6 steps to transition your company to the next generation

A construction business owner’s exit options include closing, selling or transferring the company to a family member. Over 80 percent of business owners prefer to eventually transition their company to the next generation in the family. However, a good succession plan might take a minimum of 2 to 3 years to put in place. The sooner that future leaders can take responsibility for business growth and profits, the better off everyone will be. If you plan to transfer your company to your family, first answer the following questions:

  • Are you willing to trust others to care for the company without you?
  • Are you ready to walk away from daily activities and major decisions?
  • When is the right time to turn over ownership, leadership and management to the next generation?
  • Do you have enough money to stop receiving a paycheck as the president of the company?
  • Are your family members ready to accept the risks, responsibilities and liabilities of owning a business?
  • Is the best solution for you and your family to close, sell or transition?
  • Why haven’t you started the transition process yet?

1. Draft a 5-year Plan

Once you decide to transfer your company to your next generation, what will make the transition a success? Companies can have a higher value when they are less dependent on an owner to manage the business. To build a valuable company, you need basic structure, a clear business plan and a 5-year vision, including:

  • Growth targets
  • Core values and principles
  • Financial profit and return on investment goals
  • Organizational chart for growth
  • Clear position descriptions with responsibilities
  • Defined management team
  • Workforce enhancement programs
  • Regular strategy meetings
  • Customer and project goals
  • Sales and marketing plans
  • Investment targets and goals

2. Determine Owner Needs

Developing a transition plan starts with determining what the owner wants and needs from the transfer. The owner’s desires must be balanced with what is fair and reasonable for the next generation and with what will allow them to be successful.

Price

  • Amount of money the owner wants from the transfer
  • Worth of the business to investors
  • How to pay for shares (stock transfer, loan or lump sum)
  • Timing of transfer

Income

  • Amount of money the owner needs
  • Payments, terms, interest and timing
  • Salary, benefits, perks and duration
  • Dividends and profit sharing
  • Investments

Former owner’s role

  • Former owner’s involvement after the transition
  • Former owner’s work schedule
  • Responsibilities and activities

The next leader

  • Ownership, timing and responsibility for any liabilities
  • Transfer ownership to workers or family in or outside the business
  • Percentage of ownership for owners, spouses and children
  • Timing of succession or transition

Compensation & liabilities

  • Transfer of risks and liabilities
  • Pay for work and profit for owners
  • Profit split for managers versus owners internally or externally
  • Compensation, benefits, perks and pay for owners
  • Tax consequences of transfer
  • Bank line of credit, guarantees, bonding, insurance and licenses
  • Long-term agreements (mortgages, leases and equipment)
  • Compensation, benefits and perks for key employees
  • Clear policies, standards of performance and policies for owners

3. Plan for the Future

Who is the best choice to be the new leader? Should the company hire an outside president or transition leadership to a family member? Which family member is the best choice to run the company? Does he/she have the drive, skills, experience and respect? Is he/she willing to take on added liability, risk, extra responsibility, workload and long hours? Can the new leader manage key relationships? How will important decisions be made?

4. Put the Plan in Writing

Draft and prepare the necessary documentation, contracts and buy-sell agreements. Don’t forget to address what can go wrong and what happens when something does go wrong. Develop a plan to address worst-case scenarios, too.

5. Name Leadership During Transition

During the transition, leadership will eventually transfer to the new owners. Be sure to address timing, levels of authority, control and decision making. Include the transition of control, the proposed organizational chart and position descriptions, a timetable for transition and how you will communicate the transition plan to your team. Open the books to the next generation and explain financial management. To ensure you don’t lose any of your valuable managers, address how you will reward and compensate them moving forward.

6. Review the Results

Determine the factors you will review on a regular basis, and develop scorecards to track actual results versus the plan. Include the following success factors in your monthly analysis.

  • Financial performance and accounting system and practices
  • Dividends, distributions, profit sharing and return on investments
  • CPA and annual audit policies
  • Compensation and benefits of owners
  • Develop plan for regular updates
  • Create an active advisory board

Transitioning your business to the next generation is a step-by-step process filled with emotion and tough decisions. If you want to turn over your business to your family, get started on developing a plan for the future now.