How to Build a Transition Plan That Works for Your Business

When designed around business realities, ESOPs offer a transition option that balances value, continuity and culture.

Transition planning isn't a one-size-fits-all project that follows a standard formula or fits neatly into one bucket. Growth ambitions affect how much capital is available for internal transitions, while leadership bench strength determines how quickly owners can exit. Market position influences which buyers show interest and company culture shapes which paths preserve what owners built.

These factors don't exist in isolation. They interact with each other, creating tradeoffs that require owners to decide what matters most. The problem is that value and continuity are often competing priorities. For example, buyers offering the highest purchase price typically plan to restructure operations, replace leadership or integrate the business into a larger platform. On the other side of the table, owners who prioritize preserving culture, and protecting employee relationships may end up accepting lower valuations in exchange for that continuity.

When Competing Priorities Meet Their Match

Because each transition path includes implicit choices about what gets preserved and what doesn't, there's no avoiding this tension. The good news is that employee stock ownership plans (ESOPs) give engineering and construction firms a structure that addresses both priorities simultaneously.

These plans are gaining traction in E&C for a few practical reasons. Many E&C firms are not easily sold to third parties, particularly when the business relies heavily on specialized expertise, long-standing client relationships or leadership continuity. Moreover, many E&C firms experience difficulties identifying internal buyers with enough personal capital to transact and ESOPs provide a solution by creating a market for ownership shares when internal buyers are limited, allowing owners to transition out without forcing a sale that reshapes the business.

Here’s how it works: ESOPs allow owners to exit while transferring ownership to employees who already understand the business and its culture. Employees become owners without having to purchase shares with personal capital, and those selling owners get competitive financial returns while preserving their leadership teams and operational approaches.

The numbers back this up. Between 2021 and 2024, despite economic challenges like inflation, rising interest rates and geopolitical tensions, ESOP-owned companies delivered a 17.3% average annual return, based on a widely recognized ESOP performance index tracking companies across industries including government contracting, industrials and business services. That performance outpaced both the S&P 500 (11.9%) and the Russell 2000 (3.1%) indices over the same period.

The research also found that:

ESOP companies across all size ranges outperformed public markets, with firms over $500 million in enterprise value delivering 18.1% annual returns, those between $100 million and $500 million generating 16.0% returns, and companies under $100 million achieving 15.5% returns.
Less mature ESOPs showed equity prices impacted by debt repayment following leveraged transactions, while longer-established employee-owned companies demonstrated stronger returns over time.

Of course, performance data only tells part of the story. The decision to pursue employee ownership also depends on what matters to owners beyond financial returns. “ESOPs tend to work well when owners want liquidity and they care deeply about the people and the businesses that they’re exiting,” says Nathan Perkins, managing director with FMI Capital Advisors.

“That’s why when owners start considering transition, the first step isn’t picking a structure,” he continues. “It’s understanding what their priorities are around valuation, legacy, timeline and preservation so they can properly evaluate the full range of options available to them and what would be right for their circumstances and desired outcomes.”

Planning for an ESOP Transition

While most E&C firm owners have a strong understanding of their businesses, the mechanics of ownership transition can feel like unfamiliar territory. Perkins sees this regularly and encourages owners to start by understanding the full spectrum of options available to them, from private equity to strategic sales to internal transfers, and says ESOPs work best when owners plan them around business realities instead of forcing the business into a predetermined timeline.

“An ESOP isn’t a template you drop on a company,” Perkins says. “It’s a structure that has to be shaped around how the business actually operates, who’s ready to step up, and what the owner wants the next chapter to look like. When it’s designed with those realities in mind, owners get more control over timing, continuity and outcomes.”

For best results, Perkins tells companies to first examine whether the business can sustain employee ownership both financially and operationally. Some of the key “must haves” here include stable earnings, a clear growth trajectory and employees who are ready to embrace ownership responsibilities.

Not every business is a good candidate for employee ownership. Before going too far down the ESOP path, owners should step back and assess whether their company meets some baseline financial, operational and cultural conditions. Some of the key questions owners should ask at this point include:

What is motivating our interest in transitioning ownership, and how deeply aligned is that motivation with our long-term intentions for the business?
How has succession planning taken shape so far, and in what ways are potential future leaders already stepping into expanded responsibilities?
How do we see the company’s long-term growth trajectory, and what factors would influence its ability to sustain or increase equity value over time?
What does our current earnings consistency and operating scale suggest about the business’s readiness to support an ESOP?
How do we anticipate employees responding to broad-based ownership, and where might enthusiasm or resistance emerge?
How ready are leaders to clearly communicate how employee ownership works and what it would mean for employees in the long-term?

ESOPs work best for companies that have stable earnings, sufficient scale and a workforce that’s ready for ownership. Firms with fewer than roughly 25 employees or below roughly $3 million to $5 million in EBITDA may find it difficult to support the financial and administrative requirements of an ESOP.

Don’t underestimate that final education piece. Early on, employees may not understand how employee ownership benefits them or what responsibilities come with it. Perceptions vary during the transition period, Perkins adds, which makes strong leadership essential. Leaders must be able to explain how ownership works, what equity value means and how individual roles connect to company performance, especially during periods of change.

From Evaluation to Execution

With more than 7,000 U.S. companies currently using ESOPs to build loyalty, manage succession and compete for talent in tight labor markets, the structure has proven itself across industries and company sizes. E&C firms that leverage employee ownership gain competitive advantages in recruiting and retaining skilled talent, while owners can exit in a way that’s rewarding both for themselves and the teams that helped build the business.

The approach requires planning and the right advisors. Firms that work with experienced professionals who understand both ESOP structures and the E&C industry can navigate the transition smoothly and position themselves for long-term success. These advisors help owners evaluate whether employee ownership fits their situation, structure transactions that work financially and operationally, and build transition plans that account for where the business is headed over the next decade.

"Come up with a plan that’s well thought out for today, but also factors in how things are going to play out over the next 5-10 years," Perkins says. "That forward-looking perspective enables sustainable transitions that work for owners, employees and the business itself."