Business

Construction Execs’ Succession Plans Uncertain Due to Market Conditions

Five pieces of advice for construction executives based on a survey conducted by Wipfli LLP.
By Brian Bohman and Paul Lally
August 12, 2021
Topics
Business

Wipfli LLP, an accounting and business consulting firm, recently completed a survey of nearly 400 construction company owners and C-suite executives that asked respondents about their top internal and external business concerns, their recent business valuation and transition planning activities, the impact of the COVID-19 pandemic and more—and it provoked interesting conclusions.

Significantly, 73% of respondents had their construction business professionally valued in the last three years, and 68% have a documented and actionable succession plan. Yet 66% listed ownership and management succession planning as a top internal business concern. How could this be?

Well, it makes more sense when one considers that 83% also said the pandemic has changed either their business transition plan, their timeline or both.

Many owners have been through disruptive events over the past two decades, including the 2008-2009 Great Recession. The pandemic has served as another reminder that most of their net worth is tied up in their businesses. While the industry has seen 13 years of growth, everyone knows that past performance never guarantees future success.

In fact, 73% of survey respondents listed market conditions as a top external business concern. It was the No. 1 concern in the survey, even above profitability. Owners are starting to consider how they can maximize the value of their businesses now so they can properly bequeath them to successors while ensuring they maintain their current lifestyles in retirement.

The transition is looming for many. The survey found that 15% of owners want to transition their ownership in the next one to two years, 33% want to transition in three to five years, and another 33% want to transition in five to 10 years. That’s a total of 81% of construction businesses looking to transition ownership within the next 10 years.

For many, it won’t be easy. Gone are the days when company owners could anticipate transitioning their business to their adult children. Now, many have to look internally at key employees or existing partners. For an industry that struggles with attracting and retaining young talent, that’s a huge concern.

Not only do owners have to identify how best to determine and maintain transferable business value, but also they must properly motivate, incentivize and develop key employees who may be a future part of a transition plan.

Throw potential tax changes into the mix, too. Nearly 70% of respondents are concerned about tax change, which includes an uptick in business valuations and clients looking to have conversations about the estate tax exemption, capital gains tax and other key estate planning and tax planning considerations. Contractors are learning about their options and developing plans for how to tackle what may or may not happen during the current administration’s time in office.

Executives should consider five key pieces of advice:

1. Be Proactive and Understand the Options

Being proactive is extremely helpful. Waiting too long to develop an actionable succession plan eliminates previously viable options. It also makes it more difficult to build transferable business value in time for a sale to a third party or even an internal transition.

Understanding options also reveals alternatives, such as gifting the business to the next generation, maintaining ownership into retirement while relying on key employees to manage the business, or transitioning the business to an employee stock ownership plan structure. Once contractors understand the options, as well as the pros and cons unique to their situations, they can start to make decisions and develop a viable succession plan.

2. Understand What Builds Value

Transferable businesses are stable, sustainable and profitable. They can continue to function even if something unexpected were to happen to the owner. The more crucial the owner is to the day-to-day operations of the business and its key relationships, the less the business is worth. The lack of robust management or key employees in development can decrease value. Even something like a lack of modern technology or the presence of outdated technology can decrease value.

In this way, the value of a business can be a great indicator of the business’s overall health.

3. Embed Succession Into Strategic Planning

A good strategic plan factors in internal and external pressures. Like using GPS in daily life, a good strategic plan provides a road map to arrive at the desired destination, and it builds in contingencies in case one gets lost or detoured along the journey. Building succession into the strategic plan helps ensure the succession is viable and actionable to ensure the business minimizes its operational disruption—and that it’s actively being worked toward.

A big blind spot for owners is planning for the unexpected. Succession planning should take into account what would happen if the owner had to be hospitalized for a long period of time or even passed away unexpectedly. Who would take over, and would they be prepared? How are outside relationships going to view the viability of the company afterward? Would major customers leave for a competitor?

4. Develop and Retain Key Employees

Think of transition planning as not just succession of ownership but also leadership development. Employees are the future of the business. They are what makes it successful. Every contractor seems to have those one or two project managers who turn everything they touch into a profitable project. The focus should be on how to further develop them into future leaders and incentivize them to stay.

Owners should recognize, too, that the way they did business isn’t necessarily going to be the same way their successor does business. Baby boomers, Gen Xers and millennials all have different workplace styles. While future leaders should be mentored by older, experienced managers, they should also be allowed to utilize their strengths—one of which is likely an enhanced ability to usher the company into the digital age.

With 66% of survey respondents listing technological innovation as a top concern, it’s important to consider transitioning leadership to someone who demonstrates digital know-how, or at least the capacity to learn.

5. Don’t Confuse Succession With Exiting the Business

Lastly, don’t confuse succession with exiting. Many owners have mentored a key employee, promoted that person to president and stayed on as the owner to keep the business and its relationships stable until they feel comfortable fully retiring.

A hard and fast exit doesn’t have to be the only option, and many owners are realizing that. In the survey, 30% of respondents indicated they want to transition ownership but remain active in the business for varied periods of time afterward, and 7% want to decrease their activity while remaining the owner.

Successful business transitions are proactive ones. Securing value for an owner’s life’s work while also ensuring it perpetuates long after they retire requires planning ahead.

Only 36% of construction executives are completely satisfied with the amount of time their company spends on ownership and management. Diving into best practices can help owners jump-start their transition planning, increase business value and gain greater peace of mind that they’re on track to meet their financial and personal goals.

Want to view the full Wipfli construction owner survey results? Visit wipfli.com/CRE to access the report.

by Brian Bohman

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