From $25M to $80M as an Employee-Owned ESOP Contractor

Ralph Dumke started Waterline Industries 30 days after the 1987 stock market crash with a pickup truck, a shovel and his house on the line for bonding. Today the Seabrook, New Hampshire water and wastewater contractor is 100% employee-owned and has grown from about $25 million to nearly $80 million in revenue since its ESOP closed eight years ago. Ralph joins Chuck Mazzanti to walk through a first ESOP attempt the surety shut down, a stock giveaway that backfired with the IRS, a 100% seller-financed transaction and the bank that walked away the day after closing. His core lesson: talk to your bonding company and your bank first, then tell your people they are the owners and mean it.

About Ralph Dumke and Waterline Industries

Ralph Dumke is the founder and CEO of Waterline Industries, a water and wastewater contractor headquartered in Seabrook, New Hampshire. Founded in 1987, Waterline builds water and wastewater treatment plants and pump stations, mostly for cities, towns and state agencies in New Hampshire, Massachusetts and Maine. The company self-performs nearly all of its work, including electrical, instrumentation and controls, and has run its own apprenticeship program for almost 30 years. Ralph studied civil engineering at Wentworth Institute of Technology in Boston, finishing his bachelor's degree at night while working full time for site work contractors. Waterline became 100% employee-owned through an ESOP eight years ago and today has about 140 employee owners.

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What We Covered

The meeting where Ralph told every employee to shake hands with the new owners of the company
Starting Waterline 30 days after the 1987 stock market crash, with a $150,000 pump station as the first job
Earning an engineering degree at night, and leaving a company Ralph learned he would never own
Why the surety shut down his first ESOP attempt about 20 years ago, and why your bonding company and bank should be your first two calls
The stock giveaway to key employees that ended in a tax bill in the hundreds of thousands
How a different surety brought an ESOP attorney to his office a decade later and restarted the process
Why the equipment and real estate companies had to be part of the deal, and how below-market equipment rent changed the valuation
Selling a company without knowing the asking price, and the trustee's advice that finally got Ralph to sign
Seller financing 100% of the transaction, and the bank that walked away the day after the ESOP closed
How a communications committee, job site lunch and learns and an annual stock announcement day built ownership culture quickly
Why employee owners rent instead of buy, keep the old plotter and hunt down a two-foot piece of pipe
How an established ESOP could help retiring owners who would otherwise close up shop

Key Takeaways

Call your surety and your bank before you do anything else. Ralph's first ESOP attempt died at the bonding company, and his bank walked away the day after his second attempt closed.
Never give stock away on your own. Stock has value, and an informal gift to key employees produced a tax bill in the hundreds of thousands.
Plan for related equipment and real estate companies early, and charge the operating company market rates before the valuation. Below-market rent shifts value and complicates the deal.
Seller financing can protect the company. Ralph carried a low-interest note with eight years to repay, and the company paid most of it off in under five.
Communication builds ownership culture. A dedicated committee, lunch and learns at job sites and an annual stock announcement day help employees believe the company is theirs.
Employee owners spend like owners. Renting instead of buying, sharing materials across jobs and confronting problem jobs early all show up in the share value, which has grown roughly 7,100% since the ESOP began.
An ESOP lets a founder sell and still protect the people who built the company, something a sale to a competitor or private equity cannot promise.

Full Transcript

Ralph Dumke: And I got up and I just said, you know what? Everybody's been wondering what I'm going to do, and Maria and I have finally figured it out. We had some choices. We could have sold to a competitor, we could have had an auction. Or our other option was, I want you to look to the person to your left, look to the person to your right, and shake their hands, because you just met the new owner of the company.

Ralph Dumke: And of course I said, anybody got any questions? Most people were just dumbfounded. They didn't know what to say.

Chuck Mazzanti: Welcome to the Construction ESOP Collective. I'm Chuck Mazzanti, Senior Vice President at Christensen Group Insurance, and this is the show where we explore the wins, challenges, and real-world lessons of employee ownership in construction. Each episode brings insights from CFOs, former owners, and employee owners who are building something bigger together. Let's get into it.

Chuck Mazzanti: Joining me today is Ralph Dumke, founder and CEO of Waterline Industries in Seabrook, New Hampshire. Ralph started Waterline 39 years ago, 30 days after the 1987 stock market crash, with a pickup truck, a shovel, and his house on the line for bonding.

Chuck Mazzanti: Today they build water and wastewater treatment plants for cities and towns, and they self-perform almost all of it. Waterline went 100% ESOP eight years ago at about $25 million in top-line revenue. This year they did close to $80 million. Here's my conversation.

Chuck Mazzanti: Ralph, thrilled to have you on the Construction ESOP Collective. I've been looking forward to this all week, man.

Ralph Dumke: Me too.

Chuck Mazzanti: Can't wait. There's a little bit of backstory I want to give, but to start things off the right way, we've got Ralph Dumke with Waterline Industries out of Seabrook, New Hampshire. Ralph, I'd love for you to give us the 10,000-foot overview of who you are and your company.

Ralph Dumke: Sure. First of all, I want to thank you, Chuck, for having me on. Your podcast with Bob Whalen got me really pumped up on the whole ESOP thing, in regards to acquisitions. We'll get into the acquisition part later, but your podcast really got me pumped up, and I've been going to school on everything and learning everything. I appreciate all the introductions you did for me too.

Ralph Dumke: But anyhow, I'm Ralph Dumke. I started Waterline Industries 39 years ago. We're a contractor, and we only work in the water and wastewater industry, pretty much for municipalities. We do some private work, but mostly for cities and towns or state government.

Ralph Dumke: My background is I went to college in Boston. I went to Wentworth Institute, got an associate's degree in civil engineering, and started working for a site work contractor that at the time was doing HUD low-income housing. I was doing layout for them. I did a co-op with them for a semester, and when I was supposed to go back to school, the owner of that company said, I'll pay your tuition to go nights if you'll go nights and work full time. So I did it. It took me five extra years instead of two to get my bachelor's degree, but I finally got it done.

Ralph Dumke: I worked for two contractors. That first one was a large union site work contractor. Like I said, we were doing HUD low-income housing, because at that time there was a lot of federal money for that. That was back in the seventies, I hate to admit it. Then all of a sudden the Clean Water Act came in, and the next thing I knew we were doing all the site work on some of the largest sewage and water treatment plants in the Northeast. I worked for them for another five years. At the time I was 27, 28 years old, running these projects and dealing with a lot of issues a 28-year-old shouldn't be dealing with, with the unions and labor.

Ralph Dumke: So I went to work for a smaller general contractor in southern New Hampshire that did small wastewater plants and pump stations. I worked for them for five years and ended up starting Waterline Industries 30 days after the stock market crash in 1987. A lot of people listening may not know about that, but it was almost like the thirties, when people were jumping out of windows. I was young and dumb and didn't know any better. I had no idea what a line of credit was. I did know you needed bonding.

Ralph Dumke: So I started the company with virtually a pickup truck and a shovel. I had two young kids at the time, three and five, and I put the house on the line and got some bonding.

Chuck Mazzanti: Wow.

Ralph Dumke: So that's how we started. The first job was a $150,000 water pumping station in Bartlett, New Hampshire. We're now in our 39th year and our eighth year as an ESOP. The company grew pretty much all along, usually about 5 to 10% a year, just adding a few more people. We also self-perform most of the work. The only things we really sub out are masonry and painting.

Ralph Dumke: We do everything from site work to the electrical, and now we even do the instrumentation and controls for the water and wastewater treatment plants. When we became an ESOP eight years ago, we were doing around $25 million a year. So we went from $150,000 to $25 million in about 30 years. And since we became an ESOP, this year we did a little less than $80 million. So the growth has been unbelievable. I'd like to attribute it all to the ESOP, and most of it is, and I'll explain the tax advantage later. But we were also very fortunate because of all the infrastructure money for water and wastewater.

Ralph Dumke: And the PFAS issue in drinking water has been a big growth driver for us over the last three to five years. So that's how we got there. Some of the things I really wanted to talk about were just starting the company. I guess sometimes it's good to be young and dumb.

Ralph Dumke: But I always liked the idea of ESOPs, because we're a small company. We'd bring on two, three, four, five people a year, so a lot of people in the company have been there a long time. Almost 20 years ago, I got the idea of doing an ESOP. I looked into it, really liked it, reached out to a company that sets up ESOPs, and went down the road. We did the valuation, we did everything else. Then I had two hurdles I needed to get over. The first one I went to was the bonding company, and they said absolutely not.

Ralph Dumke: I'm a civil engineer. I never took any business classes. I knew how the balance sheet was supposed to look, but I didn't realize what doing an ESOP does to a balance sheet. Basically, the debt equaled the value of the company. So the bonding company shot my feet out from underneath me. I thought it was a great idea and a great way to excite the people who had been there. At that point there were a lot of people who had been there 20 years or so, and that's really what I was trying to do: take care of them. So I guess I'm going to lay out all the mistakes from the beginning.

Chuck Mazzanti: Ralph, I'm sorry to interrupt, but I just want to make sure everyone's on the same page. What you're talking about right now was 20 years ago.

Ralph Dumke: Right, 20 years ago. So if somebody's going to do an ESOP, before you do anything, especially if you're in construction, and especially if it's bonded construction, the first thing you do is have the conversation with the bonding company. The next place I would go is the bank. I'm going to tell you about the problem with the bank later on. When I finally did get to do the ESOP, we had a little surprise from the bank. So don't let me forget that, Chuck.

Chuck Mazzanti: All right.

Ralph Dumke: So anyhow, now I was frustrated, I was upset, and I really wanted to reward the people who had helped me grow the company. So once again, I just did this on my own. I think I had an attorney help me. It's been a while, so I don't remember exactly how I did it, but I basically gave about 10 people some stock in the company.

Chuck Mazzanti: And the reason you did this is because you went to the surety and they said, forget it, we're not going to keep your bonding line if you flip the balance sheet and go ESOP. So you're like, all right, shoot, I can't go ESOP, and this was your response to not being able to do the ESOP. Am I following that correctly?

Ralph Dumke: Right, exactly. Let me back up even more. The reason I left that second company was because I worked for it like I owned it. The guy I thought owned it was getting older, and he was ill. I was running the company, and at that point I was about 30 years old. I was doing the bidding, basically doing everything. Then I came to find out he didn't own it. A large contractor in Boston actually owned the company. So I found out I was never going to own it. That's when I said, okay, I don't care if I just do tiny little pump stations, I'm going to go do this on my own. It's not that anybody ever threatened to leave, but I wanted to bring them in, pretty much the way an ESOP brings people in, so that they're the owners.

Ralph Dumke: So that's what I tried to do by giving them stock. Well, not a good idea. Don't ever try doing that. The following year we're closing out the year, we're doing our audit, and the auditors find this. Ralph, what's this stock thing you did? Well, we had to pay hundreds of thousands of dollars in taxes because we had given away stock. You can't just give it away, because there's a value to it. And I couldn't make them pay the taxes on it, so I paid the taxes on the stock I gave.

Chuck Mazzanti: No good deed goes unpunished, especially if the IRS has something to say about it.

Ralph Dumke: I was dumbfounded. I'm like, you've got to be kidding me. I couldn't believe it. Luckily my accountant talked me off a ledge, and we just paid the taxes and moved on. So the first thing is, get good advice. Don't do stuff on your own.

Ralph Dumke: What happened with the stock thing is I just went to an attorney and said, set this up so I'm giving everybody stock. He didn't advise me to go talk to my accountants. He was just doing what I told him to, so I couldn't even blame it on him. Then it was actually about 10 years ago, because it took me two years to finally jump over the fence, I guess, and do the ESOP. I started looking at it this way: I need to do something, because at that point I was almost 60 years old, and I wasn't getting any younger, even though I didn't want to admit it. So I said, okay, I can either sell to a competitor, or I can just close up shop.

Ralph Dumke: By then we had tons of equipment, cranes, excavators, all this stuff. You could just have an auction and sell the real estate. We had built a new building in 2008, so the building was fairly new. That was another bad move, right in time for the recession, but it worked out. It had some debt on it, but there was a lot of value there. So I could have done that. But selling to a competitor, I just couldn't do that to the employees, all the people. So the other option was an ESOP. I really started looking into it. I started going to conferences and talking to a bunch of different people. And it was kind of weird, because at that point, probably only 10 years after my first flop at an ESOP attempt, the bonding company actually sat me down and said, hey Ralph, you're not getting any younger. What are you going to do?

Chuck Mazzanti: I want to land the plane here for a brief minute, and then we'll let you continue. So 20 years prior, you go to do the ESOP, and the surety says no can do, buckaroo. So you say fine, you give the stock thinking you're going to be Santa Claus, and then the IRS says, where's our couple hundred grand? So after that, you're not limping along, but you're kind of like, all right, it is what it is.

Ralph Dumke: Yeah.

Chuck Mazzanti: Head down, doing the work. And then 10 years after the mishaps, you reload with the surety. Is it the same surety that said you couldn't go ESOP?

Ralph Dumke: No, it was a different one. At that point we had been with them probably five years or something, and we were growing pretty good, so they were starting to write bigger bonds. And they're looking at more gray hair, or less hair. So they just started asking questions, and they actually brought an ESOP attorney to our office.

Chuck Mazzanti: Wow.

Ralph Dumke: And had the conversation with us. At the end of the meeting, the ESOP attorney said to me, so what are you thinking? And I said, well, I'm not ready to retire, but I've got to start thinking about this. And she said, well, that's good, because if you told me you wanted to be out in six months, I'd just leave. She said the ESOP needs the founder to at least agree to stick around for a while, and you set those expectations up early so everybody understands it. And I said, okay. And the bonding company was like, yeah, if this is organized and we plan this out, this is a good idea. Let's continue with the process.

Ralph Dumke: To be honest with you, I think they looked at it like, if we sold to a competitor, they probably wouldn't be writing bonds for us anymore. That competitor would use their own bonding company. So it was in their best interest too to stick with us.

Chuck Mazzanti: Got it. So now this is 10 years from the first flop, and you're actually setting up the ESOP for real.

Ralph Dumke: Right. And Chuck, I'll tell you right now, that same ESOP attorney has me talk to probably 20 to 30 people a year who are thinking about doing an ESOP. Because just like me, there are some things you just can't get your head around. Just to give you an idea, I actually had three companies. I had the construction company, then I had an equipment company that owned all the cranes, excavators, all that stuff. And then we had the real estate company that owned the office building and the shop. In my mind, I wanted to ESOP the construction company, keep the equipment company so I could continue to rent equipment and get the tax write-offs from it, and keep the real estate, because that would be good retirement income.

Ralph Dumke: And the ESOP attorney was adamant. She's like, no, you're going to retire, Ralph. You need to do the whole thing. At that point I think I walked away for about six months. I'm like, no, I'm not doing it. I'll give up the construction company, but I'm not doing the whole thing. And she was adamant. She said the taxes will kill you if you don't do this with the equipment company, because we'd been taking all this bonus depreciation. You've got to do everything all at once. So it took me a long time to get my head around that. And then there were a bunch of other things I just wasn't sure about with the ESOP. How's it going to go? How's control of the ESOP going to work? Am I going to lose all control? Can I get fired?

Ralph Dumke: Those are all things you think about. And this was the other thing: this is the first time in your life you'll ever sell something and not know what the asking price is. Because you do it as an ESOP, the trustee hires a valuation company, the valuation company comes up with a value, the trustee agrees to it, and then you find out what the value is. That's when a lot of people end up calling me. Once I got that, I'm like, this doesn't make any sense. And then finally, and I probably shouldn't say this, but the trustee. What happens is, you get the valuation, and you've only got so much time before the valuation's going to change. So you have to pull the trigger while that valuation's still good. I was hemming and hawing, and finally the trustee called me. The reason he was a trustee was because he used to be the CEO of a company that went ESOP. And he said, Ralph, I can't tell you anything other than just do it, it'll work. He was really good. So I said, okay, I'm going to do it. And we did it. I think that's the best advice I ever got.

Chuck Mazzanti: What was the duration? So 20 years ago you try to do it, it doesn't work, you do the stock, that backfires, you slug along. Then 10 years ago you revisit it, but you've been an ESOP for eight years, right? So from the second start to finish, did it take two years to transact?

Ralph Dumke: Probably half of that time was me, Chuck, because I was busy, and it was easy to stick my nose in other things instead of dealing with this. Some things with the valuation company were very difficult, because they weren't just valuing the construction company. That was pretty easy, because we had audited financial statements and everything else. We also had the equipment company, which wasn't as easy, because you had the value of each piece of equipment, the market value and the purchase price. At one point the valuation company sits me down and says, we have to knock down the value of the construction company. And I'm like, what? And they're like, yeah, because you haven't been charging enough for your equipment. If we look at the market rate for the excavators and cranes, you're charging less than market rate, so that overvalues the construction company. So at that point I said, okay, I'll start charging more. Those were just some of the challenges with the valuation company, and me. I think it was more me.

Chuck Mazzanti: I think there's a good lesson there, because you weren't renting equipment to anyone else, it was just for Waterline, right? It's not atypical in the construction business to have a holding company for the real estate, lease the real estate to the main construction company, and then bifurcate the equipment. To your point, A, it helps limit liability, and B, there's some arbitrage there from a business standpoint. So I think it's very pertinent for you to walk us through that, because there are other contractors doing the same thing. That's great when you're privately held with a single owner, but there are ramifications, as you're pointing out, when you go through an ESOP transaction and need it to be fair market value.

Ralph Dumke: Right. And it was weird, because at one point the bonding companies really liked the equipment, because it was an asset they could sell. But at some point their mentality changed, and they didn't like the equipment and they didn't like the debt. We used to mostly use Caterpillar equipment. Caterpillar would give me anything I wanted, and I'd have to sign for it personally because it was a different company. A lot of times it was a zero-interest loan, or 1% or 2%, and you'd get the bonus depreciation. That's why I was buying the equipment, because then I could write it off. That's why it was set up as a separate company, and the same with the real estate. I know a lot of contractors keep their shop or their real estate separate too.

Chuck Mazzanti: Correct. Like I said, I think that's important, and most people wouldn't even bat an eye. You're not even going to think about it. But once you go ESOP, there are different things to contemplate, and there are impacts. You mentioned a couple of minutes ago that something may have gone awry with the bank, maybe the first time. Do you want to touch on that now or later?

Ralph Dumke: It wasn't the first time, Chuck. What happened was, once I said, okay, we're doing this ESOP thing, we had the value, and we had to share that with the bank. The bank thought the company was going to take a loan to pay me the money for the valuation, and that they were going to get to do the loan and charge interest on it. But I wasn't even sure this ESOP thing was going to work, to be honest with you. I was kind of skeptical. So what I said was, listen, we're not going to do a bank loan. I'll take a note, and I think I charged 1% or 1.5% interest or something like that, that they could pay me at the end of the year, and then pay the principal when the company was making money. When the bank found out that's what I was doing, and they looked at the balance sheet, because the debt was owed to me, the balance sheet was basically zero. The bank said, we're done with you. See you later. And this was like the day after we became an ESOP.

Chuck Mazzanti: So you did 100% seller financing. Not for the faint of heart. I want to make sure I'm understanding, though. You did 100% seller financing?

Ralph Dumke: Yeah. Chuck, I really was skeptical this was going to work, and I didn't want to overload the company with debt and have people stressed out about that. So that's why I did it that way. We set it up so they had eight years to pay the note, and in less than five years they paid most of it, and they paid off the debt on the building. Everybody got a lot cheaper when they owned it, and I'll tell you that story. But the thing is, we're not paying federal income tax. We used to buy equipment just to get the depreciation. Now it's a completely different mentality: when you need something, you rent it, and as soon as you're done with it, you send it back.

Ralph Dumke: The other reason I think the company has become so profitable is that everybody became really cheap when they became the owners. I think I shared this with you once. We need to be able to print full-size plans and drawings, and we had a plotter printer in the office that was 12 years old and only did black and white. So I said, it's time, let's get a new one. It'll be faster and it does color, because a lot of these plans have pictures on them now. And they wouldn't buy it. This one's fine, it works.

Ralph Dumke: This still happens a lot. Anytime somebody needs a two-foot piece of pipe, instead of ordering a 21-foot piece, they'll shoot out an email to the superintendent email list: hey, I need a two-foot piece of six-inch ductile iron pipe, anyone got any? And in five minutes, yeah, I've got it. One time a guy said, I'm looking out my window and I see the town has a piece, I'll go ask if I can have it. It's a different mentality when it's an ESOP, for sure.

Chuck Mazzanti: I go to pretty much every ESOP conference I can make, and in doing this podcast and talking with other ESOP contractors, and contractors that are ESOP curious, I'll call them, it takes time to get the employee owners to really feel like they own the joint. That doesn't happen overnight. At eight years, you're not a new ESOP, but you're not a 30-year super-mature ESOP either. So do you have any advice on how you built the culture and got the employee owners to buy in so quickly?

Ralph Dumke: Chuck, that was the thing. Going to these conferences, the one thing we learned was that it's all about communication. You've got to make sure that everybody understands you're turning this over to them. A lot of people won't believe that. So one of the first things we did was put together a communications committee. We only allowed somebody from management to be on that committee for the first six months, just to get it up and going, so they understood what it was all about. They do lunch and learns. They go out to the job sites, get subs or pizzas or whatever, explain the ESOP and let people ask questions. I go to some of them, and other people in management go to some, so people can ask, how does this work? What is that? I think that's really good. The communications committee also runs our annual stock announcement day, when the new value comes out.

Ralph Dumke: And I'm going to brag on this one, just real quick. We just had it last week. The first year, obviously, the stock is worth next to nothing. It was $17 a share. And this year it was over $4,200 a share. So this is crazy.

[Editor's note: Waterline's share value actually went from $56 in the ESOP's first year to $4,033 this year, growth of roughly 7,100%.]

Chuck Mazzanti: Congratulations, Ralph.

Ralph Dumke: It went up 38% this year. And that's because of the employee owners. That's what it's all about. The communications committee sets this up, and the company's gotten so big. We used to do it just in the shop, and this year we had to rent a venue where they have concerts.

Chuck Mazzanti: I meant to look it up. What was the place called?

Ralph Dumke: It's at Salisbury Beach. They have concerts and stuff there. It was pretty neat. It was a nice venue, and a beautiful day too, because it's in the summer. The ocean was turquoise blue. It was great.

Chuck Mazzanti: That's awesome. Congratulations on that. That's 38%, man. And you get to make an impact. That's my favorite thing about the ESOP. You could be in equities, and you're hearing all this crazy stuff with Elon and SpaceX going public, and Anthropic is going to do their IPO, supposedly north of $2 trillion. Maybe it works. Maybe it goes to zero. Maybe there's a correction. Who knows? But the employee owners at Waterline Industries, guess what? Everything they do makes a difference to yield that 38%. You make a direct impact, and you protect it so it doesn't go to zero. That's one of the coolest things.

Ralph Dumke: Yeah. And getting back to your question, it's all about communication. Before we did our ESOP, I actually went and visited some companies and asked them, how's it going? And they'd say, well, not real good. We didn't really tell everybody. I'm like, what do you mean you didn't tell everybody? So what we did, and granted, at the time there were probably only 60 people, was invite everybody. It wasn't a dinner, it was more of a passed hors d'oeuvres thing. We told them, you've got to be there, please come. And of course everybody thought, my wife's name is Maria, okay, it's got to be that Ralph and Maria are retiring and selling the business or something like that. We didn't tell them what it was about.

Ralph Dumke: The trustee I was telling you about earlier sat over in the corner, everybody was chit-chatting, and then we started. I got up and I just said, you know what? Everybody's been wondering what I'm going to do, and Maria and I have finally figured it out. We had some choices. We could have sold to a competitor, we could have had an auction. Or our other option was, I want you to look to the person to your left, look to the person to your right, and shake their hands, because you just met the new owner of the company. And of course I said, anybody got any questions? Most people were just dumbfounded. They didn't know what to say. There were a few questions.

Ralph Dumke: And then the trustee got up, and I use this all the time. He said, listen, you are a good company. You guys know how to make money. You just bought a house with 5% down. The more you pay off the mortgage, the more equity you're going to build in your house. Don't change anything. Just keep doing what you're doing and you'll be fine. That echoes in my ear all the time. You guys know what you're doing. Just keep doing what you're doing. Don't change anything.

Ralph Dumke: That's what I'd say to anybody thinking of doing an ESOP: you've got to communicate to the people that they're now the owners. I'm still involved, because I get to do the things I like to do. I love estimating. The estimators are the glorified gamblers in the company, so to me it's exciting, it's fun. I'll probably do it till the day I die, maybe not for this company, just because I enjoy it. But now they have the people. They don't need me. If I left tomorrow, they'd be fine. They're up to about 140 employees now. We had a great graph at the ESOP meeting last week showing the growth in income and the growth in new employees, and it was amazing how close they were to being equal.

Chuck Mazzanti: It's wild.

Ralph Dumke: And we attract employees because of the ESOP. We don't have many exits, but we ask people why they came, and they say, I want to be part of a company where I feel like I'm part of the company, not just a number, and I want to be an owner. One of our sayings is, why work for a company when you can own it?

Chuck Mazzanti: Why not? You're doing the work anyway. Like the trustee said, keep doing what you're doing. But if you have the option to own it, or just work today and collect a check, I think anyone is going to say, if I don't have to do anything different but I get to own it as an added benefit, what the hell, why not? One question I had: are you guys union or nonunion?

Ralph Dumke: We're nonunion, and that's been some battles, because we're just north of Boston and a lot of our work is in Massachusetts, and we self-perform. We have electricians, plumbers, HVAC. And the other thing is, when a bunch of that infrastructure money came out, you had to have apprenticeship programs. We already had them. I started our apprenticeship program almost 30 years ago, because it was hard to find people who knew how to build water and wastewater treatment plants.

Ralph Dumke: We had one guy who came on as an apprentice carpenter, and he went to HR and said, I need to resign. They asked why, and he said, I really want to be an electrician, and I'm going to go find a company where I can be an electrical apprentice. And we just said, forget it, we'll move you into the electrical apprenticeship. So now he's an electrician, and he actually just passed his test for his master's license.

Chuck Mazzanti: Wow, congrats to him. So you went 100% ESOP, you did 100% seller financing, and it's a sweetheart deal, Ralph. One percent interest. You cared about it working. I've known you for a little bit now.

Ralph Dumke: Chuck, I didn't think it was going to work. The trustee's name was Harry. Even though Harry said it was going to work, I'd only known him for so long. I wasn't sure it was going to work.

Chuck Mazzanti: That's true. So you're eight years in now, and granted, there's PFAS and some market conditions that have benefited Waterline, which I understand. But I feel like for, what, 22 years, you were building the foundation, getting all the systems and processes in place to be able to take on the extra work. One of the biggest reasons contractors fail is that they grow too fast. Then they have an issue, the bond gets called, and if you can't get bonded, you're dead in the water. So you built a great company slow and steady. You go ESOP at $25 million in top-line revenue, and now, let's just round up, you're at $80 million. What are you guys doing right? Outside of the good market conditions, how have you grown that well? You said you'd attribute a lot of it to the ESOP. Can you break some of that down?

Ralph Dumke: There's just a lot of good people, Chuck. Even before we became an ESOP, on our first federal project we got audited on our hiring practices. It was mostly because a lot of the people who came to work at the company came through word of mouth. We never advertised. It was a friend of somebody, or a relative. So we actually had to sign an agreement with the federal government that we would at least advertise at the unemployment office when we had an opening.

Ralph Dumke: And I can't take credit for it, but my wife, Maria, is great at putting policies and procedures in place. She really drove that home, whether it was in the accounting or in the reporting coming in from the jobs. Cost control is huge. We spend a ton of money on cost control. If we have a project that's got a problem, we deal with it. We don't try to ignore it. I know a lot of contractors get in trouble because they have a bad job and pretend it's not there. When we have something in a difficult position, we focus on it and get through it so we can get to the next one.

Ralph Dumke: It really is the people. I can't say it enough. That's why I really wanted to take care of the people who'd been there a long time. And that's why I did the financing myself. If it didn't work out, I wouldn't foreclose, I guess is the way to say it. I'd just probably work harder and help more.

Chuck Mazzanti: And that underpins one of the benefits of going ESOP: control. If you sold to a strategic, guess what? It's their company. They dictate to you, if they even retain you, how they're going to operate. If you sell to private equity, same thing. It's no longer your company. All those people who helped you build it, you don't have control if they start cutting heads, or if you go into a downturn. Look at your career, Ralph. The late eighties, then the financial crisis of '08, then COVID. You've been through a lot of market conditions, and you get to choose where you go lean to keep the people on payroll. Some other companies, or strategics, aren't that way. There's going to be some redundancy. If your competitor down the street buys you, and I think Maria, your wife, was or still is your CFO, they already have a CFO. They're not going to have two CFOs. So they start cutting out the redundancies. When people ask what's a less-known benefit of ESOPs, it's that you're selling the company, yet you still have a lot of control over it.

Ralph Dumke: Yeah. The other thing, Chuck, and this doesn't have anything to do with the ESOP, it just has to do with mentality. I actually had to let some people go because they didn't follow my mentality. One of the reasons I wanted to start my own business was that some people make money by beating up subcontractors and suppliers. The relationships we have with our subcontractors, and with the suppliers we buy the process equipment and pipe and fittings from, are second to none. I've always told everybody in the company, if at the end of the job you can't look the subs and suppliers and the owner in the eye and shake their hand, then you shouldn't be in the business.

Ralph Dumke: I think that's gotten us a long way. A lot of the reason we do well is that the engineers who design for the cities and towns want us to be the low bidder, even though it's low-bid work. They'll let us know, hey, don't fill up your bonding, we've got this project coming and we need you to do it. We have a real good relationship with the engineers. You're going to have disagreements, there are going to be some bumps, but it's all about the relationships.

Chuck Mazzanti: Yeah, and a well-run ESOP just underpins that. It shows the character. You do so much public work, whether it's state or federal. What was the feedback when you went ESOP? Was anyone curious? Did it help? Did it hurt? What did that look like?

Ralph Dumke: Most people were like, what's the big deal? And now it's amazing, because a whole bunch of the engineering companies have gone ESOP. Luckily, knock on wood, not many of our competitors. And that's the other thing, Chuck, with our competition. When I started in this business in '87, the Clean Water Act had been in for almost 10 years. A lot of the guys got into the water and wastewater business 10 years before me. I just turned 69 this year, so they're 79. They're retiring and they're not doing ESOPs. They're either selling to competitors or closing up shop. A couple of times in the last year or two, I've asked, how come this guy's not bidding anymore? And they're like, he retired, closed up shop, sold everything.

Ralph Dumke: And that's how I met you, when you were talking to Bob about acquisitions. Right off the bat, three months after we became an ESOP, an instrumentation company came to us and said, hey, will you buy us? The owner wanted to retire. I'm like, hey, I'd love to, but I don't have any money. We've still been approached by other people, some electricians, some other companies. And I couldn't get my head around how to meld those people into our company, because their company's so different. They have their founder and everything else. When Bob started talking about acquisitions where you keep them autonomous and let them run as a separate company, that's pretty exciting. Now you can actually grow.

Ralph Dumke: I've been doing my homework, doing a lot of reading and talking to people, a lot of people you turned me on to. I think it's pretty exciting for the ESOP world, because there's a whole bunch of little ESOPs, and I think it'd be great to see a bunch of larger ESOPs. All the struggles I went through, all the money I shelled out to the valuation company, the attorneys, everything else. If I could go to a guy who's thinking of closing up his business and say, hey, look, hang around for four or five years, let me turn your company into an ESOP, I'll pay for the valuation company, I'll pay for this. How could you not do it if you were the founder? I think you'll see a lot more ESOPs once people start to get their heads around that.

Chuck Mazzanti: Well, it's why I'm so passionate. There are so many people like you, Ralph. When you go to these conferences, or now that I have the pleasure of meeting people like you because of this podcast, it's just great, down-to-earth people who have worked their butts off to build a company and now want to give back. You probably have enough money. And it's like, what else? What's my purpose? It's taking care of the employees who helped me get where I am. Because without employees, especially in construction, you don't have anything. Your biggest asset in the construction business is the men and women who helped you build the company and are in the field. Period.

Chuck Mazzanti: Selfishly, it's just a blast doing this, because I get to be around people like you and go to these ESOP conferences, whether it's The ESOP Association or NCEO, or ESCA, which we're members of. That's how I met Bob Whalen of HB Global, who you're referencing and who I had on the podcast. I met him through ESCA in St. Pete at the leadership summit last February. And everyone's an open book. You've got someone like Bob running essentially a holding company with 30 acquisitions underneath it, and he grew it from a hundred-some employees to 2,500. And people like you who say, I want to do this, I don't know how to do it. Now you're eight years in, just had 38% stock growth, and took the company from $25 million when you went ESOP to $80 million in eight years. It's a masterclass in how to run a construction company at a high level. And there are all different types of ESOP contractors. There's your water, there's Garney in water, there's Bob, who's more mechanical but has stuff outside of that, and there are so many general contractors. It's just a really good, down-to-earth community where everyone's willing to band together and learn together. I don't care if you're a new ESOP or 40 years in, you have challenges. They're just at a different level, or a different spot in the ESOP life cycle.

Ralph Dumke: Yeah, and one of the things we do is, when we see a supplier or subcontractor that's an ESOP, I tell everybody, hey, they're an ESOP, help them out. It is like a brotherhood, for sure.

Chuck Mazzanti: It is. And the funny thing, I'll give a little color commentary on how you and I met. I did a post in The ESOP Association forum letting people know, hey, I started this podcast and I've got these episodes recorded. And at the time it was crickets. So I was like, that went over real well. Then I'm sitting at home on a Sunday and I get an email. And here's Ralph Dumke of Waterline Industries saying he listened to the podcast, liked it, and it opened his eyes. And I'm like, this has got to be a fake email. I just launched this thing Thursday, I did the post Friday, and now I have an ESOP contractor who I'd love to have on emailing me? This is fake. So I respond, we get on a call, and sure enough, you're real, as far as I can tell. And now I'm having you on the podcast. It's pretty serendipitous. Like I said, selfishly, I have these types of calls all the time, because I love learning how people like you have grown businesses. There's so much to learn. So it's come full circle, and I'm grateful you agreed to come on, Ralph.

Ralph Dumke: Well, it was amazing. I reached out to Bob Whalen and spent probably an hour on the phone with him. I think people who are in ESOPs just love talking about it. I love talking about it. We have friends who own all kinds of businesses, and last time I counted, I think we have nine friends who have now made their businesses ESOPs since we did it. They're not all construction. One of them is a tower company, he does cell towers and stuff like that, which is about as close to construction as you can get. And another one, believe it or not, who just did it in April, was my bonding agent. He made his company an ESOP. Good for him. So it doesn't have to be construction either. One of the people the attorney had me talk to was a guy who owns a chain of jewelry stores in Hawaii. ESOPs can work for anybody, I think.

Chuck Mazzanti: Yeah, as long as you're big enough, you're not impatient, and you're willing to work with it. If you're looking to cash your check and go to Hawaii to join that jewelry store guy, then maybe it's not the right fit. But if you're willing to stick around, or at least have the next generation of leadership in place as you step away over a couple of years, that's the key. And I think you've got to have probably $2 million to $2.5 million of EBITDA to have enough meat to pay the different advisors to get the transaction done, especially in construction, because it's so cyclical. You don't want to do an ESOP and then go into a downturn, especially if there's not heavy seller financing and now the bank is a little bit underwater. So there are some technical things. But outside of those, if you've got a business, it can go up. It's a beautiful thing.

Chuck Mazzanti: Ralph, I won't keep you any longer. This was a blast. I think we're going to have to have Maria on next, to get her perspective, both as your wife and as the CFO. I think that would be cool.

Ralph Dumke: Okay, Chuck, but you've got to remember, you can't believe everything she says. She exaggerates a lot. Unlike me. And she may tell you stories that would make me redder than I am now.

Chuck Mazzanti: Well, it's all right. My wife says the same thing about me. Any parting shots before we sign off, Ralph?

Ralph Dumke: I just think if somebody's thinking about going ESOP, they should definitely go to some conferences. And I always tell everybody I talk to, if you're going through the process and you don't believe it or don't understand it, then talk to somebody like me, anybody who's done it, and they'll talk you through it. That's the problem with this ESOP thing. There's nobody who's a consultant to nurse people through the ESOP process. You really need a psychologist or something to help people.

Chuck Mazzanti: Well, my wife's a psychotherapist, so maybe you just helped me come up with a new business plan.

Ralph Dumke: I think it would be good, yeah.

Chuck Mazzanti: Awesome. Well, Ralph, thanks again. It was a blast having you on.

Ralph Dumke: Thanks, Chuck. We'll talk soon.

Chuck Mazzanti: Thanks for listening to the Construction ESOP Collective. If this was useful, follow the show and share it with a colleague. Join the conversation with me, Chuck Mazzanti, on LinkedIn and find all episodes at constructionesopcollective.com. Until next time, keep building ownership one conversation at a time.

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Questions about how any of this applies to your company? Email Chuck at cmazzanti@constructionesopcollective.com and we can talk it through.