Company Ownership: ESOPs on the Rise in A/E Design Firms
Employee stock ownership plans, or ESOPs, are becoming increasingly popular among firms in the architecture, engineering, planning and environmental consulting industry, according to researchers at Natick-Mass.-based ZweigWhite.
ZweigWhite’s annual Valuation Survey of A/E/P and Environmental Consulting Firms finds that the percentage of firms with ESOPs has increased from 17% in 2002, to 22% in 2003, and finally, to 26% in 2004.
“ESOPs have been around for more than 30 years, but seem to be gaining in popularity in the [A/E] industry in recent years. One reason may be the legislative changes effective in 1998, which made S-corporations eligible to sponsor ESOPs,” said Ian Rusk, ASA, a ZweigWhite principal who specializes in financial advisory consulting.
Another reason may be simple demographic forces. The A/E/P industry is a highly fragmented one, with tens of thousands of companies, many of them relatively small (under 100 employees) and still owned and operated by their founders.
“With many of these first generation owners being of the baby-boom generation and nearing retirement, and given the tax efficiencies of ESOPs, it's not surprising to see more firms employing them as a tool to manage major stock redemptions,” said Rusk.
He further explained that the tax advantages of the ESOP include the ability of the company to deduct the principal portion of ESOP debt and redemption of shares through contributions to the ESOP plan. From the sellers’ point of view, selling their shares to the ESOP may allow them to defer the capital gains tax on the sale under certain circumstances, although this deferment is not applicable for S-corporations.
“ESOPs are not for everyone, however. Factors such as firm size, cash flow, debt service capacity and corporate culture need to be carefully considered,” cautioned Rusk.
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