Aging Owners Spur Employee Buyouts as Baby-boomers sell to the next generation

The baby-boomer generation is affecting the construction industry once again. Contractors built developments to house them, schools to educate them and health-care facilities to treat them. Now baby-boomers who own companies are working on their corporate structures, building new executive leadership that will take over where the 60s generation off. This is the first of a two-part series that will discuss the changes in corporate ownership for Northwest companies.

As a sitework contractor for more than 30 years, Walt Smith is used to project beginnings. As he, comes closer to retirement in December, he is getting used to the idea of finishing one.

Smith, the president and owner of Active Construction in Tacoma, has been planning five years for the day he leaves his company and becomes a visitor, not an employee.

With baby-boomers like Smith reaching retirement age, new ownership through takeovers, mergers and acquisitions is becoming more and more common.

But contractors are finding it as hard to make money in a sell-out as it was as a company owner. Many companies have few assets. Others expect to reap financial rewards for their reputation, only to find it has little monetary value.

And some owners lose money during a sale in a "key man" discount. Owners who don't delegate and share information with key personnel, lose money during a sale because when they leave the information on how to run the business goes with them.

"Construction companies run on tight margins to begin with," said Mike Mansfield, a CPA with Moss Adams Seattle office. "One or two mistakes can easily bury a company."

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Both generations of ownership count on financial success. The old owners need continued success so they get paid over time. The new owners need money to run the business, but they may have relied on company assets to finance the purchase.

"That leaves many companies in an even tighter financial situation," Mansfield said.

Success is more likely with a strong company with sound practices in place already, Mansfield said.

With no family member able to take over, Smith breached the topic of ownership with his four top employees - Dave Burglund, Scott Morris, Dennis Kooker and Rose Garmas. The four, along with David Ceccianti will take over completely in December 2005. Ceccianti, the former owner of an earthwork company, will become the new company president.

The process forced Smith to also look at what he called his "silent partner," the IRS. The buyout method he chose could change the amount he paid in taxes as much as 25 percent, depending on whether "you take it as a salary or capital gains," he said.

Smith chose the method that about 70 percent of contractors do - an internal buyout. About 10 percent of contractors sell their companies to outsiders, and 20 percent liquidate, according to statistics from the Fails Management Institute, a construction consulting group based in Denver, Colo.

"Generally companies see a turnover in leadership about every five years," said Will Hill an FMI principal. "But right now we have a lot of 50-somethings getting ready to sell to a lot of 30-somethings."

Though financing a takeover may seem like the most daunting task, the hardest part is picking the right people to take over, Hill said. "The odds are against success to begin with because too many people focus on the mechanism and not on the goals and objectives of the people involved," he said.

"To provide stability, the new owners should be in their 30s. The problem is that there are few Prince Charmings that are 30 years old. You have to pick carefully."

P&C Construction of Portland took a similar path to complete its recent buyout. The new owners of the general contracting firm, with revenues in the $35 million range, are paying the old owners over time. Both previous owners will be on an advisory board.

"I wanted to own my own company because I wanted the challenge, and I wanted to watch the company grow and help the people in the field improve their skills," said Steve Malany, the new owner and president of

At P&C, Malany and a group key employees approached the owners about a buyout. The two agreed to the sale, after a four-year training process and review of a 2-in.-thick document.