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Case Study

Succession planning with ESOP transition

May 31, 2017 / 2 min read

Private company successfully transitions business to ESOP, preserving owner's legacy and quickly returning to positive equity.

The client

A $100 million electrical contracting business.

The challenge

The owner of an electrical contracting company wanted to retire, but his children weren’t the right fit to take over the business. He didn’t want to sell to an outside party, fearing the company could be dismantled or that its collaborative, family-oriented culture could be destroyed.

The solution

The owner engaged our construction industry and succession planning experts to identify and evaluate all feasible options. The strongest was an employee stock ownership plan (ESOP). The majority of the company’s approximately 250 employees had worked there for over 15 years. The owner also had a knack for grooming people for the right roles, resulting in a strong, stable team.

ESOP shares are part of employees’ compensation, and they’re allocated through a tax-exempt trust until the employee retires or leaves the company. An ESOP structure also is tax-free. This means that cash distributions to the owner to fund personal tax on company income can stay in the company to support debt obligations, putting it in a better position to negotiate with the bank financing the plan.

First, we worked with the owner to identify key employees whose buy-in would help make the ESOP a success. We then developed a presentation to explain the ESOP option to the group, including a clear description of both benefits and challenges, and we facilitated discussions to address their concerns. This core group of influencers agreed an ESOP was the best option and met with the rest of the staff to share what they’d learned and why it would be beneficial. Soon, everyone was in agreement.

Next it was critical to ensure both the bank and the bonding company understood the plan and were supportive. The bank needed to provide funding to buy out the owner and, despite negative equity, the company needed to maintain cash flow and the ability to bid on jobs. In addition, because the company would be highly leveraged, the bonding company needed to understand what the balance sheet would look like.

With close relationships already established, our team organized and facilitated successful meetings with these parties. Our employee benefit consulting practice then worked with legal counsel and a valuation firm to develop and review legal documents for the client.

The benefit

The owner successfully transitioned his business to the ESOP. With the tax-exempt trust in place, employees were able to take over ownership without investing their own funds. The owner, who preserved his legacy, agreed to stay on board for a year and then continue in an advisory capacity. Within two years of the ESOP conversion, the company paid off its debt and returned to positive equity.

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