With the state of the economy over the past years, it has been difficult for owners to think about their businesses more than a few months out. The day-to-day demands of running a construction or engineering company have preempted planning for the future. And by “future,” we don’t mean how your tax liability will look at year-end or even how you might grow your business over the next decade. We’re referring to the future in which you no longer own your company.
Succession planning is an important activity for every business owner. It is a topic frequently not considered or discussed until an event, often catastrophic, occurs that starts the discussion. It’s never too early to start thinking about the general concepts involved. Here are three key succession planning factors to consider.
1. The family
You’ll first need to ask whether you plan to transfer or sell the business to a family member, someone inside the company or to an outside party. If your children are involved in the business or there’s another logical successor — someone who, with good training and sound business experience, could fill the seat behind your desk — you should start grooming that person as early as possible. The conversation of whether a family member or employee wants to take over the business needs to be sooner rather than later. We have seen many instances where an owner assumes for years he/she has found their successor only to have the offer rejected. Additionally, the evaluation of whether a willing successor is qualified needs to be made. A written plan with a timeline and milestones is necessary to define responsibilities and keep the process on track. Depending on the amount of support and knowledge your prospective replacement needs, this may take up to several years.
Remember, succession planning and estate planning are generally linked. You’ll want to create a clear, legally defensible ownership transfer plan while you also fund your retirement. Additionally, this is the time to formulate an estate plan that reasonably divides your wealth among family members who participate in the business and those who don’t.
2. The buyer
If none of your family members are qualified or want to assume the mantle, there are a number of ways you can transfer ownership of your construction company to a buyer. Who might that buyer be? There are various answers to this question. The buyer could be your employees. Selling the company to them through an employee stock ownership plan (ESOP) is an approach used by a wide variety of businesses, including construction and engineering firms. However, the added debt can constrain bonding capacity and constrict the company’s cash flow if not structured properly.
There are also somewhat less complex options. You might set up a purchase via an internal buy-sell agreement — making your management team the buyer. Or you could simply sell to an external party, such as a private equity firm or competitor. Each of these options has its pros and cons. An ESOP or management buyout can save you the time and expense involved in finding an outside buyer but may strain the future cash flow of the company. On the other hand, if you can find the right third party, you may be able to sell your business at a premium but your company may lose the culture you created.
No matter what path you plan on taking, you’ll need to start preparing. Continually upgrade your business processes, with special emphasis on financial management and reporting. A well-run, efficient construction business will carry less risk and command a higher price.
Next, regularly estimate the market value of your company. Industry trade groups and discussion with your financial advisors, including your CPA, can keep you abreast in what is going on in the marketplace. You can also consider speaking with a business valuation expert when the time for a sale is near. This information can help you determine the value of your company and how that ties into your succession and estate planning.
3. The market
Some construction company owners overlook this factor. When you are actually ready to put your business on the market, will there be a market? Are mergers and acquisitions relatively common in your specific trade and are they happening in your geographic market? In short, will you be able to sell when you’re ready?
Start developing a list of potential buyers, such as competitors, business associates and private equity firms, now. Once you’ve identified a few, formulate a plan for marketing your business to them. You may need to enlist the assistance of merger and acquisition specialists, such as business brokers and investment bankers, to act as a go-between with certain types of outside buyers. This information can help you determine when it is the right time to sell your business.
Again, these three factors are fairly general in nature. There will be many specifics regarding your construction or engineering company that you’ll need to cover in your succession plan as you get closer to retirement or whatever you intend to do after leaving the business.
We welcome the opportunity to meet with you to address your succession planning needs. Click the button below for a complimentary consultation.
Brian Tunnelle, CPA, CCIFP, CGMA, MBA
Brian Tunnelle has more than two decades of experience in auditing, accounting and consulting for a wide range of companies with particular expertise in the construction industry. Brian’s areas of expertise include financial statement engagements, transaction financial due diligence, agreed upon procedures, employee benefit plan audits and general business consulting. Contact Brian at [email protected] or 714.671.2214.
Frazer LLP has far-ranging experience in the specialized accounting methods for the construction and engineering industries. From tax and accounting compliance and consulting on purchase and sale of real estate, negotiating and tax free exchanges to cost segregation and business valuation, our team can provide you with expert tax, financial, and management advice in any stage of your construction business.