What is a Construction Company?
The title of this blog may seem like an unusual question. But if you try to sell your company or are thinking about buying another, the question takes on a whole new significance. Just think about it for a minute. Is a construction company the home office building, a yard full of used equipment, and the residual value of the current projects in progress? Is it the unencumbered cash in the company accounts or the potential value of contracts signed but not yet completed? Suddenly, what your company is, exactly, is not so apparent.
What is a construction company?
A construction company is a unique business that is not valued as an accumulation of tangible assets, but rather as the collective intangible intellectual assets of the team it has assembled to provide construction “services”.
• Your company is primarily the organization you have put together. Its experience. Its reputation. Its ability to successfully complete the next project. The client loyalty it has earned. Anyone interested in buying your construction company, values the collective skill set of your team. Your scattered collection of used tangible assets may, for some buyers, be seen as a liability.
• The construction industry is also unique in its adherence to an entrepreneurial corporate construct. There are few mom-and-pop auto manufacturers around these days, and most of the families who founded the great department stores have sold out to large corporations long ago. Yet, entrepreneurial independent (mom-and-pop) contractors’ soldier on energizing every area of the construction industry. (According to Sageworks, a financial information company, residential builders and remodelers make up one of the fastest-growing groups of privately held companies in the country.)
Construction Company Life Cycle
Business organizations are living organisms, and, like all living organisms, they have a life cycle. The cycle is the progression of a business in phases over time and is most commonly divided into five stages:
1. Launch – All construction companies begin with entrepreneurs starting a business and driving growth through the force of their personalities.
2. Growth – At this stage everyone follows the usually charismatic leader to the promised land. Founders recruit and inspire loyal employees who collectively build the company to scale.
3. Shake-out – If the company continues to succeed long-term under the founder’s leadership, it will likely outgrow his/her ability to manage it effectively. Eventually it is time to change leadership and bring in professional managers to guide the company to maturity.
4. Maturity – The company achieves full scale and either continues to expand or, if left in the same form, may not grow much beyond this stage.
5. Decline – At maturity, without continued growth, all that’s left is decline. If slow, decline extends the stage or if not managed for all stakeholders, eventual dissolution.
Managing Life Cycle Transitions
We call the launch and early growth phase of your independent construction company the entrepreneurial stage. This stage is entirely in your control and a direct result of your talent and dedication. However, when the “shake-out” phase arrives (and it will if you’re successful) the exposure starts.
1. Entrepreneurial Stage – You might call the launch stage of a construction company’s lifecycle, the entrepreneurial stage. Success, however, encourages growth that can eventually expand the company beyond the founder-entrepreneur’s ability to manage it effectively and many companies get into trouble.
2. Professional Management Stage – If this exposure occurs, we call it the shakeout stage of the construction company lifecycle. If the company is to survive, the founder must bring in professional managers to take control or try to re-learn much of what got them to this stage. This transition is incredibly difficult and often fails for a whole variety of reasons.
Reasons For Failure At This Stage
1. Eventually most successful construction companies outgrow the founder’s ability or willingness to manage the business.
2. Few founders have a detailed succession plan.
3. Almost all founder resists giving up control.
4. Too many companies fall into the “family trap”. (Usually fails at or after third generation because the skillset that made the founder a success is not inherited by his or her offspring and when they leave, so do their critical skills.) (How to replace this skill set will be discussed in following weeks).
5. If the family trap is avoided, professional management is installed by the founder, but in way too many cases, is then resisted by the founder.
6. Legacy employees’ side with the outgoing founder and the company slides into an internal resistance phase.
7. Professional management changes goals from cash flow to profits.
8. Professional management puts in structure and controls to ensure profits.
9. When the founder can’t control the company, he or she either leaves or begins to weaken the company.
10. Too often the founder returns and fires professional manager. The cycle begins again.
Tune In Next Week
For the next three weeks we will discuss how to avoid the pitfalls in corporate life cycle transitions. More than 95% of the construction industry is populated by family contracting businesses. This dialogue is important to all of them. Don’t miss it.
Just released my latest book The Secretes To Construction Business Success Published by Routledge https://bit.ly/3G9ornf.
For a deeper look into construction company management, read more here: https://simplarfoundation.org/?s=construction+company+management
For a broader view on company life cycles, read more here: https://simplarfoundation.org/?s=company+life+cycles
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