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Succession Planning: 4 Important Steps You Need to Know

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Construction is a hotbed of family businesses. However, even though you most likely want successive generations to take over the business, small construction businesses are notorious for not doing the succession planning to make that happen. Here are four tips to help you successfully navigate that transition.

FMI surveyed construction business owners in 2017 and discovered:

  • 51 percent of respondents described their construction businesses as 'family businesses,'
  • 32 percent of respondents said they’d prefer family members to run the business when they retired.

So, while half of the surveyed construction businesses are family businesses, only about a third of the owners plan to leave the business to the family. Moreover, that appears to be a long-term trend. FMI compared the results from its 2017 survey to the ones from the 2013 survey and found:

  • A drop of 28 percent in the number of firms having family members actively working in the business,
  • A 20 percent drop in the number of owners who plan to pass on the business to the next generation.

1. Family Business Shrinkage

FMI found that construction continues consolidating and large firms are growing rapidly, partly through acquisitions. A portion of those acquisitions involves family-owned firms. But, family succession is also affected by internal company issues and personalities.

70 percent of family businesses fail on the transfer from the first generation to the second generation.

Maybe there is no family member who has the skills and leadership abilities to take the reins. Or, perhaps the most logical successor just isn't interested. Business models are at work as well, diluting the base of family businesses. As firms reward and promote based on merit, they drift away from the family business model. Additionally, employee ownership schemes dilute family members' share of the business. 

Assuming you have a family candidate with the right temperament, skills and leadership ability, pulling off the transfer requires planning. The better the plan, the greater the chances of a successful transition.

An often-cited statistic attributed to the Family Business Institute is that 70 percent of family businesses fail on the transfer from the first generation to the second generation. Only 12 percent survive the transfer to the third generation, and just three percent transfer successfully to the fourth generation. 

2. You Get Benefits with a Succession Plan

Succession planning is a lot more complicated than simply naming who will take your place. That might be exactly why approximately half of construction businesses don't have a plan. What you need is an Ownership Transfer and Management Succession plan. And, it's probably wise to include legal and tax counsel at some point in your planning as well. You will get these benefits:

  • Clear paths for transferring equity
  • A tax strategy that favors your interests
  • Viable new leadership invested in the company's success
  • Established strategies for dealing with emergencies and absence of key leaders
  • A clear roadmap to a successful transition
  • A boost to your business' value

Your first step is to know what you want. You have invested a significant portion of your life to build and maintain the business. How do you want to leave it, gradually, or all at once? Do you want continued income from the business? How do you want the business to benefit others, like family, employees, and the community?

3. Using a Family Business Succession Formula

If you decide that transferring the business to your family is the best route for you, it follows that you probably have at least one person in mind. One of the first things you must grapple with is the idea that nobody else, not even your kid, is going to run the business as you do. Hopefully, though, your successor will still have the skills and experiences needed to run it as well as you, and perhaps even better. 

Suppose you have more than one child interested in the business, or maybe even a spouse and a child? For any family succession scenario, your plan needs to be flexible as things change. A child that has no interest in construction is a long shot for taking over the business. But, what about a few years down the road? 

People's interests change as they experience more of the world and gain new insights. That same child might later become a viable candidate. Or, maybe your teenager is wildly interested in the business, but you wonder whether they'll ever learn some patience and take the time to grow into their adult role in the business. 

Unfortunately, you can't know today how all that will shake out in the future, so by having a Plan B, your family succession plan will be adaptable. Your Plan B could be an alternative plan for a different family member; it might be a different exit strategy like selling out, employee ownership, bringing in outside talent, or even liquidating.

As you lay out your plan, you have to deal with what you know today. Fashion the plan around that. Then, make sure you do regular reviews so you can update it based on change.  

4. Having the Right Conversations is Important

The dicey work here is unraveling what's important to you, what's important to your successor, and how you can create a plan acceptable to all.

Once you decide what the best course is to have family take over, it's time to start talking about it. The dicey work here is unraveling what's important to you, what's important to your successor(s), and how you can create a plan acceptable to all. Your conversations have to touch on more than just the money. Your successor's long-term outlook for themselves, their family, your employees, and the company are important to discuss in light of your own goals. It's through these discussions that you'll confirm whether family succession is viable for your particular circumstances. 

Once you have the tough conversations behind you, it's down to setting up your plan and reviewing it regularly to account for all the changes that will inevitably happen. Be sure to include input from your legal and tax counsel as you build your plan. Finally, set up a training plan for your successor(s) to teach them all the softer skills needed for running the business.

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