Do you have a succession plan for your business? Repeatedly our construction and real estate team will hear of construction owners simply closing up shop once they are ready to retire instead of developing a profitable exit plan. Typically the owner hasn’t invested time in proper planning due to the daily demands of running a construction business.
“Unlike many of our agricultural clients, often construction owners do not have the luxury of passing down the business to their family to operate,” Ian Grimbleby, Construction Team Lead mentions. “Nor is it as easy as selling land to your farming neighbor. There is more risk involved because it is an owner-operated service and there are no guarantees that the next generation has the skills required to run the business. “
Understanding the Challenge
Succession rates are highest when the original business owner is passing it down to the 2nd generation, with a 30% success rate. Once the original owner is out of the picture, succession rates dip even further—with a 12% success rate from 2nd passed to 3rd generations and a mere 3% success rate from 3rd passed to 4th generation owners.
Even with careful selection of a future successor, inheritors are often ill-equipped to handle the transition due to a lack of understanding of what is needed to succeed, and undeveloped skills such as: a lack of management, financial, sales or leadership ability. Additionally, a lack of natural entrepreneurial grit can be to blame for the failed business.
Common succession struggles for business owners often include concerns about their employees through a transition, incentives to keep key employees motivated during uncertain times, long-lasting legacy uncertainties and of course – will I be able to maintain my quality of life?
Where to Start
Have discussions about long-term goals with trusted advisors such as your legal and financial team, key family members, and key employees.
Conduct a business valuation (this is recommended for all types of businesses). Recognizing the difference in fair market value and your emotional value is key, as they will not be the same. Understanding the value of your business assets, financial performance and opportunities is critical. To learn more about Business Valuations please click here.
Consider all succession alternatives, including, but not limited to:
ESOP (full or partial)
Discuss buy-in tactics such as sweat equity.
Assess the management capability of the next generation and identify the “gaps” in required talent.
Evaluate the tax implications of any transaction.
Make your recommendations to provide the basis for a formalized succession plan.
Our Construction team is here to help you navigate these discussions and uncertain times. Rule of thumb is…it’s never too early to start succession planning and being flexible will certainly help in the long run! Please give a member of our construction team a call today.
Sue serves as the Accounting and Auditing principal at Grimbleby Coleman. She handles a majority of the firm’s audits, and brings expertise in interpreting and analyzing financial data to a wide variety of businesses. She's spent time studying as an undergraduate at both UC Davis and California State University in Sacramento, where she received her B.S. in Business Administration with a concentration in accounting. And speaking of concentration, Sue's also found time for graduate courses in the MBA program at Stanislaus State University.
Sue’s industry expertise includes construction, health care, manufacturing, and not-for-profit entities, where her diverse range of responsibilities include analyzing financial statements and designing and enhancing internal control systems.
When asked what she enjoys most about working with clients, Sue says, “Watching ‘the light go on’ as they understand what their financial statements are telling them and what the implications are. I like making a difference with their ongoing life plans.”
On most Saturdays, weather allowing, you’ll find Sue in her garden. If it’s January, don’t bother—she’s in the office.