Generational Change: Handing Your Business Over to New Ownership
Pride courses through the veins of every construction company owner. We proudly hang banners from project fences, emblazon company names on vehicles and equipment, and puff chests up at the close of a job well done.
And rightly so.
Construction is a difficult business where success isn’t guaranteed. Building a profitable and growing business is absolutely a feather in your hard hat.
But when it comes time to move on from that company, this pride can make it challenging. While the future and their next phase in life might be exciting, company owners shudder at the prospect of a new owner running the company name into the ground. This guide on construction company generational change aims to help.
Generational Change: What New Ownership Might Look Like
Before going too deeply into the different requirements and need-to-know information about handing a construction company over to new ownership, it’s important to know what that new ownership might look like. The following possibilities are worth considering, and some might be better for a given company than others.
One of the methods of selling a construction company is to sell it to a private buyer. This might be another construction company, an investor looking to move into the space, or even a large conglomerate of companies looking to absorb the company into its portfolio.
Private buyers have their pros and cons. Some might pay cash, while others need to secure funding from investors or loans. Also, private investors will often request the owners stay on board for a prescribed period to ensure a successful handover. But these private companies may be more apt to change the company name—a hit to that construction-industry pride.
Another option is to hand the company over to employees. In this case, each employee becomes part of an ESOP, or Employee-Owned Stock Plan, each owning a small part of the company. As the company’s value increases or wanes, so do the values of the stock portfolios each employee owns.
ESOPs have some incredible benefits. For one, there is typically less employee turnover, as the average ESOP employee retires with nearly twice as much in their retirement account as an employee retiring under other options. Also, since each employee has a vested interest in the company’s trajectory, these companies often succeed and carry on the company founder’s vision.
Also, company owners can stay on as CEO or board members or maintain stocks of their own to keep money flowing during retirement.
The downside? ESOPs are more regulated than other company structures and it takes years of planning to ensure that company management is competent after handover.
The third most attractive option is handing the company over to family. For many business owners, this was the plan the whole time. They wanted to establish a financial machine that the family could rely on for generations to come.
There are many potential upsides and drawbacks to family ownership. As an upside, families typically continue operating under the company name. Also, they’re often familiar with the inner workings of the business, as well as the employee body and clients. Owners can also give the company to the family members as a gift, which helps reduce the red tape involved with transferring debts and liabilities. Owner financing is also a breeze, relatively speaking.
Downsides? There are many. Inter-family struggles due to personal disagreements or professional differences of opinion can tear the family apart. Also, if employees don’t respect the new generation as much as previous generations, effort and profitability will plummet. And just because a child was present each day on the job site or in the office doesn’t mean they were paying attention—there was never a threat of being let go for poor performance.
Ultimately, family handovers are the most likely to fail for a variety of reasons. However, when successfully prepared for and with the right eye for choosing a successor, they can be the smoothest and easiest handover of the bunch.
Preparing for Construction Business Handover
Regardless of the new ownership type, there is a lot of preparation that goes into construction business handover. Unless a rich offer slides across a table out of nowhere, most construction company owners should start planning their handover at least 5 years ahead of their scheduled exit date (10 is better).
Also, it’s worth noting that almost any handover should go smoother with the help of an attorney specializing in business sales and mergers and acquisitions (M&A) or hiring the services of a business broker. Skipping this important third-party could prolong the process and result in less profit and, ultimately, regret.
Ideally, the process of exiting a construction company starts years ahead of time, so it’s better to establish a valuation closer to exit. During this process, owners have to consider several factors to determine how to price the business. This guide won’t help explain how to establish a valuation, but these are some of the important factors that impact business valuation:
- Company profitability
- How much the owner wants to make
- The value of real estate and assets
- The cost of debts and liabilities
- Market value
Document preparation is critical to the handover of a construction business. This step ensures that the new owner is entirely aware of all the financial upsides and downsides, as well as any underlying agreements they might have to honor.
Documents that construction owners need to prepare include three years of tax returns, three years of profit and loss statements, rights to property or equipment, employee agreements, credit history, pending client agreements, safety records, and other important documents that potential buyers would want to see.
This is one of the most important steps when it comes to handing a business over. Company owners need to start preparing their management staff years ahead of time to ensure that they’re competent enough to run the business to the same standard. This is important not only for the outgoing owner’s peace of mind but also for new owners.
New owners want to see established, well-trained management before they’re willing to purchase a company. They want to know that these employees are capable of taking over the roles that the owner once held and that the company’s entire success isn’t hinged on one person.
There are many reasons to start this process early. One of the reasons is to allow capable managers to grow into the roles. Another reason is affording time to determine which employees don’t fit the role and are better suited for lower-responsibility roles.
One other reason to consider starting the management preparation process early is that many construction business owners don’t realize how many hats they wear until they start training employees to take over their role.
Limiting the company’s risk before handover is also important. Construction companies should diversify their client base to ensure that the majority of their profit doesn’t come from one or two clients. Diversifying the client base limits risk and makes the company more attractive to a buyer.
Also, ensuring that any trade licenses, compliance documents, and other credentials are renewed and up-to-date is best practice for construction company handover. The incoming owner will know they can take the reins without worrying about expired licenses and the risks associated.
It’s important to lay the groundwork early for family businesses. First, owners might consider hiring a third-party consultant to determine whether there are even family members capable of running the business. If not, it may be best to sell the business and establish a financial vehicle that can help the next generation rather than give them the wheel to their own destiny.
Second, owners need to establish family agreements or pacts. These pacts will determine things like acceptable workplace relationships and boundaries, dispute resolution techniques, and clearly defined roles. Leaving this to chance is a recipe for family strife, so get these items written in stone before even considering a handover.
If the plan is to turn the company into an ESOP, there are some mandatory steps that the ownership has to take. Company ownership needs to establish a trust to buy the stock. Then, the company makes contributions of company shares or cash each year. At that point, the trust allocates shares to individual employees.
This business structure is regulated by the IRS, Department of Labor, and the Employee Retirement Income Security Act. For this reason, owners need to start this process early before attempting to completely hand the company over to a board of directors.
One of the final aspects of preparing for handover involves the company owner establishing and managing their own expectations. Do they want to be involved in the business and sit on the board? Would they rather be in a consulting role? Do they want stock options and long-term healthcare or life insurance benefits? Would they rather just cut free from the business and ride off into the sunset?
These are all questions that a company owner has to ask themselves to determine what their exit strategy and future will look like. The answers can be the key to a successful construction business handover that’s lucrative for everyone involved.