The $75 Million Mistake: Behind the scenes of a $75M Fumble.

How not being self aware cost one family tens of millions when they sold their construction company in lieu of stepping aside.

The price of not being honest with the person in the mirror.

Three years ago, a construction family made what they thought was a smart business decision. They had built a construction company over six decades. The business had plateaued between $145M and $155M in gross revenue. Entering the third generation, there was no one prepared or willing to lead the company. A $7 million ESOP sale to employees seemed like a full value exit strategy.

The family was wrong. Catastrophically wrong.

The shackles of history, comfort, and distractions.

Before the sale, the company generated a couple million in profit each year. A comfortable lifestyle was produced with no recognition the company could be run better. 

The company had a non-family member running a division in the adjacent state. The division was started from scratch and was currently doing $100M in gross revenue. The division doubled the gross revenue and net profit margin of the much older parent company. The division was 30 years old. The division was established, consistent and documented on every financial statement. 

21 operating entities had been developed from the free cash flow from the construction couple over time. These entities are still owned by the family. Entities that looked stronger than they were since much of the overhead was subsidized by the construction business. 

Even with the divisional's CEO consistent performance, the family could not imagine a non-family member in the CEO position.

New Ownership. New Perspective. 

When the family sold to their employees through the ESOP, they struggled to realize that they now worked for the employees, and the Board of Directors answered to the ESOP Trustees. 

“Their” board was no longer “their” board. It was the employees’ board. The board’s responsibility is to serve the stockholders. The family was no longer stockholders. 

After the sale, the board and the ESOP trustees had to find someone to run the company. Their choice was clear and known. They promoted the person that built and ran the division in the adjacent state. The person that had consistently produced results for the family. 

What happened next was brutal for one party and exciting for another party.

In the three years following the ESOP sale, under the new CEO's leadership, the company generated $20 million in net profit. Twenty million dollars!!! Far exceeding the $7M sale price.

In essence, the employees paid a net profit multiple of a little over one (1) when the family thought they were selling for a net profit multiple around two and a half (2.5). 

Expensive Distractions

The lost profits created another painful realization. The family may have neglected their golden goose while chasing fool's gold.

The 21 non-construction entities consumed enormous amounts of time, attention, and resources. The family thought they were diversifying and building sustainable wealth. In reality, the family was neglecting their most valuable asset.

The harsh truth? All 21 of the entities combined are not worth $20 million. Not even close. Yet the entities demanded constant attention, pulled the focus from the construction business, and likely prevented the family from seeing the massive potential sitting right in front of them.

While they were busy creating entities across multiple industries, their construction company, the one generating the positive cash flow, was being run at a fraction of its potential. 

The family was so distracted by their other entities that they never stopped to ask:

"What if we put all this energy into optimizing our core business instead?"

Nor did they ask, “Would the 21 entities consistently spin off $2M in net profit without being subsidized by the construction business.

Brutal Math

Let's break down the $75-100 million mistake:

• The family received: $7 million from the ESOP sale.

• The company made record profits in 3 years under new leadership: $20 million gross profit.

• The family could have received by promoting a non-family leader over three years: $13 million more ($20M less the $7M received.)

• The cost of not selling at full value: $10.5 ($17.5 less $7M received.)

• The estimated cost of not promoting the non-family CEO two decades sooner:  $100M. ($7M less $2M times 20)

The man the ESOP Board promoted to CEO had been proving his worth for three decades. His division consistently outperformed the rest of the company because he knew how to run a construction business properly. The family was just too proud—or too blind—to see it.

The “I built it” tax

At some point, every construction company owner faces a choice: grow your ego or grow your bank account. Too many owners chose ego at the cost of a fortune.

The truth is, the family should have stepped back, promoted the company’s best performer to CEO, and watched their bank account grow while someone else handled the daily stress. 

Instead, the family sold because they couldn't bear the thought of considering or admitting someone outside the family could run the business better.

Pride is expensive. In this case, the price was tens of millions any way you cut it.

Return on Motivation

The family used to think success meant being in control and making all the decisions. Now they understand that the true definition of success is when you can enjoy your wealth with your family while your business thrives without spending energy day to day.

The former employee—now the CEO—understands this. He's building something greater than the family ever imagined while the family has documentation of what could have been. What could have been…

The Mirror Doesn't Lie

Taking a long, hard, honest look at yourself in the mirror is brutal. The family thought they were maximizing value. In reality, they were limiting the business they built. The company’s builders were now the thing holding the company back. 

The most painful part? The family only discovered how much potential their company had after they sold it. 

For 60 years, the family built something incredible, but the family never let it reach its full potential because they couldn't get out of their own way.

A Message to All Owners of Construction Companies

If you're reading this as a construction company owner, ask yourself these hard questions:

• Is your company limited by your leadership, or enhanced by it?

• Are you holding back talent that could take your business to the next level?

• Would you rather make $2 million a year running everything, or $7 million a year letting someone else stress about the details?

• Are you neglecting your golden goose while chasing other opportunities?

• What's more important: your title or your net worth?

Don't make the same mistake of being distracted by shiny new ventures while your core business—the one that's actually generating serious revenue—operates below its potential. Sometimes the best growth strategy isn't starting 21 additional entities. It's optimizing the one that is already working.

The Lesson the Family Learned Too Late

Sometimes the best thing you can do for your business is to step aside and let someone more capable take the reins. The hardest part about being a business owner isn't building the business; it's knowing when to let someone else optimize what you've built.

The family spent 60 years building a strong construction company, but it took selling the company for the family to realize they were also its biggest limitation. This lack of being self aware cost the family tens of millions.

Think about this family each day you look at the CEO in the mirror. Consider it might be time to enjoy what you have built by letting someone else be CEO and spending more time with your family.

Wasn’t a better quality of life one of the reasons you started the company?