Like other privately held companies, engineering firms will eventually face the task of finding successor management. In many cases, the most logical choice for these posts is management, but management almost never has the cash to buy out shareholders.

 

In this case, an ESOP can be an attractive option. ESOPs are tax-qualified retirement plans, designed to invest primarily in employer stock. However, they are also commonly used as a succession planning method for closely-held companies. They offer shareholders of engineering firms an "in-house" market for their otherwise illiquid, privately-held stock and an ownership interest for key management and employees.

 

Because of the very nature of their business, ESOP transactions in engineering firms are unique. The firm's most valuable resource walk out the door each night - their employees. And because engineering firms often do not have enough unencumbered assets, they sometimes have difficulty supplying collateral for an ESOP acquisition loan. To avoid this complication, selling shareholders can provide a limited guarantee to the bank consisting solely of a pledge of their "qualified replacement property." As the company pays back their loan to the bank, the "QRP" is also released.

 

Now more than ever, engineering firms are utilizing ESOPs to facilitate liquidity and succession. Recent changes in S corporation legislation have made ESOPs more attractive to service firms, including engineering firms. In the 2004 "Employee Ownership 100 List," the National Center for Employee Ownership (NCEO) found that a wide array of prominent companies nationwide are utilizing various methods of employee ownership; however, a large number of those were concentrated in this industry - 10% of total list and another 8% are in the construction industry.

 

To learn more about ESOPs in engineering firms, please utilize the resources below:

• Click here to watch James Steiker's webcast on succession planning for Architects and Engineers.

• Click here to read "The ABCs of ESOPs: Employee Stock Ownership Plans are Making Ownership Succession a Success" published in the March/April 2005 issue of Engineering, Inc. magazine. (includes quotations by Jim Steiker)

 

• Jim Steiker was a presenter at the 2005 American Council of Engineering Companies Annual Conference in Washington, DC. To receive a copy of his presentation, "ESOPs in Engineering Firms: A Case Study", please call Alice Simons at 215-508-1600 ext. 243.

 

• SES Advisors has many clients in the engineering industry. To hear about our experience in this field, please call Jim Steiker at 866-316-ESOP.