For most construction companies, the recent recession was especially painful. Now that we are in an economic recovery, albeit a modest one, many business owners believe that they’re back to break-even or on solid footing. After putting succession planning on hold during the downturn, you may be tasked with exploring several exit-strategy options for your company’s owners as they seek to monetize their hard-earned wealth.

The Desire for Liquidity

The majority of business owners’ personal wealth is usually tied up in the company. As an owner looks to diversify, a liquidity event becomes a critical step in the wealth management planning process.

Most owners employ several traditional exit strategies for succession, including:

• Transfer to the next generation
• Sale to management
• Sale to a financial buyer (e.g., a private equity firm)
• Sale to a strategic buyer (e.g., a publicly traded company)

However, another exit strategy is gaining traction: the sale of all or a portion of the business to an employee stock ownership plan (ESOP). According to statistics from The ESOP Association, there are approximately 10,000 ESOPs in the U.S. covering 10.3 million employees (10% of the private-sector workforce). While ESOPs are prevalent in a broad range of industries, the majority of ESOP Association members are in manufacturing (22%), construction (13%), and engineering (9%).

Why Are ESOPs So Popular?

ESOPs are a successful exit strategy for many company owners. In addition to providing retirement proceeds to participants that often exceed those of traditional retirement plans such as 401(k)s, ESOPs create a liquidity event for business owners and can be a powerful tool in succession planning.

Provided certain rules are met, another ESOP feature that may appeal to owners is the deferral of capital gain if the owner invests the proceeds of the sale in qualified replacement property – generally U.S. corporation stocks and bonds (not mutual funds, REITs, or government securities). Depending on the owners’ subsequent estate, charitable contributions, and personal financial planning, all (or a portion of) the capital gain may be permanently deferred.

Numerous studies by The ESOP Association and National Center for Employee Ownership (NCEO) demonstrate that ESOP-owned entities outperform their peers and the general stock market, increase productivity and sales, and have a much smaller bankruptcy rate than other businesses.

What’s more, ESOPs work well in the context of both S and C corporations. Even if your company isn’t an S or C corporation, your advisors may be able to create a structure that still makes an ESOP feasible.