Business

Five Tips for Succession Planning for Construction Companies

Succession planning can be easy to push off until tomorrow. However, construction business owners who have dealt with ownership transitions recognize succession planning is critical to the future success of a business.
By Ken Van Bree
September 6, 2019
Topics
Business

Succession planning, similar to estate planning, is a very important yet often overlooked or delayed topic of discussion.

People do not want to talk about their incapacitation, retirement or death. To talk about a successor means business owners have to relinquish control, plan for the sale of a business they have overseen and inherently trust another person with one of their most valuable assets.

Between daily responsibilities of running and operating a business, succession planning can be an easy topic to push off until tomorrow. However, construction business owners who have dealt with ownership transitions recognize that succession planning is critical to the future success of a business.

Strong management succession will increase the business’ value, in addition to providing other benefits.

Building Value

Building value in a construction company is important. Succession planning should be a formal process and not a surprise, which will help mitigate risk and protect that value.

The first step of the process is to identify key decision-makers and succession planning goals and objectives.

Gather the following information:

  • What top management personnel will be involved in the planning?
  • Who are the outside advisers that should be consulted?
  • What is the transition timeline?
  • What does the owner want his or her legacy and the company’s legacy to be?
  • Evaluate possible successors, including the technical and soft skills and a psychological assessment.

Different owners may have different exit goals or timelines. Common topics among these discussions usually include items such as future financial security, financial stability for dependents, maintaining family ownership and treating children equitably.

Communicating Objectives

The next step of communicating the objectives with key members of the organization is vital.

  • Will management be onboard with the goals of the succession plan?
  • Are the family members onboard with changes of control among generations?
  • What is the communication plan to external parties?

A misstep in communication could cause costly disruptions such as power struggles among key employees or family members and stress for external players, including suppliers, customers, lenders and advisors.

Groom A Successor

Ideally, the owner’s successor will be part of building the succession plan. Once the goals have been agreed on, continuous grooming for the successor needs to be a priority. Adequate training and development, necessary leadership experience and quality mentorship need to be part of this process.

This is an important piece of the succession plan. The successor needs to be able to use the owner’s intangible assets. These intangibles include the owner’s knowledge, skills and relationships.

A good succession plan will gradually reduce the company’s reliance on the owner by transferring knowledge to the successor. In doing so, the plan ensures that a competent and valuable leader is available at all times during the transition period.

Transfer Ownership

The next and most complex step is to decide how to transfer ownership. There are many ways ownership can be transferred.

The options include, but are not limited to: gifting stock, redeeming stock, buy-sell agreements and stock recapitalization.

Gifting stock is an effective way of passing stock to the successor and in turn, reducing the estate of the original shareholder. Gifting stock can seem self-explanatory, but many considerations need to be taken into account, such as annual gift exclusion amounts, future appreciation of the stock and voting versus non-voting stock.

An alternative to gifting is a stock redemption, where the company may purchase certain owners shares, thereby increasing the remaining shareholders' ownership percentages.

In many instances, the redemption may be part of a buy/sell agreement. Buy/sell agreements are also an effective method to transfer ownership. With a buy/sell agreement, the price of the stock should be based on a predetermined valuation.

With this approach, the agreed stock price is an important component and should be reviewed annually.

Another choice is stock recapitalization. Common stock recapitalization enables a shift in voting power to successors that will operate the company.

Estate Planning

Estate planning is the last step in the process. However, this step should be considered throughout the planning process.

  • What does the business owner want to leave to his or her family?
  • Does the owner have the financial capacity to retire?
  • What are the tax consequences of the owner’s succession plan and beyond?

As you can see with the transfer of ownership options mentioned, estate planning is an integral part of each option. Owners need to consider all the alternatives when reaching their estate planning goals.

Overall, given all the components, complexities and challenging conversations that come with the aforementioned options, it is easy to see why succession planning is pushed to the back burner for many construction companies. Flexibility is important; the plan will likely evolve and be revised along the way, but if the process is followed, a succession plan can be built from the ground up.

by Ken Van Bree
Ken Van Bree is the Partner-In-Charge of RubinBrown’s Construction Services Group. He also serves as a Partner in the Assurance Services and Entrepreneurial Services Groups. He specializes in financial, operational and plan audits and also provides general business advisory services.

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