News & Press

As Published in CIC Construction News – April 2025

By Phillip Ross, CPA, CGMA, Anchin
Partner & Co-Leader, Construction Industry Group

Succession planning is a pivotal process for construction business owners, ensuring their legacy endures, wealth is preserved and that their company remains stable. Among the various options available, an internal transition – whether to family members, key employees, or even through an employee stock ownership plan (ESOP) – is often favored for its potential to preserve company culture and continuity. However, internal transitions also present challenges, including financial feasibility, leadership preparedness, and valuation considerations. Business owners must carefully evaluate their options to determine the best course of action.

Successful construction businesses thrive on long-standing relationships with clients, subcontractors and suppliers – in addition to a strong management team. An internal transition can help to maintain these relationships and preserve the company’s reputation, values, and operational structure. Unlike external sales or mergers, which may disrupt company culture, an internal transition can ensure continuity in leadership and business philosophy.

It also stands to reason that internal successors, whether family members or key employees, are already embedded within the company, reducing the learning curve. Their familiarity with operations and existing relationships fosters business continuity. A phased transition approach, such as a structured buyout or mentorship program, allows for a smoother leadership handover while minimizing operational disruptions. Keeping the business within the family or employee base can also enhance morale and commitment. Employees often feel more invested in the company’s success when they have a direct stake in its future. Similarly, a well-prepared family succession plan can provide long-term stability, provided the next generation is equipped for leadership.

Owners will have options available to them: they could look to sell their entire interest at one time or sell portions of their ownership periodically. The seller may also have to finance a portion of the sale in the event the buyers are not able to obtain financing for the full amount.  By selling portions of ownership periodically it allows for a more orderly and controlled transition and the retiring owner is around to oversee the transition period, helping to guide the firm and maintain a share of income.

However, challenges do exist in regard to internal transitions. Unlike external buyers who often bring substantial capital, internal successors may struggle to afford full market value upfront, as banks will typically not finance an entire deal. Owners may need to finance the sale themselves, which carries inherent financial risk. Furthermore, successors may need to utilize cash flow from company operations and profit-generating activities to help make these payments.

Construction company leadership requires many skills and talents, such as technical, financial, management and leadership expertise, to name a few. Not all family members or key employees possess the leadership capabilities necessary to sustain and grow the business on all fronts. If leadership gaps exist, investing in training and mentorship well in advance is essential, as the combined team should be able to leverage these talents.

Internal transitions can also be complicated by interpersonal conflicts. Family-run businesses often face disputes over roles, compensation, and wider strategic vision. Similarly, internal power struggles among employees or management groups vying for ownership can disrupt operations. Additionally, if the former owner remains involved post-transition, resistance to change or micromanagement issues may arise. Selling internally often results in a lower purchase price compared to an external sale to private equity firms or strategic buyers, who typically offer more competitive valuations. Business owners must balance their financial needs with their desire to keep the company within familiar hands.

Choosing the right succession strategy is one of the most significant decisions a construction business owner will make, and all options require careful planning. Passing the business to a family member can be an effective succession strategy, but not all heirs are interested or capable of running the business.

Internal transitions provide continuity, cultural preservation, and potential tax benefits, but they also present financing, leadership, and valuation challenges. A management buyout, meanwhile, ensures continuity, as the buyers are already invested in the company’s success. However, financial constraints may necessitate external financing or seller-backed loans – which can be difficult to source.

By understanding the advantages and risks associated with family succession, management buyouts, and other options, business owners can make informed decisions that align with their financial and legacy objectives. With strategic planning and the right advisory team, internal transitions can set both successors and the business up for sustained success.