In the Construction Industry, Succession Planning is a MustJune 21, 2012
By Virendra Shah, CPA
Does your construction business have a succession plan in place? If not, it should.
When it comes to the construction industry, where so many businesses are either family owned or closely held by a small group, planning for the future can be a major challenge. With such businesses, the idea of “keeping it in the family” is often front and center, and the great unknown of what may happen when the business’ founder is no longer able or willing to be in charge can lead to much concern and uncertainty.
For this reason and others, succession planning needs to be an integral part of any business plan put forward by a construction company these days. If the wish of the owners is to keep the business going for years to come, it is essential to have a succession plan that helps lead the way to a more stable future.
Who will take over when the company’s founders/leaders are gone? Have the proper people been groomed as leaders? How will the company adapt to an ever-changing construction market once the transfer of power has occurred? Are there issues with bonding companies, creditors, suppliers or subcontractors that need to be addressed as part of the plan? Are there issues of potential family conflict that need to be acknowledged and dealt with? Is there enough capital to keep the company going through a succession?
In our work within the construction industry, these are the types of questions that need to be addressed by any company that wishes to remain successful and relevant when its leadership inevitably changes. And these are the questions that are addressed when a company puts together a solid, well thought-out succession plan.
In short, a properly conceived succession plan for a business should:
- Deal with immediate openings in leadership or openings that will be coming in the next few years.
- Prepare future leaders for leadership roles well in advance.
- Be regularly tracked for effectiveness and to ensure that the targeted goals and dates are being met.
The objective of any succession plan is obvious – keep the business vital into the future, after new leaders have succeeded the current ones. In difficult economic times such as the one we are in right now, that objective becomes all the more imperative. Construction is a fluctuating, volatile industry and any plan must keep this in mind.
The reality of family owned businesses – so prevalent in the construction industry – is a harsh one: according to the Association of General Contractors of America (AGC),
70% of family owned or closely held businesses die once the founder is no longer around. And 30% of businesses that do make it to a second generation do not make it to a third.
The AGC makes is clear why businesses like this tend to fail after a leadership change – most of the time the reasons are either underfunding or lack of planning. While there are no guarantees, a succession plan addresses both risks.
Other key needs of any reliable succession plan for a construction business include:
Retirement Planning – Does the business have a plan in place for when its leaders retire?
A Plan for Employees – What will happen to the workforce once the succession occurs?
Vision – Does the successor have the vision for the business that will successfully bring it into the future? Does this vision match up with the company’s mission statement, and does it properly allow the business to adapt to a changing business climate?
Leadership Development – Are the future leaders of the business being prepared for their prospective roles well in advance of the succession, and is it enough time to get them ready?
Tax Considerations – Considering that most construction contractors are transitioned to the next generation, rather than sold to a third party or liquidated, there are tax elements that must be considered. Some common transitional choices for the next generation in leadership include gifting, deferred compensation arrangements, sales and arrangements where specific generations are skipped. All of these should be examined.
Delineation of Future Roles – What does the future look like in terms of the company’s leadership structure? Will it be different than the current alignment? The same? Again, this should be determined well in advance and included in the plan.
Audit/Assessment of the Plan – Is this needed to ensure it is the right plan for the company, and that all bases are covered?
Tailor Plan to Specific Company Needs – Naturally, succession planning needs to be tailored to a specific business’ needs, and there is no “one-size-fits-all” model. Consulting with a knowledgeable advisor with expertise in creating and implementing these plans is certainly beneficial.
Succession planning is not just a plan for leadership, but for an entire company. It must start at the top and work at every level. With the right succession plan in place, a business can be optimistic for viability well into the future.
But the company should not wait too long. The time for proper succession planning, in most cases, is right now.
Virendra Shah, CPA, is a manager with BlumShapiro, New England’s largest regional accounting, tax and business consulting firm based in Connecticut, with offices in West Hartford and Shelton, CT and Boston and Rockland, MA. The firm serves as business advisors for today’s leading companies, non-profit organizations and government entities, working to strategically tailor and consistently deliver tested solutions for unlocking an organization’s full potential. For more information about BlumShapiro, visit blumshapiro.com.