J.D. Flaherty, CEO of Construction Systems Inc., Shares His Employee Stock Ownership Plan Experience

J.D. Flaherty, CEO of Construction Systems, Inc.

A small number of business owners choose to use an Employee Stock Ownership Plan (“ESOP”) as part of their succession plan.  Due to its very specific benefits and drawbacks, an ESOP works with business owners that have the following characteristics:

• Values the legacy of the business and the welfare of the employees as much as the purchase price
• Does not need quick payout
• Strong management in place
• Has the patience to work with multiple attorneys, CPAs, financial planners for a fairly prolonged period of time (6 – 18 months)

Our client, J.D. Flaherty, exemplifies all of these characteristics in spades.  J.D. recently sold his company, Construction Systems, Inc. (“CSi”) to his employees through the use of an ESOP.  J.D. acquired the company in 1972 from a successful contractor, and became president in 1986. He feels that ownership of CSi has given him a level of financial stability that he would like to pay forward to his employees, which he views as family.  At Beacon Hill, we have never seen someone selling their business that voluntarily offered to take less advantageous terms.  We saw this twice with J.D.  He truly cares about the future of CSi and the employees that work there.

Excerpt from his letter to employees introducing the ESOP:

This organization is all about working hard, having fun, and fulfilling commitments. This company has been my life’s work and I am very proud of it. Long ago, I promised myself that I would help the people who helped me build the organization by passing ownership to them, rather than to my own children or an outside buyer.

Implementation of the ESOP is a way to preserve CSi’s legacy as an independent company and to reward the employees responsible for CSi’s success while providing for your future employment and long term financial security. – J.D. Flaherty

J.D.’s first foray into the world of ESOPS came when his CFO, Danny Bauders attended a workshop in 2011 on Business Succession where Clint Edgington and Roy Messing, of the Ohio Employees Ownership Center, spoke about ESOPs.  At that time, J.D. was in the early stages of planning for how he wanted to sell his business. His original plan was to essentially sell to four of his key management employees; however, two of the employees were not comfortable with shouldering the risks of a business by taking on debt.  Six years later J.D. circled back to the ESOP idea and reached out to Beacon Hill to help with the planning and the implementation of some of the tax savings components we’ll review in our next article.

J.D. has been kind enough to offer up his experiences during this process.

When did you first decide to go the ESOP Route?

I decided to go the ESOP [route] when a long standing plan for four (4) designated individuals within the organization could not commit.  Two could, and two could not.  It was not the price – they were risk adverse.

How have your employees accepted it?

So far – good! I expect it is still sinking in and that it will pick up steam in a few years. The ESOP transition is very smooth, with no impact on daily operations.  Nothing changed, there was not a new boss, for example. Overtime it will become more important to employees.  When they see their statements and the [accumulation of] funds being credited to their accounts, it will make an impression.

Of the benefits promised, were they delivered?

Yes, totally.  [There is no cost to the employees. They receive equity in the company along with retirement benefits.]

What do you wish you would have known at the start of the process?

It requires a good bit of time.  Many decisions had to be made, and there were many documents to review. In the last two months it became very time consuming.

What would you like business owners to know?

It is very important to be comfortable with your ESOP team and their ability to work together. All law firms [say they] do ESOPs, be careful with who you go with. Not all law firms are equal. Do your homework, and make sure the law firm has done a good number of them.

Looking back, are you happy with your decision?

Yes, very much so!

Thank you J.D. for taking the time to share your experience with our readers and provide us with first-hand knowledge on ESOPs.