EP3 - Construction Industry Spotlight Interview with Joe Jones, Audit Partner at Berman Hopkins

In this episode, Makenzie Wirth interviews Joe Jones, Audit Partner at Berman Hopkins. As lead of the firm’s Construction Advisory Services Team, Joe shares his perspective on the recent trend of construction companies transitioning ownership to ESOPs. From audit considerations, valuation risks, bonding, backlog quality, governance, and jobsite culture, Makenzie and Joe provide practical advice for construction owners considering employee ownership.

Transcript

[0:12] Hi everyone and welcome back to another episode of Journey to an ESOP and Beyond I am your host today Mackenzie worth and today I'm excited to welcome a very special guest. On our podcast um if you are watching our episode this week and yes you can watch on YouTube um if you. Our YouTuber versus Spotify or whatever else to go check out our episodes on YouTube um so if you're watching this week you may be wondering um how in the world did you get Scotty Scheffler on your ESOP podcast. Uh believe it or not it is just his doppelganger and I am excited to welcome Joe Jones to our podcast this week.

[0:59] Joe Jones is an audit partner with Berman Hopkins CPAs and Associates um. For those who maybe have been with us for a while listening to our podcast, you may know that we are kind of backed by a CPA firm which is Burman Hopkins so we're excited to bring on Joe today to specifically dive into the um his knowledge and expertise that he brings um but also relative to the construction industryit's been. A very trending topic lately that in the last 5 or so yearsum construction companies have been more.

[1:43] Exposed to esops and becoming ESOP companies um so we're going to kind of dive into that and get. Perspective from Joe so thank you Joe for joining us today and I'll kind of pass it to you just to give a little brief introduction and background to our listeners. Yeah thanks Mackenzie and I know I look a little bit by Scotty scheffer but I wish I had a swing because I would definitely be a golf course uh and not on, a podcast although I'm very excited to be on this podcast so as Mackenzie said my name is Joe Jones I'm an audit partner, um at Burman Hopkins I've been a partner for almost a year now with Burman Hopkins prior to that I was with the uh the 1 of the Big 4 firms for about 12 I get I get lost and how long it's been maybe 12 or 13 years. Um predominantly in the construction space there when I transitioned to Bourbon Hopkins, I may have 1 or 2 manufacturing clients but mostly construction clients and I can tell you over the past 2 years I've I've heard ESOP so much, and so it's really such a growing thing and and and our my little construction Niche that we have I hear about it every day so looking forward to talking talking with you about it and kind of sharing my perspective on it.

[2:48] Awesome thank you um so we'll kind of just go ahead and Dive Right In I guess I would just like to kind of hear from your perspective um kind of you've you've already mentioned you've you've been exposed to esops you know it's a prevalent kind of Trend in the in the industry right now what do you think makes construction companies uniquely positioned for esops. Yeah it's a great question I think from my perspective construction is uniquely positioned umfor ESOP ownership because of how the values created in these businesses so the meaning the value isn't just equipment or backlog it's really the people it's the estimation discipline right when you have Construction it's all built on estimation from a financial perspective it's also a project execution um and institutional knowledge and so I think all of those aligned pretty well from an ESOP perspective and that's why I think we're seeing it grow in a construction industry, um

[3:45] And I would also just kind of add to that that I feel like I've noticed driving that Trend too is kind of the um.

[3:54] The kind of like powerful engine that an ESOP provides relative to like Workforce retention um.

[4:02] Is that something you're kind of noticing too obviously like labor shortages and that kind of. Um issue in the industry ESOP yeah we're we're a construction industry you know labor issues and shortages and so I think what I what I'm seeing, is you know any stops just not a an opportunity for the owner to leave it's also becoming a tool for labor retention right hey we're all buying it as a as a company the lower level people as well trying to keep in the key people right you want to keep them and retain them and then this is a way to do it without selling to maybe private Equity or or a competitor right it's more of an internal way to keep. So yeah I do think with the shortages we're seeing and and I think we're seeing shortages across the entire industry and elsewhere right have really been able to keep good people I think this is a tool to do that.

[4:47] You mentioned um ownerships and like the exit strategy factor of esops um.

[4:54] Do you see esops like I guess from the companies that you you've worked with are you seeing companies these companies that become esops are the owners quick to exit are they hanging around do you feel like it's kind of more of, their exit strategy to do the transaction and leave or they kind of sticking around and leveraging it as um a growth strategy.

[5:17] Yeah I I would say it varies by by company but what I I do see a lot of is that the owners are kind of sticking around I think. When you especially when you're the first generation owner and you've built the company right from the ground up it's really hard to let go of that right and I can understand that right because it's it's your baby you've built it, um but I do think it's a way of more of a growth opportunity it still allows the owner to be in, still kind of being involved right maybe there's are on the board right but they're still involved in some of the business. I rarely see you know hey Renee stop and I'm gone and the owner's kind of gone and out of it so I I do think it's more. A vehicle for the owner to still be involved but also as a growth of the companyuh you mentioned, kind of how and this seems to be common in construction companies that they're built from the ground up they're I feel like oftentimes family-owned it's very like a tight Niche um ownership and to your point it's hard to let that go what do you think are some of the challenges that the owners face when contemplating a a transition an ESOP or not um when they've kind of like had this baby their whole life yeah I think whenever we. With clients that I've worked with that have gone through it and clients that are contemplating going through and just we're talking to I think the number 1 thing is.

[6:37] What is my bench look like meaning hey do I have enough key people that I think could really. If I take if I leave or if I step out of the business do I have the right people to make sure that this business continues right because even though the owner may take out of it still hey I still want to see this company succeed and I want to make sure I've got the right people and I think there's a lot of times. Companies are a little hesitant do we have the right people in place to run this if I no longer here. Um and I think that's a real big hesitation and it and it's a it's a valid hesitation right and I think it's just making sure that they feel comfortable that I've got the people in place. Yeah I think that's huge and that's something we see a lot as well umand just.

[7:18] That kind of emphasizes for our listeners that maybe listen to our our first um. Podcast of January I guess second podcast of January that um. The idea of being prepared and thinking about your succession plan and transitioning is something to kind of start, as early as possible I'm not when you are kind of in the position where you're ready to get out. Yeah and I'll just I'll add on to that I mean whenever we get with our clients you know we have these yearly planning meetings with them and we involve our audit team and our tax team and our State team and we, there's always ask hey have you started I know it's a tough question for owners but have you started thinking about your succession planner or how have you started because I don't think there is a, a wrong time to start early like I think early the earlier the better right the worst time to me is hey I want to leave in a year and now it's a very rushed and it's a very scrambled process and it's not well thought out I think that's when these. Um whether it's an ESOP or these succession transitions that's why I think they kind of fall apart yeah.

[8:22] Are you seeing when you have these conversations just out of curiosity um are you seeing more of the responses to that kind of. Then yes I have a plan or no idea like where. I would typically see yeah I would say we see most people say okay I'll think about that next year right kick out kick and down the road and I think it's what what we try to do is really get to to Envision themselves hey 10 years from now or 15 or 5, where do you want to be right do you want to be be behind the desk or do you want to be, out fishing enjoying your life or whatever you do that enjoy your life and then let's start planning for that succession and kind of trying to get them to think ahead because I think a lot of owners. Are just thinking what am I doing next year operationally how do I get it done and not really thinking about this long-term planum. So kind of fun conversation to have you know yes pick their brains make them think a little bit do you think about something that maybe they don't want to think about um but something that's pretty pretty necessary to think about if they want to you know.

[9:26] Liquidate their business or or not just let their business kind of die when.

[9:31] When that happensum so kind of moving towards like obviously you work with construction companies but your your specialty is audit so kind of moving to like an audit perspective um. At least from our perspective as ESOP advisors what often comes up is bonding bonding is huge in the construction industry and I think. 30s and bonding agents um May kind of jump whenever their clients say that they're looking at an ESOP um.

[10:04] What is your perspective kind of what what from your standpoint changes when a company becomes an ESOP um and how do you think. The the bonding kind of weaves into all of ityeah well I think you know bonding and and we do work with a lot of different charities and bonding and you know I think if. If you have a survey that is not well-versed in what an ESOP is I think if you're going to put a lot of debt on the books right sure these are looking at working capital they're looking at your leverage and so if you have a transaction that's putting a lot of debt. It Spooks them very easily write it messes up their metrics and ratios. Um so I think 1 thing as as companies are and owners are thinking about and he's not I think you've got it involved and I call it the ecosystem of a business right you've got involved your CPAs you've got about involve bonding, your Banking and make sure everyone's on the same page and if you haven't assured me that maybe doesn't understand esops and we can help get them educated, um I think as as it gets more prevalent the shirt is in the agents are more understanding of the ESOP and the debt is but it is a little spooky for them when when the leverage goes up and uh so I think it's really important to involve, the barn in the show the early in the process and kind of get them on the same page.

[11:17] And from an audit perspective how do you think like the the reporting or the disclosures that change and like obviously the bonding agents the Shorties are looking at the financials as. As that changes um what kind of sticks out to you what are the the biggest items that are like important to look at and make sure is properly. Disclosed for the users.

[11:39] Yeah to me and even in a Noni soft world and I think it doesn't change as much I think the debt right anytime your debt The Leverage The working capital we talked about. I think what a lot of gets looked at as well as kind of how good is this company at estimating. Um and that usually comes through their jobs and when they have gains which they have profit pickups or they have losses, because what that ultimately going to do is that's going to translate the cache and you gotta have enough cash to pay down the note right from a from a financing perspective so I think those are really the big areas where if I'm a bonding agent or Surety agent I'm a bank the I'm going to look at the balance sheet how are we leveraged how's my debt house my cash flow and how are the jobs doing um because that's that's all interrelated, right I think you made a really good point about kind of.

[12:25] All of the estimates that are involved and when they're too aggressive or if they're inconsistent it can create problems um and that can, really affect the ESOP in many ways in terms of like obviously an annual evaluation is done each year to Value the stock of the company that's based on, uh the company's forecast and you know historical current performance so. Having those estimates being able to audit those and make sure that the company is is accurately estimating at least in the best way they can with the information they have um is important and kind of critical for ESOP companies. Yeah a lot of point I want to make that because you mentioned forecasts in from evaluation perspective something that's really important as your backlog right I mean that's your known known contracts and so you got to make sure, you know these work in process schedules and that's really kind of the heart of what's driving Construction that that whip schedule is in a good shape you got good backlog and your estimates are good because that's all I got to impact you know the valuation and that's so important from from an ESOP perspective for sure.

[13:30] Let's see umhow do you I guess with backlog and all of thathow do you. With your with your experience in working with construction companies are they do you feel like they have a good grasp on on projecting these things um is it inconsistent year to year, what does that look like. Yeah I think from a backlog perspective I think the the 1 thing that I see can get a little messy is kind of making sure you're identifying your change orders which you know hey I've got a base contract. I tracking those change orders making it making sure they get into the system properly so that you can show like a true backlog um and then I a lot of our companies you know for every audit we look at and and even review too which is a different level of assurance there. The estimates right that's the key thing we focus on because I think if if if you have wild estimates it's the bonding is going to get a little annoyed the valuation could be wildly different year over year right and that's gonna impact your employees and so those are all just key elements of the process.

[14:36] So kind of transitioning from from the company's audit and since I know you also have experience in this as well um.

[14:46] Maybe touch on just a little bit of what's involved with an EVP audit so that's kind ofseparate from the the company's financial statement audit um it's the employee Benefit Plan audit but obviously these are. Um these companies are subject to that if they meet certain uh requirements I guess regarding the number of participants.

[15:10] Maybe just speak a little bit on that yeah so I I got a lot of experience in EVPs this past summer uh which was a good good opportunity for me as a, as a partner I think the biggest thing the EVP you know it's still a an ESOP but that the valuation of the investment right into that ESOP is the big the biggest thing there that's typically, done by a third party that does the valuation and it's certified and that's really the big key part and then you may have, different things going on the plan just the plan rules but that valuation really becomes the heart of, the EBA EBP plan and that's where we spend our time and that's why I was going back to it's so critical to have, the good information inputs to give the valuation team so that they can get a really good valuation because that drives both from the the Share value and then also the EVP land.

[15:59] So kind of just another tidbit for those out there that um maybe are exploring esops and in the construction space you you may if you're not already um going through Audits and reviews or whatever for your company's Financial. Um that's kind of just another consideration that you'll have as an ESOP company if you have um over 100 participants I think is the kind of threshold. Yeah generally that's kind of the threshold there is around that 100 mark.

[16:27] All right so I'm moving kind of away from the audit but kind of back to the construction industry in general um.

[16:35] Maybe from what you've seen or heard with discussing, in your discussions with business owners how do you think employee ownership changes kind of the job site culture and accountability and how the employees show up day-to-day.

[16:49] Yeah I think from a culture perspective and and this is why it's so key to make sure you know you you. You understand a succession plan early do I think I've got the right culture in place before I do the ESOP right I think, because now you're giving hey every every employee has some type of ownership within the company and you got to make sure that culture is right I think if you've built the right culture then there's not a lot of change from a job site I do think it gives, the employees more hey I'm a part of the ownership of this of this company gives them a little bit more accountability right to make sure we're doing things the right way um but I think it's crucial to make sure and you feel good about the culture before you dive into it because if you've got this bad culture I don't think it's the esops going to change the culture and make it a great culture I think you've got to have that Foundation already yeah that's very true I think that's maybe, I don't even know if it's a myth but it's kind of something we like to point out to our clients is it's an ESOP is not is it's not a solution to your culture or something that can change um it of course will um Drive things forward and enhance the culture that's already there um but if you're kind of lacking that from the get-go then it's not kind of guaranteed to switch things around.

[18:01] And that's a tough part too it's hard to measure culture right and I think that's something that the owner and maybe that that senior group, maybe like yeah we've got a great culture but then really at the bottom it's not as great so that's it's tough to measure that but I think it's something you've really got to think about um when you're thinking about success in planning and Esau. Um kind of branching off of that how can, companies or or the employees who are the participants of the ESOP and understand like the ESOP and what that means to them how can they connect their day-to-day performance to the value creation of an ESOP.

[18:36] Yeah I think it's for for the employees I think they they have to the ownership team or the as we move in that Trend really really teach or kind of provide hey here's what an ESOP is right I think that's Step 1 making sure. The employees know hey you are getting get some value in this company and that means. You know for construction companies hey we can't have all of our jobs just all of a sudden go terrible right we all gave up because now we're owners in The Firm right, if if the if the company is not doing well the value of the shares of our ownership is going to go down right and I think it's educating them on, what the ESOP means to them and how their day-to-day performance whether it's a job site it's billions it's cash collections it's estimating, all of that plays into the value creation of the shares yeah I think kind of the education piece is huge which is something that. We emphasize as well for kind of like the roll out of the ESOP and communicating that to your employees making sure they understand what it means for them what it means for the company um. Sometimes it's better to stay high level rather than get into the real weeds of the the mechanics of an ESOP because we all know that's complex and can be very overwhelming um but I think to your point just making sure they understand at the bare minimum how.

[19:52] How their uh performance or how they show up to work each day can truly make an impact on what ultimately is. Their value and their retirement plan. Right and and esops are there there can be very complex and I still learn any about esops every day and so you know to your point really keeping them at that layman's terms and not trying to get too Technical and and really saying here's what your job does that provides value that ultimately is going to provide value for everybody.

[20:21] Yeah and to your point about Esau was being complex and learning about them every day it's it's so true people say like when you see when you've seen one ESOP you've seen 1 Esopus um. What maybe has surprised you the most the first time you've kind of been exposed to ESOP owned construction companies. Yeah I I will give an example and it's not technical or anything like that I was able to sit. As I first got to learn about it sit on in in a board meeting where and this had been a long-standing ESOP and and they went through.

[20:56] Every employee that has shares in the ESOP and and it's all the value that has been created for this individual and what I thought was really cool is. It's not just the upper management team that's getting all the value, it's the people in on the job sites it's the people in the manufacturing right it's really it was really eye-opening to see how if it's done and executed appropriately how it provides value for the entire organization not just. You know the the sea Suite or that level so that thought and it's you know people that have been working there for 30 years and so it's really cool to see the value that they're getting out of that and um and it's it's the people that are really doing the day-to-day jobs as well. And then anything from an audit perspective when you go into auditing the financials and and the changes that come with with the ESOP, did anything kind of stick out or surprised you or something that you had to kind of. Dig it and research more than usual yeah I think for me and not to get too technical for the listeners it was really understanding the impacts on equity and kind of how their shares get released and how that impacts Equity um you know I just I had to learn a little bit about that and making and then there's obviously the debt associated with that but that was really the big thing for me and sometimes it can be a complex Equity structure um and making sure that that kind of amortization um. Is is done appropriately that I had to kind of take a step back and and think about it and make sure I was researching it correctlyvery true.

[22:20] Let's see uh maybe without calling out specific clients but can you share some sort of success story um of a construction osob that you'd kind of from your perspective say was done well.

[22:33] Yeah and this is the 1 that I was kind of alluding to earlier with all that the value creation from for the you know the entire organization they, had started quite a bit ago on on it it's a long-standing ESOP they had really good um leadership team right that not they got the leader the ESOP, the leadership team stayed on they're able to transition I think they're on their second or third generation of leadership that has continued the momentum, um and they you know the business is doing really well the value that's being created for the employees is doing well and it's a long-standing ESOP and so it it it's a true Testament of. Over time how powerful an ESOP could be and uh that that's why when I it was really impactful for me to sit during the board meeting and kind of see over time what has the value has been created.

[23:17] Um and then it's in a very strong management team there as well yeahvery coolum.

[23:26] If you had to give someonean owner in the construction industry a piece of advice relative to what they should be doing today if they are thinking about an ESOP or exploring an ESOP um. What what would you say.

[23:41] Yeah well I think that we talked a little bit earlier but really getting having that planning kind of thought process early on in the game right you don't want to be waiting until the very end but from a construction perspective it's making sure that your work in process schedule is really there's a lot of discipline around it, discipline around the estimates discipline around the contract values right all those are going to drive ultimately the value I think you got to make sure you've got. Or start thinking about a good leadership team that can come behind you know kind of hey if you're going to pass off and do the ESOP and kind of move on that you've got a team that can still run the day-to-day without you, um and I think another big thing that is really important is cash flow right you I think you've got to be able to start. Developing a cash flow forecast so that you know that you're going to have some down the bush with a company can still pay the obligations, and make sure I have the cash flows moving appropriately because the last thing you want to do is leverage the company up with debt and the cash flow is not there to kind of, to bring it down so I think those are really like the key fundamentals from a construction perspective those to get those going right as you think about the the ESOP, yeah definitely and by doing so you're you're going to keep all parties happy you're you're you're Surety company everyone's going to be on board and support everything if, making sure you're you're on top of everything and to your point earlier kind of bringing in the entire ecosystem and all the all the players in. Early on so that no 1 is getting surprised on the day the transaction closes.

[25:08] Yeah I like to I like to say with my clients you know you got thread the needle with the bank and you got to thread the needle with the charity right you got to keep everybody happy and and everyone's got a different perspective on what they want to see and what keeps them happy and so, um and when you bring on an ESOP in that debt it kind of changes the Dynamics a little bit and so making sure you're doing everything to to keep all your ecosystem, um in place and and happy because if 1 of them is not happy that's usually a struggle so yes and knowing there's there's options to kind of make it. Um easier on the company whether that's um, the transaction is completely seller finance versus involving a bank obviously when there's a bank involved the they are um less forgiving than if there's kind of a a downturn and or a bad year um. That the seller is likely to be more flexible when it's completely seller financed um so knowing there's options there and then also knowing that you don't even um if you're just kind of looking to take some chips off the table you don't have to sell a 100% to the ESOP um. There's you can you can be partial and sell 30% or 49% if you want to maintain control. So I guess speaking of that are you do you see um.

[26:22] Your clients in the construction space doing more partials versus full or do you see a mix. Yeah I see a mix I think what I'm seeing kind of expand a little bit is, the partial right for these owners that they're not ready to give up everything just yet so they'll get you know they'll do a minority, into it so they still kind of control it and then slowly get out of the business and that you know I think that's kind of a middle ground where I don't want to completely give it control up but I don't want to completely be, 100% responsible and then I then that's a way to make sure you're bringing that new leadership team along.

[26:59] So I think kind of the last question I have for you is kind of just looking ahead into the future of the industry um obviously um, there's there's transitions I had a bus and with there being multiple options whether that's a strategic buyer or you know p is also a really big um do you expect the ESOP Trend to kind of continue within the industry to to accelerate. Yeah I think you know my client base and the construction you know a lot of the these, first time generation owners or second they're they're getting a little bit older right so now and I think this is a cross not just specific to the construction industry but, the others this this large wealth transfer from owners that's going to happen right and so I do think there's a lot of succession planning that it's going to happen and I I I do think esops if they're becoming more and more popular so I I, if I had to look in the crystal ball and uh do my own forecasting I would say that that esops are probably going to be on the Rise um so that's kind of my my forecast there yeah. That's what we like to hear um anything else that you'd like to share I think that's relevant uh regarding kind of your experience in the construction industry.

[28:08] 3 stopsno I think we covered a lot of good topics and uh you know I think when when people hear esops it can be a scary thing and I think. Um you know McKenzie your team do a great job educating people and, just hey here's what he stopped means right I'm just giving potential individuals who are thinking about ESOP. Here's the just the tools for you to think about and so I think uh the more you can get educated ESOP as a tool for succession planning it's not the only 1 um but I think that the better the better that you're equipped with knowledge of the different tools, I think that'll help you make the best decision possible great yes and that is our goal here um on our podcast is to, kind of provide an accessible and understandable resource for individuals work looking or exploring the idea of an ESOP so that is a kind of our our uh our weekly goal as we release episodes but.

[29:03] So yeah thank you so much for joining us today Joe it's great having you on and um maybe in the in the future we can pull you in for another episodeso I'm gonna go to the golf course now and work on my so I could be like Scotty Scheffler soon but no thanks for having me on and, umI really appreciate it. Awesome and thank you to our listeners um we hope you enjoy the episode feel free to share um subscribe and as always we hope you join us again next week on our podcast. Thank you.