Succession Planning Strategy

MCC Construction Zone

Succession Planning Strategies

Richard P. Higgins, CPA

Business owners know that a succession plan is needed for the company to continue operating without them. Unfortunately, most owners do not have a viable plan in place to transfer leadership. Instead, they hope that a family member or employee will be available to fill their shoes. This tactic can lead to a myriad of problems that can put the operations of the company at risk. A qualified successor may not be readily available and trained for the job.

A succession plan identifies who willtake over leadership of the business when the current owner phases out. The plan generally states how and when the successor will be trained. It is designed to position the future leader for success and to ensure that the business continues to operate.

The 2021 Ownership Transfer and Management Succession Industry Survey found that 15% of the owner participants want to transition ownership in the next one to two years, 33% in three to five years, and another 33% in five to 10 years. More than three quarters (81%) of the nearly 400 construction company owners and C-Suite executives surveyed expect to transition ownership within the next 10 years.

MCC Construction Zone

The surveyors, FMIand the Construction Financial Management Association (CFMA), found that more than half (51%) of the respondents have formally identified successors for the company’s most critical positions. Even so, 47% of these companies will not be ready for the transition for another 4-5 years.

According to the survey results, mid-level and field leadership positions are typically not included in succession planning. Companies developed succession plans for only 17% of middle management positions, 18% of superintendent positions and 19% of project manager positions. Filling these positions with qualified and trained workers is as important to the success of the company as owners and C-suite executives.

Considerations Owners must carefully consider who will replacethem. One or more candidates may be identified within, or outside of the company and family. Start by taking a hard look at the talent in-house; if no one is qualified, it becomes necessary to look outside of the organization.

Strategic companies identify talented and capable leaders 5 to 10 years before they are needed to serve. These companies create a development program to ensure that the successor is ready when the time comes. The program typically includes everything from leadership and on-the-job training to mentoring/shadowing, coaching, and relationship transition planning with key customers, employees, and stakeholders.

The Great Resignation is having an impact on executing some succession plans.Talent retention is crucial for minimizing the succession gap and maximizing company value. Mid-level employees need to see that the company has a vision for their future. A company’s lack of investment in its people may persuade future leaders to leave the organization.

A potential buyer will look at the company’s current and upcoming leadership team to determine if there is the depth of talent required to grow the business. Retirement-age leaders without identified successors is a red flag.

Expectations Owners should discuss with each other and key employees their expectations, vision for the company, and the intent of the transition plan. Succession planning requires leadership to be openminded and honest about the possible impact on: • Family relationships and finances • Company culture and employee engagement • Employee retention • Customer and stakeholder relationships

Everyone involved should have the opportunity to voice their opinions and concerns and decide whether to support the plan. Buy-in is critical to the success of the plan.

Financing Options The Ownership Transfer and Management Succession Industry Survey found that just 5-10% of companies in the construction industry are truly salable. Even so, successors typically buy-out the owner who rightfully wants to be paid for the equity they invested into the company. Several options are available to finance the transaction:

MCC Construction Zone

• Internal cash flow: Easy for the buyer but it risks depleting the company’s balance sheet. • Bank financing: Owners must qualify without leveraging the balance sheet. • Private equity: Cash is made available but at the cost of losing control of the company. • Employee Stock Ownership Plan (ESOP): Is restrictive and costly, but it does provide cash to the owner.

I generally advise clients to develop a succession plan along with their business plan. Both are fluid documents which should be continuously changed, amended, and updated as the company progresses in its lifecycle.

Aboutthe Author Richard P. Higgins, CPA,is the managing partner in the New Jersey office of McCarthy & Company. Contractors trust Rich to assist them with a strategy to achieve their goals by looking at key indicators such as productivity, job costing, profit margins and cash flow. Rich helps contractors establish realistic benchmarks to assess how well they are doing or to alert them to issues that need to be addressed. He can be contacted at 732.341.3893 or Richard.Higgins@McCarthy.CPA.

Rich Higgins, CPA

Disclaimer: This article is for informational purposes only and does not constitute professional advice. We strongly advise you to seek professional assistance with respect to your specific issue(s).