Tag Archive for 'employees'

ESOPs as an Exit Strategy for Owners of Construction Companies

By Chris Hirschfeld, ASA, MBA, Director of Exit Planning, Somerset CPAs and Advisors

Running a profitable business is a daily challenge for most business owners. Finding an exit strategy is a challenge that every business owner will eventually face. It is especially true for many in the construction industry. If you want to sell to management, how often do they have the funds to buyout the owner? If you want to arrange bank financing for a transaction, what impact will this have on your bonding? If you want your children to remain in the business, how willing is a buyer to honor that request? If you consider selling to a competitor, what is the risk of sharing proprietary information with your competition? What if the deal doesn’t go through? How often do Private Equity firms even look at construction companies for their portfolio of acquisitions?

The list of issues above is exactly why more and more construction companies are turning to ESOPs as an exit strategy. What is an ESOP? It stands for Employee Stock Ownership Plan. It is a vehicle by which business owners can sell their stock to the employees through an ESOP Trust. The ESOP Trust buys the shares for the benefit of all employees. Not only does it provide an exit strategy for the current owners, but it also creates an ownership mentality among all the employees because all employees will have an economic interest in the success of the business. 

An ESOP is a qualified retirement plan. Therefore, it is governed by the same rules that apply to other retirement plans such as 401k or SEP or SIMPLE IRA’s. ESOP plan documents will specify eligibility, vesting, and retirement ages, just like other retirement plans. The accumulation of value inside an ESOP grows tax deferred, just like all other retirement plans. Employees only pay ordinary income tax when they withdraw their funds from their ESOP account just like any other retirement plan. When employees retire, or leave the company for any reason, however, they must sell their stock back to the ESOP. The stock never leaves the company. The terminated employee may roll their cash proceeds into their IRA or 401k if they wish to further defer taxes on their ESOP account after retirement. The one thing that makes an ESOP unique among retirement plans is that, by law, ESOPs are allowed to hold employer stock as its only security. 

When setting up an ESOP, current owners must sell their stock at fair market value, as derived by an independent appraiser. This is a market-based price which gives owners a value comparable to what the current market would bear. Often, “fair market value” is a higher price than formulas many companies have in place within their buy-sell agreements. Once the owners sell their shares to the ESOP, the ESOP Trust will allocate shares to employees over several years. This creates a long-term incentive for employees to remain with the company. It is why ESOPs have become such a wonderful retention tool. It is like a “golden handcuff” for all employees. If they leave, employees lose their unvested balance and also walk away from the potential of future share allocations. 

One of the biggest benefits to ESOP-owned companies is that management does not have to change. Corporate governance does not have to change. The day-to-day operations do not change. The company remains local. Headquarters will not be moved out of state. The local community benefits when companies don’t sell to out-of-state companies. There is one additional benefit to the owners who sell their shares to the ESOP. If they remain employees after selling their stock, they may also participate in the ESOP to build additional wealth.

In today’s tight labor markets, ESOPs are especially attractive. Imagine being in competition for new hires. Your company can offer not only salary, wages, and a 401k plan, but also a second retirement plan that the company contributes to (not the employee). How many employers offer two retirement plans? This will make your company more attractive to potential new hires in a tight labor market.

What types of companies make good ESOP candidates? ESOP candidate companies should be profitable, with stable earnings and some growth potential. If the company has the capacity to borrow money, the selling shareholders can get more cash up front as part of the deal. Owners who want to keep the company local will find ESOPs attractive. If you already have an employee-ownership culture, your employees will treasure the ESOP benefits.

ESOPs are only available to corporations. LLCs and Partnerships would have to convert to either an S-Corporation or C-Corporation before forming an ESOP. One of the advantages of a C-Corporation that forms an ESOP is that the sellers can get tax deferral on their capital gains if the ESOP buys 30 percent or more of the ownership. One of the advantages of an S-Corporation forming an ESOP is that income taxes on corporate profits can be eliminated. S-Corporations do not pay a corporate income tax. Corporate income passes through to the shareholders who pay the tax. If an S-Corporation is owned 100 percent by an ESOP, the corporate income tax liability passes through to the ESOP, which is a qualified retirement plan. Qualified retirement plans pay no income tax. Therefore, a 100 percent ESOP-owned S-Corporation is a tax-free entity. Imagine not having to make income tax distributions equal to 30 to 35 percent of the corporate income each year or in quarterly installments. That cash can be retained and used for other corporate purposes (pay down debt, bonuses, acquisitions, etc.).

The company will incur added expenses to an ESOP. ESOPs require a trustee, an independent business appraiser (who appraises the stock each year for the benefit statements), and legal counsel. Additionally, a record-keeper/third-party administrator must be retained to administer the plan, file necessary annual tax forms and produce the employee ESOP benefit statements. The corporate income tax savings alone, however, can more than offset the increased operating costs for an ESOP.

In summary, there are several reasons an ESOP might be an attractive exit strategy for business owners in the construction industry. It allows the owners to sell their stock at a market-based price. It provides a means by which the owners can sell the company, but the company remains local. The ESOP has a built-in mechanism for buying shares when employees leave the company, so there is always a market for minority interests. ESOPs help build an ownership mentality among employees. An ESOP provides a second retirement plan for all employees that builds value over an employee’s career. This additional retirement benefit will make your company unique and creates an attractive recruitment and retention tool. ESOP-owned S-corporations can eliminate corporate taxes altogether, creating a unique source of cash flow unavailable to most other corporations. If you have a business that you would like to turn into a legacy, an ESOP just might be that vehicle. 

Why Recruit Veterans

Beyond Workforce Development, Workforce Solutions

by Julie Davis,

Association of Equipment Manufacturers Director of Work Force Development.

Are you tired yet of pulling from the same employment pool? If the answer is yes, then you are ready to explore the new world of veteran recruitment. If you think that you’ve tried it, it doesn’t work for you or there is no one to recruit in your area, then you simply aren’t up to date. 

Why recruit Veterans?

Many companies find veterans to be more productive employees with lower turnover rates when compared to their nonveteran counterparts. Additionally, their past military background can give veterans distinctive capabilities and perspectives that can add insight and diversity to your team’s problem solving. Employers can also qualify for up to $10,000 in federal tax credits per veteran. 

There are multiple state and federal organizations that exist to connect employers with veterans. Many of them work with veterans before they leave active duty to ensure they have skills that can plug immediately into the workforce. Furthermore, just because you may not have a military base located near you is no longer a reason to exclude veterans from your search. Organizations looking to place veterans into employment include working to get veterans back to their home states if that is what they are looking for. Taking a few extra steps could mean providing a veteran the opportunity to truly come home.

Veteran Retainment

Approximately 40 percent of veterans leave their first job out of the military within a year of being hired. The transition can be challenging but there is some common sense, yet very real ways that you can position your company to retain your veterans. 

First, define what your motivation is to hire veterans. Then identify what skills, attitudes and experience would benefit your organization the most. (If you are not sure, simply find your best current employee in that position and identify their skills, attitudes and experiences.) 

Decide what a successful veteran hiring program for your organization looks like. Are you looking for just one or is this going to become a regular program? 

Identify the service branches, ranks and occupational specialties you might like to target. Don’t know? That’s okay because there’s multiple ways to connect. You could reach out to your state or local Veteran’ office and talk with someone or here are some great website you can connect with:

Understand the basics
https://content.iospress.com/articles/work/wor01987
(A brief introduction to military workplace culture)  
https://www.va.gov/VETSINWORKPLACE/docs/em_termsLingo.asp 
(Common Terms) 

Difference between the branches 
https://www.va.gov/VETSINWORKPLACE/mil_structure.asp

Difference between officer and enlisted ranks 
https://www.va.gov/VETSINWORKPLACE/docs/em_rank.asp

Civilian to Military Occupation Translator
https://www.careeronestop.org/BusinessCenter/Toolkit/civilian-to-military-translator.aspx?frd=true

While building your veteran’s program, don’t forget to tap into your secret weapon – any veterans you are currently employing. Get their thoughts about skills and areas of service that might be a good fit. Don’t forget to ask them what about working for your organization might appeal to a veteran. After all, they have stayed with you! 

There are multiple employment organizations that will connect you with veterans. A few of my favorite include:

Hero’s MAKE America (Provides 10 weeks accelerated skills training for manufacturing)http://www.themanufacturinginstitute.org/Initiatives/Military-and-Veterans/Heroes-MAKE-America/Heroes-MAKE-America.aspx 

Hire a Hero
https://www.hireheroesusa.org/hire-a-veteran/ 

Bradley-Morris, Inc. (Specifically for Skilled Technicians)
https://www.bradley-morris.com/military-recruiting-firms/field-service-technician/

Orian Talent
https://www.oriontalent.com/military-job-seekers/enlisted-technicians/

Lastly, don’t forget that to retain your veteran, you may want to consider having some supports in place to make their transition smooth. Connect them to existing veterans in your workplace, let them know about opportunities for professional growth and advancement, and consider engaging current veterans in creating the program to ensure its effectiveness. 

Veterans who are coming out of service where they have worked with heavy equipment may be a perfect fit for the construction, agriculture, mining, utility or forestry industry sectors. Don’t let taking a few extra steps keep you from your next best hire.

Invest in Training for Better Employee Retention

Why Contractors Should Consider Outsourcing HR

By: John G. Allen | Vice President, G&A Partners

Caterpillar Celebrates Grand Opening of New Hydraulic Excavator Facility in Victoria, Texas

The new factory is the most recent expansion for Caterpillar in the United States and is expected to employ about 800 people once it is fully operational

Executives from Caterpillar Inc. and leaders from the state of Texas celebrated the grand opening of Caterpillar’s state-of-the-art hydraulic excavator facility in Victoria, Texas.  The new, 1.1 million-square-foot operation represents a $200 million investment by Caterpillar to increase excavator capacity and production in the United States.  The company has already hired about 225 new employees in Victoria, and plans to continue hiring based on demand for products made in Victoria and as it ramps up production with additional models to be produced at the new facility.

“This new facility in Victoria will help us better serve our customers in North America, and I am thrilled to have the opportunity to meet some of our newest employees and to see first hand a factory that I am sure will be among the very best we have anywhere in the world,” said Caterpillar Chairman and CEO Doug Oberhelman.

Prior to taking part in the grand opening ceremony, Oberhelman toured the new facility with leaders from Caterpillar’s Excavation Division and with Texas Governor Rick Perry.

“Caterpillar’s ongoing investment in the Lone Star State is proof positive that the low taxes, reasonable regulations, fair courts and skilled workforce we’ve worked hard to foster continue to attract world-class employers to create jobs and

opportunity here in Texas,” Gov. Perry said. “We’re proud to welcome this new facility and the hundreds of jobs it supports to Victoria, and wish Caterpillar continued success.”

When operating at full capacity, the new Victoria facility will more than triple the current capacity of hydraulic excavators produced by the company in the United States. The excavators to be produced in Victoria are now made at a Caterpillar facility in Aurora, Illinois, and at a Caterpillar facility in Akashi, Japan. Expanding capacity in the United States at the new Victoria location will position Caterpillar to better serve North American excavator customers with a single, dedicated facility. In addition,the Caterpillar facility in Aurora will then focus on other products while the facility in Akashi will be more focused on serving customers in Asia.

For information about Caterpillar: http://www.caterpillar.com.