Transfer of ownership of a construction company isn't as simple as signing some paperwork and handing over a set of keys. Owners must understand their options, along with what they can do to maximize company value prior to selling. Most importantly, owners must recognize why many construction business succession efforts fail — so they can proactively take steps to ensure a successful, lucrative exit of their own.
There are two primary elements of business succession: ownership transfer and management succession. Ownership transfer is transactional; it is largely about making sure the financial and legal aspects are handled properly. The management piece, on the other hand, is where good planning becomes crucial.
"The management succession piece can be really tough," says Mike Clancy, principal at FMI Corporation. "There are a lot of things owners do in the business that they don't even realize they are doing. For example, they often decide who the construction company is and isn't going to do work for. The problem is that these decisions typically aren't based on pre-defined criteria; they are based on years of experience and intuition. How do you transfer that kind of thinking to the next generation of management?"
You can't — at least not in the final days leading up to the moment when the owner walks out the door. This is why continuity planning is so important. Owners should be developing the people behind them well in advance of putting the company up for sale. In fact, the typical ownership/management transition takes 8-12 years, according to Clancy.
There are a handful of common reasons why ownership transfers often fall apart during those transitional years:
- Successor management proves to be incompetent
- Children not capable of running business
- Key management leaves due to nepotism
- Key management leaves due to poor planning
- Owner asking too high a price
"As you can see, a lot of this comes down to people," Clancy points out. "Very few potential pitfalls relate to the financial transaction. It is largely about people."
3 Ways to Sell a Construction Company
First things first … let's quickly discuss the three primary methods for selling a construction company. As you will see, optimizing this transactional component largely comes down to people, too.
Liquidation Sale. While this is definitely a viable option, it is not the best option. In fact, this is typically the "last resort" option when other means for selling a business fall apart. There's a good reason why: Owners typically get roughly 60% of what the company is actually worth. Not ideal.
External Sale. While this can prove to be the most lucrative selling method for construction business owners, it is quite rare. In fact, only 3% of construction business ownership transfers fall into this category. For some reason, there aren't too many people interested in buying a construction business who aren't already entrenched in the construction industry. Let's be honest: Construction work is hard work, and not everyone wants to work hard.
Internal Sale. This is by far the most common method for selling a construction business. When executed correctly, it can also be lucrative for owners. There are several ways to go about internal sales, including simple direct sales and employee stock ownership plans (ESOPs). Benefits of this approach include increased flexibility with transaction structure, and continuity for customers and vendors. Downsides for the owner are giving up some profit, having to disclose financial information to employees, and poor employee morale if the transition doesn't go as planned.
Additionally, owners may have to put off retirement for a year or two in order to make sure the succession goes smoothly. But with something as important as ownership transfer, rushing things through really isn't an option. It pays to have a little patience — and a lot of planning.
Define Overall Objectives and Parameters
The first step in planning ownership transfer is identifying what you, the owner, want to get out of it. How much money would I like to make? How long do I want to stick around until the new owner completely takes over? What about the business do I want to remain the same after I leave?
"To some owners, it is very important that the business maintain the same name," Clancy says. "Some owners want certain employees to be retained in certain roles. These are the types of things owners need to be thoughtful about as they begin the continuity planning process."
At the same time, an owner must talk with the future owner(s) about what their objectives are. "There has to be some alignment here," Clancy cautions.
First of all, corporate objectives must be defined. This includes things like growth and profitability, as well as the potential obstacles to achieving those goals.
Secondly, it's important to separate ownership transfer from succession management. Again, these are two separate components of an overall construction business transfer. That said, the two often intersect.
For example, a long-tenured superintendent may also be part of a company's ownership group. However, that superintendent is functioning as a "manager" 90 percent of the time, and should be compensated and incentivized based on that managerial role. Another example is if you have two 50 percent owners, one of whom oversees business development while the other oversees operations. Even though the two are equal partners, their salaries should be based on industry norms for those positions. Then the ownership piece is handled separately.
Things for Current Owners to Think About
Owners must also contemplate their own personal goals when planning a business exit. There is a lot to consider during the continuity planning process.
Personal role. How do you plan to phase out of your role as owner? Do you plan on sticking around as a consultant or board member, or are you headed straight for the golf course or fishing boat?
Organizational objectives. What do you want to see the next generation of ownership and management do with the business?
- How long do you expect this entire transfer process to take? As pointed out earlier, it's common for construction business ownership transfers to take 8-12 years.
Personal goals. Some owners say they don't want to leave until a certain project or initiative is completed, for example.
Key employee retention. Owners must realize that they don't have to give every current employee a piece of ownership. But owners do have to find ways to encourage the most valuable employees to stick around.
Other considerations. "As you, the owner, are putting your list together of what is important to you, there are many other things to think through and have an answer for," Clancy says. For example:
- Estate and life insurance
- Voting control and power
- Rick profile and indemnification
- Buy/sell agreements
- Treatment of children, family and key employees
Things for Future Owners to Think About
The future owners of the company should be thinking about many of the same things outlined above. Additionally, future owners need to think about the level and duration of the previous owner's compensation.
Future owners also need to think about their personal financial situations. Future construction business owners are often at an age (30s or 40s) when they don't have a lot of extra cash lying around. "They are often still in that head-above-water phase," Clancy says. "That's why future owners really need to think through their personal financial situations and objectives."
Avoid shotgun partnerships. When two people are forced to be business partners, it rarely ends well. Even when it appears to be a good fit on paper, things can go wrong.
"I had a client whose next generation management came into play, and one of the new owners didn't have that fire in the belly to evolve outside of his current role to help grow the business," Clancy says. "It all looked good on paper, and he did turn out to be a really good project manager. But he just didn't have what it took to be an owner. The client had to have the difficult conversation with this person and buy him back out. Thankfully, he didn't get upset and quit. In fact, he agreed that he probably wasn't a good fit for part owner, and didn't even want to be an owner. He stuck around for another three or four years."
In the event that a potential new owner does prove to have what it takes, it is important to define what that person's day-to-day role in the business will be. This is especially vital when multiple people are slated to take over the business. The last thing a new ownership/management team wants is confusion among itself and its employees — much less conflict.
Develop Potential Successors Early in the Process
When you look at the top reasons why continuity planning and management succession fail, most relate to not having the right people who are prepared to assume leadership and management of the company. To avoid this, a current owner must take steps early in the process to begin identifying and developing their potential successors.
Clarify key roles. According to Clancy, roles such as equipment operators and project managers, while vitally important, are givens. "We're talking about people who really help drive the business forward," Clancy points out. "Maybe that is your chief estimator, business development director or operations manager, for instance."
Once those strategically critical roles are identified, owners can define what great looks like in each of those roles. "When someone walks in the door to fill one of those positions, what characteristics would they possess that would compel you to hire them on the spot?" Clancy asks.
Set some standards. Building on the above statement, what do you need when it comes to successor candidates? Yes, they need certain technical skills and industry knowledge. But to increase the odds of being a successful successor, the following traits are also important:
- Compatible with company culture
- Strong in communication and networking
- Open to development and coaching
- Fierce commitment to meeting unselfish goals
- Curious, insightful and engaging
- Strategic, long-term thinker
Clancy refers to something called peak profiles. Peak profiles align with the company's purpose, values, culture and vision. Peak profiles also help differentiate a star performer from an average one. "Peak profiles drive who we are and what we do to make the company successful," Clancy says. Essentially, a peak profile describes the "perfect employee" in terms of how they think and perform.
Assess your pipeline. Whom do you already employ that could potentially fill the key roles in the future? Do you have enough talent in the pipeline or will you need to look externally for talent? Identify the candidates, assess their capabilities, and then identify where any gaps exist. "Then you can begin addressing those gaps, whether that means training and mentoring of existing candidates, or additional efforts to recruit externally," Clancy says.
Prepare your successors. Training and mentoring are critical. "Give your successor candidates developmental assignments, and then evaluate whether they are getting them done the way you would like," Clancy says. "The next step is looking for ways to accelerate their development."
There are different tools available including coaching and mentoring, peer groups, and formal education and training programs. "Any combination of these tools can be used to create an IDP, or individualized development plan," Clancy explains.
Sometimes construction company owners are afraid of investing too much time and money into their people. Owners fear that once these employees are trained, they will go work somewhere else. While this fear is understandable, it must be overcome.
Transfer of ownership of a construction company is a complex process that requires hours of planning and years of careful execution. The odds of a smooth transition skyrocket when the right people are in place to take over the business. The sooner an owner starts the process of getting those people in place, the better.
This article is based on a presentation given by Mike Clancy at CONEXPO-CON/AGG 2020. Clancy is a principal at FMI Corporation, a management consulting firm that works exclusively with the construction industry. He has a strong background in construction operations, bringing a unique focus on operational improvement and strategic thinking.
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