Succession Planning: The First Steps for Construction Companies

  • Preparing for transition
  • 12/3/2012
Two Hands Passing Relay Baton

The number of aging construction business owners is growing, and many need to start formally planning how their business will be managed once they retire.

Many business owners know they need to make formal plans for a successor, but planning can easily take the backseat to the urgency of managing daily operations, people, equipment, credit, cash flow, business development, and the next big project. However, this is becoming a significant issue for the construction industry. According to FMI Special Report: 2011 Surety Providers Survey, more than 50 percent of construction firm owners are over age 55, and less than half have a formal succession plan.

Many construction companies are family-owned and operated — some for generations — and have had a substantial impact on their local communities over the years. In addition, many of these companies are smaller, and therefore highly dependent on their owners to manage day-to-day issues.

Unfortunately, these are often the same companies that have no succession plan to prepare for future leadership, ownership, and management once the owner retires or is unable to manage the business.

Common struggles

Many construction owners have similar challenges when they start the succession process:

  • How can I avoid selling to a third party and provide for the welfare of my trusted managers and employees?
  • How can I develop the next generation to manage and lead in today’s complex business environment without my continued involvement?
  • What incentive can I give key employees to remain with the company through an ownership and management transition?
  • What will be the long-lasting legacy of my business for the community, employees, and the construction market?
  • When I retire, do I have the finances necessary to maintain my lifestyle, including my hobbies, activities, and daily expenses? Have I provided for my spouse and family?

How do I start?

Although many owners prefer to pass the business on to family or staff, 70 percent of family business transfers fail, according to the FMI Report. This is often due to a lack of trust and communication between the owners and successors, and the successors not being adequately trained with the right management skills.

Succession planning starts by communicating with those you know and trust. Start the process by talking to family and staff who can objectively discuss your vision for the future — for yourself and your company.

Once you have shared your ideas you can formulate a plan by focusing on the following steps:

  • Identify financial conflicts:
    • Expected versus real value of your company
    • Personal needs after retiring
    • Management’s acceptance of risks associated with a change in ownership
    • Credit capacity of the company, and impact on ongoing operations after the transition
  • Decide which family and/or key manager(s) you want to be part of your ownership and management succession plan.
  • Make sure they understand the responsibilities and risks associated with their role in the succession plan. Alignment of all of the stakeholders regardless of their role is essential for your vision to be realized.
  • Evaluate your successor owner/manager’s dynamics in anticipation of how he/she will respond to a change in management.
  • Assess the near and long-term development needs of the company.

Assess your company’s value

Evaluate how the concepts below affect your company’s future, and what you need to do to sustain the value and operations of your enterprise.

  • Market and customers. What is the potential for your company’s growth — is there a market of expertise or specialization to enhance its operations? Do your employees have adequate knowledge of this specialized area, or do they need more resources?
  • Infrastructure. What is the quality of your assets, such as real estate and equipment? Do you have adequate management information systems, and is your management team able to maintain your company’s infrastructure?
  • Financial performance. What are your company’s earnings, and what is your company’s bank and surety credit without your involvement as a founder?

Be realistic and flexible

Be pragmatic about your plans for ownership and management succession — not everything will happen exactly how you envision it, and you will need to stay flexible.

Remember you don’t need to execute a plan all at once, but by setting interim goals, you can have a solid plan in place before you’re ready to pass on the business. The sooner you start discussing your succession with those you trust, the sooner you can feel secure about your company’s legacy and your personal future.

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