Providence Engineering Sells Business to Employees
The Lancaster-based engineering firm creates an ESOP to ensure its legacy
LANCASTER, PA – The employees knew something was up. The boss was off script. But they weren’t expecting what came next.
Typically the meeting is fairly predictable when the 75 employees of Providence Engineering come together from across its seven offices in Pennsylvania. David Bernhardt, the company’s president, goes over standard performance indicators, welcomes new employees and points out important events coming up. But on Oct. 6 at the Sheraton ballroom in Harrisburg, Bernhardt outlined five key dates in the company’s history.
He began in 1992 when Dan Fichtner founded Providence Engineering in the basement of his home in Providence Township, Pennsylvania and walked his audience up to the present. In all examples, he highlighted dates that were significant not only to the long term success but also to the long term stability of the firm. “And that brings us to today,” he said. “The fifth important date for Providence Engineering is today when I announce that we sold the company.” The entire room fell silent.
“We sold the company to you,” Bernhardt said. “Today, Providence Engineering is 100 percent employee-owned through an ESOP.” Brett Smith, Providence’s marketing manager who was in the audience, said the reaction was a mix of relief and head-scratching.
Bernhardt went on to explain there are currently more than 300 employee-owned companies in Pennsylvania, employing over 306,000 people. They include Sheetz, Urban Engineers, Pennoni Engineering, TRIAD Engineering, RETTEW, Commonwealth Fire Protection and Voodoo Brewery. Nationally, 5,000 other companies have ESOPs.
Engineering firms are commonly enticed by Employee Stock Ownership Plans (ESOPs)
for several reasons according to Kevin McPhillips, executive director of the Pennsylvania Center of Employee Ownership. “Engineering firms are typically successful because of a longstanding reputation they build over decades. ESOPs help retain that legacy, keep employees, and ensure its future in Pennsylvania,” McPhillips said.
For example, if Providence sold to private equity, they may look to reduce overhead and if it sold to a competitor, they may have a different culture or move the business to the detriment of current employees. ESOPs create a flexible path to transition ownership at fair market value while preserving the legacy, mission and culture of the business.
If you ask Bernhardt, that is exactly why Providence is now an ESOP. “The ESOP allows Providence to remain Providence,” he said. While Bernhardt, who is still young at 52 years old, has no immediate plans of retiring, he said succession planning was not something he wanted to sneak up on him. “I didn’t want to wake up years from now and have this panic about what was going to happen with the company,” he said.
Bernhardt said he saw other business leaders wait too long to tackle the challenge of transition and he did not want to end up having that happen to Providence. His predecessors, Dan Fichtner and Mark Ritchie, proactively focused on Providence Engineering’s transition, and he wanted to do the same.
Helping navigate Providence through the transition was Dan Zugell, Director at Business Transition Advisors, Inc. (BTA) in Pittsburgh and a team of specialists. “I started working with Providence last year and, aside from working entirely remote, it was a pretty straightforward process,” he said. “David and Mark’s desire to make sure their employees had an optimistic and financially beneficial future with the firm was evident from the start.”
In the case of Providence, the company took out a loan to buy the shares from the previous owners and shareholders, then it divided the shares among the employees, who pay nothing for their shares. And one of the extraordinary benefits of an ESOP is that it creates a tax-free company. There is no other program in the tax code like it. To incentivize more ESOPs, the federal government and the State of Pennsylvania do not tax the profits of ESOPs and the tax savings are used to pay off the loan. Once the loan is paid off, ESOP profits continue to be tax free, which can lead to accelerated growth and additional retirement benefit to all of the employee owners.
For Brett Smith who is now also an employee-owner of Providence Engineering, the
ESOP is like a benefit on top of a benefit. “This is a real win-win for us,” he said. “We have a 401(k). Now we add an ESOP. I’m looking forward to what’s next for Providence.”