There are many ways to run a construction business. Family ownership is a common model—of 789 family firms surveyed in a 2024 study by non-profit research group, Family Enterprise USA, a little over 10 percent were in construction, making it the second most common industry category.
Construction firms are also increasingly opting for Employee Stock Ownership Plans (ESOPs). An ESOP can be defined as “an employee benefit plan that buys and holds company stock in accounts for the benefit of participants,” explains an ESOP FAQ on the website of the National Center for Employee Ownership (NCEO), a nonprofit research group.
Both approaches offer benefits, albeit with a few significant provisos.
In terms of family firms, it can be tricky to operate a company with co-owners who are also relatives. Fortunately, there’s no shortage of advice on how to make things work. The article Five Keys to a Successful Family-Owned Construction Business, posted January 14, 2021 on the website of the Gross Mendelsohn accounting/business consulting firm offers some excellent pointers. At the top of the list is holding everyone to the same standards. While it’s tempting to cut your co-owners some slack when they’re part of your family, allowing relatives to dodge the rules is a recipe for disaster.
“More often than not, the destruction of a family-owned business comes down to the decision or action of a family member who has violated a core company policy,” notes the Gross Mendelsohn article.
Owners in such a position might consider establishing an independent board of directors that can provide objective oversight and help with the decision-making process. Making tough decisions is challenging enough without worrying about how they might impact a relative, points out Gross Mendelsohn. Also, set up a business plan and stick to it, reward good employees, and establish an exit strategy.
“Any good company owner hopes that their business will continue to succeed long after they’re retired. To ensure the future success of your business, anticipate starting the exit planning process seven to 10 years in advance,” writes Gross Mendelsohn.
Battles over business succession can tear families apart—which is one reason owners of family firms often shy away from the issue. Nearly 50 percent of construction executives surveyed (from both family and non-family-owned firms) said they had no plan for transferring ownership, noted a 2021 survey from the FMI consultancy and the Construction Financial Management Association (CFMA).
BuildCenter, a California-based construction software firm, and Construction Dive, an industry publication, both offer solid suggestions on how to successfully transfer ownership within a family. Learning the business from the bottom up is essential. “If you are the son or daughter of the owner and you want to take over someday, plan to spend time in the field learning the ropes from the crew. Work with the crew side by side and learn the trade,” recommends the post, How to Take Over the Family Construction Business, on the BuildCenter blog.
Determine the nature of the company’s relationships with staff, subcontractors, and clients Who are the leaders? Who is a problem? Who does stellar work? Construction companies live or die on their reputation, making such investigations all the more crucial.
“Unlike other types of businesses, construction companies tend to have a reputation-driven pipeline of projects, as opposed to a set of long-term revenue-generating relationships. So make sure that your successors are client-facing and have the opportunity to begin building relationships that are strong enough to endure after your departure,” states the article, 5 Steps to Transfer a Construction Business to a Family Member published March 22, 2022 on the Construction Dive website.
If you don’t know already, learn the secrets of the company’s success, continues BuildCenter. What is the main factor that bolsters the bottom line? Is it good prices? Solid craftsmanship? Speedy response time? Talk to the family member who has been running the firm to find out.
When it comes to scheduling an ownership transition, the BuildCenter blog recommends taking a go-slow approach. Instead of retiring all at once, perhaps the parent/owner could gradually reduce their working hours and responsibilities. “Realize that your parent owner’s life has been poured into this business and it’s not easy for them to let go. This is to be expected. Be patient. Let the process happen in its due time,” states the BuildCenter post.
“Start preparing your successors—the process of grooming successors can take years. So as early as possible, identify the roles that will need to be filled upon your departure and discuss with your family members who might be best suited for each,” adds Construction Dive.
Construction Dive recommends establishing a “family pact”—a set of ground rules on how the firm will operate and the role each family member/co-owner will play. The family pact should also include notes on “how to resolve any disagreements that will inevitably arise.”
Also, should the ownership change be a sale or a gift? While the monetary benefits of selling a company to a family member are obvious, it can be advantageous to grant ownership in the form of a present. “If the business has debts or other liabilities, a gift can be an easy way for an owner to turn those responsibilities over to the next generation—so long as there’s open communication with those family members about what they’re stepping into,” explains Construction Dive.
Just as a board of directors is a good idea for oversight purposes, family firms should “seek professional assistance—when it comes to transferring ownership of a business to another family member, the complexity generally makes it a wise move to hire an experienced, third-party who can assist with the finer details,” adds Construction Dive.
Regardless of how they operate or transfer ownership, family-owned firms are “private” companies as opposed to “public” businesses. The latter offers shares that are traded at stock exchanges and are “required to file annual reports and other documents with regulatory bodies such as the Securities and Exchange Commission,” explains a Brock University Library webpage on Company & Industry Research. In a private firm by contrast, “it is not possible for the general public to buy shares. In most jurisdictions (e.g., Canada or the United States), private companies do not need to file annual reports or disclose financial information to the public.”
Private, family-owned firms can, however, set up ESOPs. In fact, the FMI/CFMA survey found a growing interest among construction companies in such programs: “Many large general contractors are shifting to employee ownership (10 percent of those surveyed), enticed by its value as a talent retention and recruitment tool as well as its benefits to the company’s bottom-line,” stated the study.
So, how does an ESOP work? “The company sets up the ESOP plan and trust and contributes tax-deductible cash to buy company stock… Companies can also borrow money to buy a large block of shares and then repay the loan through the ESOP trust. The ESOP trust is the legal owner of the shares (to be precise, the trustee is the shareholder of record), and the employees have accounts in ESOP,” explains the NCEO ESOP FAQ.
At present, roughly 6,300 businesses in the United States have ESOPs, according to NCEO information. Private construction firms accounted for 17.4 percent of these ESOPs, according to 2024 data on the NCEO database. The popularity of such plans in construction circles was noted by Forbes.com in a February 22, 2022 article titled, Why Construction Companies Are Leading the ‘Decade of ESOPs’ Trend.
“Many established C&E (Construction & Engineering) ESOP companies fared surprisingly well during the pandemic. While profits were hurt for some, access to capital continued to be strong for many firms as did cash flow and liquidity,” writes Forbes.com.
Incentivizing employees is another key benefit. The construction industry suffers from a shortage of skilled workers as existing employees near retirement age and young people aren’t flocking to replace them. An ESOP enables employees “to share in the capital growth of the company… Given the cyclical nature of the industry, labor shortages are common and other firms can woo key people. Employee ownership is a good tool to lock in a work force,” notes an article, ESOPs in the Construction Industry: Issues for Contractors and Others, on the NECO website.
Encouraging workers to remain with your firm by offering an ESOP can also help firms obtain surety bonds, a common requirement on a building project to make sure a contractor abides by contractual conditions and terms.
“Some of the benefits of an ESOP in the eyes of the surety include the use as an ownership transfer vehicle that is part of a continuity plan, an incentive plan to retain key employees and work crews, and the potential to enhance the financial wherewithal of the contractor,” note the NCEO article.
Finally, ESOPs can also help address the tricky issue of ownership transfer in family-owned construction firms. As Forbes.com states, “Establishing an ESOP can make a difference in succession, both for the owner and the next generation of management. It allows them to retain a family’s legacy while transferring ownership to employees, thus retaining the company’s culture without selling to another entity.”
