Although most construction contractors have a formal business plan, few have a succession plan—which is equally important. While a business plan focuses on the current direction of the company, a succession plan focuses on the future of the business and transition of ownership.
In a family-owned construction company, a succession plan is particularly important. According to Paul Karofsky, executive director emeritus of the Northeastern University Center for Family Business, fewer than one in three businesses successfully transition to the second generation of the family and just one in ten survive into the third generation.
Succession planning is a process that requires proactive and open-minded leadership with the ability to see beyond what might be expected. Consider how the transition will impact:
- Family relationships and finances;
- The company’s culture;
- Employee retention and engagement;
- Subcontractor and supplier relationships;
- Brand equity;
- Customer acquisition and loyalty;
- Current projects and contracts;
- Future earnings and the value of the business; and
- The entity’s structure.
Transitioning leadership is a business decision, not a family decision. Even so, contractors should discuss with family members and key employees their expectations, vision for the company and the intent of the succession plan. Everyone should have the opportunity to voice their opinions and decide if they buy into the plan or if they should leave the company. If needed, arrangements will have to be made to buy out family members or partners.
Identifying the Next Leader
A strategic plan should clearly identify the capabilities, roles and talent needed to lead the company. It is important to match potential candidates’ temperament and skill set to the job. Otherwise, money and resources could be invested in grooming the successor(s).
Owners of family businesses may want to transition leadership to the next generation. Unfortunately, a family member(s) might not be interested or, if they are, they might not have the right skills to take over the company. If a relative is not qualified for the position, they should not be considered. Contractors should do what is best for the company.
Another person inside of the business might prove to be a better option. Or, if the right talent is not in-house, a contractor can hire someone with the right skills or look for a company to acquire the business.
Preparing for the Transition
“Companies recognize the importance of a thorough and rigorous succession process for both the CEO and senior executive positions; however, most fail to create one,” according to the 2014 Report on Senior Executive Succession Planning and Talent Development published by The Institute of Executive Development and the Rock Center for Corporate Governance at Stanford University. Only 50 percent of the companies that participated in the study have an effective succession plan in place, less than 46 percent are in the process of grooming the next CEO or have a formal process for developing successor candidates for key executive positions and only 25 percent agree that they have an adequate pool of employees ready for key C-suite positions.
Strategic companies identify talented and capable leaders years before they are needed to serve. It could take five to ten years to prepare the right person for the job. A formal development program is recommended to ensure the successor is ready when the time comes. This could include:
- Formal leadership training;
- On-the-job training;
- Specific, measurable, attainable, realistic and time sensitive (SMART) career advancement goals;
- Executive coaching;
- Talent assessments; and
- Relationship transition planning.
It is also advisable to have the new leader in place at least one year before the owner exits the business to ensure the transition goes smoothly.
Contractors should determine the fair market value of the business five years before the transition so they know how much the business is worth. A proper business valuation should be done by a construction accountant or another qualified industry expert. Contractors need to know exactly how much their business is worth before implementing a succession plan.
They should also consider how the succession plan will fund their retirement and provide financial security for their family. Contractors should discuss the succession plan with their lawyer, accountant, insurance agent and financial advisor to ensure the plan is viable and can be executed according to their wishes. It is also a good idea to address retirement and estate planning before the transition.