Selling Your Firm to Retire Requires Early Planning

By Jim Jordan

Jim Jordan is director of construction services for Dallas/Fort Worth-based Weaver and Tidwell LLP.

The author discusses the immenent retirement of baby boomers, which will create a large turnover in management and ownership of construction companies. Early planning is key to a saisfying family succession and retirement experience.

For the baby boomers turning 60 this year - and those close behind - decisions relating to retirement should be addressed now.

In the construction industry, the retirement of baby boomers will create a large turnover in management and ownership, espcially for family-owned businesses. The wave of change will be felt in many industries. Family-owned businesses account for about 90 percent of businesses - and employ 60 percent of all workers. Over the next five years, 30 percent of family businesses will experience a management or ownership change due to retirement or semi-retirement, according to the University of North Carolina's Family Forum.

According to the Family Business Institute, 60 percent of owners who plan to retire in five years have not identified a successor. Planning an ownership change at a family business can be an emotionally charged issue. Family owners typically have much of their net worth tied up in their businesses, which generally are not liquid investments. Quality of retirement will depend on how - and how quickly - they get their money out of the business, often a hard process when family members are involved.

Owners must first decide how to minimize risk when beginning the process. An early decision will be to select a successor who will protect the owner's investment. Should it be a family member, an employee, an outsider? Although 80 percent of owners say they want their business to stay in the family, 70 percent of family-owned businesses fail once ownership passes to the second generation; 88 percent fail by the third generation; and 97 percent fail by the fourth generation, according to the Family Business Institute's statistics.

For a contractor who has family members working in their company, here are a few key considerations:

What is the owner's primary goal? A business owner must first decide whether their chief goal is to cash out in a way that provides sufficient retirement income and, perhaps, some future inheritance for the children. Or is the goal to provide retirement income and a livelihood for younger family members? Owners must decide how much money they need to take out of their business to have a satisfying retirement. Emotions must be removed. It would be quite easy for a parent to allow a younger family member to pay a lump sum, and pay off the rest over several years. But what guarantees that the business will continue to succeed and future payments will be made? Remember the statistics.

What is best for the business? For those who want their business to continue, deciding what is best for the company may require some soul searching. Given the poor record of second- and third-generation businesses, selling to an outsider may be the best answer. Such a decision is easier if made early in the process and communicated effectively and honestly to younger family members.

Who should get the business? If an owner is willing to sell the business to a child, but more than one is employed, the owner must decide who gets the business - or how it will be divided. Dividing ownership can create problems. Generally it's best to sell the business to one child and, perhaps, allow others to hold key positions. Treating children fairly and equally is not the same thing. One of the children will be more skilled and enthusiastic about the business, and that is the one who should be given the right to buy the business. Children and family members who aren't involved in the business can be provided for in other ways. These relatives need to understand that the family member who takes over the business is inheriting a double-edge sword. Yes, that member will own the family business, but he or she is now on the hook for debts, liabilities and management mistakes.

Will the underwriters approve? Whether an owner plans to sell his company to an outsider or a family member, they need to win the approval of the surety and bank. If these underwriters don't feel the retirement plan adequately protects their financial interests, future loans and further bonding may not be forthcoming. This can be avoided by engaging the underwriters early in the retirement planning process.