Most business transition plans never get started or sputter quickly to the ground. The construction industry is no exception.
Does the problem lie in owners not wanting to engage on the topic? Is the process considered intimidating and time-consuming? Do they fear the potential results of major business changes? The answer is likely a healthy dose of all the above—and much more.
The business transition process is not simple. There is a lot to consider, and it takes time to put plans in place and execute them effectively. However, getting started can be easy. Business owners can use the questions below to launch into the first few steps of the process.
1. What is their timeframe for leaving the business?
For most, if not all, business transition plans, the answer to this question lays the foundation for the entire planning process. Time is an incredibly valuable resource when it comes to business succession. Every member of the planning team, including the owner, must be fully informed about how much time is at their disposal to create and implement a functional plan.
2. Who or whom are the next owners of the business?
Typically, there are six transition paths that a business may take: third-party sale, merger, family transition, transition to management, key employee transition or a co-owner buyout.
An ideal pathway should be identified and validated as a realistic objective as early in the process as possible. This should be a collaborative effort between the owner and the transition planning team.
Here’s an example of how a pathway might be selected:
Jim owns a third-generation construction company. He has always assumed that his son, Dave, would take over the business so it can remain in the family. Dave has been a carpenter with the company for 12 years and has shown little desire to own the business. Jim offered to invest in management and leadership training for Dave with the hope that he would develop ownership ambitions, to no avail.
Jim has communicated to his employees and family that he would like to transition out of ownership in three years. He and his wife want to travel and spend more time with their young grandchildren. Jim knows that he needs to receive full value for his equity in the company, so he and his wife can live the lifestyle they want.
After several conversations with Dave and his transition team, Jim accepted that Dave is simply not interested, nor does he have the skills needed to generate sufficient profits to cover his buyout payments over a period of time.
With this pathway closed, Jim and his team identified Rob, the company’s operations manager of 24 years, as a viable candidate for ownership. Rob has extensive experience managing through market cycles and is a respected leader in the business. Jim and Rob meet several times over the next six months to discuss their objectives and determine that Rob is the ideal successor owner of the company.
While this example is quite simplified, it demonstrated the importance of making an honest assessment of the transition pathway options. Even if Dave were interested in buying the business from Jim, his lack of experience beyond his trade could require a vastly different transition plan than that for Rob.
Many owners find that their transition decisions are dictated by the people involved in the business. Communication early and often gives everyone an advantage.
3. How much money do they need from the sale of the business?
It is very likely that this is the largest and most significant transaction that the owner will ever make. For the members of the transition team to put the best plan together, the financial needs of the seller must be analyzed. Does the owner need to receive maximum market value? How much after-tax income is needed, and what other resources are at the seller’s disposal? What does the owner’s lifestyle cost and how much will it cost when there’s more free time to spend money? Is the business worth enough, or does work need to be done to build value over time?
Typically, a personal financial plan that includes income, spending and tax projections can help answer these questions. This analysis will determine how much flexibility the seller has regarding timeframe, payout structure, sale price and making concessions for the family.
No matter the complexity and unique dynamics of a particular succession plan, most of the decisions are rooted in the answers to these simple questions.
This information is provided for general purposes and is subject to change without notice. The information does not represent, warranty or imply that services, strategies or methods of analysis offered can or will predict future results, identify market tops or bottoms or insulate investors from losses. The information has been obtained from sources considered to be reliable, but it is not guaranteed. Past performance is not a guarantee of future results.
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