Construction Case Study - Selling Through Succession Planning

June 4, 2019

GC NICHE: Construction

TYPE OF INDUSTRY: Construction

GC TEAM MEMBER(S) INVOLVED: Ian Grimbleby, CPA

SITUATION:

We were approached by a father and son who had been working together for the father’s company. They had started to discuss a plan for succession and soon realized they had different views on how the company should be run, as well as on the value of the company. Because of these differing opinions, they couldn’t come up with an agreement to transition ownership from father to son. They knew the succession of the business was critical for its continuation, but they were unable to work through the details on their own.

CHALLENGES:

  • Organizing all of the financial and tax records from the past five years to understand the business’s history and deliver an accurate business valuation.
  • Creating revenue and profit predictions for the business. The existing project backlog extended nine months, which helped with current year projections.
  • Settling on an agreed-upon valuation of the business and setting up a payment schedule for the son to pay out the father.
  • Facilitating conversations and coaching both parties throughout this process. We needed to work with them both separately and together to really understand their individual perspectives and concerns.
  • Developing an agreed-upon transition schedule for the father to sell the business and the son to assume ownership and day-to-day responsibilities over the next two years.

CONSIDERATIONS & TACTICS:

  • Presenting the facts and current status of the business.
  • Managing both joint and individual conversations with the father and the son to understand the goals of each party and identify mutual goals.
  • Working with both the father and the son to arrive at an agreement to work together for the next two years. This allowed the father to mentor the son and helped ensure the continued success of the business.

STEP-BY-STEP PROCESS:

  • Meet with the father to understand the objective and scope of the project.
  • Request and obtain historical financial reports and current-year projections.
  • Complete a business valuation report.
  • Schedule individual meetings with the father and son to discuss the valuation report.
  • Discuss potential purchase / payment options (i.e. 20%, 50%, 100% purchase options) and payment terms (i.e. 3, 5, 7 years) in order for the son to buy out the father. This includes making considerations and “breathing room” in case future revenue or profit was lower than projected.
  • Discuss tax implications and purchase options such as stock sale or stock redemption.
  • Help father and son reach an agreement on a buyout and succession plan.
  • Work with a third-party attorney to draft a buy-sell agreement and promissory note.

FINAL RECOMMENDATION AND OUTCOME:

We assisted the father and son in reaching a stock buy-out agreement by providing an updated business valuation and discussing viable options for the transition. Following this, we worked with them to develop a succession plan that detailed the roles and responsibilities each person would take on during the transition years.

OTHER CONSIDERATIONS OR PERSPECTIVES:

When working with family business owners, we find it helpful to have two partners involved in the project. For example, one younger partner assigned to coach the son through the process and one older partner to coach the father. This is not a necessary step, but we have found it has been productive with past clients in similar situations.

200 West Roseburg Avenue
Modesto, CA 95350

(209) 527-4220 (phone)
(209) 527-4247 (fax)

https://www.grimbleby-coleman.com/resources/articles/199

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