Why ESOP Companies Command Higher Valuations in AEC

AEC firms—architecture, engineering, and construction—are seeing a clear trend:

ESOP companies are outperforming their peers on valuation.

In this episode, Trevor Gilmore and Ben Spadt break down the 2026 data and explain why ESOP-owned companies are commanding higher valuations—and what that means for owners considering succession.

In this episode:

•  Why ESOP companies see ~25% higher value relative to revenue 
•  How backlog drives forward-looking valuation 
•  The impact of S-Corp ESOP tax advantages on cash flow and value 
•  How EBITDA multiples and cap rates are actually determined 
•  Why ESOP companies often carry a lower risk profile 

This is a practical, data-backed look at valuation—not theory—and why many AEC firms are rethinking how they approach ownership and exit planning.

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Transcript

0:04

Hey, everyone, welcome to ESOP Radio. Today we're doing a deep dive on the 2026 valuation trends of AEC companies. And by AEC, I mean architecture, engineering and construction. According to a recent survey by Zweig, esops are outshining their non Esop counterparts on valuation and by pretty far in valuation, Esop valuations are often higher than other valuations internal, for instance, which a lot of these companies rely on because they are fair market value based and an independent appraiser takes that into account. So you have to include key drivers such as backlog, profit per employee, market EBITDA multiples, strength of the balance sheet and company risk. And this might be one of the key reasons why this would be Delta here. We noticed five key metrics that are driving Esop and non-ESOP valuations. I'm Trevor Gilmore, CEO of Menke. And I'm Ben Spadt investment banking with Menke. Let's dive in Ben. What are those five key metrics that are enabling Esops to lead the pack in valuation? Sure. Number one is, you know, the company valuation divided by net service revenue. So value over service revenue. And we see that there's you know about a 25% premium for Esop companies. And that means that these values tend to be higher for the same level of revenue company. And if you think a company does$10 million in revenue, that is an Esop and a company that does $10 million in revenue, that is not an Esop, that Esop company is going to be valued 25% higher. That's pretty meaningful upgrade there. You know, in valuation premium 25%. Absolutely. And I think you alluded to it a little bit in the intro that, you know, these Esop companies have to have an independent valuation. It's not just a buy sell agreement. It's not a business broker that is using some rule of thumb method that is determining this value and that there are metrics and elements that go into this that take in not only the health of the company as far as the financial statements go, but what is the industry at large doing? What is the economy, both local and nationally doing? And I think a lot of that plays into this increase that we're seeing. And I think, you know, another element you hit on was the backlog component. And do you want to talk more about that Trevor. Yeah, absolutely. So we'd tell this to our clients all the time who are in the ATC category, a big part of your value for Esop purposes or even in the open market or any sub as a fair market value. Valuation is your backlog and you need to know it, have great insight into what it is and really maintain that backlog as well. One of the key metrics that we noticed in this valuation survey is that, esops valuation per a backlog and this is a multiple here, is 1.22 to X, you know, it's 1.22 times. That means, hey, if your backlog is 10 million and the value for Esop purposes, using this metric is going to be 10 million times 1.22, that's meaningful. Compare that to the non counterparts. That's only 0.63 multiple. So what that tells us is is Esop companies have a valuation of roughly X on that metric compared to the non companies. That's huge. And you know you think okay if I'm an appraiser going in valuing this company for fair market value purposes, the backlog is the story of the future. And that's what I'm buying. I'm not I don't want to buy in the past. You know, I want to buy the future. Right. So this shows that these valuations are getting credit for that. Whereas these other valuations in the survey non Esop purposes you know it could be as you mentioned earlier internal buy sell you know and and so on are not taking that into account. So actually relying on that for an exit. You could be leaving money on the table. Absolutely. And I think not just leaving money on the table, but it alludes to the fact that these Esop companies do have a stronger forward visibility. They are understanding the projects that they have in front of them a lot better. What their cash conversion cycle is might be understood a little better, or might be a little tighter than those that don't. And I don't think it's a, a factor. An Esop company is not going to create this strong forward visibility, but it's one piece of the puzzle that we always allude to. You know, we talk about culture that an Esop company is not going to create this culture, but in tandem, that strong forward visibility and being an Esop company is huge. And when those backlogs are well understood and well accounted for, you're going to understand how you can make a reliable income stream. And that reliable income stream is the thing that is taken against a multiple to determine company value. So, I mean, it's pretty simplistic, but that backlog and we harp on it all the time and then, you know, understanding that and having those cash flows come to the bottom line. We then hit you know, Uncle Sam Tax. And a lot of these non Esop companies have to pay the piper in terms of tax. But if we have 100% S Corp owned or Esop owned S Corp then essentially we're not paying any tax. There's this huge tax shield by implementing an Esop and having essentially like I said, a tax free entity, which means higher cash flow, which means a higher valuation on not only the revenue but the backlog like we talked about. Absolutely. And the third point, their key metric here is the tax savings. So s Corporation owned completely by its Esop does not need to make tax distributions. It operates tax free. So cash flow savings happen. You know those on the cash flow statement balance sheet etc.. You don't need to distribute cash and pay tax. Huge multiply that you know over how many years you know and so on. And it becomes a, you know, a good driver there for value because your cash is going to increase all things equal. Yeah. So that is the third metric there. So never underestimate the power of that's corp Esop tax shield. And I will note here for anyone well-versed in valuations of course a fair market value always does impute tax right. You know you always say hey the hypothetical buyer is a C corp. So you're not just going to put zero in that tax rate. You're going to put this in corporate. But the company is still going to have more cash, which means the valuation which takes into account excess assets excess cash minus long term debt. You know the cash part is going to be higher. So we're seeing that in this data. The fourth data point which I think this rings true for everyone talking about value is EBITDA. What is your EBITDA multiple. And then define what EBITDA is as a favorite corporate buzzword. EBITDA. And you know it comes back to accounting one a 101. Both you and I are CPAs. And this is sort of etched into our brains now. But that's earnings. That's the E before interest taxes depreciation and amortization. And so all of these things that either are not cash like depreciation and amortization, no cash moves hands in terms of that. And then interest in taxes. Different strategies will be put in place by different owners. And so we need to understand what are the cash flows before those choices. You know, am I going to take on debt where I have to pay interest? Me as an owner? We'll have a different opinion than you, Trevor, as an owner of this business. So let's eliminate that and then taxes. If it's an s-corp, you may be taxed at a different rate. I may be taxed at a different rate. We could live in different states that have different tax rates. So just for ease of use, it's earnings before income or before interest taxes depreciation and amortization. And yeah. All right. Go ahead. That helps the value drive value with that cap rate. And you want to talk more about that. Yeah. So Ebit a multiple. And you know you talk about Ebit or multiples. And you never really talk about the cap rate. You say it's five times it's seven. It's ten you know and so on. But the Ebit multiple is really driven by the cap rate. And that's where you get the numbers. So the cap rate is a percentage and it is calculated by the independent appraiser. And they have to take into account current economic metrics such as the risk free rate of return, industry specific risk in your industry, whole databases out there that you can pull data to get that number. Company specific risk is also included. Smaller companies have higher risk, larger ones don't you know. And that's in a nutshell. There's more that goes into it. But at a very high level, that's what makes up your cap rate to, let's just say, your cap rates 20%. That means your EBITDA multiple is five. So one divided by 20% equals five. That's where the EBITDA multiple comes from. We're seeing here is Esop. Companies in this survey have higher EBITDA multiples compared to their non Esop peers. And again you know Trevor I think that alludes to both a buy sell agreement. We're not taking into consideration any cap rate or anything like that. So your multiples going to be somewhere across the board. But we don't know where. And then if you deal with like a traditional business broker they're going to say, well I need a cap rate of 2,530% in order to make this investment make sense. And they're just going to apply a blanket cap rate they're not going to look at, like you alluded to, that industry specific risk, company specific risk. What is a buyer that wants a risk free investment. What do I need as a return. And so we got to add that into it. But I think you're absolutely right. We're taking a more critical look at what kind of a return do I need as just an investor in a company. This company. Exactly. And that's the that's what that rate is. Hey, what would a hypothetical investor require as a rate of return to invest in this business? You know, and it's more often than not it's much higher than Prime. It's going to be a prime right now, 6.75% as of, 26, 2026. These cap rates are going to be much higher, right, for small businesses. So it's going to be something higher. So it takes into account everything that we describe a company's risk in the future. Current economic trends can invest the money and actually get a risk free return and so on. Right. Lastly, the fifth metric that really drives these higher is valuations. And again this comes into play in the cap rate and so on is the lower risk profile that is that companies have compared to their non Esop peers. Yeah you're absolutely right. And it's all boiled down to this. You know we have an internal market for these shares. So I don't have to find somebody to buy them. You know the buyer is not hypothetical. And therefore we don't have to depend on what an outside investor would demand for a return. We have one that's established in this market. And then that broad employee ownership means the employees are going to stay with the company because they can see I've got skin in the game. We hammer on that a lot and it keeps growing. My account balance keeps growing and predictability in your staff, predictability in your backlog, predictability in your earnings. All of those things become evident and lead to a lower risk profile. So predictability is the key here. You know, a lower risk profile. You know that's that's what we're all looking for right is predictability. Great point there. So in summary the survey proves out the notion that Esop valuations outshine their 90 stock peers. And in some metrics by quite far. And just a data point here. I was talking with an engineering firm recently whose internal valuation is 4.5 times EBITDA. Yet the market multiple for them is closer to seven x, so seven times. So we're talking about a 2.5 multiple difference huge difference there. Those differences can make the Esop very interesting. And that engineering owner said hey well okay. But how can this whole thing work? You know, because right now we're buying people out using cash flows of 4.5. You say we can go Esop and maybe the value is closer to seven for us. How can it cash flow. And the answer is well you're not going to be paying tax. You know you're not you're not distributing 40% of the earnings or 50% if you're in a high tax state to cover those annual tax payments that all those as corp came on, shareholders need to make each year. So that's one reason, you know, or one way that, just at a high level, how this whole thing works on the cash flow perspective here. Then before we wrap this up, any parting comments? No, I think you're right. And I think, you know, we get down to it where when you're on the golf course, there's one price that you're going to talk about, oh, my company's worth. You know, $5 million, $10 million whatever, or five x this, ten x this. And you had a great LinkedIn post where you talk about ten x what? And we talk about it on another Esop radio episode. And we, as you know, your advisors in this journey can help guide you to understanding what we're talking about when we talk about multiples, when we talk about discount rates, things like that. And, yeah, I, I think that this is very telling of how strong Esop companies can be and how much more predictable they are, how much more reasonable they are in terms of an investment. Thanks, Ben. Thanks, everyone, for joining us today. If you're curious to learn more, reach out. We love talking valuation. Both Ben and I valuation credentials talk about this stuff all day long with our clients and our prospects. Our Esop fit tells you which direction is right for you. Please shoot us a note or connect with us on LinkedIn, Spotify, Apple, YouTube or Menke.com Have an awesome day everyone! Take care. Thanks and goodbye.