Succession planning in construction: A closer look at ESOPs

The following article was originally published by the Canadian Construction Association (CCA) and has been re-published with consent.

From coast to coast, Canadian real estate and construction business owners are confronted with the same question: What happens when it’s time for me to step away from my business and an outright sale to a competitor or consolidator is not the most viable option?

One solution is employee share ownership plans (ESOPs). This succession strategy allows your employees to gradually gain ownership of your business. Instead of selling the business to an external buyer or transferring ownership to your family members (or those of other shareholders), an ESOP helps an existing team member purchase shares over time. This approach makes ownership more practical and affordable for the employee, while giving those selling shares a way to manage their investment risk as the transition evolves.

A key benefit is the integration of parallel motivations: this keeps your leadership and client relationships stable, while allowing for the key shareholders to exit safely.

The recently released Preparing for the Next Chapter in Construction: 2025 MNP Report dug into this question in earnest. Here’s what it found: there’s a big group of owners who just don’t know how ESOPs can help them solve their succession challenges.

• 41 percent of business owners are familiar with ESOPs
• Owners with formal succession plans have higher familiarity with ESOPs
• Seven in 10 heavy civil construction owners reported being familiar with ESOPs
• 66 percent of surveyed residential construction owners said they were unfamiliar with these plans

Why succession is a pressure point in construction

Construction is a unique industry. Projects can span years, and the risks within the industry, client relationships, and the large multi-year commitments bring unique dimensions that need to be reflected in the solutions you generate.

Often, these client relationships are built on trust with owners or key leaders. The goal is to find a middle ground where current shareholders can exit on their own terms, while bringing value creation and retention to new employee-owners. This results in a win-win for everyone.

How do ESOPs work?

An ESOP is a structured plan that allows an employee to purchase shares in the business over time. The shares will either be sold directly to an employee or held in a trust.

For construction companies, ESOPs have some distinct benefits:

• Continuity of leadership: Ownership passes to key leaders who already know how the business runs, reducing uncertainty for clients, vendors, and crews.
• Employee retention: Offering ownership opportunities can motivate employees to stay and invest in the long-term success of the company. This is a valuable advantage when you think of today’s competitive market for good project managers, site supervisors, registered professionals, and estimators.
• Preserving reputation: Ownership stays in the hands of those who helped build a company’s proven track record. Done well, the transition is seamless with minimal disruption in the key customer relationships.
• Financial viability: Financing strategies can be developed around the need to extricate equity, company cashflows, and affordability for new shareholders.
• Cultural fit: Core employees already know and embody the business’s values, safety standards, and client expectations.

What to watch out for when considering ESOPs

ESOPs aren’t a one-size-fits-all solution. Like all your business transition options, they require careful planning and professional guidance. Some potential risks include:

• Strained cashflow: If shares are purchased by borrowing money, repayment needs to fit within your financial capacity.
• Valuation: A professional valuation can help set a fair market price for the shares.
• Increased governance: ESOPs can mean more voices at the ownership level, but this can be dealt with through clear shareholder agreement and decision-making structures.

How to approach ESOPs

Recently, our team worked closely with two large construction companies.

Company One is considering the full exit of the current shareholders, desiring a complete sale to employees over a minimum of 10 years.

At Company Two, they are looking at preserving continuity across a shorter timeline yet want to accommodate some large shareholders who are looking to exit.

In many ways, the key moving parts of building a solution for these organizations are similar. However, the way we applied and balanced these key motivations and business plans turned out to be very different.

To land on the right solution for each company, we factored in practical considerations, such as:

• Affordability and the ability for those coming into ownership to afford their buy-ins. Even great opportunities need to cross the affordability hurdle.
• The impact on cashflow and working capital requirements for bonding and bank financing, especially for multi-year project timelines.
• Risk management for the company, specifically for exiting shareholders.
• The integration within the overall compensation structure.
• Finding a good balance between reward, retention, and recruitment.

If you’re interested in learning if an ESOP is a good transition option for your organization, this list of considerations is a great starting point.