Think Outside the Box When It Comes to Succession Planning

When pondering how to exit their companies, most construction business owners understandably think of themselves. After all, you’re the one who’s leaving — and no one knows the company better than you.

This is all true. But, when looking to maximize the value of the business and ensure it stays in good hands, it can be helpful to envision the company from an outsider’s perspective. How would a surety rep view your business? Or a bank’s underwriter? Or, perhaps most salient of all, a prospective buyer?

Find the Right Way Out

Aside from liquidating the business, contractors can generally execute one of three exit strategies: You can transfer the business to family members (by sale or gift), sell it to your employees or put it on the market.

The strategy you pursue raises a variety of business, financial, tax and estate planning issues. So, you’ll need to think about your family’s expectations if you do intend to sell or gift the company. Do they view your business with as much passion and loyalty as you?

Regarding the second exit strategy type, one option to consider is an employee stock ownership plan (ESOP). This arrangement creates a market for your shares and transfers the business to employees (including family members) in a tax-efficient manner. Consider whether your employees would appreciate this opportunity.

If your company has multiple owners, an informed outsider will likely want to see a well-drafted and financed buy-sell agreement in the event an owner dies or otherwise departs the company earlier than anticipated. If you haven’t already established one, this is a must-have.

Look for Leadership

The sudden departure of a business owner usually doesn’t sit well with those on the outside. For this reason, it’s critical to identify potential successors as early as possible.

To address these concerns, start looking for leaders now. Identify family members or other employees with leadership potential and get them involved in company governance and strategic planning. Establish leadership roles with accompanying objectives. Create individualized development plans for each prospective leader and map out detailed developmental paths. Provide leadership training and educational opportunities.

Be sure to recognize the distinction between ownership and management succession. Adult children may view the business as their “birthright,” but if they lack the skills, experience or desire necessary to take the reins, placing them on a management track may be a mistake.

Fortunately, there are ways to share the wealth without sharing control. Examples include issuing nonvoting stock and buying life insurance to create liquidity for family members who won’t be involved in managing the business. Other options include using a family limited partnership, a family limited liability company or a trust to facilitate ownership and management.

Preserve Your Knowledge

Someone outside your company — a long-time customer, for instance — will want to know that an ownership change won’t compromise the quality of your construction services. So, you’ve got to make sure that your knowledge won’t suddenly vanish when you step down.

If your successor has been working alongside you for years, maybe you won’t have to do that much. Should you decide to sell the company, however, you may need to document various approaches and procedures in writing. You can also consider staying involved as a consultant.

Think About Finances

Cash flow is the lifeblood of a construction business. Interested outside parties, and certainly a potential buyer, will want assurances that your succession strategies won’t suddenly endanger working capital.

As you establish or re-evaluate your succession plan, consider the effect of future financial obligations. Compensation plans, buy-sell agreements, ESOP debt and repurchase obligations, taxes — all of these things will demand cash at some point. Be prepared to explain to interested outside parties (and yourself) where the money will come from.

Carry On

It’s not easy to be objective about a business that you may have spent a lifetime (or at least a long time) building. Succession planning demands that you consider not only your own needs, but also those of the people who will carry on after you retire or head off to life’s next big challenge.