Marcum recently published the 2024 edition of its annual construction industry survey. Every year, industry leaders respond to questions on everything from the top issues keeping them up at night to emergent trends. Marcum then collates, analyzes and distributes the results, shedding light on the thought processes of industry leaders.
One standout finding from this year’s survey is the investment companies are pouring into their succession planning. When asked, “Which of the following actions are among your company’s top priorities?” a staggering 49% of respondents selected succession planning.
Why Now?
For years, succession planning and its robust cousin, exit planning, have been afterthoughts in construction. Maybe that’s because business was moving too fast for leaders to take the time to sit down and think about the future — or perhaps they were too fixated on achieving growth to worry much about these processes for fully realizing company value.
But with the baby boomer generation rapidly approaching retirement, it’s no longer possible to ignore the elephant in the room. None of us can work forever, and if we think of a business as part of an enduring legacy, the transition from one generation of leaders to the next must be carefully plotted.
According to Family Enterprise USA’s 2023 article summarizing a survey of family businesses, construction is second only to manufacturing as the industry category with the most family-owned businesses. The same article reports that 66% of its respondents experienced a change in leadership at their organization. It’s easy to understand why an industry with so many closely held businesses would want to preserve their structure and protect the interests of beneficiaries, but it’s less clear how this is accomplished.
Any change in leadership has many moving parts to consider, regardless of the business’s operations or ownership structure. However, a few key issues stand out when succession planning occurs within the construction industry.
How Succession Planning Goes Wrong
The No. 1 risk of any plan is simply not having one. Succession planning is one aspect of a business where personal circumstances can have a sudden and unexpected impact on the business and its employees. Unexpected developments affecting health can suddenly impede a leader’s ability to contribute, and that’s one reason having a plan in place is so important. With a route charted, the business will depend less on one leader to steer the ship.
Furthermore, leadership transitions are complex undertakings that can’t be improvised or rushed. Anything less than a careful, considerate and thorough plan introduces immense risks, including the loss of essential talent, interruption of business continuity, high legal fees and excessive taxes, among others.
Help Wanted: Master Carpenter & CEO
Many family-owned construction businesses have found success thanks to the literal hands-on contributions of their owners. From days performing specialized work on-site, they may now spend most of their time in a boardroom. The search for a successor can often overemphasize the importance of a similar career of widely varied experience. Firsthand knowledge of skilled labor undoubtedly adds useful perspective when running a business, including intimate knowledge of the potential pitfalls of on-site work (and how to avoid them) and the ability to create realistic project timelines.
I often see owners hung up on finding candidates with a career trajectory similar to their own. But there aren’t many such candidates, and the challenges facing businesses today may benefit more from leaders with a sophisticated understanding of asset financing, sureties and negotiations, among other back-office functions. Succession planning requires owners to keep an open mind. Instead of looking for that one diamond in the rough, perhaps it may be wise to sell to an outside company or to sell the business to a group of employees over time through an employee stock option plan.
The first step in succession planning is to acknowledge that while there may not be a perfect candidate, the business’s needs come first. For instance, a business with a high volume of infrastructure contracts should prioritize candidates with experience working with government agencies, even if they don’t fit the traditional mold.
When handing over the reins of the business they have built, leaders need not find a mirror image of themselves but be objective about what skills and capabilities will best prepare the business for continuing success.
Transition Timeline & Talent Development
Succession is a complex, time-intensive process. For that reason, it’s best to allocate a minimum of five years to realizing any transition plan. That should allow ample opportunity for identifying and vetting succession candidates and developing potential successors. Your transition plan should be flexible enough to account for unforeseen events, and it might make more sense to think of it as a collection of milestones rather than a strict timetable. Still, most successions I see are accomplished within three to seven years.
The Succession Checklist
Ultimately, any succession plan that best suits your business pursuits will be as unique as the business itself. However, there is a universal path all business owners can use to help ensure a smooth transition beneficial to all parties. The devil is — as always — in the details, but below is a five-phase checklist to guide the creation of an effective succession plan.
1. Begin Succession Planning
- Identify potential successors.
- Implement training and development programs to prepare potential successors.
- Explore transition strategies.
2. Assess the Current Business Situation
- Evaluate business needs and goals.
- Establish long-term vision and objectives.
- Conduct financial health assessment to produce current financial status and future projections.
3. Create a Transition Plan
- Timeline for transition featuring:
- Realistic timelines
- Stages of transition
- Communication strategy
- Prepare internal and external communications.
- Manage stakeholder expectations.
4. Legal & Financial Considerations
- Get comfortable with estate planning and taxes.
- Understand estate taxes.
- Explore strategies for minimizing tax liabilities, such as strategic gifting, trust planning, deferring taxes and evaluating business structure.
- Legal documentation
- Create or update wills and trusts.
- Create shareholder agreements and buy-sell agreements.
5. Begin the Transition
Implement the plan, and review and update the plan regularly.
Succession Success: A Case Study
To put the importance of succession planning in perspective, consider the following real-world example. A construction company client recently decided to sell and identified a standout employee as the right leader to carry the business forward. With consistent profits of $2 million per year and a growth rate of 3% over the past five years, the company was in an enviable position. The sale was planned to be completed in five years.
In the meantime, the employee/future owner was offered an opportunity: Any growth beyond the established annual benchmarks of $2 million in profits and 3% in growth would benefit the buyer and seller equally in a 50/50 split. That way, the buyer could use their excess earnings to commence the acquisition of the company stock. By the end of the five-year transition runway, the employee owned 17.5% of the company and was able to purchase the remaining 82.5% with financing and a seller note. Post-transaction, the bank, buyer and seller agreed that excess cash would be used to pay down acquisition debt before the new owner could take profits.
Within another five years following the acquisition, the buyer had paid off their loans, owned 100% of the business, retained key employees and realized further growth objectives. Now, they are considering a similar transaction to transition ownership to another star employee and prospective owner.
Succession planning, like the case study example, enables business continuity, a fair-value exit for owners and the empowerment of new leadership. It is an essential consideration for any business that aims to carry its efforts into the future, and an important aspect of growth planning and value generation.
If you have questions about your succession or exit planning, speak to a qualified industry advisor today.
