Succession planning: Don’t risk your company’s future — plan for it
Many construction companies are closely held or family owned and thus see a transfer of ownership generationally or via the management team. According to the Family Business Institute, only 30 percent of family businesses survive beyond the founder’s generation. From there the odds of survival only get worse: only 12 percent make it to the third generation, and a paltry 3 percent persevere into the fourth. With these numbers in mind, don’t let succession planning take a back seat at your organization. It may be the most important investment you ever make.
- There are a number of reasons why contractors put off succession planning:
- They’re entrepreneurs and cannot envision anyone else running their company
- They’re too busy with the day-to-day tasks of running a company
- They think retirement is so far off that it’s not important to consider yet
- They don’t want to acknowledge the impending transition
- There is no one to transition to
- They don’t know where to start
Some of these reasons are more valid than others, but it’s important toinvest the time and consideration annually to ensure the future successof your company. Succession plans are not one-size-fits-all and there are a number of issues to consider when developing your plan. Considerthese five steps:
- Think of yourself first.
Will you have the finances to maintain your lifestyle after retirement?Will your family be properly provided for in the event of a crisis?Who’s the trustee of your business? Answering these questions andputting your plan and wishes into writing are the first steps in creatingyour succession plan. Your personal plan for retirement shouldinclude financial planning and estate planning. Financial planningwill help you set clear, reasonable retirement goals and will outlinethe steps you need to take to meet these goals up to, and after, yourretirement. Beyond the tax and legal issues, estate planning will ensureyour business is in good hands in the event of a crisis. Don’t forgetcommunication. Sharing your vision and plan for the future is a keyelement in business profitability.
- Understand your company's value.
Another component of ownership transition is valuation. How much isyour business worth? Unfortunately, the value is often less when sellingto a family member or internal management, versus a third party.This is an important consideration for your financial planning – if yourretirement is well-funded, you can often afford to take the risk of aninternal business transition.However, the valuation balance is very delicate. Failure to have atalented management team in place will affect the value a third partyis willing to pay – especially if a private-equity fund is the buyer.
- Identify your successor.
You may not be ready to make a definitive decision on who will runyour business in the future, but you should be narrowing the list downas much as possible. Family dynamics, with the potential for siblingrivalry and hurt feelings, can make planning very difficult. It’s importantto not let emotions take precedence over sound business decisions.Keep things in perspective by establishing a sense of stewardshipthat will ensure family members are thinking of the business first, andnot themselves.If you have several potential successors, identify and prioritize the skillsand traits needed to do the job. Analyze your candidates against thisdefined criteria to see who rises to the top. This same analysis appliesto non-family members who may be key members of management forthe future.
- Develop your future leaders.
Often times there is too much focus and attention paid to the assetsof the business, and the human element — preparing successorsfor leadership — is often lacking. Think of your own strengths andweaknesses as a business owner. What skills and lessons learneddo you want to pass on to the next generation? Does your teamcurrently have the right skills? What training is needed? Does themanagement team need restructuring? Whether you’ve chosen yoursuccessor already or not, leadership and management training are vitalcomponents of succession planning. Investing the time and money nowwill lead to a seamless transition.
- Put it in writing and review often.
You have a vision for the future of your business, and it’s crucialyour management team and successor share your vision. Make sureyour strategic plan and succession plan are in writing and clearlycommunicated.But, don’t just set it and forget it. Economic shifts, personal and familydevelopments, and even changes to your business model itself can,and should, result in a review of your succession plan. Even if you feelconfident that all bases are covered, it’s important to regularly check-inand assess your plan to ensure your personal and business goals arealigned and on track.