Construction and contracting executives are, understandably, focused on the here and now – managing projects and employees, pursuing new business and keeping up with the latest technology and building trends that can enhance their operations.
But what about the future?
According to the Service Corps of Retired Executives (SCORE), almost half of all small business owners acknowledge that they haven’t planned for the continuation of the company should they no longer be in control due to retirement, moving on to pursue new ventures or becoming incapacitated.
Identifying and orientating a qualified successor can be a lengthy process – and one that should be undertaken before it becomes necessary. A detailed plan for transferring ownership and decision-making can lead to a thorough thoughtful process – and the right successor for the company.
When Should You Start?
It’s never too early to start succession planning. Ideally, you should begin the process at least three to five years before you plan to exit the business. This will give you more control over your exit and better succession options to choose from.
Here are a few important questions to think about as you begin the succession planning process:
- What are your succession goals? For example, do you want to maximize the sale price to fund your retirement or is it more important to preserve your personal legacy in the business?
- Do you want to keep the business in the family? If yours is a family construction business, is there a family member who is qualified (and willing) to become your successor?
- Are there key employees who need to be retained after you leave? If so, what kinds of incentives can you offer to motivate them to stick around?
- Are you willing to finance some of the purchase price? Owner financing could expand the field of potential buyers, but it also entails financial risk that you might not be comfortable taking.
Succession Planning Options
There are several different succession options; the best one will depend on the circumstances of your exit. The four types of succession plans that construction firms most commonly use:
1. Transition to heirs. Keeping your business in the family may allow you to preserve your legacy while handing your heirs a successful enterprise. But transitioning your business to heirs can be tricky. The first challenge is choosing a successor. If one family member is helping you run the business right now, the decision could be easier, but there could still be hurt feelings among other family members who aren’t chosen.
The most important factor in your decision should be who is most qualified to lead the company, regardless of personal feelings. Once you have named a successor, start training him or her so the future leader is prepared to take over when you leave. Involve the successor in important decisions, and introduce him or her to key clients and vendors.
2. Sell to one or more co-owners. This could be the best option if you have partners in the business who are willing to buy you out. A buy-sell agreement is usually the best way to execute this kind of transfer. A buy-sell agreement is a legally binding document that details the terms of a partner buyout, including what happens to a partner’s ownership shares if he or she dies or becomes permanently disabled.
Cash value life insurance policies or a disability buyout policy typically fund a buy-sell agreement. There are two main types of buy-sell agreements. With a cross-purchase plan, each partner buys a life insurance policy on the other partners. With an entity purchase plan, the business entity buys life insurance policies on each partner. This type of plan is best when there are three or more partners.
3. Sell to employees. Selling your business to employees can be a win-win: you gain the satisfaction of transitioning your business to people you know and trust, and your employees benefit from greater stability and the opportunity to reap some of the rewards of business ownership.
An employee stock ownership plan (ESOP) is a good way to transition ownership to employees. With an ESOP, you can liquidate ownership gradually by selling employees a minority interest in the business over time, thus retaining a controlling interest. A big benefit of ESOPs is the positive impact they have on employee morale and productivity. Many employee-owners work harder and are more loyal to the company when they have an equity stake.
4. Sell to an outside buyer. Third-party business buyers are usually competitors who want to expand market share by acquiring your customers or other businesses along the supply chain (like vendors and suppliers) looking to expand their operations. Selling to an outside buyer is often the most straightforward process. It also tends to yield the highest payout and avoids potential complications that can arise when passing your business on to family members.
Before listing your business for sale, focus on specific value drivers to help boost your business’ value and potential sale price. See the sidebar for three key value drivers.
Get Started Now
As Benjamin Franklin said, “By failing to prepare, you are preparing to fail.” This is especially true for construction firms and contractors, who can’t miss a beat during a leadership transition. Now is the time to get started.
An accountant and tax advisor should be a critical part of your succession planning team. The professionals at Dembo Jones have vast experience advising business owners about leadership transitions. Let them help your planning process.