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Preparing for transition
Transitioning to the Next Generation of Construction and Real Estate Ownership
Business owners understand that it’s easy to focus on issues immediately in front of us while waiting to address longer-term plans. This can be especially true for owners of construction and real estate companies as building activity increases and real property values rebound.
One often-overlooked area of long-term planning is business succession. While your company may be operating efficiently under your ownership and management, you want to make sure it continues to operate well in the future, after you exit. Having a good plan in place will smooth the transition and help you receive maximum value for the company upon your exit.
When we talk about succession planning, this includes:
- Ownership succession
- Management succession
- Business continuity
- Addressing any closely-held business concerns
- Merger, sale, and acquisition strategies
Why is planning important? Because it impacts you, your family, and the families of all of your employees. A solid business succession plan should also address your personal issues, such as changes in your marital status, work situation, and health.
Transition planning should cover intentional events (retirement, moving on to other endeavors, owners seeking to monetize and/or diversify their investment) and unintentional events (death, disability, ownership separations, involuntary termination of employment).
Characteristics of a good plan
Succession planning can seem overwhelming, and it can be hard to know where to start. Begin by talking to family and staff who can objectively discuss your vision for yourself and your company. It may also help to make a list of goals you want to accomplish for the remainder of your life.
In planning for the future success of your construction or real estate business, you should aim to:
Retain key employees
- Minimize business interruptions
- Create a transition of management and vendor relationships that appears invisible to the customer
- Retain brands and images untarnished throughout the transaction
- Maximize value and minimize taxes
- Have plans for contingencies, such as death and disability
- Address entity structure considerations
- Achieve your end goals, whatever they may be
Start by evaluating who you think might be future owners of your company. Are family members able to run the business? Are they interested in doing it? Ask yourself, “Is the next generation ready?” If you have more than one heir you must consider whether to distribute ownership among family members, or if there is one person who is more interested in the business than others. You must also assess whether the next generation has the skills to run the business and if there are any family conflicts that would prevent a successful transition.
All parties will need to reach agreement on the value of the company and the means of payment. It is important to create a payment plan that does not unduly burden the younger generation, and before ownership is transferred, both parties should agree on a timeline for payments to be made.
Timing of transaction
Consider the timing of the transition; when will you be ready to exit the company? Will you be able to meet your retirement goals?
This issue is especially tricky if the company is expected to grow rapidly in the near future (this may be likely, due to increasing activity in the construction and real estate industries). Selling sooner may result in increased value for the next generation, whereas selling later may give you more resources for retirement.
Family succession planning issues must also be fully integrated with your estate and gift planning. Under current laws, up to $14,000 a year can be gifted without triggering a gift tax, and a $5.25 million combined estate and gift exemption is available. Under a spousal access trust, spouses can effectively transition up to $10.5 million of value without incurring the gift and estate tax, after which a rate of 40 percent applies.
Special consideration should be given to the impact that a transition of ownership may have on the company’s borrowing and bonding capacity and relationships. The earlier that future generations are integrated into these relationships, the greater the opportunity for long-term success.
Start planning now
You can never be too early — but you can be too late — to begin planning for a smooth transition of your company. Begin the process now or evaluate whether your existing plan needs to be updated.
Brian Buwalda, Partner, Construction and Real Estate
brian.buwalda@CLAconnect.com or 407-244-9322