Succession planning is an important and potentially complicated process that can seem daunting for construction company owners, their families and their colleagues and employees.
But with appropriate foresight, strategic planning and execution, construction owners can position themselves for a strong financial situation in retirement, while also maximizing the future of their organizations and their legacies.
We sat down with Mike Africk, Principal of CliftonLarsonAllen's Oak Brook, Illinois operation, and Emily Gunther, Principal of CLA’s Philadelphia office, both of whom have decades of experience in succession planning for construction companies, to talk-through the five most important tips for approaching the succession planning process, no matter what point you’re at in your career.
1. It’s Never Too Early to Start
Regardless of your age or the maturity of your business, as soon as the thought of retirement, succession, or how you’d like to frame your legacy and the future of your business, you should start to set a plan in motion.
The changing dynamics of the construction industry and the economy can play critical roles in the overall valuation of a construction company, so it’s critical for your advisors to understand every detail that could impact your financial and organizational future.
“We need to have the time to make it all work,” Africk said. “Whether it’s an internal or an external succession event, certainly it’s never too early to start the process.”
Your succession planner will need to thoroughly understand the specific industry or niche your company operates in, and how that relates to your financial statements, structure, and what impact those elements have on the overall valuation of your company. At a minimum, the experts at CLA recommend a five-year minimum for developing and executing a succession plan.
But starting early doesn’t just mean engaging in the succession process. It also applies to how you approach the design, structure and culture-building of your company in the near-term.
2. Build for Success(ion) Now
With over decades of experience in the succession planning sphere, Africk and Gunther agree that one of the most challenging things for construction owners to build is their own organization.
Too often, organizations are reliant on a single figurehead to maintain a steady stream of business, to forge important development relationships and to ensure the company is on solid footing for years to come.
The top factor in ensuring a successful succession, Gunther said, is making sure that construction owners are investing in the people around them by developing a deep bench of leadership talent that can serve as the lifeblood of an organization after their departure, or after their retirement.
“Value is built, and a great succession event is built, if you have a solid team behind you,” Gunther said. “Do you have a depth chart? Do you train your people? Are you hiring the best of class? Those are all important questions that you need to answer.”
That process starts with disseminating institutional knowledge from the top down. In the case of an acquisition, if the departing business owner holds the keys to all of the relationships and all of the historical knowledge, how valuable – really – is the company as a whole, Africk says.
“It really is important to teach your people what you know and let them run the company, because if somebody’s going to buy it and you’re not going to be there, what really are they buying?”
3. Incentivize Your Organization
To gain buy-in from your team, it’s important that they feel incentivized. That could be financial but doesn’t have to be. Incentivization could come in the form of increased responsibility, leading to a greater sense of importance for the organization; the empowerment of people to make their own decisions, allowing them to leave their mark of influence on the company; or recognizing talent and investing in them to be the future leaders of the company. People are motivated by a lot of different things, Gunther says.
Those mentioned above are all examples of creating a culture that shows that you care not only about the current and future success of the organization, but in helping colleagues become the best, most valuable versions of themselves through incentivization and empowerment.
4. Understand Your Goals
This element is more difficult to pinpoint, Africk and Gunther agree, because in many cases a final succession goal does not become clear until the planning process begins. But there should be significant thought given beforehand, even if it’s not conclusive.
To gain clarity on what your succession goals might look like, here are some questions you can ask yourself:
- How does your family’s next generation fit into your succession plan? Is that important?
- Do you want to ensure the company continues to operate as it currently does, or are you comfortable with an acquisition?
- How do you feel about an Employee Stock Ownership Program (ESOP) and is that a format you may consider?
- What do you want your legacy to be?
“Different owners have different goals, and depending on what each owner's goals are, really understanding what the succession looks like to them is really important,” Africk said. “Really sitting down and figuring out what the owner's goals and dreams are help formulate the overall succession plan.”
5. Work With a Specialized Planner
Finally, work with a succession planner who understands you, your business and the construction industry. There are so many factors that contribute to a successful succession execution that without appropriate partners, construction business owners can be left foundering.
One of the major pieces of that is in the valuation process. How does the company value fit into your personal financial plan? Is your ability to retire based solely on the value of the company?
“You must have a realistic valuation or metrics that you're using to really determine the value of the company and how you can turn that into cash,” Gunther said. “Is it going to be all cash upfront? Are you willing to hold a note? Is there real estate that you own where you might have some other source of income? Is the rent really going to match their value currently?
“Cash is king, and so it’s really critical to understanding the finances for a succession event.”
Editor’s Note: Information for this article was provided in interviews by CliftonLarsonAllen, and is being provided as a reference for our readers. Content in this article does not reflect a product or service offered by CASE.