A version of this article previously appeared in the May 2017 issue of  United Contractors Magazine.

Every business is different, and so is every business owner. No matter what path you took to build and grow your construction company, though, there’s one milestone you’ll eventually have to cross: transitioning the ownership of your business to a successor. Whether that successor is a family member, your management group, or a third party, it’s an event that will have far-reaching effects on your business, your family, your wealth, and your future.

Succession planning can be a complex undertaking that’s filled with questions. For example: When do you want to transition out of your ownership role? How can you derive the greatest value from your business? Who’s the best candidate to lead your company into the future? How do you know you have the right management team in place?

Many contractors, like most business owners, avoid important succession issues like these because they touch on sensitive areas. The result is often an inadequate estate plan; one that reduces some future taxes but does little to fulfill the owner’s vision for his or her family and business. That’s why it’s important to build a comprehensive succession plan that accounts for the unique needs of your business and family—because it empowers you to create a lasting legacy.

Five Fundamentals of Succession Planning

Succession planning requires just that—planning. Yet many business owners aren’t motivated to act until ownership transition is a clear, present, and pressing need. This can often be too late to be effective.

If you start planning early, focus on five fundamental areas—business financial planning, personal financial planning, management succession, estate planning, and ownership transition—and understand your strengths and weaknesses in each, you can increase the likelihood of a successful management and ownership transition. 

For each area, it’s important to evaluate your current plans and ascertain whether they’re sufficient for you to continue as is, whether additional long-term assistance would be beneficial, or whether you need to take immediate action. Once you’ve assessed your succession planning strengths and weaknesses, it’s time to determine opportunities to improve your plan. Will your current tactics in each of the five fundamental areas be effective in supporting your succession goals? If not, how can you modify your plans? What immediate actions can you take to avoid derailing your succession plans?

Below are some sample recommendations. These may or may not apply to your current situation or strategy. It’s important to remember that your business is unique, so any succession planning advice you receive will be better if it’s tailored to your specific needs. 

Business Financial Planning

Ask Yourself:

Which areas do you need to focus on to make sure your business can maintain its competitiveness beyond the ownership transition process?

• Achieving a healthy balance sheet
• Providing fair compensation and returns to owners
• Increasing profit and cash flow
• Securing greater transferable value
• Satisfying external stakeholders

Possible Solutions:

• Develop and implement a consistent budgeting process
• Formalize and implement a strategic business plan
• Create a formal plan to maintain, develop, and transition key relationships with land developers, subcontractors, bankers, and other stakeholders
• Modify your entity structure to allow for greater flexibility for future exit-strategy planning
• Update your corporate documentation, such as minutes, bylaws, and buy-sell agreement

Personal Financial Planning

Ask Yourself:

Which areas do you need to focus on to save and invest for the long term while also protecting assets, minimizing taxes, and managing cash flow?

• Achieving financial independence
• Meeting liquidity needs (cash flow management, in other words)
• Decreasing taxes
• Managing risk and asset allocation
• Planning for your retirement

Possible Solutions:

• Formalize your personal wealth plan and investment strategy in conjunction with your goals.
• Prioritize your assets for use in retirement
• Ensure that your personal wealth, ownership transition, and business plans are integrated and don’t conflict
• Evaluate your life insurance portfolio by analyzing policy type, structure, amount, and alignment with business transition and estate planning objectives

Management Succession

Ask Yourself:

Are you adequately training and developing the next generation of leaders for the business? Are you building the right corporate culture?

• Retaining key employees
• Managing through crisis
• Managing through ownership transition
• Revitalizing the business
• Rewarding employees

Possible Solutions:

• Formalize a contingency plan
• Prepare a detailed organization chart and integrate it with job descriptions
• Develop a formalized, proactive management development and succession plan for future managers
• Address current and future management expansion needs as your organization develops its strategic plan for the future
• Keep family members and key employees informed

Estate Planning

Ask Yourself:

Are you balancing the needs of your family with the needs of your business? Does your estate plan make sense to you and your spouse?

• Meeting your liquidity needs (estate tax management, in other words)
• Dealing with unique family issues
• Controlling the transfer of your wealth and asset protection
• Decreasing estate taxes
• Achieving fairness

Possible Solutions:

• Address the issues of estate tax minimization and funding
• Update your wills and keep them current
• Ensure your assets are titled consistently with where you want them to go
• Address the lifetime cash flow needs for you and your surviving spouse
• Ascertain that appropriate documents—durable powers of attorney and living wills, for example—are in place in the event you become incapacitated

Ownership Transition

Ask Yourself:

Which areas do you need to focus on to most effectively transfer ownership to a new generation?

• Understanding your choices
• Integrating your business and personal goals
• Increasing the value of your business
• Coordinating your transition with your estate plan
• Achieving cash flow and liquidity

Possible Solutions:

• Establish a baseline value for the business or businesses
• Create and document your ownership transition plan and share it with your family
• Create a buy-sell agreement for your company
• Evaluate transition alternatives and choose the most advantageous strategy
• Gain an understanding of the commitment levels of those involved

It takes time to develop a successful succession plan, but it’s important. Your certified public accountant and other advisors will be able to guide your attention to important areas, explain and analyze your options, and ultimately help you implement a strategy that aligns with your vision and objectives. By looking at these five fundamental areas of your succession plan, you’ll start to ascertain your exit readiness.

We're Here to Help

For additional insight into how planning ahead for an ownership transition can help your company, contact your Moss Adams professional.