The road to retirement

You’ve built your company up from scratch, overcome impossible obstacles, created a thriving well-respected construction company with your own two hands. You may think you’re sitting on top of the world, but in fact your biggest challenge yet is staring you right in the face – a challenge that many if not most privately owned and family-owned construction companies don’t handle well.

Most family dynasties don’t last long in construction. There are a lot of reasons why. Succeeding generations of family members don’t have the fire or the aptitude for construction, entrepreneur owners fail to identify and develop the right kind of managers to meet the future needs of the company and frequently owners don’t allow enough time to implement a succession plan.

Nonetheless, there is a path you can take to make sure the company you built survives beyond your retirement. Identifying the people who can lead your company and then sticking to a management and ownership succession plan requires a lot of work, time and tough decisions. But choosing the right successor may be the single most important decision of your business career.

Old school vs. new school
The construction business environment has undergone profound changes in the past 10 years and the skills you used to build your company are not the skills that will make it succeed in the future. Honesty and hard work will always be required, but tomorrow’s managers need some new ways of thinking.

“Some companies think they can carry out the formula that’s worked in the past and they select a guy who is just like the guy who is leaving,” says Dan Wooldridge, a senior consultant at FMI and a faculty member in the company’s Leadership Institute. Typically that person is focused on operations. They’re top down managers – strong, hands-on leaders who as Wooldridge says, “know more than anybody else in the company.”

The robust construction economy has made it relatively easy for good contractors to make money, Wooldridge says. But as the industry continues to consolidate with bigger contractors merging or swallowing up smaller contractors, margins are shrinking and competition for dollars is intensifying. “Where the money is being made in construction is beginning to shift,” Wooldridge says. “You can’t succeed by just running your projects more tightly.”

Partner Insights
Information to advance your business from industry suppliers

In the next 10 years the people who will lead construction companies to success will be more outward focused, able to create alliances and partnerships, and a lot more financially savvy, Wooldridge says. “You’re going to be leading people, but having more of a collaborative team. Your responsibility will be more about setting direction and creating alignment around diverse people,” he says. “A senior leader is going to be more of a strategist than an operational guy, more of a coach and developer of leaders. He’s got to be a talent recruiter because the industry is desperate for good talent. The construction company leader in the future will have the ability to enable people to succeed, not just get them to do what you want them to do.”

Future leaders will also market and promote their companies differently, Wooldridge says. A question he asks contractors is this: If you’re in the business of building hospitals or schools, who do you hang out with at the end of a day, who do you network with on an informal basis? Old-school contactors typically network with their peers, other contractors or subcontractors. Marketing minded new-school contractors, Wooldridge says, will network with hospital and school administrators, or other decision makers who shape or influence the markets they serve.

Not always an obvious choice
Identifying the person or people who have the skills or ability to lead the company into the future requires a lot of soul searching on the part of the owner. Many of the obvious choices may be unsuited to the role. Wooldridge identifies two common fallacies: the charismatic personality and the right-hand man.

The charismatic personality is well known and well liked within the organization; a strong personality, but often more focused on themselves than the goals of the organization. Wooldridge cites a recently published business book, Good to Great, by Jim Collins as evidence of the dangers of putting a charismatic personality in the top role.

In studying the characteristics of companies that greatly outperformed the stock market over a minimum of 15 years, Collins found that none of them were led by high-visibility, rock star CEOs. Rather, the best performing companies were led by low-key CEOs who were characterized by what the book describes as a profound personal humility or Level 5 Leadership. These leaders focused on “clock building,” that is building an organization that worked versus “time keeping,” running an organization and keeping score. “In contrast, charismatic leaders often don’t create a management team around them, they create a supporting cast,” Wooldridge says.

Another obvious choice that sometimes proves disastrous is the person who has been the owner’s right-hand man (or woman) for 10 or 15 years. While this person may know as much about the business as the boss, they can be prone to a couple of shortcomings. First, they are often carbon copies of the boss and may lack the skills or aptitude to take the company into the future. Second, Wooldridge says, “The reason they were so good as your number two man is that that is what they are gifted at. They don’t have the inclination or aptitude to be the leader, or they’ve developed some pretty deep habits that make it hard for them to change.”

Send the kids packing
Of all the tough choices in selecting a successor, none can be more difficult to make than those involving your children. While many construction companies are handed down to the children of the owner, the emotional bonds that make families strong can also make a business weak.

“We often see contractors promote their own lineage over and above competence,” says Landon Funsten, a principal in FMI’s investment banking group. “They want to see their family legacy perpetuated. And often the second, third or fourth generation just doesn’t have it in a way that the current leadership or management does. That being said we also sometimes see second, third and fourth generations really take off, that take a company to a new level.”

Wooldridge says it can be hard for parents to be ruthlessly objective about their kids. They either overestimate their talent or they’re blind to certain faults. Another problem is that the children are sometimes reluctant to tell the parent they’re not really excited about the business, but stay on out of fear of disappointing the parent.

Kids who succeed and those who don’t
The difference in the companies that flounder and those that take off when the children inherit the reins is mostly a matter of how honest the owner is in evaluating his kids and how good his plan is for training them in the business.

Funsten recommends several things. First of all make sure they go to college and get a related technical or business degree. Second, when the child graduates from college send him or her to work for a different, non-competing contractor for two to three years. Then when they’re ready to come back into the family’s business, have them come in at a relatively low level, as a superintendent or foreman and work their way up.

That’s appealing on any number of levels, Funsten says. First of all it gives the family member coming up in the business immediate credibility. They’re not in the job just because of their last name. They’re starting from the bottom like everybody else. It also gives the family member some confidence, some new ideas, some fresh ways of thinking they can make an immediate impact in their family’s business.

One contractor who followed this advice is Pete Henderson, president of Henderson, Inc., a Williamsburg, Virginia, contracting company that does site work, concrete and carpentry. The company was established in 1956. Pete took the reins from his father in 1979 and is now in the process of preparing two of his three children for their eventual roles in the company.

“Our oldest, Leslie, graduated from Virginia Tech two years ago,” Henderson says. “She immediately went to work in northern virginia for a similar-sized contracting firm. Our son Peter graduated from James Madison University a year ago. He went to work for a large site contractor in northern Virginia.”

Henderson said it took some explaining to get his kids to agree to the idea. They had been involved with the business as summer interns between school years. But he’s sold on the benefits of the strategy. “The worst thing you can do is come in directly to a family business with no experience,” he says. “Regardless of how hard you try you’re going to be percieved as getting special treatment and if you do ride up to the top of the ladder, it’s not going to feel natural.”

Henderson was also diligent about choosing the companies his kids were working for and in selling them on the idea as well. “I met with them before I introduced my kids, letting them know what the game plan was, because I didn’t want any misunderstanding,” he says. “To my surprise they were more than willing to at least interview them, and the kids took care of themselves from there.”

The only drawback for the hiring company is that they lose that employee eventually. Henderson says that’s an acceptable sacrifice if the company knows it’s getting a high quality individual for a guaranteed period of time. “But the companies who hired our kids were willing to do it and paid them very marketable wages,” he says. “And they’ve been wonderful to my kids. They’ve gone out of their way to help them.”

Forget a quick exit
Once you have a handle on your leadership succession issues, you still have to put a plan together for eventually turning over the company. But to successfully exit a company of your own making takes a lot longer than most people think.

Most internal transactions have an underlying assumption that the buyer, whether it is the management team or family members, aren’t going to have the cash to buy the company outright, says Funsten. So in some fashion the owner will be buying himself out, using the profit that they would ordinarily stick in their pockets and giving it in some form, usually bonuses or stock, to the new team. And to do this can require anywhere from eight to 15 years.

“We talk to a lot of owners who say, ‘I want to get out of here in five years. I want to be in Florida and completely out of the company and not involved anymore,'” Funsten says. “And you can do that, but you’re still going to have a substantial amount of your net worth tied up in the company because its unrealistic to think you can get the transaction done that quickly. If you do have a substantial exposure, either with net worth in the company or personally guaranteed to the bank or surety, you can’t go to Florida in five years. You need to be there watching the store.”

Putting the long-term plan together
One of the most important things you can do during this eight- to 15-year period is to make sure your heir apparents get the right kind of assignments. These should be assignments that help them break out of the right-hand- man role and develop some entrepreneurial skills. “Often when a new generation of company leaders fail its due to lack of relevant experience and know how, of them not having been given sufficient authority and responsibility earlier,” Funsten says.

“You should be giving them roles that expose them to the kinds of things they will be responsible for when they get to the next level,” says Wooldridge. “That doesn’t get done very much.” To do this it may be necessary to restructure your company into smaller, independent units that function as separate profit centers. Then you can give your future leaders experience in the full range of activities and decisions required to manage a complete business.

Taking it to the bank
The strategies mentioned above may also be necessary to help get your management and ownership succession plans approved by your bankers and surety company. And without their approval your plans may very well never come to fruition.

“There are a lot of constituencies involved,” Funsten says. “It’s a very visible process. It’s banks, surety companies, equipment dealers, subcontractors and customers – anybody the company touches. Certainly the bank and surety companies need to know what’s going on because dollars are going to different places. And they need to be involved very early on. They need to know that the company’s not going to change. Just the ownership’s going to change. Sureties and banks hate surprises.”

The investment community in the past evaluated companies on their track records and hard assets, Funsten says. “But nowadays they’re making bets on people. The development of your core leadership team is probably one of the top strategic issues you need to pay attention to.”