In 2022, the Department of Defense (“DoD”) launched a pilot program to award sole-source follow-on contracts to S-corporations that are 100% owned by an Employee Stock Ownership Plan (“ESOP”). This program was designed to encourage employee ownership within the defense contracting space. While the pilot represents a promising opportunity, the Government Accountability Office (“GAO”) has raised significant concerns about its design and execution.
In general, the federal government views ESOPs favorably due to their benefits, including increased productivity, wealth creation for employee-owners, and improved employee recruitment and retention. These advantages are particularly relevant in the Aerospace and Defense industries, which employ a significant number of ESOP companies. According to the National Center for Employee Ownership (“NCEO”), approximately 300 ESOP-owned companies operate in the Aerospace and Defense Sector.
Shortcomings Identified by the GAO
Despite the program’s promise, the GAO identified several shortcomings:
- Lack of clear, measurable objectives: The DOD has not established specific benchmarks to evaluate the program’s success.
- No structured evaluation plan or methodology: Without a clear framework, assessing outcomes and potential scalability remains difficult.
- Inadequate guidance for contracting officers: This has led to inconsistent eligibility validation—one contract was even awarded to a company later found ineligible.
- Insufficient stakeholder engagement: Limited feedback loops with contractors risk overlooking practical insights that could strengthen the program.
GAO Recommendations for Improvement
To strengthen the pilot program, the GAO issued recommendations to the DOD, including:
- Establishing clear, measurable objectives to track whether the program is meeting its goals.
- Developing a structured evaluation plan with defined methodologies for measuring outcomes and determining scalability.
- Providing detailed guidance to contracting officers on how to verify ESOP eligibility consistently and accurately.
- Implementing regular stakeholder engagement practices, such as feedback sessions with ESOP-owned companies, to capture practical insights and ensure two-way communication.
The GAO believes that if these recommendations are implemented, it could significantly improve the program’s effectiveness and ensure that it achieves its intended purpose of supporting ESOP-owned S corporations in the defense contracting sector.
The Ongoing Benefits of Employee Ownership
Despite these programmatic challenges, the ESOP ownership model continues to provide tangible benefits to companies in the Aerospace and Defense sectors. At Prairie Capital Advisors, we consistently see companies leverage employee ownership to strengthen their organizations through enhanced recruitment and retention in a highly competitive job market; favorable tax treatment unique to ESOP structures; access to capital for growth and investment; greater employee engagement and alignment of interests; and improved opportunities for mergers and acquisitions (“M&A”).
Conclusion
While the DOD’s pilot program faces design issues that must be addressed, employee ownership remains a proven and valuable model for Aerospace and Defense companies. At Prairie Capital Advisors, we work with many businesses in this industry and are well-positioned to help them navigate these challenges, maximize the benefits of ESOP ownership, and position themselves for long-term success.
Henry Ventura is a Director at Prairie Capital Advisors, Inc. He can be contacted at 404.809.2444 or by email, hventura@prairiecap.com.
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