Four Steps to Achieve a Sustainable Management Succession Plan

The result of these steps is a systematic, long-term succession strategy that has total transparency and accountability. It delivers the company the original owner built back to the people who most deserve it.
By Shane Brown
November 9, 2019

There’s a glaring discrepancy in the construction industry between the kind of business exit that owners want and the kind they get.

Many owners of small to mid-size construction firms want to leave in a way that assures their legacy and keeps the company name on the door. Their other desire is to give key players in the company a chance to step up, work hard and have their own chance to profit from the business’s success.

To achieve that, they’re often prepared to accept a lower financial windfall than might be possible through other types of exits—though, of course, they still want to reap their own rewards and guarantee themselves a comfortable retirement.

In reality, relatively few owners manage to get their dream exit. Commonly, they start preparations too late and end up going down less desirable, if not more personally lucrative, paths such as a private equity buyout or an employee stock option plan.

The culture of the construction industry is partly to blame for this. Owner-led construction firms, for better or worse, are a lot like big families. On the positive side, that means they often have great camaraderie and loyalty between owners and staff. But, as in many families, there’s often a reluctance to bring up potentially awkward or sensitive issues for fear of offending people or upsetting the status quo.

In this environment, the succession issue can end up being the elephant in the room for years as the owner or owners agonize about how and whether to address it. Owners often see skills gaps between themselves and the next generation and they also don’t know what they need from the business, which can cause hesitation to move forward.

This wastes precious time as the years tick away toward the owner’s departure, potentially causing a talent drain as key staff get frustrated and leave for better prospects. They leave when the implied promise of “potential ownership” never arrives.

A sustainable management succession plan isn’t something that can be done overnight, or even in a few years. On average, 5 to 10 years is needed to prepare the groundwork, groom the necessary talent, and work through a detailed transition plan that protects the balance sheet. There are four key steps that owners should follow to build and deploy a sustainable management succession.

1. Pull the trigger

This sounds like the easy part, but for many owners it can be the most difficult. Even if they have put every other element in place to bolster the health and attractiveness of the business, it can be hard to make that final decision and easy to procrastinate. Owners can be terrified of having that first discussion about an internal succession plan, worried that they will then be on the hook to deliver or that their chosen successors might say no. They also need to have carefully thought through the kind of exit they want, what they care about and want they need to get out of it financially.

2. Get help

Once they’ve made the big decision, owners need to bring in an expert who can help the company work out a detailed succession plan. Having a neutral outsider helps take the emotion out of the process and tends to raise the comfort level of all sides. This third party has two roles: one soft, the other hard.

First, they should talk to both sides to get a thorough understanding of the company’s culture as well as the needs and sensitivities of owners and their chosen successors. Second, they should set out the financial and leadership mechanics of the multi-year succession plan and stick around to make sure the company remains on track to achieve it.

3. Implementation is key

A good succession plan needs to strike a balance between getting the owners to their exit goals while ensuring the company’s key financial metrics stay healthy enough to make the transition sustainable. For their part, the team of successors needs to be prepared to put in the hard work and progressively take on the owners’ key roles such as being a leader to employees and dealing with the banks, bonding/surety agents and customers.

A lot of the profit in the transition period will go to fulfilling the owner’s financial goals, but all the while the succession team is gaining ownership. A real-world, 10-year transition plan might create a mechanism that takes a healthy amount of money out of the business for the owners each year while also contributing to a deferred compensation plan for the new management team.

For a company with $10 million in equity, for example, $1 million in annual profits would go into the deferred compensation scheme. After three years, the management team begins to build its ownership by using the $3 million in the fund to buy 30% of the company. After six to seven years, the team has enough to take majority control of the company and become the owners in the eyes of the credit partners and other stakeholders. At 10 years or earlier, the transition is complete with 100% ownership.

4. Stay accountable

No succession plan is going to go without a hitch. All kinds of things could slow the process down or disrupt it, ranging from a recession to key staff departures. The important thing is to bake these risks into the plan and to make sure everyone involved stays accountable to their commitments throughout the transition period. There should be constant monitoring of progress and adjustments made as needed. This is where the neutral third party has another big role to play, holding all sides to account until the transition is complete.

The result of these steps is a systematic, long-term strategy that has total transparency and accountability. It delivers the company the original owner built back to the people who most deserve it, while giving the owner a comfortable platform for the next stage of life.

by Shane Brown
Shane Brown is a partner at Plante Moran, leading the construction practice for the Rocky Mountain region.

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