Tracy Allen Partner, Construction Aldrich CPAs + Advisors
Developing a succession plan is a marathon, not a sprint. Careful thought and consideration should be given to determine who your key leaders are, and identify the best candidates for the next generation of owners—and how you plan to coach and develop that team of future executives into the roles necessary to make them and the company successful for years to come. It’s also essential to consider factors such as a realistic assessment of the current state of your business, your personal goals, and all the external forces affecting your construction company.
Simply put, there’s no “one size fits all” when developing a plan which ensures your years of hard work will be transitioned effectively. By planning for succession, you retain control over the outcome. If your ultimate goal is an internal transition to the entirety of the identified leadership team or a portion therein, you also must consider financial factors such as what the business can realistically afford, in conjunction with the business’ ultimate valuation. Transitioning the business internally, vs. exploring an external sale, is a gradual, steady investment in the future of the organization you built—on average, at Aldrich, we’ve found that the process typically takes around seven-to-ten years, once a plan has been developed and that next generation of leadership talent has been identified. Patience is key to finding the right team, and the right plan for success. Phillip Ross Partner Anchin Though many aspects of the construction industry necessitate robust planning and strategy, one factor that is sometimes overlooked is planning for succession and transition. A well-crafted transition plan will provide for an exit strategy for owners and allow for identification of future owners who will be able to fill leadership roles and maintain growth for any company. Construction owners should consider the long-term future of their businesses while also striving to efficiently maintain the goals of operational, organizational and financial viability. A robust plan can also help enhance earnings and sustain cash flow while enacting a foundation for the next generation of leadership. Proper planning can also lead to a boost in operational efficiency and margins, higher valuation and increased ROI, which will also result in a higher value for the business. One vital task in this process is for owners to understand the value of their companies and, in turn, to oversee a formal valuation. This valuation can establish a baseline for both owners that are exiting as well as incoming owners. An additional and crucial step is to involve attorneys and accountants in the transition plan, as they can advise on the legal, financial, tax and business issues, in addition to the thoroughness of the process. Construction firms that are prepared for this process already will be able to efficiently and intelligently streamline the leadership transition without any obstacles or worries about delays or slowdowns. Todd Carpenter Managing Partner Baker Tilly There is increased pressure to retain key talent, as there are just not enough people in the workforce to fill positions. Succession planning can be a critical tool in retaining talent. The promise of succession is a golden carrot that incentivizes strong employees to stay with the organization for future leadership and/or ownership opportunity.
An effective succession plan focuses on both the financial transaction of ownership (if applicable) and the personnel issues of management succession that require a clear understanding of the competencies required for success, allowing the organization to evaluate readiness of future leaders, define development needs and identify where gaps in talent exist.
If transition of ownership is likely, now is the time to put the right incentive compensation plans in place to help fund that purchase. Non-qualified deferred compensation plans are powerful retention tools because they often require a vesting schedule.
Even if ownership succession is not in your organization’s future, retention of key employees and management succession is critical. Key leaders are your greatest asset and responsible for your business success. If you do not provide growth opportunities, employees will leave for more growth potential. Historically, employee development was a topic limited to human resource discussions, but today it is a critical component of business strategy. Having clearly defined position descriptions, understanding the competencies necessary for success and assessing development needs are critical steps in management succession. Effective succession plans do not begin when a leader/owner exits the business. It’s a process of proactively focusing on developing and retaining key personnel who demonstrate the competencies, capabilities and potential necessary for future success. Succession can be the powerful carrot that both retains your key employees and incentivizes your business results.
Julian M. Xavier Managing Principal of Industry, Construction CLA (CliftonLarsonAllen LLP) A number of key factors go into the successful transition of a construction company. It starts with proper planning and starting the process early. Ask yourself questions including, does our current leadership team have the ability and the desire to own and run the business going forward? Will a sale to a third party be the better answer and how will this impact the legacy/survival of my company? What are the goals and desires of our existing ownership team? Then, for a successful transition, assess which path forward can present the best chance for success, factoring in your goals and desires. By starting the process early, you can take actions to strengthen your business’ financial condition, build and strengthen your leadership team, evaluate and verify that your internal processes and execution are in good order, and strengthen the diversity of your customer base and relationships. Taking these steps can enhance the value of your business and increase attractiveness to a third party or position your company for success if geared to an internal transition. Once you have developed a game plan, you can run various transition models to assess the potential outcomes of choosing to pass the business to your internal leadership team or sell to a third party. These models can help you understand and assess the impact to your personal financial health as well as the impact to the ongoing business. Brad Werner Partner, Construction/Real Estate Industry Leader Wipfli Business transition is inevitable for all contractors, so being proactive is essential to maximizing value and securing continuity of the business. Business transition should not be a surprise, but instead a thought-out, collaborative process that paves the road for a successful transition. Some key considerations for effective business transition include: 1. Have a plan: Many business failures are the result of reacting to changes impacting transition instead of being proactive. Having a transition plan creates a roadmap to guide a business through changes as they occur. It’s critical that any plan is reviewed on a regular basis and adjusted as necessary to meet the ever-changing needs of the business and the environment it operates in. 2. Understand business risks: One of the biggest risks for a business is the loss of business-specific knowledge and skills. This is why it is never too early to begin transition planning and why individual succession is a key component of business transition planning. Whether transition is bringing key employees into ownership, selling to an outside party or continuing operations at successful and profitable levels, a business needs to have the necessary qualifications and skills at key positions. Identifying critical roles, understanding specific knowledge and data needed, providing necessary training and assessing internal qualifications are components to consider. 3. Communication: Every plan should involve proper communication, which sets expectations and avoids disruptions. Communication also provides buy-in and helps to identify perspectives from others that could be key to successful implementation. Shane Brown Partner Plante Moran When the time comes for succession planning, owners should ask: What are the most important aspects of succession to me? Is it legacy, money or time? Is family ownership important? Is management and employee ownership important? Or perhaps it’s a mix of these priorities. The answers to these questions will guide the succession options for companies to create a highly intentional and successful succession plan. The weight of importance on these questions will have a material impact on what succession options are viable; the time horizon needed to act on the ideal succession options; the growth and strategic plans needed to support the succession plan; and the time, talent and treasury necessary to support succession. When these questions aren’t the compass points of succession, owners face limited, reactive options and short time horizons, many of which won’t align with what’s most important to them. Time is always a factor in any ideal succession plan—the sooner the discussion starts, the better. Bringing in your key business partners and advisers will also help yield a much more successful plan. Marty McCarthy Managing Partner McCarthy & Company, PC Most companies have a formal business plan, but few have an equally important succession plan, especially if a retirement-age leader is at the helm and a successor has yet to be identified. When developing a succession plan, some critical questions include:
John Gallo Partner UHY LLP When a contractor client ended up with cash flow issues and conflicts with their bank, we instituted a rolling 13-week cash flow model to assist with weekly cash flow needs. Kudos to the management and accounting teams of the client for helping to get the business out of the crosshairs of the bank. We developed a 13-week cash flow model that uses the direct method to forecast weekly cash receipts less cash disbursements. The model has been a great tool for managing cash and assisting in the management decision-making process. By identifying the immediate cash flow needs at the most granular level, the model highlights the immediate impact of a variety of possible operational, financial and strategic needs. Some of the ways it assists are: Operational: • Improving collections speed • Managing payroll needs • Delaying supplier payments • Managing inventory • Selling assets Financial: • Seeking additional funding • Assisting with vendor payments • Managing debt-related payments Strategic: • Positioning company for difficult financial times/slow periods • Identifying when cash infusions are needed • Preparing for buys/sells While its core focus is cash, the model can be used to reconcile the weekly forecast to a weekly Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) forecast. This helps management by monitoring this other crucial financial measurement. This model can also be customized and is easily updated without major disruptions to accounting. Joseph Natarelli Construction Services Leader Marcum LLP Cash flow is king in any business but particularly in construction. So how can you ensure your customers pay promptly and preserve that all-important cash flow? Here are three tips: • Use cash flow forecasts. This can help you identify potential shortfalls and surpluses to better anticipate expenses and manage your money, holding onto funds for slower times, like the winter months. That cash flow forecast can also help you see the financial impact of a potential investment, like new equipment, so you understand how much additional cash you need to generate (or save) to make payments. • Avoid overbilling. When you overbill, you’re invoicing for more work than you’ve completed, perhaps because your client is a slow payer. By overbilling, you can put more cash in your company’s pocket early on. The downside is that you can find your company short on cash at the end of a project if you don’t manage those excess funds properly when you receive them. Your best bet is to bill in line with your costs and based on a project’s actual progress. • Speed up closeout. The longer your firm takes to complete a construction project, the longer you have to wait to receive final payment. That’s why it pays to stay organized from the project start, so you can easily access project-related documentation, punch lists, inspection certificates and lien waivers at project completion and get that bill out promptly. The faster your project closeout, the faster you’ll be paid. Michael Ceschini Managing Member Ceschini CPAs Managing cash flow for construction companies has its own set of challenges. Unlike in other industries, each construction project is entirely different; therefore, improving cash flow requires unique strategies. Cash flow management is an area where contractors should dedicate a significant amount of effort in order to improve profits, as having negative cash flow is a red flag signaling potential financial problems for a company. A company should focus on the following areas: contract receivables, accounts payable, minimizing under-billings and maximizing over-billings. Some best practices to consider are as follows: • Review and negotiate favorable contract terms such as billing provisions, payment terms, indemnifications, penalties and liquidating dames to name a few. Ensure the payment terms and schedule are in your company’s best interests. Ideally, the billing schedule reflects the upfront costs of project mobilization—such as being paid for materials once they are delivered to the jobsite versus when they are installed. • Prepare and continually update a rolling 12-week cash flow projection. • Prepare annual budgets and meet regularly to review actual results to budget. • Negotiate reductions in retainage at certain milestones as the project progresses—for instance, a reduction from 10% to 7.5% once the project is 50% complete and 7.5% to 5% once the project is 70% complete. • Process change orders quickly. • Accept electronic payments. • Review your company’s tax deferral strategies with professionals. • Close out projects and effectively manage the final punch list to avoid delays in collecting final payments. Taking these steps should help ensure that a healthy cash flow is maintained throughout the year for your construction company.
Kara Judd Solutions Consultant CMiC A scalable construction accounting technology is important for a few reasons: First, it provides an organization with a customizable infrastructure that enables it to expand or shrink the solution to adapt to the demands of its business needs. Given that the construction industry is experiencing considerable growth, software scalability is critical not only to accommodate the expansion of operations, data and resources, as well as the number of customers, but also to help pivot to scale back, if required, during times of uncertainty. Second, when new construction accounting technology is implemented, there is always a risk of losing historical data, and sometimes it’s also difficult to access. Having technology that will work for your organization regardless of size allows you to seamlessly leverage historical data to continue making data-driven business decisions. Specifically for accounting functions, it is important that the solution delivers on industry-specific workflows and is designed to override duplicate entries and eliminate any manual entries. Lastly, a scalable solution helps drive operational efficiency. The longer a technology is used, the more efficient the users and processes become, which essentially becomes self-reinforcing. With continued adoption, it gives leaders the opportunity to mitigate risks and elevate opportunities. Choosing the right scalable construction accounting technology supports your company with adapting to changing business needs without losing resources and data, all while generating revenue. Dustin Stephens Vice President, Construction and Real Estate Sage It is important to choose a construction accounting solution that is scalable in order to protect your technology investment and ensure you can continue using the solution for the foreseeable future. Cloud technology provides the most flexible option—you can adjust the number of users and add or subtract modules as your needs change. It also eliminates IT burdens and provides anytime, anywhere access to data. Cloud solutions with an open API provide additional flexibility, as they can seamlessly integrate with the other solutions you are currently using as well as those you may use in the future. This gives you the power to choose the right mix of solutions to address your individual business needs. Joel Hoffman Director, Product Management (Construction, Field Service, Property Management) Acumatica Attempting to run and grow a successful construction organization in today’s business environment is a multilayered undertaking with many moving parts and players. With shifting industry demands and building delivery methods, it’s more important than ever to focus on efficiencies and productivity, high-quality, on-budget project delivery, open communication between associates and clients, profitabilit, and client satisfaction—all while taking on more projects. Many ERP solutions and applications only solve pieces of the puzzle, leading to information silos, double data entry and a lack of real-time information flow between the office and the jobsite. Construction ERP solutions that are scalable, true cloud applications provide best-in-class functionality in a single, cohesive platform configured to meet the needs of a contractor, whether general contractor, specialty subcontractor, homebuilder or civil construction business. Companies can be held back because of their existing accounting solutions’ confined and aging technology platforms, with limited accounting functionality. The ability to report on the strengths and weaknesses of a project and its profitability is needed to make any informed decisions on future endeavors. The accounting technology’s ability to provide a 360° view of your business anytime, anywhere, from any device, during each aspect of the project life cycle, enables contractors to address all these mission-critical factors.
Elaine Ervin Partner & National Practice Leader, Construction Moss Adams Some common errors that business owners make when managing their wealth include issues with diversification, risk considerations and estate planning. With diversification, we commonly see over-reliance on a single asset, such as business ownership, individual stock positions or real estate. Further, some owners rely on one tax bracket instead of diversification across 401(k)s or Roth or SEP IRAs to provide flexibility. Although owners may have already built out different tax buckets, they may not have optimized the types of assets held in each bucket or allocated assets that produce tax-free income in taxable accounts such as certain municipal bonds that are not taxed at a federal or state level. For risk considerations, owners tend to emphasize market and default risks, but may have overlooked critical factors such as interest-rate risks, inflation risks, horizon risks (making sure your risks are segmented by the time horizons of your investment goals) and better understanding market timing, especially in times of large market swings. Lastly, in the realm of estate planning, our wealth advisers see limited estate planning when business owners have net worths in excess of federal limits—this could potentially be a huge source of exposure if these limits are halved in 2026 with the expiration of the Tax Cuts and Jobs Act of 2017. The present federal estate tax has a top rate of 40%; those without prudent planning before the law expires could potentially leave their heirs with that much less of a legacy in an estate event. Billy R. Robinson Partner and Construction Niche Practice Leader Brown, Edwards & Company, L.L.P. One of the most common mistakes construction owners make when managing their wealth is assuming they are going to be able to monetize the value of the company. Many owners reinvest all of their profits into their company, and in good economic times, this can result in enhanced profitability. However, if the economy turns and the company faces headwinds, the ability to monetize the value of the company becomes more difficult. In this industry, bad things can and do happen, and the value of the company can erode quickly as those risks materialize. Subcontractor defaults, estimating errors, productivity challenges, litigation and customer payment issues, among many others, can all contribute to large losses and the rapid use of cash reserves. Construction companies are difficult to sell in the best of circumstances, and with these downside risks, it can make a quick and clean exit for the owner exponentially more problematic—and, in turn, dramatically impact the owner’s wealth. If all of your profits have been stored away in your company, your concentration risk is much higher. When the headwinds happen and your company cannot recover, the likelihood of meeting your future financial goals is significantly reduced. As many advisers will recommend, diversifying your portfolio to reduce your overall risk profile is the key to wealth preservation. Distribution of profits out of the company, when excess cash is available, should be considered. You can then use those profits to diversify your asset mix, whether it be real estate, stocks or other investments. Building wealth outside of the company is advantageous and highly recommended. Joseph Piela Partner, Wealth Adviser Sax LLP Running a business and managing the wealth that business creates are two separate animals, but are equally important to long-term success. However, there are several common mistakes business owners make when managing their wealth. First, most successful business owners take unnecessary risk. They have built a stable income through sound decision making, and in turn have a high risk tolerance. It is important to have an investment portfolio risk coordinated with other components of wealth, such as business interests, real estate, etc. The most successful wealth management strategies are accomplished in coordination with the business. Second, business owners may manage their investment portfolio the way they manage their business, and the same principles don’t always apply. For example, a successful business strategy often requires significant adjustments during changing market conditions to drive growth. Proper management of an investment portfolio is often contrary to these basic human instincts and principles. Third, business owners commonly make the mistake of prioritizing their business over their personal finances. Even though the business drives the creation of wealth, an equal focus on the strategic plan for the investment portfolio and its management is needed to secure that wealth. Lastly, a large mistake business owners make is not hiring a personal financial adviser. Understandably, business owners often work decades to amass their financial holdings, and it can be challenging to entrust their life’s work to someone else. However, a capable financial adviser who understands how they operate can be a valuable partner in their financial success while running the business and long after. Louis Sandor III Partner Withum Business owners tend to look at themselves as a typical investor, but they are not. Every owner—even the top owners and CEOs in the country—can reap benefits from including their business interests in their wealth plans. After all, the business itself is likely their largest investment. Not having a plan increases the risk of leaving easy money on the table in terms of opportunity costs, tax savings and risk management. How an owner accounts for cash flow and liquidity risks is a particularly timely topic given the recent increase in interest rates. For assets held outside of a business, owners should consider carving out an allocation that is centered on more conservative holdings before moving to riskier long-term investments. This does not necessarily mean over-allocating to cash at the bank. According to BankRate.com, the average savings account only pays 0.07%, U.S. Treasury bonds, which are generally considered among the safest investments in the financial markets, offer competitive yields and can be used as another source of liquidity. A one-month Treasury currently yields over 1%, and if you are willing to go out six months or a year, you could get over 2% oralmost 3%, respectively. (Municipal bonds can offer even more attractive yields.) If you need to access your cash before a bond matures, there is no penalty for selling a Treasury bond back to the market. Laddering Treasury bonds is also helpful, so you consistently have money maturing that can be reinvested or used for cash-flow needs.
John Rosch Regional Sales Manager Explorer Software One of the biggest obstacles to running a successful construction company is cost overruns. Despite best efforts, sometimes maintaining a tight budget while watching every source of cost can be overwhelming. From light estimates to project scope creep, construction companies can find the extra dollars stacking up against them quickly. Thankfully, the technology contained in modern project management solutions offers easy ways to stay on budget without pouring extra hours into micromanagement. Investing in the right solution can help prevent cost overruns and improve communication between the field and the office. Using today’s technology, staff in the field can enter their time daily. There are solutions available for field staff to either enter their time individually or have the foreman or field supervisor enter the time for themselves and their crew, equipment used and quantities installed. The data is then subsequently gathered and submitted to improve accuracy and drive accountability. The data can be sent through an electronic workflow to ensure accuracy and timely approval. Since the data has already been entered and reviewed by the field crew, the payroll person’s responsibility is limited to checking hours, rates, applying overtime and per diem. This makes tracking costs and preventing overruns a simple part of the daily routine. In some systems, such as Explorer Eclipse, the time, equipment use and installed quantities can be posted daily into job cost software, and project managers can view reports and dashboards to see near real-time (up to and including the prior day’s work) costing and production, so proactive changes can be made to keep the job on-budget and on-schedule. With technology, we can mitigate the many factors that are within human control and keep our businesses profitable and our stakeholders happy.
Mike Milligan Head of Corporate Development and Marketing Payapps The numbers are hard to miss these days. The economy, the stock market, impacts of COVID-19 and so forth. The industry is also working remotely more and more. And that alone presents its own set of issues. Remote work may seem impossible for construction finance and administration teams who are accustomed to manual processes, such as updating spreadsheets, printing documents and cutting paper checks. Since subcontractors still submit applications for payment and lien waivers through the mail and receive payment by paper checks, they may be waiting for their physical checks to arrive in the mail. In some cases, subcontractors may have to go to a public, central location to pick up their checks. Examining these companies' technology benefits is more paramount than ever. Manual processes like these go away after construction companies invest in an automated payment application system that streamlines work and limits person-to-person contact. Technology that’s suitable with a work-from-home reality will help you keep track of jobs and provide you access to data at any time. General contractors turn to SaaS pay-app functionality so they can quickly and easily collaborate with their subcontractors. Systemizing and streamlining manual processes has never been so critical in ensuring business continuity and operating “business as usual” in these uncertain times. Mike Ode Chief Executive Officer Foundation Software When a contractor looks to make the decision on which accounting software is right for them, there is a lot to consider. Not only is it important to do your research on the product and technology, you’ll want to make sure the company is also a good fit for your business and needs. Many times, contractors are only focused on the product and what it can do for their company—which is important, but it’s just as important to evaluate the vendor. Make sure you know the different vendors that are out there and see which best matches your company’s needs . Take your time and have conversations with not only sales representatives but sales managers, management, C-suite executives and anyone else who can give you a good idea of the company. You’ll also want to make sure you speak with the employees on your team who will use the software on a regular basis and keep them involved throughout the process. As you work through the demo process, be very thorough and make sure the product matches your company needs. Keep in mind, not only are you buying a product, you’re buying in on a company and their technology. With the influx in software converting to SaaS models, you’ll want to make sure you have a good understanding of what their models mean for your company and if the security meets your security plan requirements. This will set you up to make the best decision for your company. The goal is to know what you’re getting your company into. Choosing accounting software is an investment in the product, company and technology.
Carl Oliveri Partner, Construction Practice Leader Grassi Advisors & Accountants Many states enacted a pass-through-entity tax (PTET) last year to mitigate the impact of the $10,000 federal cap on the state and local tax deduction. These new PTET laws brought significant tax savings to partnerships, S-corporations and their owners, but they also brought extra complexities at tax time. Each state has its own unique set of rules for electing the PTET, calculating PTET rates, paying estimated taxes and meeting other PTET requirements. Multistate companies had to be evaluated based on each state’s rules to first determine if the PTET was in fact more beneficial and then to meet all of the specific compliance requirements to claim it. The rollout of PTET in some states exposed flaws that CPAs and their clients had to navigate. For example, under the original New York State (NYS) PTET law, S-corporations that elected the PTET could only apply the benefit to NYS-sourced income, while partnerships could apply it to all NYS resident partners’ income sourced from any state. NYS eventually corrected this discrepancy, but not in time for 2021 tax returns. In the 2021 economy, income tax deferral also became an even more attractive—and often necessary—strategy for construction companies. Contractors have numerous methods available, such as cash basis, completed contract and percentage of completion, but which ones are allowable and most beneficial can vary by contract. Careful consideration of the tax code was essential to create an income tax deferral strategy that left more cash on hand for day-to-day operations.
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