So here you are. You’ve worked like a dog since the time you were little. You always knew that you wanted to work for yourself, so eventually, you went out on a limb, got some financing, and started your own contracting business.
Gradually, your construction business grew, thanks to your “sweat equity” and some good people around you. As your business grew, so did your family. Maybe one of your children even decided they liked doing what you do, and they started working for you also. So now, here it is. You’ve spent years building your successful business, but now you are starting to realize that the time is coming that you may not be able to continue in the business, or maybe, you’ve just decided that you want to take the rest of your life to enjoy the fruits of your labors. What do you do? Do you sell the business? Do you keep it in the family? This is where the idea of succession planning comes into action.
Succession planning is the process of creating a plan for how the business will transition to the next generation. Regardless of whether the transition is triggered by the owner’s retirement or by some event such as death or disability, succession is something that cannot be avoided. Here are some things to keep in mind as you begin to put together your plan.
Create a blueprint
If you’ve been in construction for any amount of time, you know that a structure does not get built without a blueprint. The same goes for your succession plan. This will need to be thought out in detail, much like a building blueprint. It is important to realize there will be more to think about than just numbers, as it will also involve people – family, advisors or employees who will be participating in the transition.
Some questions you will need to ask are things such as, “When do I want to exit the company?”, “Will it be family that takes over, or would one of my employees be a better option?”, and “How much will I need to retire?” Knowing the answers to questions like these will help your plan come together more efficiently.
Start preparing your successor
A business owner must be willing to put in the time and energy necessary to set up their successor for a promising future. Once you’ve determined who your successor will be, whether it’s a family member or not, it’s time to start teaching them. Teach them how you would expect things to be constructed. Teach them how you would expect the business to be run. Make sure they understand the things that have made your business successful. And stay alert! If you see that your successor is not able to do these things, it may be time to re-evaluate, before it’s too late. Also, be sure to include your family in the process. This will at least give them an opportunity to understand your thought process and include their feedback in your selection, especially if your successor is not a member of the family.
Get your financial house in order
You will need a good team of professionals around you to assist with your plan, such as your accountant who can assist you in determining the value of your business. Going through the valuation process helps the owner understand not only the current value of the business but also its value drivers. Knowing the elements of your business that add to its value along with what the business may be worth in the future will help the business owner plan for retirement and transfer wealth more efficiently.
Because of the heavy fixed asset nature of the construction industry, there may be special tax implications when structuring your succession plan. This is where your tax accountant comes in. Your tax accountant will also be an important member of your team, as they will be able to assist in understanding the tax consequences of your decision. By estimating and helping to reduce your tax burden, they will also be able to help you understand how much capital will be needed in order to execute the transition plan.
It will also be helpful to have a corporate attorney on your team. The attorney will be the one to advise you on structuring your transition plan, such as determining the ultimate control of the business, including determining ownership and voting rights. At a minimum, these three advisors should be included as core members of your transition team.
Most importantly, make sure that your plan is well-documented. A written plan serves as a guide to executing the transition plan in the manner you and your advisors envisioned. It will prove invaluable as you move ahead in putting your plan into action both from a legal and personal perspective. Once your plan has been determined, you should have an idea of the capital needs of the successor organization, and your role in the newly succeeded organization. Be flexible though, as your plan may experience some changes with changes in the flow of your business.
Done properly, a good succession plan is a powerful tool to ensure that the business continues to thrive after the owner is no longer involved while supporting a seamless transition to the next generation of leadership.
Waiting to create your succession plan until it’s too late will bring about nothing but questions and limited options. Succession is not something people want to discuss, but it is important to be prepared. Your CPAs, along with other advisors will be able to help you in drawing this “blueprint” to your future. MKS&H will help you through this.
Article Contributed by Jeff Rubin
About MKS&H: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by putting complex financial data into truly meaningful context. But deeper than dollars and data, our focus is on developing an understanding of you, your culture and your business goals. This approach enables our clients to achieve their greatest potential.