To Sell or Pass to Your Kids—What’s Best for Your Construction Company?

April 21, 2016Exit Strategies, Family Business, Succession Planning

Construction is a classic trade. It’s been around since the dawn of time. Tradesmen have been passing along their skills to their children for just as long. In many ways, it was very ceremonial to bring the next generation up in the business. Today, construction is one of the few remaining industries that you bring your children into at a very early age.

Mine started joining me once they could stand. As a proud dad, I got them their own belt and boots as soon as I could. Boy, did they love going to work with dad! They started by sweeping and digging, then grew to carrying lumber, cleaning job sites, washing trucks, and later they graduated to doing material runs. Eventually, they got a saw in their hands and started building.

It’s a great bonding experience to work side by side with your kids. The harmony on a jobsite when the entire team works together, taking the blueprints and transforming them into a building is exhilarating. That experience is even better when you have your children by your side.

Not to mention that it’s also really nice to have that wingman that will go out in the rainstorms and help you tarp off roofs when no one else is around at 2am.

My wife was never happy with me, but we always came home with a new story.

There comes a defining time in every business owner’s life when they have to start evaluating the legacy of their construction business. It’s no longer small construction boots and miniature-sized belts. Is the business something that you hope stays in the family for years to come, or are you hoping your children steer clear of the industry all together?

Anyone who owns a construction company is usually very clear on what they think about this question. Some say that their kids will never take this business and have drilled into them that they should never get into the trades. Then there is the other side: teaching them everything and actually wanting to hand the business to their kids.

When it comes to evaluating the question whether to sell it or pass it to your kids, my advice is to reflect on why. There is a significant difference between being the boss and working together with your child and handing over the reins completely.

The reality is that your child has no better chance at succeeding than anyone else out there. There are countless statistics about the success rates of passing the business from Generation 1 to Generation 2 and even to Generation 3. We’re not going to spend time digging into these, because parents are notorious for not believing in statistics when it comes to their child. All I will do is mention that the success rates are not impressive.

Instead, I am going to request that you evaluate the idea of passing on the business from a bigger perspective.

Here are difficult questions you need to ask yourself as you start this evaluation:

  • Why do you want your kid to take the business?
  • What happens if he/she fails?
  • What happens if he/she wants to bring technology into the business? What happens if he/she wants to makes changes?
  • What happens if he/she wants to let go of some of your “friends” that he/she thinks are not good for the business?

Those are only some of the mechanics of operating the business. You also need to consider the relational aspects.

Consider how this transfer will impact your relationship with your child. It’s one thing to watch a stranger fail and crash their business. It’s another thing entirely to watch your child do it to your business. The other added layer is the financial component. When an unknown buyer makes unwise decisions after you collected all the money from the business sale, it’s unfortunate but your retirement isn’t in jeopardy. It changes the equation when your child makes foolish decisions and still owes you a lot of money earmarked for your nest egg.

As with all family dynamics, it’s never isolated to one relationship.

Most likely the direct relationships in question will be your other children. They will view you “giving” the business to a sibling as a sign that you should give something to them as well. After all, these are children who still believe that everything in life needs to be fair.

Imagine now that the deal goes south. How will your children get along after you have to take money out of the estate because one of your children floundered the business that was designed to support you and your wife through retirement?

Hopefully, extended family politics don’t intertwine with the situation as well. That is never pretty.

The point here is that the decision to pass on the business is much more about the long-term effects of your relationship with that child as well as how it affects the rest of the family. A family business never operates in isolation to the family. You’ve seen this play out time and time again over the years.

Evaluate all aspects of what this business sale could mean for you and your family. Consider worst-case scenarios and ensure that you are fine if the results veer that way. Remember, just because you were successful and they grew up in the business with you does not ensure success.

The true definition of success in a family business transfer is that upon your death, the next generation will still want to have holidays together and the cousins know each other. If that is ever at risk, then sell it to someone else.

Regardless of which route you decide to take, or if you are still determining which is the best for your family, it’s essential to approach your transition with a strategy. This becomes even more pivotal when you pass the business to your children. Additionally, the timeline to successfully transition out becomes longer. You need to ensure that you address family dynamics as much as you do building structure in the business.

I have successfully helped plan and execute transition plans for dozens of business owners, including effectively building out strategies for handing off the business to following generations. Together, we can ensure the success of your business exit and maintain family relationships throughout the process.

Contact me today to start outlining the plan to realize your long-term business goals.