Following up on our prior blog posts (here and here) regarding employee stock ownership plans (ESOPs) generally for constructions companies, as well specific issues for consideration, this blog post evaluates the pros and cons of ESOPs overall.
Pros
ESOPs provide a tax-advantaged path for an exit strategy, and they can provide liquidity for owners that may not be easy to obtain in a sale to a third party. ESOPs help build an ownership culture and incentivize employees to grow the company. As a related matter, they can be a useful retention tool. The increased cash flow generated by reducing or eliminating taxes can be critical to the sustainability of the company.
Cons
If a company borrows money and then lends this money to the ESOP to purchase company stock, the loan will be a liability that will reduce the company’s net worth, and this loan could also affect surety bond requirements. However, these issues can largely be addressed through seller financing and subordinated notes. Companies do have to be mindful of repurchase liability, but the right distribution policy and repurchase liability plan can address this issue.
Conclusion
ESOPs can be the right solution for construction companies, particularly closely held businesses where the selling shareholders have a need for liquidity and a desire to continue the business legacy to benefit employees.
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