6 steps for passing down your construction business to your children

Passing down your construction company to your heirs can leave you exposed to liability if you fail to take the necessary steps

|  December 12, 2013 |

shutterstock_65375929You’ve grown your construction firm into a thriving business, and now you’re ready to retire. Your children are waiting in the wings to take over the company they’ve been groomed to run since they were old enough to climb onto a piece of equipment.

However, you know you can’t just hand over the reins and head to the golf course. So, how do you make sure you’re protected? And how do you know your children are covered?

For the smoothest possible transition, think of yourself as the seller and your children as the purchaser, says Chicago-based construction attorney and registered architect James K. Zahn. Have attorneys handle the ownership transfer, and treat it as a sale, even if the company is a gift. Here are some practical matters Zahn recommends you discuss with a lawyer:

1. Have your own legal advocate

Before negotiations begin in earnest, each party should consult their own attorney, accountant and estate planner.

2. Know the value of the assets

Have a knowledgeable, objective third-party value the company to determine the fair market value, even if the owner transfers his interest as a gift.

3. Update your records

To begin with, you’ll need four years of financial records: income tax, balance sheets, profit/loss, etc. You’ll also want to have handy any outstanding financial obligations, such as loans, lines of credit and equipment leases. Have copies of all business licenses available.

GenerationGapBox 4. Nail down the specifics

If there is a purchase price involved, outline the sum to be paid, the period of time over which the amount is to be paid and the interest rate the debt will incur. For a purchase over time, come to a mutual agreement on a specific time period. Include information on salaries for the buyer and seller. All insurance policies and equipment and space rental leases should remain in place unless specifically noted.

5. Eliminate risk

All terms should be outlined in the purchase agreement, including those you think you’ll never need. Have your attorneys draw up a covenant not to compete, non-disparagement provision, confidentiality agreement and defined dispute resolution process, for starters. In the event any disagreements crop up during or after the transition, you’ll have a guideline to fall back on.

6. Ensure a smooth hand-off

Keep the seller involved for a short, specified period of time. Not only will the seller be in a position to further mentor the next generation, the transition to new ownership will be smoother for your client base.

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