Valuation is ultimately about future cash flow, risk, and predictability.
In the architecture, engineering, and construction (AEC) sector, recent data shows a consistent trend:
ESOP companies are outperforming their non-ESOP peers on valuation.
In this episode of ESOP Radio, Trevor Gilmore and Ben Spadt break down the key drivers behind that valuation gap—and what it means for business owners evaluating succession options.
Why It Matters
For owners in AEC and similar project-based industries, valuation isn’t just theoretical—it directly impacts:
- Exit value and liquidity
- Internal ownership transitions
- Long-term company strategy
- Risk and sustainability of the business
Understanding how ESOP structures influence valuation can materially change how owners approach succession.
Key Valuation Drivers Behind ESOP Performance
1. Revenue-Based Valuation Premium
ESOP companies are often valued at a meaningful premium relative to revenue—in some cases around 25% higher for comparable firms.
This reflects stronger fundamentals, more disciplined operations, and improved forward visibility.
2. Backlog as a Forward-Looking Asset
In AEC, backlog is one of the most important valuation drivers.
- ESOP companies tend to maintain stronger, more predictable backlog
- Backlog represents future revenue already secured
- Independent valuations give greater weight to this forward visibility
As discussed in the episode, backlog is not just a metric—it’s a proxy for future earnings quality.
3. Tax Efficiency and Cash Flow Expansion
A 100% S-Corporation ESOP can operate effectively tax-free at the federal level, which has a direct impact on value:
- More cash retained in the business
- Greater ability to service transaction debt
- Higher long-term equity value
This structural advantage is one of the most underappreciated drivers of ESOP valuation.
4. EBITDA Multiples and Risk-Based Pricing
Valuation ultimately ties back to EBITDA and the capitalization rate (cap rate).
- Lower perceived risk → lower cap rate → higher multiple
- ESOP companies often demonstrate:
- More stable earnings
- Better governance
- Stronger internal alignment
The result: higher EBITDA multiples relative to peers
5. Lower Risk Profile Through Employee Ownership
One of the most important (and often overlooked) factors:
Predictability reduces risk.
ESOP companies benefit from:
- Broad employee ownership (“skin in the game”)
- Improved retention
- More consistent execution
- Internal market for shares (no reliance on external buyers)
These factors contribute to a lower overall risk profile, which directly increases valuation.
A Practical Example
In the episode, the team discusses a real scenario:
- Internal valuation: ~4.5x EBITDA
- Market-based valuation: closer to ~7x
That gap can materially impact an owner’s outcome—and highlights why structure matters.
🎙️ Listen to the Episode
Video Transcript
Chapter 1: Introduction: ESOP Valuation Trends in AEC
4 seconds
Hey, everyone, welcome to ESOP Radio.6 seconds
Today we’re doing a deep dive on the 2026 valuation trends of AEC companies. And by AEC,13 seconds
I mean architecture, engineering and construction.20 seconds
According to a recent survey by Zweig, esops are outshining their non Esop counterparts on valuation and by pretty far in valuation,29 seconds
Esop valuations are often higher than other valuations internal, for instance,Chapter 2: Why ESOP Companies Are Outperforming
34 seconds
which a lot of these companies rely on because they are fair market value based and an independent appraiser takes that into account.42 seconds
So you have to include key drivers such as backlog,46 seconds
profit per employee, market EBITDA multiples,49 seconds
strength of the balance sheet and company risk.52 seconds
And this might be one of the key reasons why this would be Delta here.55 seconds
We noticed five key metrics that are driving Esop and non-ESOP valuations. I’m Trevor Gilmore, CEO of Menke.1 minute, 3 seconds
And I’m Ben Spadt investment banking with Menke. Let’s dive in Ben.1 minute, 7 seconds
What are those five key metrics that are enabling Esops to lead the pack in valuation? Sure. Number one is, you know,Chapter 3: Metric 1: Revenue-Based Valuation Premium (~25%)
1 minute, 15 seconds
the company valuation divided by net service revenue. So value over service revenue.1 minute, 20 seconds
And we see that there’s you know about a 25% premium for Esop companies.1 minute, 25 seconds
And that means that these values tend to be higher for the same level of revenue company.1 minute, 31 seconds
And if you think a company does $10 million in revenue,1 minute, 34 seconds
that is an Esop and a company that does $10 million in revenue, that is not an Esop,1 minute, 39 seconds
that Esop company is going to be valued 25% higher. That’s pretty meaningful upgrade there.1 minute, 46 seconds
You know, in valuation premium 25%. Absolutely.1 minute, 50 seconds
And I think you alluded to it a little bit in the intro that,1 minute, 53 seconds
you know, these Esop companies have to have an independent valuation. It’s not just a buy sell agreement.1 minute, 57 seconds
It’s not a business broker that is using some rule of thumb method that is determining this value and that there are2 minutes, 5 seconds
metrics and elements that go into this that take in not only the health of the company as far as the financial statements go,2 minutes, 12 seconds
but what is the industry at large doing? What is the economy, both local and nationally doing?2 minutes, 18 seconds
And I think a lot of that plays into this increase that we’re seeing. And I think,2 minutes, 24 seconds
you know, another element you hit on was the backlog component.2 minutes, 28 seconds
And do you want to talk more about that Trevor. Yeah, absolutely.Chapter 4: Metric 2: Backlog as a Driver of Value
2 minutes, 30 seconds
So we’d tell this to our clients all the time who are in the ATC category,2 minutes, 35 seconds
a big part of your value for Esop purposes or even in the open market or any sub as a fair market value.2 minutes, 40 seconds
Valuation is your backlog and you need to know it,2 minutes, 43 seconds
have great insight into what it is and really maintain that backlog as well.2 minutes, 48 seconds
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,2 minutes, 58 seconds
is 1.22 to X, you know, it’s 1.22 times. That means, hey,3 minutes, 3 seconds
if your backlog is 10 million and the value for Esop purposes,3 minutes, 7 seconds
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.3 minutes, 16 seconds
So what that tells us is is Esop companies have a valuation of roughly X on that metric compared to the non companies.3 minutes, 25 seconds
That’s huge.3 minutes, 26 seconds
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.3 minutes, 34 seconds
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.3 minutes, 38 seconds
So this shows that these valuations are getting credit for that.3 minutes, 42 seconds
Whereas these other valuations in the survey non Esop purposes you know it could be as you mentioned earlier internal buy sell you know3 minutes, 50 seconds
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.3 minutes, 57 seconds
And I think not just leaving money on the table,4 minutes, 1 second
but it alludes to the fact that these Esop companies do have a stronger forward visibility.4 minutes, 5 seconds
They are understanding the projects that they have in front of them a lot better.4 minutes, 10 seconds
What their cash conversion cycle is might be understood a little better,4 minutes, 14 seconds
or might be a little tighter than those that don’t. And I don’t think it’s a, a factor.4 minutes, 21 seconds
An Esop company is not going to create this strong forward visibility,4 minutes, 26 seconds
but it’s one piece of the puzzle that we always allude to. You know,4 minutes, 28 seconds
we talk about culture that an Esop company is not going to create this culture, but in tandem,Chapter 5: Why Backlog Reflects Future Earnings
4 minutes, 34 seconds
that strong forward visibility and being an Esop company is huge.4 minutes, 39 seconds
And when those backlogs are well understood and well accounted for, you’re going to understand4 minutes, 47 seconds
how you can make a reliable income stream.4 minutes, 50 seconds
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,4 minutes, 59 seconds
but that backlog and we harp on it all the time and then, you know,5 minutes, 3 seconds
understanding that and having those cash flows come to the bottom line. We then hit you know, Uncle Sam Tax.Chapter 6: Metric 3: Tax Advantages of S-Corp ESOPs
5 minutes, 10 seconds
And a lot of these non Esop companies have to pay the piper in terms of tax.5 minutes, 15 seconds
But if we have 100% S Corp owned or Esop owned S Corp then essentially we’re not paying any tax.5 minutes, 21 seconds
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,5 minutes, 29 seconds
which means a higher valuation on not only the revenue but the backlog like we talked about. Absolutely. And the third point,5 minutes, 36 seconds
their key metric here is the tax savings.5 minutes, 39 seconds
So s Corporation owned completely by its Esop does not need to make tax distributions.5 minutes, 45 seconds
It operates tax free. So cash flow savings happen.5 minutes, 50 seconds
You know those on the cash flow statement balance sheet etc..5 minutes, 53 seconds
You don’t need to distribute cash and pay tax.5 minutes, 55 seconds
Huge multiply that you know over how many years you know and so on. And it becomes a, you know,6 minutes, 2 seconds
a good driver there for value because your cash is going to increase all things equal. Yeah. So that is the third metric there.6 minutes, 9 seconds
So never underestimate the power of that’s corp Esop tax shield.6 minutes, 13 seconds
And I will note here for anyone well-versed in valuations of course a fair market value always does impute tax right.6 minutes, 20 seconds
You know you always say hey the hypothetical buyer is a C corp.6 minutes, 24 seconds
So you’re not just going to put zero in that tax rate. You’re going to put this in corporate.6 minutes, 28 seconds
But the company is still going to have more cash,Chapter 7: How Tax Savings Increase Cash Flow
6 minutes, 31 seconds
which means the valuation which takes into account excess assets excess cash minus long term debt.6 minutes, 37 seconds
You know the cash part is going to be higher. So we’re seeing that in this data.6 minutes, 41 seconds
The fourth data point which I think this rings true for everyone talking about value is EBITDA. What is your EBITDA multiple.6 minutes, 49 seconds
And then define what EBITDA is as a favorite corporate buzzword. EBITDA.6 minutes, 55 seconds
And you know it comes back to accounting one a 101. Both you and I are CPAs.6 minutes, 59 seconds
And this is sort of etched into our brains now. But that’s earnings.7 minutes, 4 seconds
That’s the E before interest taxes depreciation and amortization.7 minutes, 9 seconds
And so all of these things that either are not cash like depreciation and amortization, no cash moves hands in terms of that.7 minutes, 17 seconds
And then interest in taxes.7 minutes, 19 seconds
Different strategies will be put in place by different owners.7 minutes, 22 seconds
And so we need to understand what are the cash flows before those choices. You know,7 minutes, 27 seconds
am I going to take on debt where I have to pay interest? Me as an owner?Chapter 8: Metric 4: EBITDA and Valuation Multiples
7 minutes, 31 seconds
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,7 minutes, 39 seconds
you may be taxed at a different rate. I may be taxed at a different rate.7 minutes, 42 seconds
We could live in different states that have different tax rates. So just for ease of use,7 minutes, 47 seconds
it’s earnings before income or before interest taxes depreciation and amortization. And yeah. All right. Go ahead.7 minutes, 54 seconds
That helps the value drive value with that cap rate. And you want to talk more about that. Yeah. So Ebit a multiple.8 minutes
And you know you talk about Ebit or multiples.8 minutes, 3 seconds
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.8 minutes, 9 seconds
But the Ebit multiple is really driven by the cap rate. And that’s where you get the numbers.8 minutes, 13 seconds
So the cap rate is a percentage and it is calculated by the independent appraiser.8 minutes, 19 seconds
And they have to take into account current economic metrics such as the risk free rate of return, industry specific risk in your industry,8 minutes, 27 seconds
whole databases out there that you can pull data to get that number. Company specific risk is also included.Chapter 9: Understanding Cap Rates and Risk
8 minutes, 34 seconds
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,8 minutes, 41 seconds
that’s what makes up your cap rate to, let’s just say, your cap rates 20%. That means your EBITDA multiple is five.8 minutes, 49 seconds
So one divided by 20% equals five.8 minutes, 52 seconds
That’s where the EBITDA multiple comes from. We’re seeing here is Esop.8 minutes, 56 seconds
Companies in this survey have higher EBITDA multiples compared to their non Esop peers.9 minutes, 2 seconds
And again you know Trevor I think that alludes to both a buy sell agreement.9 minutes, 6 seconds
We’re not taking into consideration any cap rate or anything like that.9 minutes, 9 seconds
So your multiples going to be somewhere across the board. But we don’t know where.9 minutes, 13 seconds
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%9 minutes, 20 seconds
in order to make this investment make sense.9 minutes, 21 seconds
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.9 minutes, 29 seconds
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.9 minutes, 38 seconds
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.9 minutes, 46 seconds
And that’s the that’s what that rate is.9 minutes, 49 seconds
Hey, what would a hypothetical investor require as a rate of return to invest in this business? You know,9 minutes, 56 seconds
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.Chapter 10: Why ESOPs Achieve Higher Multiples
10 minutes, 6 seconds
These cap rates are going to be much higher, right, for small businesses. So it’s going to be something higher.10 minutes, 11 seconds
So it takes into account everything that we describe a company’s risk in the future.10 minutes, 14 seconds
Current economic trends can invest the money and actually get a risk free return and so on. Right.10 minutes, 20 seconds
Lastly, the fifth metric that really drives these higher is valuations.10 minutes, 26 seconds
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.Chapter 11: Metric 5: Lower Risk Profile and Predictability
10 minutes, 36 seconds
Yeah you’re absolutely right. And it’s all boiled down to this.10 minutes, 39 seconds
You know we have an internal market for these shares.10 minutes, 42 seconds
So I don’t have to find somebody to buy them. You know the buyer is not hypothetical.10 minutes, 47 seconds
And therefore we don’t have to depend on what an outside investor would demand for a return.10 minutes, 53 seconds
We have one that’s established in this market.10 minutes, 55 seconds
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.11 minutes, 2 seconds
We hammer on that a lot and it keeps growing.11 minutes, 5 seconds
My account balance keeps growing and predictability in your staff, predictability in your backlog,11 minutes, 12 seconds
predictability in your earnings.11 minutes, 14 seconds
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.11 minutes, 23 seconds
You know that’s that’s what we’re all looking for right is predictability. Great point there.11 minutes, 27 seconds
So in summary the survey proves out the notion that Esop valuations outshine their 90 stock peers. And in some metrics by quite far.Chapter 12: Real-World Example: 4.5x vs 7x Valuation Gap
11 minutes, 35 seconds
And just a data point here.11 minutes, 37 seconds
I was talking with an engineering firm recently whose internal valuation is 4.5 times EBITDA.11 minutes, 44 seconds
Yet the market multiple for them is closer to seven x, so seven times.11 minutes, 47 seconds
So we’re talking about a 2.5 multiple difference huge difference there.11 minutes, 51 seconds
Those differences can make the Esop very interesting.11 minutes, 54 seconds
And that engineering owner said hey well okay. But how can this whole thing work? You know,12 minutes, 1 second
because right now we’re buying people out using cash flows of 4.5.12 minutes, 5 seconds
You say we can go Esop and maybe the value is closer to seven for us. How can it cash flow.12 minutes, 11 seconds
And the answer is well you’re not going to be paying tax.12 minutes, 14 seconds
You know you’re not you’re not distributing 40% of the earnings or 50%12 minutes, 17 seconds
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,12 minutes, 26 seconds
you know, or one way that, just at a high level,12 minutes, 29 seconds
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.Chapter 13: How ESOPs Still Work from a Cash Flow Perspective
12 minutes, 36 seconds
And I think, you know, we get down to it where when you’re on the golf course,12 minutes, 40 seconds
there’s one price that you’re going to talk about, oh, my company’s worth.12 minutes, 43 seconds
You know, $5 million, $10 million whatever, or five x this, ten x this.12 minutes, 48 seconds
And you had a great LinkedIn post where you talk about ten x what?12 minutes, 51 seconds
And we talk about it on another Esop radio episode. And we, as you know,12 minutes, 55 seconds
your advisors in this journey can help guide you to understanding what we’re talking about when we talk about multiples,13 minutes, 1 second
when we talk about discount rates, things like that. And, yeah, I,13 minutes, 6 seconds
I think that this is very telling of how strong Esop companies can be and how much more predictable they are,13 minutes, 13 seconds
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.13 minutes, 20 seconds
We love talking valuation.13 minutes, 22 seconds
Both Ben and I valuation credentials talk about this stuff all day long with our clients and our prospects.13 minutes, 28 seconds
Our Esop fit tells you which direction is right for you.Chapter 14: Final Thoughts: Why ESOPs Are Gaining Momentum
13 minutes, 31 seconds
Please shoot us a note or connect with us on LinkedIn,13 minutes, 34 seconds
Spotify, Apple, YouTube or Menke.com Have an awesome day everyone! Take care. Thanks and goodbye.Planning an Exit in the Next 1–5 Years?
If you’re evaluating succession options in the next 1–5 years, an ESOP may offer:
- Liquidity and control flexibility
- Tax-efficient transaction structure
- Long-term ownership continuity
About ESOP Radio
ESOP Radio is the official ESOP podcast from Menke — where real stories of growth, succession, and long-term wealth building are told.
Hosted by Trevor Gilmore and Ben Spadt, the show features conversations and educational episodes designed to help business owners better understand employee ownership.
Disclaimer
This podcast is provided for educational purposes only and does not constitute legal, tax, investment, or fiduciary advice.
Phil DeDominicis is an ESOP strategist and M&A advisor who has guided 300+ companies through ESOP formations, financing, and transactions over 20+ years at Menke & Associates. He specializes in selling ESOP‑owned businesses to financial or strategic buyers and in helping ESOP companies acquire other businesses.
