The usual exit in this trade is thin. You work until you cannot, then you hope someone buys the trucks, a family member wants the keys, or a broker finds a buyer who closes. The crew you need in April is still choosing between other shops. An employee stock ownership plan is a different tool. It is a retirement plan that can own shares of the private company, funded by the company, so a shareholder can take some cash out without putting the whole business on the market.
This article is from Employee Stock Ownership Plans with Menke & Associates, episode 110 of the How to Hardscape Podcast, published July 19, 2021. Michael Pletz hosted. Phillip DeDominicis, managing director and senior East Coast partner at Menke & Associates, was the guest. He described the firm as investment bankers and ERISA lawyers focused on these plans, and as the largest ESOP record keeper in the country. The firm had been around 47 years, about as long as the industry. John Menke, his boss, helped draft the original legislation. About one in four new plans, he said, are created there. Menke has about 50 employees and is 70 percent owned by its own ESOP. He had been in the ESOP at Morgan Stanley, where he worked for 10 years, and he had sold businesses for about 14 years before joining Menke 17 years before this conversation. Every headcount, percent, and dollar figure below is from that conversation. This is a summary of a conversation, not legal, tax, or financial advice, and it is not a description of current tax law.
A Retirement Plan That Can Own the Company
He put an ESOP in the same family as a SIMPLE IRA, a 401(k), and a 401(k) profit-sharing plan, under ERISA. They are tax-deferred compensation. The money does not show up as current income. It grows without tax until retirement, and ordinary income tax is normally paid when it comes out. He did not quote a rate.
The split that matters is who funds the plan and what it can buy. In a 401(k), the employee chooses the investments, and those investments cannot be shares of the private company. Congress looked at putting that stock into the 401(k) more than 50 years ago, he said, decided it was too complicated, and wrote a separate set of rules. An ESOP exists so employees can be attached to the equity. The board directs the investments. Employer money goes to the ESOP. Employee money stays in the 401(k).
Most of his clients already have a 401(k). He usually keeps it and adds the ESOP beside it. A SIMPLE IRA would need to be converted to something like a 401(k) or terminated. Eligibility and vesting can look similar. The investment side does not.
Most Calls Are About Who Owns It Next
For new plans, about nine calls in ten are succession. He said more than 60 percent of adult workers in the United States work for privately owned businesses, so somebody has to own the company next. The caller has a retiring shareholder at 17 percent, or 50 percent, or 100 percent. About one call in ten is a younger owner who is not rushing to sell and wants a pay plan that attracts and keeps people. He said connecting employees to the stock builds a better company. The design starts from which purpose is primary.
Those are the two jobs in the first 10 years. A mature plan often has cash building in the accounts, and the investment question changes. About one in five new ESOPs he sees sell 100 percent on day one. About 80 percent sell less, and many of those sell nothing yet. They fund the plan and sell shares later. About four out of five people he meets are not trying to sell the business that day. They want money moved from the left pocket to the right while they still run the company.
Headcount, Value, and the Work You Sell
He treats an ESOP as a financial tool, not a plan reserved for one trade. Landscaping is not on the short list he gave of businesses state law sometimes blocks. That list is certain licensed practices where only the professional may own shares: medical, dental, law, CPA, and some engineering firms, across 50 states and about a dozen industries. If an individual can own the shares, he said, the ESOP can own them too.
Size matters because setup and administration have fees. The year before this episode he did a plan for six employees at a C corporation. He was not eager about a company that small, but a specific reason made it work. For an S corporation he looks for about 12 or more employees, growing or very stable, and about a million dollars of company value. You can go below that. Owners who do usually decide the fees are too high for the benefit.
Saying you will sell when you are done is not a plan. He is an M&A banker, and Menke also sells companies that are already ESOP-owned, so the trust does not have to be the last owner. Private sales are still hard. An SBA study from a couple of years before this conversation, he said, found that 80 percent of privately held businesses that hire a broker or an investment banker fail to sell. Wait until you have to sell and a decent price is difficult. In this trade, that delay is how a company becomes a yard sale of equipment.
Maintenance versus design-build is a valuation question. The ESOP is a trust that, as he described the law, wants to buy the shares and does not want to overpay. Recurring revenue is usually easier to defend than one-off work in a given year, even when the one-off year is more profitable. Menke’s record-keeping work, about a thousand companies sending business every year, is the anchor in that firm’s own valuation. The project side moves more. A maintenance book can play that role. A hardscape shop that eats what it kills can still work if the history is there: a long run of work, referrals, or a place as the go-to crew, including government jobs that move when budgets move. You also need to shrink labor in a thin year without bleeding cash. The ESOP price is a value the owner accepts or walks away from. A third-party buyer is doing different math, around debt, payoff, and a later flip.
Shareholders First, Then the Crew
Once you decide, getting a plan ready to fund takes about a month. Deciding is not on that clock. The month before the episode he took two clients, one after three months of talk and one after eight years. Succession is personal. Family and structure sit in it. He said they often work through something like 20 issues, and the ESOP is one.
It is still faster than a third-party sale. You already know the buyer, and you know the buyer is willing. You still have to settle the price. Even a small block of shares, he said, should be assumed to take three or four months.
He does not want the crew polled first. Pay, in his view, is the board’s decision. Ask people how they want to be paid and he expects cash today, with no tie to the company. That is not always in their interest if they stay for years. He said the data on ESOPs is clear about higher retention and easier hiring, and that effect takes time. Shareholders go first. If they are not the managers, management is next, especially the CFO. Then the transaction. Then the employee meeting, which is part of the setup. The person who told the owners it was a good idea is the person in the room defending it.
He had done more than 300 of those meetings in 17 years, in front of something like 20,000 people by his count. They thank the owners. He could think of about five who did not get it. No owner he has worked with installed a plan that was good for the shareholder and bad for the crew. The owners are usually not taking all of their money on day one, so the same people have to earn the profit that pays for the shares.
Take Cash Out and Keep a Chair
For an owner-operator, succession is three hats: the shares, the board, and the daily work. Many contractors wear all of them. You cannot leave the field, or the office, and keep your whole net worth in the company. The plan buys some of the stock. You can stay on the board while you add value, drop from five days toward three, hand pieces of control over, and maybe stop as CEO while remaining chair. Some owners he meets do not know how to retire. A board seat, including at another ESOP company, is a way to stay useful. Others go back to the work they liked. He has seen owners return to selling cars, to a kitchen, and to a lab. The hardscape version is the person who built the company outside and then got stuck at a desk. That door stays shut while you still own everything and the payroll depends on you.
His concentration picture was a $10 million company and $1 million of liquid assets. That is not a diversified retirement. Too much net worth sits in one illiquid security. If you sell only part, you still take most of any later increase, and you can participate in the plan as an employee. Family stakes fit in the same structure. His opening questions are who owns the stock and what they want. Owners often tell him they did not know that version was allowed.
What Changes After the Plan Is Real
Plans date to 1974, the first study he cited landed around 1984, and by this episode he was seeing about three a year. The pattern he described was a better top line, a better bottom line, lower turnover, easier recruiting, more margin, and more cash to grow.
One comparison was the recession before COVID, not COVID itself. The average U.S. company laid off 12 percent of its workforce. The average ESOP company laid off 3 percent. People attached to the equity help cut costs, and these companies tend to hold more cash. Early COVID numbers, as he described them in 2021, showed ESOP companies surviving at much higher rates. He did not give that percent.
On savings, he said the average ESOP participant then had four and a half times the retirement savings of other working adults. When he entered the field the multiple was two. A 2019 NCEO study, as he cited it, found that people about 60 to 64 with an ESOP account, someone who was 62 in 2019, had about 10 times the retirement funds of other workers that age. He put the balance at about $400,000. He credits the tax treatment Congress built in, stronger companies, and cash left for growth. Those multiples are his reading of the studies in this conversation, not a forecast for your shop.
For the crew, the practical piece is a second plan. Their own money still goes to the 401(k). Morale research moves up because the job starts to include the whole company, not only because people feel looked after. Menke pays him on revenue. His shares depend on profit, including other offices and the legal and admin groups. He will cover a colleague’s seminar because it helps the firm. Owners, he said, treat a car or a house differently than renters, and the last person out kills the lights because the power bill comes out of profit. About 11 of Menke’s 50 people sit on the management committee. He wants the other brains in the conversation. None of that culture shows up the week the documents are signed.
The Company Writes the Check
Employees do not buy in with a check based on years of service. The plan is company-funded, like a profit-sharing contribution. The board usually waits until the year is over, sees whether there was a profit, and decides. His example was 4 percent of pay for everyone eligible. A $100,000 W-2 would get $4,000. A $50,000 W-2 would get $2,000. The company writes the check. Other splits exist. Pay is the usual measure because it is already how the company scores the work.
That choice sits beside trucks, another acquisition, cash held after a shock like COVID, and money sent to shareholders. The ESOP is one more place the check can go.
A Few People Will Not Hear It
He thinks the logic lands for almost everyone. In 17 years he remembers about five who did not. A normal employee meeting runs about an hour. At a Boston tech company, people who had watched privatization fail at home heard equity as a scam. He stayed three hours. They thanked the owner. At a blue-collar company in New York, about 300 people, one man objected that allocations followed pay instead of an equal split, walked out, and was fired. The owners said he had never fit, and the company was adding employer money, not taking pay away. Another man argued that equity itself was a bad idea, a lesson he had learned in a union setting, and did it in front of a shareholder. Those are outliers. The first meeting still has to be run by someone who has heard the questions.