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The Top Five Ownership Transition Inflection Points

By Robert J. Gross

There are many moving parts in the day-to-day management of a construction company. Between dealing with people, managing
project profitability, tracking materials flows, and financial reporting, you may not have much time to think about your
companys ownership mix. Whether there is a single owner or multiple owners, family members or not, sooner or later the topic
of ownership transition may come up. When it does, CFMs are frequently looped into those discussions because a number of
financial questions may emerge.

There are numerous reasons why company owners decide its time to consider who the next owners of their business should be,
whether the successors are family, managers, employees, or a third party. All companies, however, ultimately undergo an
ownership transition process, whether they have planned for it or not. Planning for ownership transition often leads to more
satisfying outcomes. Time is the valuable commodity in transition planning; the more time you have, the better it will be.

If ownership transition is the effect, then what are the causes? CFMs should be aware of common inflection points that can (or
should) trigger action. While they occur in many different types of businesses, they are quite pronounced in the construction
industry. Here are some signals that it may be time to consider a transition plan.

1. Age of the Companys Owner(s)

This one can be easy to observe, but dealing with it can be quite delicate. The right time to exit a business is, in many cases, more
a function of the business owners state of mind rather than chronology or health. As such, there isnt a common timeline that
business owners follow, and many may exhibit a fair amount of procrastination because they are unsure about the process or the
alternatives.

The age element becomes even more challenging when there are multiple owners of different ages. It is quite likely that they are
not all operating on the same timeline. It is unwise to assume that the older business owner seeks transition first. This scenario
presents both a problem and an opportunity. Theproblem is that business owners frequently believe that their only option is to sell
the entire business. When there are multiple owners with varying timelines, this lack of information may stop the process in its
tracks. So, the opportunity for CFMs is to be the source of information and education, informing owners of fractional strategies to
consider.

2. A Hot External Market

At a robust markets peak, the information on acquisitions is almost unavoidable, but the market isnt always ideal. If the market
activity is strong and valuation multiples are rich, then the companys owners may have considered valuation, which may lead to
a discussion of transition. More than in other industries, however, construction industry participants and potential acquirers alike
understand business cycles, and the market may soften ahead of a sector decline. If youre observing a heated marketplace for

business transactions, you should evaluate whether it is in its early or later stages in the cycle as you seek to manage your
ownerships expectations.

3. Internal Management Succession Status

Sometimes, an exit strategy is exactly what business owners want, and theyre well on their way to making it happen. Many
business owners have already considered management transition as part of this process they just havent yet told employees
about it. Of course, its a good business practice whether a transition strategy is being evaluated or not. Still, management
transition planning can signal preparation for an ownership transition process because it plays directly into the results. If your
company has addressed this, an ownership transition discussion may occur in the near future.

4. Observing Career Anxiety

The next inflection point is a little more subtle. As private company owners near retirement age, their associates often begin to
wonder what the future holds. This preoccupation may lead to a sense of anxiety because theyve witnessed elsewhere what can
happen when a transition process occurs. And, in the absence of communication from the companys owners, theyll often fear
the worst. This anxiety can impact employee behavior and also impact the desire to stay on board. In construction, retaining
employees is critical given the unique skills needed manage projects and PMs.

5. Observing Value Protection Mode

For many company owners (and especially founders), there may have been a time during the companys history when financial
stress was encountered. As a result, some business owners dont want that history to repeat itself. For many, getting out of debt
lifted a weight off of their shoulders, and so they are reluctant to re-lever. While this is a laudable desire in the occasionally
volatile construction sector, it can also result in missed opportunities as the owners protect their nest egg. For people who have
built their careers at the company, this financial stagnation can be frustrating. It can also be costly because if one firm passes on
an opportunity, another will likely pursue it, which can lead to eroded market share and, ultimately, lost value.

Conclusion

These key inflection points can often coincide with or precede the discussion of ownership transition planning. It shouldnt
surprise you when the companys owners approach you with the topic given your financial expertise. For some observers of an
inflection point, however, the only path may be to initiate a discussion with the companys owners directly. If you use your
observed inflection point as the way of starting the discussion, it may help. Its possible the companys owners have had similar
thoughts and would welcome a discussion.

Robert J. Gross is Senior Managing Director at Prairie Capital Advisors, Inc. He provides more than three decades of
experience in valuation, ownership transition, capital management, financial transactions, and more. He may be reached at 630413-5585, rgross@prairiecap.com, or www.prairiecap.com.

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