Bottom Line

Contractor succession planning in boom times

The construction macroeconomy looks like it is going to be pretty strong for the foreseeable future. There are some challenges, obviously, such as supply chain disruptions and inflation, but backlogs and gross and net margins look very strong this year and into 2023.

Boom times like these are great, but they can have profound effects on contractor business succession for these reasons:

Complacency

Complacency can kill a contractor’s business over time. How does it show up? Plenty of ways. A general lack of rigorous accountability and focus on fundamentals like days gained or days lost on projects. Business development efforts get soft because the phone is always ringing, and opportunities are abundant. Overconfidence causes erosion in the quality of go/no-go decisions. Volume goes up, but margins begin to erode. The rate of innovation slows down. A lack of adherence to—or lack of development of—standard operating procedures appears. Complacency is the number one thing contractors must look out for in boom times.

Senior leaders hang on too long

Consider a company with a senior leader who announced they were going to retire in 2021. But now the company is making more money than it has ever made—in fact, more money than the senior leader ever thought it would make. In that sense, they may feel they can’t afford to retire. If the senior leader hangs on beyond the implicitly or explicitly stated transfer date, he may so discourage his successor(s) that they move on to other opportunities, and the company’s sustainability is suddenly in jeopardy.

Senior leaders depart too quickly

On the other end, a senior leader might be tired of the grind and choose an earlier retirement date than they previously planned on. An abrupt retirement decision often results in the next-generation successor not having time to be properly prepared. For example, whereas a single senior owner was able to make informed decisions independently, if the company is being passed down to three next-generation owners, they will need to develop an entirely new communication system. They’ve got to decide how they’re going to decide, and develop a way for holding each other accountable. They must be afforded the time to establish a specific way to determine exactly how and when they’re going to communicate before they hit the ground.

The entry costs for next-generation leaders go up

If a rising leader in a company is scheduled to begin buying shares, company valuation is a big factor. For example, in 2021 a $100,000 bonus could have bought, let’s say, 10 shares of company stock, but because the firm’s valuation is increasing, by the end of 2022 that amount may only buy five shares. In boom times, the cost of entry steadily increases for aspiring leaders who want to become owners.

Future owners become discouraged

It’s exciting for a younger leader to think about becoming an owner. However, if a senior leader hangs on for a few more lucrative years, that excited young leader may become much less excited over time. It’s far less enthralling to take on all the hard work and risk associated with owning a company as one ages and becomes more risk averse.

No time to hesitate

Without a strong succession strategy, contractors inadvertently damage the thing they love. The trades are a tough business for tough people who need to make tough decisions. You can’t afford to take your eye off the succession ball in boom times. Such are the problems of success! WAYNE RIVERS is the president of Family Business Institute (FBI), whose mission is that We Build Better Contractors. The company’s contractor-only services provide solutions for issues beyond the financial and operational concerns of running a construction organization. FBI’s service offerings include Management Consulting, CEO Performance Roundtable program and Contractor Business Boot Camp. Wayne can be reached at 877-326-2493 or FamilyBusinessInstitute.com