Transitioning a construction firm is perhaps the most challenging process a privately held company will face in its business life cycle. Family, key employees, competitors and financial investors all play a role in this process. In this article, we will discuss different types of transition methods, and how to maximize the value of a construction company through a well-developed succession plan from the start.
Since many construction firms are small businesses -frequently owned by family, partners, or employees- succession plans are all the more relevant. The fast-moving and competitive nature of the construction industry mean that construction firms can ill afford to have any downtime or lost efficiency when succession becomes necessary.
When preparing for a succession plan, consider the entire process. Let’s explore some steps you need to take to ensure the succession goes smoothly.
Identifying a Succession Team
No manager is floating alone like an island. You’ll need to assemble a succession team. By and large, the people should know your business, staff, and ambitions. Most of the team members should be “process” oriented. After all, the succession itself will be a process. People skills and personal connections are also important.
Know the Main Factors That Will Influence Your Success
What factors could influence your succession plan and the long-term health and stability of your company? Could changing market conditions be creating opportunities, or likewise forming hazards? Your succession plan needs to take all of these factors into account.
Make Sure Your Succession Plan Aligns with Your Strategic Plan
Your succession plan and company strategy plan must fit together, and in a certain sense, they will be part of a larger whole. If these two do not align, one or both of your plans are likely to fail. Indeed, the succession should be ingrained directly into your strategies.
The Different Types of Succession Plans
Not all succession plans are the same. In fact, at the individual level, each succession plan is unique. However, in broad terms, there are several different types of succession plans, such as:
- A Designated Replacement
- Target Date Replacement
- Internal Sale of the Company
- External Sale of the Company
- Employee Stock Ownership Plan
Which type of plan you execute will be heavily dependent on the type of company you own?
Designated replacement is one of the more popular succession plans for small businesses. Basically, a new boss and even owner is chosen, declared, and then trained on the job. A small family owned business might choose a designated replacement, say a son or daughter. Ownership might be divided up among family members, however. In some cases, the designated replacement may not be a family member either.
Target Date Replacement
Similar to designated replacement, except a hard date for the handoff is set, usually far in advance. In some cases, multiple heirs may be selected and elevated into leadership positions. The target date is usually done when the owner or CEO knows years in advance when he or she wants to retire. For example, if the owner of a small construction firm knows that he or she wants to retire in ten years, say at age 65, he could designate replacements.
Internal Sale of the Company
Sometimes an owner will want to cash out of his or her business. It’s not unreasonable to expect payment after building up a successful construction firm or other business. With an internal sale, the company could be sold to employees, family or otherwise. Upon handoff, the purchasers would take control of the company.
External Sale of the Company
In some cases, an internal sale may not make sense. Perhaps there is no one on staff with the experience and leadership skills necessary. Or maybe there are financial or competition risks. In this case, an external sale, perhaps even to a rival, might make the most sense.
Employee Stock Ownership Plan
An employee stock ownership plan, or ESOP, allows employees to take ownership of the company. In some cases, the company may be wholly divided up among employees. In other cases, the ESOP would give employees a sizable chunk of the company but not the whole thing. Generally, when employees retire, they sell their stake back to the company at a fair rate determined by a neutral third party.
Conclusion: Plan and Chose Careful
There are other types of succession plans, such as going public. There are also many planning and execution considerations that have not been covered. For example, how do you actually vet potential heirs? The succession process can be long and complicated. It’s almost always intricate and delicate. As a result, it’s important to take your time.
What’s not up for debate is how vital a succession plan is for construction companies and other small businesses. Without a process in place, even a thriving business could collapse. So plan early, and plan patiently.