ESOP

The pandemic, followed by the twin forces of inflation and recession, have generated a lot of financial uncertainty over the past few years. Through it all, 20/20 Plumbing & Heating. Inc. has continued to thrive, in part, because of our strategic positioning as an ESOP. An ESOP, or Employee Stock Ownership Plan, is an employee benefit plan that gives workers ownership interest in the company via shares of stock.

ESOPs also give the sponsoring company and its participants certain tax benefits that employers can use as a corporate finance strategy to align the interests of their employees and shareholders. This lends solidity to a company and ensures a productive future for its employees.

The cost of capital has spiked considerably since the start of 2022, when a business could expect to borrow at somewhere between 4-5% from a commercial bank. Now, borrowing costs are set at 7-8% or even higher. Concurrently, underwriting by lenders is more stringent as they are deploying capital at higher interest rates while trying to hedge against elevated risk.

Many economists are projecting that the rate environment will remain relatively high for the next few years, with sustained borrowing rates in the mid-to-high single digits until mid-2026.

The financial advantages of an ESOP help to mitigate the effects of the current financial environment. According to Forbes, many commercial banks have recently established dedicated ESOP lending groups, signaling “an increased understanding of the ESOP structure’s benefits in terms of lower leverage and greater business stability as well as their heightened commitment to financing ESOPs.”

Nonbank lenders are also demonstrating a willingness to provide capital directly to ESOPs. ESOPs are an attractive alternative to more highly leveraged companies, giving nonbank lenders a way of diversifying their loan portfolios with more stability. 

ESOP’s significant tax benefits become especially attractive when interest rates are high. Depending on how the ESOP is structured, a portion — and, in some cases, all — of a company’s earnings are tax-exempt, enhancing a borrower’s ability to service debt.

Greater financial stability is just one of the things that makes an ESOP a desirable choice for employees. The structure of its retirement benefits makes an ESOP highly desirable. While ESOPs are a form of qualified benefit plan, comparable to a 401(k), an advantage over traditional retirement plans is that employees don’t contribute their own funds toward the retirement plan. Contributions come from the employer, and employees accumulate the savings on a vesting schedule.

Job security is yet another big plus to working with an ESOP. During times of crisis, like those we’ve seen in recent years, employees at private and publicly held companies experience much higher rates of layoffs compared to employees of ESOPs. One reason for this is that future sustainability of the company is especially important to ESOPs, and with a stronger culture comes the ability to band together and push through hard times.

Employees of ESOPs also tend to feel more committed to their company due to the satisfaction they derive from their work. Having a stake in the company’s performance and profits creates an elevated sense of responsibility for the company and motivates them to do what’s best for the organization. Being able to participate in company decision making keeps people engaged and loyal.

Even in today’s challenging environment of soaring prices and high interest rates, our ESOP is benefiting our company and its shareholders, ensuring that we can continue taking good care of our customers and community!

20/20 Plumbing & Heating is proud to be a 100% employee-owned ESOP. We love our jobs, and we stand together to deliver service with uncompromising ethics, professionalism and accountability. As a result, we have been an industry leader in California and Nevada since 2015, known for delivering reliable, state-of-the-art service to single-family, multi-family, commercial, rehabilitation and hospitality projects.