Keeping it in the family – Construction dynasties

It took a long time for Paul and Philip Hodgkinson to buy back all the shares of Simons Group, their family business, from extended family members and former executives. Paul, the contractor’s chairman and chief executive, says: “At one point, there were 40 shareholders. My brother and I have spent the past two decades buying them back.”

Keeping control of the business is a struggle that many family-owned companies face. Family firms are affected by a range of unique issues, including losing control of shares as a result of divorce settlements, the decision to appoint family members to run the business and transferring the company between generations. Although all firms face financial and strategic issues, when a business is family-run, emotional histories become an added complication – witness last year’s public feud in the Miller family over selling a large chunk of that business. With construction being such a bastion of clans – think McAlpine, Miller and Wates – the potent mix of love, money and power affects many in the industry.

So how do you keep a construction dynasty going? Building spoke with the heads of some of construction’s biggest family firms to find out what problems they’ve had and how they overcame them.

Keeping a business solely in the family is something few of them achieve, according to BERR, the Department for Business, Enterprise & Regulatory Reform. It recently found that 77% of small and medium-size family businesses are controlled by the first generation, 10% by the second generation and 6% by the third. As the business is passed down it becomes increasingly likely that it will be sold or closed.

Andrew Osborne, group corporate development director at Osborne, is part of the second generation running his concern. He says passing the business down to the second generation was relatively easy, but it gets more complicated after that. So it’s vital to prepare well in advance for the transfer to the third.

Osborne says: “My dad, Geoffrey Osborne, started the business in 1966. He died three years ago and left four children imbued with his values. But it’s when the third generation comes into play that it gets difficult. That’s when you get battles between cousins competing for control of the business, or trying to sell their share to outsiders. If you don’t get the right legal structures in place to guard against this, you will have major issues.”

So what is the current ownership structure of Osborne? The firm is 90% family-owned, with the shares split between Andrew, his brother and sister and their mother. “I hold a slightly larger stake because I’m the one working in the business,” he says.

The remaining 10% is owned by current and former directors. Osborne says the family is prepared to sacrifice some shares to non-family members because that gives them an incentive and reward. The total stake outsiders can hold is capped at about 10%, however. “We don’t want to have a load of mini shareholders,” says Osborne. “The more shareholders you have, especially if they are distant from the business, the harder it is to balance all their demands and avoid difficulties.”

Also, distant shareholders who are not working in the company tend to focus only on dividends, whereas those involved in running it focus more on long-term investment.

But how will the Osborne family handle a transfer of the business to the third generation? Andrew is only 41, so any transfer is likely to be some way off, but the family recently agreed a handover structure. He says this is both in case “I get run over by a bus” and because getting the whole family to agree on how it will work well ahead of time should stop a feud erupting further down the line.

Osborne declines to reveal the handover plan in detail but says that a family forum was set up in autumn 2007 to agree a plan. The family was helped by the Institute for Family Business, which advises and promotes family firms, and has many members in the construction industry, as well as the usual lawyers and accountants.

The Osborne handover plan is not yet concrete, since the five members of the third generation – all of whom are under 25 – have yet to decide if they will get involved in the business. But the plan makes clear how shares will be passed down and how family members who want to get out can dispose of their holdings – presumably without selling them to non-family members. The point, says Osborne, is to plan as far in advance as possible.

If a divorcing couple are forced to split their assets, it can cost a huge pile of money for the family to buy back shares from the ex in-law.

Huw Davies, The IFB

There is no stock market to value the shares of a family business, so working out what they are worth is difficult. Paul Hodgkinson says the problem is more acute when someone holds shares but doesn’t work in the business; for example, when a former director’s spouse holds shares. “Because they’re less familiar with the day-to-day realities of the company, they tend to have an inflated idea of what their shares are worth,” says Hodgkinson.

Osborne’s solution has been to develop a rough formula for valuing shares – again, it is about planning in advance and not leaving things to chance. “Our formula is based on the share prices and dividend yield of other construction firms, plus our net assets, but it’s not entirely scientific. I do it myself – I am an accountant after all – and present the figure to the individual receiving the shares. If they didn’t feel it was fair, then we would get an outside party to agree a reasonable price. So far this has happened only once.”

But what if rebel family shareholders threaten to sell shares to non-family members? This can wreak havoc on the family members who are still working in the business. We saw this recently at Miller Group. The family, which is 110th on The Sunday Times Rich List at £730m, had a public row towards the end of last year. Keith Miller, chief executive of the group, faced a group of family shareholders wanting to cash in their shares. His cousin James, the firm’s former chairman led a group that wanted to sell their holdings, totalling 60% of the company, to non-family members.

The spat was resolved in April when Miller sold a stake to the Bank of Scotland. Keith Miller says he went through a tough time and describes the family rebels as “toxic”. But he says he is happy with how things have turned out. He won’t reveal the size of the stake taken by the bank, but now all the remaining shares are held by just four family members – Keith, his sister and two cousins.

The issue of involving non-family members also needs to be thought through. Andrew Wates, who has just retired as chairman of his 111-year-old family business, says the secret is to bring in outsiders if they are the best person for the job. The Wates family decided this in 2000.

Andrew says the family came to the brave admission that they were not the best people to be at the helm when the firm went through a tough patch. “We had delivery problems at the time,” he says. They brought in Struan Robertson, a BP man as chief executive, and the company’s fortunes improved. The firm has continued to thrive under Paul Dreschler, and Andrew says today, the Wates family focus on being owners, not executives. “In this business, people get to where they are based on merit.”

Other family businesses will go to extreme lengths to stop outsiders getting involved in the firm. For example, it is rumoured that the McAlpine family has put a clause into its family constitution stating women are not allowed to hold shares in the company. Sir Robert McAlpine declined to comment, but the family appears to have seen a few divorces, which could have inspired the alleged clause. For example, Alistair McAlpine, a former director of Sir Robert McAlpine, is on his third marriage.

Huw Davies, development director at the Institute for Family Business, says: “Families are increasingly keeping shares within the family, but this is easier said than done.” First, prenuptial agreements are not legally binding. Second, if a divorcing couple are forced to split their assets, it can cost a huge pile of money for the family to buy back shares from the ex in-law.

So is there a solution? “Basically, no,” says Davies. The best you can do is ensure your family constitution doesn’t allow shares to go out of the bloodline, although even that can be legally challenged.” Careful planning can help avert the worst-case scenario. Andrew Wates believes that setting out plans in the form of a family constitution (see box left) is the best way to keep the business on track. He advises drawing one up as early as possible, ensuring all the family agree on its terms, but warns that it must be reassessed.

Wates drew up its charter in 1994, reassessed it in 2001 and, earlier this year, when it handed over to the fourth generation, another agreement had to be thrashed out. These processes can be painful, says Wates, but in the long term they could save your business.

The recent handover from third to fourth generation was a tense time. Tim Wates took over as chairman from Andrew, who has retired but remains on the board. It also involved ownership of the company being spread more widely, from three family members in the third generation (Andrew, Paul and Michael) to a further five (Tim, James, Johnny, Andy and Charlie) in the fourth. “It took six months to hammer out our recent handover process and there was really heated debate. It involved eight intensive away days where we discussed nothing else. But we all had to compromise and now we have a structure we all agree with.” But even after a successful handover, Wates says family businesses can remain tempestuous and he recommends “eternal vigilance”.