Master the ownership transition game

By Brian Moore

Who comes after you?

The ownership transition and succession of closely held businesses is one of the greatest challenges in the engineering and construction industry.

Leading industry consultants FMI recently surveyed contractors to gauge where they were in the process of company ownership transition and how they develop and carry out a plan to transition ownership to the next generation or sell. Nearly 20 percent of the respondents were heavy/highway/civil contractors. The average age of the owners was 54 with 33 percent older than 60. Eighty-one percent of the H/H/C companies report more than $20 million a year in annual revenues, and 36 percent more than $100 million. Seventy-six percent of H/H/C respondents say their business is a family business, and 72 percent of businesses have been in the family for two generations or more.

In most respects, heavy/highway contractors’ concerns were very similar to the overall response, and, not surprisingly, most of the owners were of the baby-boomer generation, the notable exceptions being those few respondents of the next generation who are just recently taking over management and ownership.

It is not surprising that family members are the recipients of stock either by gift or bequeath in the event of the owner’s death. However, many owners also expect select senior managers to become owners by buying shares over time. And only 52 percent say they prefer family members ultimately run the business.

It is still somewhat alarming that so many owners have not begun to make formal plans for management and ownership transition.

Only 37 percent have a formal plan in place to transition themselves out of managing the business, and 34 percent do not have a plan in place to ensure continuity of operations in the event of their death. One area that seems to be improving since earlier surveys is the number of owners (49 percent) that now say they have strong managers who could easily manage the business in the owner’s absence. However, 47 percent have managers that still need considerable training before taking over the helm. On the plus side, 84 percent report having a buy/sell agreement in place in the event of their death.

The long recession hasn’t made it any easier for owners to plan their transition to the next generation or sale of the company. But only 16 percent of respondents say the recession has caused them to put their plans on hold. Recession or not, 42 percent have yet to begin an ownership transfer plan. Notably, a portion of those are younger than age 55, so they have time. Others do not have as much time to plan and execute a transition plan, and it does take time.

We have also found that more of the baby-booomer genration owners are intentionally creating what we are calling a “lingering ownership transfer plan.”

Ownership transition planning for engineering and construction firms has historically focused on a transaction, with retiring owners selling to the next generation. The transaction typically took place over a period of years and had a defined end. FMI is seeing a shift in the way sellers think of “retiring.”

Sellers are taking a slower approach to the sale, and sometimes the process does not have a defined end date. Thus the “lingering ownership transition.” Several factors are driving this change in thinking:

1. People are living longer – the prospect of living to 90 or 100 means that retirements are longer, which, in turn, implies that retirement income may potentially be needed for decades.

2. Traditional retirement investments have been underperforming for more than a decade. Since 1999, the stock market has been essentially flat, interest rates are nominal and real estate has struggled. The strategy of living off the income from traditional retirement investments is not working very well. Trading stock in a profitable private business for traditional retirement investments is not very appealing economically.