Four Tips for Effective Succession Planning in the Construction Industry
by Justin Brown, CPA
Transitioning a business in any industry is undoubtedly difficult. But transitioning or selling a business in the construction industry may be more challenging than any other industry. Owners of construction companies are unique leaders who bring an entrepreneurial spirit to their business. Not only are they responsible for business operations, field work and leading workers, but they’re often the ones who carry the brand recognition of their business, bringing in contracts and driving revenue opportunities.
As we’ve come alongside construction businesses to help them with succession planning, we’ve noticed a few key themes. Following these four tips can make succession much easier and more successful.
Tip One: Start Now
It sounds cliché. But we mean it when we say: start now. It might be scary or daunting to think about transitioning your business, especially when you feel you just got it off the ground. However, having a plan doesn’t mean you’re leaving your business today.
In fact, most business succession plans that we help implement for construction businesses take 5-10 years and sometimes even more. The earlier you begin the conversation about transitioning your business, the more options you will have.
Perhaps the biggest advantage of starting early is the opportunity to maximize your business’s transaction price. When it comes time to sell, everyone wants top dollar for the company they’ve built up for years through hard work and sacrifice. To ensure this happens, the succession planning dialogue needs to start early. This opens the door to more strategies and transaction price optimization.
Tip Two: Consider Your Personal Plan First
The most successful succession plans we’ve helped implement are the ones in which the owners consider their personal plans first. I know you thought we were talking about business succession planning, and we are. However, the business’s path forward intimately relies on what you want to accomplish personally, as an owner of the business.
We highly encourage any owner to complete a personal financial plan for themselves and their family. Not only will it help you answer critical questions such as, “How and when will I retire?” “What are my financial needs?” “What do I want to do in my retired years?” “What are my personal goals outside of the business?”
This process uncovers critical information that helps pave the path for the business, including timeline, required business value and selling vehicle options that align with your overall goals. With a documented personal financial plan, you’ll be able to see numbers on paper that will help chart the course forward for your business and hold you accountable to reaching your desired outcome.
Tip Three: Get Out of the Weeds
We already mentioned that the construction business owner is a unique breed, having their hands in more activities than they would typically like. As part of your business succession plan, we recommend starting to build a management team around you. This may include CFOs, Controllers, Estimators and maybe even, Business Developers. And once you’ve added or built leaders around you, share the knowledge you have with them.
If you’re the only one in your business who understands the operations, brings in new contracts and generates revenue, you’ve unintentionally backed yourself into a corner. Remember — potential buyers of your business aren’t buying you, they’re buying your business. Your business becomes highly more attractive to a potential buyer if its strength and stability looks promising beyond your departure. This requires you to get out of the weeds and start building a team around you to build strength and skill outside of just yourself.
Tip Four: Don’t Overlook Key Employees
You have plenty of vehicle options to consider when transitioning your business, including a strategic sale to an investment firm, selling to a competitor who wants to expand its brand or explore your specific niche, family members or an employee stock ownership plan. However, time and time again, we encourage owners not to overlook their key employees as an option for transitioning ownership. Here are a few reasons why:
- Key employees are typically invested and believe in your brand. This may mean that the core values, strategy and mission you built will continue, even when you’re no longer an owner.
- Selling to key employees usually means you can structure your transition to meet your specific needs and wants. If you were to facilitate a sale to a third-party, your control of timing and design often takes lengthy and nuanced negotiations.
- Employees who will one day become owners are interested in maximizing value, bringing in new business, training staff and protecting the business’s stability. This helps bring additional leadership to the table while you’re still sitting at it. (Remember, you want to get out of the weeds.)
- Transitioning to key employees can be a multi-year process, allowing you to control the timeline while getting your new co-owner(s) up to speed. Additionally, while you’re in the process of transitioning, your salary, distributions and perks can continue for several years. With a third-party sale or ESOP, this continuous cash flow isn’t typically available.
Owning a construction business is delayed gratification. Most times, we see owners tirelessly working to build, build, build (no pun intended) – wondering when they can enjoy the growth and success they’ve achieved. Starting the conversation about succession planning doesn’t mean you’re leaving your business today. However, it does provide you the peace of mind that the results of your hard work will continue when you’re ready to start checking things off your bucket list.
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Justin Brown, CPA
Justin Brown joined Larson Gross in 2009. Today, he is a Partner and the leader of the firm’s Construction industry group, assisting businesses with their tax, financial statement and consulting needs.