Management Succession Critical Issue For Contractors
A recent program sponsored by the Associated General Contractors of America and consultant firm FMI Corp. dealt with the issues of ownership transfer and management succession. The “Ownership Transfer and Management Succession” program referenced a 2003 study by FMI, which reported that almost a quarter of contractor respondents planned to sell their stock in their companies and no longer be active in their businesses in less than five years. Yet, nearly 30 percent of those responding to the survey say they are not ready to transfer ownership, and another 20 percent are unsure of or unaware of techniques for transferring ownership.
“Many owners simply do not understand how difficult it can be to manage a successful internal transfer,” said Hugh Rice, chairman of FMI Corp. “Transferring a business internally can take eight to 10 years and is not an easy proposition.”
Rice notes that although there is a heightened level of interest in contractors from both strategic and financial buyers, an internal sale continues to be the primary exit strategy for the majority of contractors - six out of 10 contractors cash out of their businesses through an internal sale to key employees or family.
- Rice told attendees at the
AGC-FMI program that there are five key components to the ownership transfer
and management succession process:
1. Defining objectives and parameters of the plan;
2. Valuing the business;
3. Exploring and selecting appropriate ownership transfer techniques;
4. Understanding and addressing management succession issues; and
5. Implementation and follow-through.
There are many reasons why ownership transfer plans fail, Rice noted, most of which can be attributed to a failure to understand this process.