Architects! Engineers! And ESOPs!

An optimist will tell you the glass is half-full; the pessimist, half-empty; and the engineer will tell you the glass is twice the size it needs to be. 

Anonymous

This quote could apply as equally to architects as it does to engineers. There is very little that we do on any given day that is not due to the efforts of an architect, engineer or both. The car you drove to work today didn’t just happen. Your house was not thought up on the spot without concern for loads, slopes, etc. There is a reason that the elevator is located where it is and operates the way that it does.HZ1573

There is also a reason that architectural and engineering (A & E) firms are more likely than most companies to consider an Employee Stock Ownership Plan (ESOP). An ESOP offers many potential advantages to A & E firms including: cultural fit, improved staff recruiting and retention, tax advantages and a simplified exit strategy for the selling owners.

Cultural fit: A & E firms have highly-skilled employees and their employees understand how their individual performance may impact the overall value of the company. This direct line of sight creates an incentive to increase performance levels, as they understand how this increases the value of their ESOP account balance.

Improved staff recruiting and retention: A & E firms often consider their employees their most valuable asset. Recruiting and retaining quality people is expected to get tougher going forward. Projections from the U.S. Bureau of Labor Statistics highlight this. Consider the following:

  • Architecture and engineering occupations are projected to add approximately 258,200 jobs (a 10% growth rate) from 2010 to 20201
  • A survey conducted by McGraw-Hill Construction found that nearly one quarter of respondents anticipate a shortage of architects by 20142
  • Technical professionals in the U.S. are seeing the biggest jump in salaries in more than a decade as tech unemployment (3.8%) is about half the national average3

An ESOP can help a firm differentiate itself and provide a path to ownership for A & E professionals aiding in staff recruitment and retention.

Tax advantages: An ESOP can offer significant tax advantages to a company. Contributions to the ESOP are tax deductible and if the company is an S Corporation, it is possible in some circumstances to eliminate current federal and state ordinary income tax on the business earnings.

Simplified owner exit strategy: An ESOP allows a business owner to sell gradually. Often times the owner will sell over a period of three to seven years. The owner(s) often stay involved during (and even after) the ownership transition. The ESOP often allows for flexible financing structures that may help meet the ongoing objectives of the selling owner.

This combination of advantages can make an ESOP a powerful tool for owners of an architectural or engineering firm looking to transition ownership and create employee engagement.

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In addition to blogging here, I also tweet regularly about topics of interest to ESOPs. Click to follow me on Twitter –  @jlripperger.

1Occupational Outlook Handbook, Bureau of Labor Statistics, March 2012
2Survey Predicts Architect Shortage by 2014, Architectural Record, September 25, 2012
32012-2013 Dice Tech Salary Report, January 22, 2013

 

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While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal are rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

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  • https://www.facebook.com/brian.gualillo Brian Gualillo

    Yay!!! I love that you are still writing blogs. Keep it up Jerry!