Construction company owners are consumed by planning initiatives —from short-term budgetary plans to longer-term bidding plans and contingency disaster recovery plans. With so many other planning issues, let alone the day-to-day responsibilities of running a business, it can be easy to overlook something that might seem a long way off. But, business owners who have dealt with ownership transitions know succession planning is time well spent and yields a positive return on investment.
Succession planning can take many different forms based on ownership structures, industry types, family dynamics, timelines, liquidity needs, estate planning issues and taxes. For some, the process may be as simple as replacement planning: building bench strength in the organization or looking outside the company to identify and develop people to fill key positions. For others, a primary objective of succession planning is to continue to build the family legacy and to pass the company on to the next generation in the most tax-efficient manner. The goal of other business owners is to maximize the value of the company in order to prepare for eventual sale, allowing for a comfortable retirement. In this case, an investment advisor can help determine the size of the required nest egg.
Because most companies will deal with new owners or operators at some point, a true succession plan should address both ownership and operational changes. Unfortunately, various surveys of business owners report only about one-third to one-half of privately held businesses have a succession or transition plan in writing. As a result, it is estimated only one-third of these companies survive to the next generation.
In fact, many similarities exist between the construction industry and successful succession planning. Begin with the end in mind. The primary objective in constructing a building is to create a sound, valuable asset that will satisfy the client’s needs. In succession planning, the ultimate goal is to meet the objectives of the owners or operators, as well as the other business stakeholders.
The first step of the process is for key decision-makers to identify succession planning goals and objectives. Some companies schedule offsite meetings during which the management team or equity holders discuss strategic issues such as succession planning. Asking each company owner about his ideal scenario for exiting the business can prove to be eye opening, as management may come to realize the firm could be sold much sooner than expected—making planning a short-term objective rather than a long-range plan. Getting everyone on the same page, or at least discussing the objectives with key members of the organization, is crucial to determining the next steps.
To meet and exceed the expectations of a potential client, it’s essential to have the right team in place early on, including internal players (equity holders, key employees, family members) and external players (CPA, investment banker, lender, attorney, investment advisor, surety, business valuation expert, executive recruiter). Once the team is established, put action items in place and assign responsibilities to meet the goals and objectives determined by the key stakeholders.
To replace key personnel, consider these questions:
- What are the strengths and weaknesses of existing personnel? Does the firm have the internal resources to fill the gap of a departing owner?
- Should the firm initiate an external search? How should it spread the word to identify candidates? Is an executive recruiter necessary?
- How should the firm structure a compensation package and incentive plan for new owners?
- What is the training and transition plan for new owners?
For many, selling part or all of their equity isn’t just about achieving the highest valuation. A transition to new or additional owners begs many questions.
- What steps should be taken now to position the company for a future sale?
- How much equity should the owner sell and when should he sell it?
- How will the new owner finance its purchase of equity? What about existing personal guarantees or debt?
- Does the firm need approval from clients, customers, vendors or bankers prior to bringing on new owners?
- With all of the recent changes in estate taxes, what is the best way to structure the buy-sell and other agreements?
- What are the owner’s investment objectives for the proceeds from the sale of the company?
Communication plays a vital role throughout the process. At first, many of the discussions are confidential in nature and may not be appropriate to share outside of the family, senior management or ownership team. However, as the process begins to unfold, consistent and regular communication with all parties that might be impacted by a change in ownership or operators is imperative. Established relationships with vendors, customers and employees can be negatively impacted if communication of the organizational changes isn’t handled properly. Some agreements the company has in place may require consent to a change in ownership, personal guarantees may be involved and lending parties must be informed.
Constructing a building starts with an end goal in mind and requires a disciplined plan to complete it successfully, but also necessitates flexibility. Similarly, succession planning is an evolving process that requires ongoing tweaks, revisions and updates. Construction company owners must run their companies day to day while setting a dependable course for the future.