For many business owners, succession planning involves more than maximizing sale proceeds. It's about protecting a legacy, preserving company culture and creating opportunities for the people who helped build the business. Commonwealth Electric's employee ownership journey demonstrates how an Employee Stock Ownership Plan (ESOP) and ESOP financing can align those goals while creating long-term value for owners, employees and the company itself.
An ESOP Succession Strategy Built Around Legacy
When the original owners of Commonwealth Electric Company of the Midwest began thinking about succession, they faced a question familiar to many successful business owners: How do you realize the value you’ve created without losing everything that made the company successful?
There was plenty worth preserving. Founded in 1987 and headquartered in Lincoln, Nebraska, Commonwealth Electric has grown into a major full-service electrical and low-voltage contractor serving commercial, industrial, institutional and mission-critical customers.
Today, the company operates across Nebraska, Iowa, Arizona and Utah, tackling everything from complex electrical construction and preconstruction to service, maintenance and low-voltage systems.
The company employs roughly 1,800 people and expects about $525 million in revenue this year, a dramatic increase from $120 million in annual revenue 10 years ago.
For Commonwealth’s longtime owners, however, succession wasn’t simply about monetizing what they had built. They also wanted to preserve the company’s name, culture, people and legacy. An Employee Stock Ownership Plan (ESOP) offered an answer and could be funded using ESOP financing, which can include senior bank loans, seller notes or mezzanine debt structured so the ESOP acquires shares over time.
“At the time it was a 30-year company, and they wanted a legacy and opportunity to pay it forward,” said Billy Friesen, CFO of Commonwealth Electric. “They didn’t want it to go to somebody where they lose the name, and they lose the culture and everything they’d worked 30 years to build. That’s what an ESOP can do.”
How Employee Ownership Creates Value for Employees
Commonwealth began its transition in 2017, when employees acquired 60% of the company. The remaining 40% followed in 2020, making Commonwealth 100% employee-owned.
The financial results have been remarkable, but employee ownership's most meaningful measure of success is what it has meant for Commonwealth’s people.
Approximately 375 employees currently participate in the ESOP. Friesen has seen longtime employees retire with life-changing account balances, including one employee who never earned more than high five figures in annual salary, but ultimately retired with several million dollars in his ESOP account.
The financial benefits and incentives have also changed how people think about the business.
“It takes three to five years for the employees to begin to understand what the ESOP is doing for them,” Friesen said. “That’s when you start to see the culture change and how people become more of a team and understand how their daily activity impacts what we’re trying to accomplish.”
Managing ESOP Repurchase Obligations While Planning for Growth
Success, however, creates its own financial challenges, and a good banking relationship can make all the difference.
As employees retire or leave Commonwealth, the company must repurchase their shares. Because Commonwealth’s ESOP matured unusually quickly and its share value has grown significantly, those obligations have become an important part of the company’s capital planning. Commonwealth expects to spend between $30 million and $35 million on share repurchases this year alone.
Friesen said working with FNBO has illustrated the value of a bank that understands ESOP financials and provides ESOP advisory services.
Commonwealth moved its banking relationship to FNBO in 2019. Friesen said the bank understood from the beginning how an ESOP can temporarily affect a company’s balance sheet.
Today, FNBO is helping Commonwealth evaluate its debt capacity so significant repurchase obligations don’t interfere with another important objective: continued growth through acquisition. In ESOP financing, common loan structures include senior secured bank debt to fund an Employee Stock Ownership Plan (ESOP) purchase, seller financing via subordinated notes and mezzanine capital; companies fund an employee stock ownership plan using these layers and repay with pretax dollars, benefiting from ESOP tax advantages such as deductible contributions and potential S-corp tax pass-through benefits.
“They said, ‘We’re 100% behind Commonwealth,’” said Friesen. “‘We don’t want you guys to put M&A on the back burner because of what you’re doing with your repurchase obligations. We’re going to be there. We’re going to help you.’”
Using Employee Ownership to Support Continued Growth
That growth matters because Commonwealth operates much like a public company in one key way: leadership continually looks for opportunities to create additional value for its employee shareholders.
Acquisitions are an important part of that strategy. Commonwealth can acquire strong businesses whose owners care about legacy and employee opportunity, then provide the capital and resources to help them grow.
For example, one family-owned company Commonwealth recently acquired in Utah had reached about $25 million in annual revenue and was struggling to move beyond that level. With Commonwealth’s systems and balance sheet behind it, the business expects to generate more than $40 million this year.
Friesen points to the positive results and alignment an ESOP naturally generates for all stakeholders, including customers, partners and employees. Using ESOP financing can offer advantages such as leveraging ESOP tax advantages to reduce effective borrowing costs and align employees with performance, though risks include debt service burdens, covenant constraints and repurchase obligations that require careful planning.
“Your focus is obviously on doing good work for customers and building a healthy, sustainable business, which also enhances the share price,” said Friesen. “Commonwealth’s ESOP has rewarded hundreds of employees with a personal stake in its future, and the opportunity to build meaningful wealth of their own. As Commonwealth grows, we all grow.”
Commonwealth Electric's experience highlights how the right ownership transition strategy can create benefits that extend well beyond the transaction itself. For business owners exploring succession planning options, an ESOP may offer a unique way to preserve your legacy, reward employees and position the company for future growth.
Learn more about ESOP financing, ESOP tax advantages, ESOP advisory services and more at fnbo.com/esop or connect with an ESOP specialist to discuss your goals.
