit because they can use an ESOP to sell part of their company stock while maintaining the desired level of control over the company. This allows the owner to transition the management and control over their construction business without a sudden change in leadership or ownership. The business owner also has the benefit of liquidity because they can sell their stock over time or divest their interest altogether.
If you have any questions about how an ESOP can benefit your construction company or other business, the law firm of Butterfield Schechter LLP is here to help. We are San Diego County's largest law firm focusing its law practice on employee benefits law. Contact our office today with any questions on how we can help you and your business succeed.