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Finance News - October 2003

Business succession tips for family-owned construction companies

By Randy Bonnecaze

Construction businesses are often family owned and operated. Sadly, many such owners fail to plan for business succession. This is one of the main reasons why recent statistics show that 70 percent of family-owned businesses fail to reach the second generation, and only 13 percent continue to the third.

Avoiding this dire fate comes down to three simple words: business succession planning. Whether you wish to keep your construction business in the family or sell it to an outsider, you need to ensure a secure retirement for yourself and a prosperous future for your company. And doing so calls for a careful, methodical business succession plan.

Ask the tough questions. Ironically, the close family relationship that builds and sustains a construction business often leads to its demise. How? The company's identity is usually linked to its owner's personal and professional relationships. Succession planning will probably change these connections, leading to potentially controversial situations - especially with family members - if not handled properly. That's why having a formal process that includes everyone's opinions and concerns is vital. Some questions you'll want to consider as you formulate your succession plan include:

  • Do I want my business to be a lasting legacy for me?
  • Should I sell the business to an outsider or let my children take over?
  • Should I turn over the company's reins to a family member regardless of his or her work history, or should I require that person to have some construction experience?
  • How will I fund my retirement, and how can I ensure that this method will guarantee my financial security?

These are not unusual concerns. As owner, you likely started your construction company and built it from the ground up. And even if you aren't your business's founder, you surely contributed greatly to its present state. So instead of seeing retirement as a sudden end, think of it as a natural progression of your ongoing success.

Consider your family. Some of the smoothest transitions occur when family members who have worked within the company assume control. In other cases, the younger generation, which has previously worked outside the family construction business, joins the company. Whichever situation applies, clarify and adhere to your policy regarding family workers to prevent contentious issues from arising. Moreover, inform family members that performance - not heredity - determines a successful business transition.

Of course, everyone in your family may not qualify to work for, much less run, your construction company. Yet excluding people with a stake in the transition's final outcome may trigger resentment, because they may feel you're not giving them what they deserve.

The solution: Communicate to uninvolved family members why you've not included them and how the overall plan will equitably compensate them.
As this important process works itself out, you may encounter some surprising revelations from both the older and younger generations. For instance, your children may not want to take over the business. Such a circumstance may seem obvious to some, but many contractors assume their kids wish to follow in their footsteps.

Only later do they learn their mistake, as they watch helplessly while their businesses either collapse or are sold.

Thus, it's better to get issues on the table before your retirement or, worse yet, death. That way, you can achieve your goals as well as those of major stokeholders and family members. Also, relationships will remain intact and the business will safely and smoothly shift to the next generation.

Design a plan. By now, we hope you're sold on the benefits of a wellbuilt succession plan. How do you create this roadmap for your construction company's future? Well, first you need to write a mission statement outlining your family's personal and business goals. It should feature the retirement strategies you'll use to allow the next generation to take over the business while creating an income stream for yourself. Fortunately, you have many options - including buy-sell agreements, profit-sharing plans and trusts.

A well-trained successor is the surest way to guarantee your construction company's future. So, secondly, design a job description that specifies your successor's leadership qualifications. Spell out critical elements, such as educational and experience requirements. And don't hesitate to suggest goals or duties - such as implementing better technology and expanding into new markets - that you believe will prolong the business's future.

If you don't know where your construction company is headed, long-term decisions become even more troublesome. Therefore, next integrate a comprehensive written business strategy into your succession plan. It should clarify business goals and growth plans for the next five to 10 years. Make sure your successor (and his or her management team) understands it - doing so will go a long way toward creating peace of mind and easing the transition.

Last, devise a time line for the transition process that allows your successor to take over gradually. As the owner, this may be the most difficult time for you, because you're accustomed to having control and may understandably feel uncomfortable giving it up. That's why having a specific transition date is important - you'll have plenty of time to prepare for your departure while still lending your professional advice, when needed.

Just be prepared to indeed step aside for good when that final day arrives.

Plan sooner, rather than later. The longer you wait to design a succession plan, the greater the risks to yourself and your construction company. In a worst-case scenario, you may die still involved in your business's daily operations without a succession plan in place.

The ramifications here can be devastating: Your company's value may plummet, and the government could become your estate's largest beneficiary. So the sooner you begin planning, the better.


Editor's Note: Randy J. Bonnecaze is a Certified Public Accountant (CPA) with Hannis T. Bourgeois LLP, Baton Rouge.

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