The National Center for Employee Ownership (NCEO) publishes an annual list of the nation’s 100 largest employee-owned companies. Construction and contractors accounted for 14 of the firms on the 2025 list, with all but one noted as being 100% employee-owned. According to the NCEO ESOP breakdowns by industry in 2025, construction companies make up approximately 18% of all private company ESOPs, ranking in the top three industry sectors.
The construction industry not only survived the economic downturn during the pandemic, many companies outperformed expectations. While many firms were hit with project delays due to health protocols and/or government funding delays, in most jurisdictions the industry was deemed an essential business and stayed the course. This type of resilience is a natural fit for the ESOP paradigm given the cyclical nature of the construction industry. According to the NCEO, a study tracking the entire population of ESOP companies over 10 years found that privately held ESOP companies were only half as likely as non-ESOP firms to go bankrupt or close, and only three-fifths as likely to disappear for any reason.
Using an ESOP as a succession planning strategy can help clearly define a firm’s ethos, especially for construction firms that thrive on reputation, legacy, and employee morale.
ESOP Benefits for Construction Companies
Maintaining Founder Legacy
Founders of construction companies are often motivated to use an ESOP as a way to preserve the legacy of the business, which may be at greater risk with a third-party sale. A financial buyer will be driven to achieve a certain return and, therefore, may look to reduce overhead and other fringe benefits. A strategic buyer may have an entirely different culture, to the detriment of current employees. An ESOP, conversely, can create a flexible path for shareholders to transition ownership at fair market value (FMV) while preserving the legacy and culture of the business.
Boosting Employee Retention and Recruiting
The construction industry faces several employment challenges, including high turnover and talent shortages, which can make it difficult to achieve business growth objectives. An ESOP provides an added retirement benefit that may be an effective tool to both attract and retain talent. The value of the company’s stock should increase year-over-year, provided the company achieves projections, and will especially impact those with the longest tenure, creating a golden handcuff to improve employee retention and provide a key recruiting advantage. ESOP employees would need to consider switching costs before moving to another firm, as the vesting schedule and share accumulation in an ESOP can lead to a significant long-term retirement benefit. If an employee leaves the company before his or her ESOP shares vest, the employee would forfeit those shares, which typically would then be recycled back into the plan and made available to new or active participants.
To incentivize and retain key employees, a management incentive plan can be used to reward certain individuals above and beyond any ESOP share allocations. A management incentive plan is a nonqualified plan that, unlike an ESOP, can be concentrated among the company’s higher-paid employees.
A BDO USA client identified competing for a limited pool of talent in its market area as a major obstacle that was limiting their growth potential. The company decided to use an ESOP to be more competitive in the hiring process and more likely to achieve its future growth objectives.
Overcoming an Obstacle: Short Lists of Buyers
Unlike industries experiencing consolidation through M&A activity, such as the technology, healthcare, and life sciences sectors, the construction space (excluding specialty trade contractors) historically has had a limited pool of buyers because of several factors:
- There are low barriers to entry in the construction industry due to its focus on labor and process rather than on technology or intellectual property.
- There is a high degree of industry fragmentation, with the five largest companies in the industry controlling less than 5% of total revenue. A third-party buyer may be interested in an acquisition because of the target company’s geographic market share or particular clients, but those opportunities are infrequent.
- The construction industry can be highly cyclical and tied to the economy’s overall performance, and a financial buyer is less likely to be interested because the potential return may not match investment objectives. An ESOP, on the other hand, has no specific investment objectives, which allows the interests of the company, management, and ESOP participants to be aligned. Each party has the company’s long-term health in mind.
Receiving Fair Market Value (FMV)
The most commonly used method for valuing a business for an ESOP transaction is the discounted cash flow method. This method discounts a business’s future free cash flows to determine its present value. Many construction companies are able to confidently forecast their revenue multiple years into the future based on the backlog of jobs under contract. Many may keep a bid backlog that weighs opportunities based on the likelihood of winning that work. These factors may support a lower discount rate and thus a higher FMV because there is greater confidence in achieving a forecast supported by multiyear projects under contract. Keeping a detailed report of work in progress and open bids is critical for a construction company considering a liquidity event.
Realizing Tax Benefits
ESOPs can provide a range of tax benefits to the sellers and the firm, including potential deferral of capital gains for the seller on the sale of a construction business operating as a C corporation, reduction or elimination of the income tax burden to the firm, deductibility of ESOP contributions, and an opportunity for tax-deferred growth on the retirement benefit to employees.
Construction companies regularly find themselves in competitive bid situations where they must weigh the impact of competing for and winning bids that ultimately may not be profitable to the company due to low margins. While ESOP sale transactions involving S corporations do not currently provide the capital gain deferral afforded to sellers of C corporation stock to an ESOP, there is a valuable forward-looking tax benefit that can be a favorable tradeoff. The tax benefit applies to ESOP-owned S corporations, because those entities will not face the cash flow impact of corporate taxes or significant shareholder tax distributions since the pass-through income allocable to the ESOP is not subject to federal and most state income taxes. While an ESOP-owned C corporation would not realize the same benefit, the firm may realize a tax benefit through the deductibility of ESOP contributions and optional dividends to the ESOP. This gives ESOP-owned construction companies a significant competitive advantage in the bidding process because they can have larger potential free cash flow generation to work with and can submit competitive bids that are still beneficial to the value of the business.
ESOP Requirements Unique to Construction Firms
Bonding Requirements
Depending on the mix of public and private work, many construction companies must adhere to bonding requirements in order to operate. These requirements are meant to protect consumers from poor business practices and can include tangible measures such as minimum net worth, net working capital, and minimum cash requirements. Because ESOP transactions are often leveraged up to 100% of the FMV of the business, the transaction can have a substantial impact on the company balance sheet. If the proper structure is not used, the transaction could put the company out of compliance with bonding/surety requirements. The bonding company will want to understand how a transaction would affect the business’s net worth, among other items. If the relationship with the bonding company is jeopardized and the company is unwilling or unable to provide sufficient bonding capacity for the construction company to bid on large jobs, it could severely impact the business’s day-to-day operations. Some bonding companies understand the ESOP structure and that debt is repaid quickly, thus right-sizing the balance sheet in a short period.
Licensing Requirements
Licensing requirements often differ by state and require proper experience to navigate. For example, the state of Georgia requires that a general contractor must demonstrate financial responsibility to the general contracting division by providing financial statements showing a minimum net worth of $150,000. The requirement is reduced to $25,000 for limited-tier contractors (GA Rule 553-4-.02). Given the ESOP structure, specifically the financing of a leveraged ESOP transaction, a reduction in net worth occurs in almost all cases. For example, in a basic ESOP transaction a $20 million stock purchase by the ESOP would typically be financed by a combination of outside financing and seller debt, creating a $20 million liability with a corresponding $20 million decrease in net worth.
Close attention should be paid to licensing requirements in each state in which the firm does business or plans to conduct business. Advance planning will reduce delays and allow the company to remain competitive in the bidding process when they enter new markets. In any transaction, extensive state-by-state due diligence should be performed.
In a recent example, BDO Capital was engaged shortly after the close of an ESOP transaction to help restructure the company in order to comply with state-specific licensing requirements. Because the ESOP’s impact on the company’s financial statements affected licensing eligibility in certain states, the company needed to address these requirements promptly to avoid operational disruption. This experience underscores the value of selecting a sell-side ESOP advisor with deep industry knowledge and a clear understanding of state licensing and compliance considerations – so potential issues can be anticipated and managed proactively while reducing business interruption and supporting post-transaction stability and growth.
Union Participation
Many construction companies across the country utilize a union workforce to varying degrees, often with union members comprising a significant portion of the total headcount. This dynamic introduces unique challenges from an ESOP perspective.
Ensuring compliance with ERISA when choosing to include or exclude unionized employees in the ESOP is critical. The plan must operate in accordance with the employee protections provided by ERISA , and IRS non-discrimination testing applies unless certain requirements are met. This creates guardrails around the company’s ability to include or exclude Union employees from the ESOP 0— something that must be thoroughly analyzed to preserve the sustainability of the ESOP, especially when the company has a high value relative to its total eligible payroll. Other plan design considerations such as benefit levels, eligibility, the internal loan term (i.e., the number of years over which shares are allocated), and compliance with IRS-defined contribution plan limits — play a critical role in both the long-term viability of the ESOP and the participants’ satisfaction.
BDO Capital Advisors has experience working with construction companies that have chosen to include all, some, or no union employees, depending on various company-specific factors. Each scenario needs careful consideration to ensure that company culture, benefit creation, and the sustainability of the ESOP are prioritized. ESOP plan documents typically include language indicating that all members covered by a collective bargaining agreement are excluded from participation unless the terms of such an agreement specifically provide for participation in the ESOP. If a company intends to include some or all union employees in the ESOP, it must timely notify and obtain necessary approvals from the union, which could impact the timing of the ESOP transaction.
ESOP Success Story: Construction Industry
A construction services firm wanted a complete ownership transition. The owners chose to pursue an ESOP, engaging BDO Capital’s ESOP Advisory Services team as the exclusive financial advisor to the transaction. The firm, originally an LLC taxed as a partnership, converted to a C corporation before the transaction, which allowed the sellers to defer capital gains tax on the sale to an ESOP. Shortly after the transaction, the firm elected S corporation status, and as a 100% ESOP-owned S corporation, it will no longer be subject to income tax.
At the time of the transaction, the firm had a long-standing relationship with its bonding company. However, the bonding company was not comfortable with the post-closing balance sheet changes and attempted to change various structural elements of the transaction, which jeopardized the deal. By working with the company to identify another bonding agency that had experience working with ESOPs, BDO Capital was able to help the construction company close the deal successfully without any of the proposed compromises.
Having advised on and structured numerous ESOP transactions for construction firms across the country, BDO Capital was able to navigate various challenges that could have delayed or terminated the transaction. BDO Capital successfully facilitated the firm’s transition to a 100% employee-owned company, allowing the selling shareholders and the firm to realize many of the benefits outlined above, including capital gain tax deferral for the sellers on the purchase price, eliminating federal and state income tax at the company level going forward, and providing a meaningful retirement benefit for their employees.
Is an ESOP Right for Your Business?
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1 NCEO is a private, 501(c )(3) nonprofit organization established in 1981 that serves as a leading, unbiased source of information, research, and resources on ESOPs, equity compensation and ownership culture in the United States. It helps businesses, professional advisors and employees understand, implement and maximize the benefits of employee ownership.
2 The Employee Retirement Income Security Act of 1974, as amended, which is the federal law governing pension plans, including ESOPs.