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Succeeding at Succession – Part III

The following article originally appeared in the August newsletter to clients of Kiley Advisors, now a part of FMI Corporation.  Reprinted with permission.

This is the third and final installment in our discussion of succession, an important and relevant topic, because over the next three to five years, the majority of construction companies will experience the retirement of their baby boomers, now filling key senior leadership roles, including the CEO. In the other two articles, we have discussed the limited options to sell their companies that most traditional building general contractors have. In almost all cases, the only option is to sell it internally it internally – to family members or to a key group of employees – or to create an Employee Stock Ownership Plan (ESOP). Specialty contractors, especially non-bonding self-performers with a book of service contracts, are attractive to both strategic and financial buyers.

We have also discussed – assuming a plan exists for the business to continue, the critical need to prepare the successors, strategically and deliberately – by experiences, education and exposures, citing the fact that there are not enough Generation Xers to replace the retiring boomers, so millennials must fill these slots, requiring the acceleration of their development. Many smart models exist to help achieve their readiness.

We want to conclude with the special challenges of family business succession, perhaps the most common for traditional construction companies. However, passing the business to the oldest son is not as automatic as it once was. These days, daughters appropriately enter the discussion as does the family’s basic belief about the core purpose of this family business. Mosaic Advisors, a wealth management advisory firm in Houston, works with families for whom the vast majority of the family wealth is their business. This group insists that families must answer this question: “Are you a business-first family or a family-first business?” For the business-first families, competency to both run and grow the business will be the dominant criterion for the successor, family or not. Ownership can be separated from leadership and management.  There are many ways to structure ultimate control in non-family executives, while giving family members full financial benefit and other respectable roles. The governance structure will need to support this decision as well.

The transfer of stock ownership is also a critical decision in family business succession, whether all siblings are competent and in the business or whether some are in and others out. Estate professionals use the phrase “equitable but not equal” when considering ownership stock distribution. Finally, there is the matter of providing a vehicle outside of the business to pay the estate taxes of the prior generation. These are heavy matters, especially for the exiting parents. Succeeding at succession requires time, guidance, deep thought and the courage to make tough decisions.