If the pandemic accelerated your timeline for an ownership transition, you’re not alone. The turmoil of the last year is making many construction industry owners reconsider their short and long-term plans, especially as many of them approach retirement age.
Even if you are non-committal, there is no time like the present to develop a transition strategy. The more runway you have to plan and consider your options, the more you can ensure a successful, stress-free exit that maximizes your return and sets the business up for future growth.
How does one approach the many interrelated transition issues? It helps to organize them into a few major categories. This can help break the logjam and give owners some logical places to start focusing their attention. Here are several broad areas that owners should be thinking about as they develop or update their transition plans.
- Internal vs. External Transition – The first step in developing any transition plan is to define the fundamental transition strategy. This involves answering a basic question: Are there family members or members of the current management team who are interested and capable of taking over, or will the company be sold to an external, third-party buyer? Owners need to address this question as early as possible because the answer will affect all subsequent decisions regarding timing, valuation, and financing.
- Cash Flow, Capital, and Financing Concerns – Financial issues play a large role in a transition strategy. The shape of that strategy will depend on the answers to some additional critical questions: Does the departing owner need immediate cash to finance new business opportunities or other immediate needs, or is the objective to generate steady, long-term retirement income? If the owner needs cash, will likely buyers be able to access adequate capital, or will the seller need to help with financing? If long-term income is the goal, how should the payout be structured in order to protect both the buyers’ and sellers’ interests?
- Gift, Estate, and Income Tax Considerations – After the Tax Cuts and Jobs Act (TCJA) of 2017 made major revisions to the tax code, prudent business owners needed to re-evaluate the tax consequences of their transition plans, particularly as they related to corporate income taxes, as well as their gifting and estate planning strategies. Now, as some of the TCJA’s major provisions could be reversed or modified, owners will once again need to monitor developments closely and be prepared to modify their transition strategies to mitigate any potentially adverse tax consequences.
- Management Continuity and Control – Most business transitions occur in stages. If ownership is being transferred to family members or other internal buyers, departing owners should begin grooming their successors well in advance and begin turning over responsibility and leadership in phases. With an external sale, it is common for the buyer to require the seller to remain active in the business during a phased transition period to help maintain existing customer relationships and complete existing contracts. Regardless, a transition agreement should clearly define both the timing and implementation to ensure a smooth transition.
Your transition plan is not set in stone. Yes, you should try to cover all the bases, but it’s possible the business environment and your life plans could require you to make changes — and that’s OK. The planning and thinking you put into the process now will pay off later.
Dembo Jones’ dedicated construction team has extensive experience in transition planning, including the critical benchmarking, cashflow analysis, and proper tax planning that can mean the difference between a smooth transition or a regretful one. Contact us today.