Getting the shareholding right
19 April 2017
Having the right, or the wrong, shareholding can have a dramatic impact upon both the profitability and the growth potential of a business in the construction sector. The issues become more significant as a business gets larger or as a key shareholder approaches retirement time.
Most companies in the sector start off as a small one-man band and for those that grow, invariably the limitations of a single shareholder/director/working owner manifest themselves. Many of the early challenges to growth are resolved by employing appropriate staff. But frequently, in the owner’s eyes, they don’t exhibit the same full range of skills and capability as the owner and growth can be stifled. The most common reason is that the business owner is solely responsible for sourcing and negotiating future work. This is a skill that some people have, some will develop, and some will never develop. It is a skill that is a pre-requisite to being invited to be a shareholder.
The industry falls into several different categories each with their own issues and opportunities:
- The big corporates including those that are privately owned are able to attract and remunerate top performers in the industry. Their shareholding strategies are different to the rest of the industry.
- The single owner-operated businesses, some of which are very profitable, controlled by a single owner with scale of operations restricted to a comfortable, maintainable level. They have limited growth but are usually sufficiently profitable to support the owner. However, issues arise when the owner wishes to retire leaving the business difficult to sell and expensive to wind down. The owner ends up working for longer than desired and not getting the desired retirement fund from the sale of the business.
- The long-term planners. The owners of these businesses recognise that to grow and have strong profitability they need a wider range of skills to complement their own and they carefully select, retain and eventually provide shareholding to the high performers. This improves retention of the high performers and enables a managed succession plan allowing the original owner to phase down and sell their shareholding at a good price.
This is a difficult industry for a newcomer to successfully acquire a business in and the vast majority of business or share sales are to employees or to a selected and groomed person currently working for one of the larger corporates.Business sales to employees in this industry usually produce a much better sale price than to a stranger.
Having multiple shareholders is not always plain sailing.Shareholder disputes in private companies are common and usually very destructive to the business and staff morale.This means that careful and appropriate shareholder selection is critical as well as having a shareholder agreement that facilitates the rapid departure of a disgruntled shareholder.
It is rare for a single person to have all the necessary skills and attributes and I have seen a lot of companies thrive when an existing previous owner struggled on his own but brought in another shareholder with complementary skills.In this situation, half the company can be worth a lot more than the whole company prior to a new shareholder being introduced.
- Past their use by date. Some former owners have implemented a succession plan to transition part of the management and shareholding and are left with a relatively small shareholding. Some of these are strangling their business through poor decision making and loss of passion. In some cases the business will be better off if the owner retired, sold the balance of their shares freeing up the new team to drive the business forward. While these owners often say they are staying on to protect their investment and get all their money out, there are other mechanisms to achieve this while creating space for the next generation of leaders.
- Larger consulting firms. Modern professional practices have very clear criteria for admission of new shareholders as well as retirement of the older ones and have a formal process to facilitate this. It is difficult to replicate their model in a construction company but the good ideas within it can be used.
Ideal Attributes of a Working Shareholder
This will vary between organisations and number of existing shareholders.
- Proven ability to obtain new projects. This requires good networking, marketing and negotiation skills.
- A passion and commitment for the organisation well in excess of that demanded of employees.
- Strong relationship with, and respect of other shareholders and senior staff.
- Technical and management skills; a basic pre-requisite and not a basis for a shareholding right on their own. Non-shareholder employees have these skills too.
Now is the time to consider these matters. Following the last downturn there were very few business sales or shareholding changes in the industry and for some, winding up or virtually giving away the business was the only viable option. However, introducing new shareholders must be done only for the best people and the right long-term reasons.