There are many moving parts in the day-to-day management of a construction company. Between dealing with people, managing project profitability, tracking materials flows, and financial reporting, you may not have much time to think about your company’s ownership mix. Whether there is a single owner or multiple owners, family members or not, sooner or later the topic of ownership transition may come up. When it does, CFMs are frequently looped into those discussions because a number of financial questions may emerge.
There are numerous reasons why company owners decide it’s time to consider who the next owners of their business should be, whether the successors are family, managers, employees, or a third party. All companies, however, ultimately undergo an ownership transition process, whether they have planned for it or not. Planning for ownership transition often leads to more satisfying outcomes. Time is the valuable commodity in transition planning; the more time you have, the better it will be.
If ownership transition is the effect, then what are the causes? CFMs should be aware of common inflection points that can (or should) trigger action. While they occur in many different types of businesses, they are quite pronounced in the construction industry. Here are some signals that it may be time to consider a transition plan.
1. Age of the Company’s Owner(s)
This one can be easy to observe, but dealing with it can be quite delicate. The right time to exit a business is, in many cases, more a function of the business owner’s state of mind rather than chronology or health. As such, there isn’t a common timeline that business owners follow, and many may exhibit a fair amount of procrastination because they are unsure about the process or the alternatives.
The age element becomes even more challenging when there are multiple owners of different ages. It is quite likely that they are not all operating on the same timeline. It is unwise to assume that the older business owner seeks transition first. This scenario presents both a problem and an opportunity. The problem is that business owners frequently believe that their only option is to sell the entire business. When there are multiple owners with varying timelines, this lack of information may stop the process in its tracks. So, the opportunity for CFMs is to be the source of information and education, informing owners of fractional strategies to consider.
2. A “Hot” External Market
At a robust market’s peak, the information on acquisitions is almost unavoidable, but the market isn’t always ideal. If the market activity is strong and valuation multiples are rich, then the company’s owners may have considered valuation, which may lead to a discussion of transition. More than in other industries, however, construction industry participants and potential acquirers alike understand business cycles, and the market may soften ahead of a sector decline. If you’re observing a heated marketplace for business transactions, you should evaluate whether it is in its early or later stages in the cycle as you seek to manage your ownership’s expectations.
3. Internal Management Succession Status
Sometimes, an exit strategy is exactly what business owners want, and they’re well on their way to making it happen. Many business owners have already considered management transition as part of this process – they just haven’t yet told employees about it. Of course, it’s a good business practice whether a transition strategy is being evaluated or not. Still, management transition planning can signal preparation for an ownership transition process because it plays directly into the results. If your company has addressed this, an ownership transition discussion may occur in the near future.
4. Observing Career Anxiety
The next inflection point is a little more subtle. As private company owners near retirement age, their associates often begin to wonder what the future holds. This preoccupation may lead to a sense of anxiety because they’ve witnessed elsewhere what can happen when a transition process occurs. And, in the absence of communication from the company’s owners, they’ll often fear the worst. This anxiety can impact employee behavior and also impact the desire to stay on board. In construction, retaining employees is critical given the unique skills needed manage projects and PMs.
5. Observing “Value Protection Mode”
For many company owners (and especially founders), there may have been a time during the company’s history when financial stress was encountered. As a result, some business owners don’t want that history to repeat itself. For many, getting out of debt lifted a weight off of their shoulders, and so they are reluctant to re-lever. While this is a laudable desire in the occasionally volatile construction sector, it can also result in missed opportunities as the owners protect their “nest egg.” For people who have built their careers at the company, this financial stagnation can be frustrating. It can also be costly because if one firm passes on an opportunity, another will likely pursue it, which can lead to eroded market share and, ultimately, lost value.
These key inflection points can often coincide with or precede the discussion of ownership transition planning. It shouldn’t surprise you when the company’s owners approach you with the topic given your financial expertise. For some observers of an inflection point, however, the only path may be to initiate a discussion with the company’s owners directly. If you use your observed inflection point as the way of starting the discussion, it may help. It’s possible the company’s owners have had similar thoughts and would welcome a discussion.
Robert J. Gross is Senior Managing Director at Prairie Capital Advisors, Inc. He provides more than three decades of experience in valuation, ownership transition, capital management, financial transactions, and more. He may be reached at 630-413-5585,firstname.lastname@example.org, or www.prairiecap.com.
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Posted on Thu, May 19, 2016
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