Why Architecture And Engineering Firms Make Great ESOP Candidates

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Originally published in SRR, on October 1, 2011.

Government statistics estimate that approximately every eight seconds another individual born during the baby-boomer generation passes the age of 55 – one step closer to retirement. the explosion of births between the years of 1946 and 1964 in the United States has resulted in a major demographic group that is referenced consistently by trade groups and companies globally. the aging of this baby-boomer generation, combined with the gradual improvement in equity pricing multiples since the financial crisis, have recently led to an amplified interest among owners of privately held architectural and engineering (“A/e”) businesses in pursuing exit strategies. However, like many privately held businesses, A/e firms often struggle with implementing longterm succession planning strategies in connection with an owner’s exit plan. While there are several liquidity alternatives for owners of mid-size companies in the A/e industry, selling to an employee Stock ownership Plan (“ESOP”) can result in numerous advantages compared to others.

Many owners initially explore selling directly to the next tier of management. However, this strategy can be complicated by a number of factors. First, most employees do not have the financial wherewithal to fund such a transaction. Second, selecting the members of management to include in the ownership transition can be challenging and may result in a selection bias. In many instances, key managers who are not included in this investment opportunity or cannot afford to participate may lose interest in the long-term success of the firm because they lack the same motivations as an owner. third, in circumstances where one of the owners is interested in an exit strategy, a leveraged redemption may be an alternative. A leveraged redemption, commonly referred to as a leveraged recapitalization, is when a company takes out a loan to pay a special dividend or redeem shares of a business owner, leaving the remaining owners with a higher ownership percentage. While this type of transaction typically does not result in a change in management control or the day-to-day operations of a business, the structure does increase leverage and may create additional risks for the remaining shareholders. If a founder or a current group of owners of the firm is interested in transitioning ownership to a broader group of the firm’s employees, the tax and operational consequences should be carefully considered.

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