Even as contractors age and seek to transfer firm ownership and management to a younger generation, more are finding that the recession and inadequate transition planning likely will keep them on the job longer. In a new study, industry management consultant FMI says that even though more than half of those construction firms surveyed will change ownership in the next decade, 52% of contractor-owners don't have management in line to replace them and 56% have not developed a formal ownership transition plan.
In a study sent to 6,700 contractors with revenue of more than $15 million, nearly two-thirds of the 4.1% of owners responding say the recession has impacted their companies' return on equity. Since FMI's last ownership-transition survey, conducted in 2007, the firm also says the proportion of respondents over the age of 60 rose to 32% from 20%. During the same time, more than 33% of respondents saw declines in company return on equity exceeding 20%. The trend is pushing more owners to postpone retirement "to rebuild their business in the wake of the economic decline," says FMI.
"From my experience, practically every contractor [over age 45] has or will have concerns for business transfer," says Phil Warner, an FMI researcher and survey co-author. "Only a small percentage seem to have a good plan under way." According to the survey, the age 60-plus respondents are better prepared to transfer ownership, while more than half of those aged 47 to 60 "have management teams that need further development." FMI says recession impacts have prompted 20% of the 60-year-old or older owners to delay retirement, although half that group is still proceeding with transition.
FMI says that while transition planning is improving, there are large disparities across the industry. The survey says 44% of owner respondents personally guarantee bonds for their jobs, but only 40% of those have a plan to exit that obligation. About 36% of respondents don't have a formal plan in place to ensure business continuity, even if the owner dies. If the owner dies, the company "may be forced to liquidate as key managers depart or heirs prefer cash over ownership," says FMI.
According to the study, 17% of respondents say they will sell their firms to "third parties," up from 9% in the 2007 survey. But with up-and-down company valuations, owners may not the find buyer with the right price when they're ready to sell, FMI cautions.
Christopher R. Ryan, the 65-year-old founder and chairman of remediation specialty contractor Geo-Solutions Inc., New Kensington, Pa., transitioned to his new role on Jan. 1 after 17 years as president. "The biggest issue was balancing the natural desire of continuing management to maintain a significant and preferably controlling investment interest with the need to provide cash to compensate exiting owners," he says. "Private equity investment was a good middle ground and [now] allows our managers to continue to run the business." Geo-Solutions had $26.3 million in 2011 revenue.
In late December, the firm acquired Geo-Con, a similar environmental contractor that Ryan had founded in 1979. "If we had waited, perhaps we could have had some higher value, but I believe it is far better to under-promise and overperform after a transaction like this," Ryan says.