Surveys show that baby boomers own the majority of construction companies, and more than half of those owners are over the age of 60. As the boomers retire over the next two decades, the industry will see the largest transfer of business assets in its history.
Some companies will be sold to a third party on the open market or internally to employees; others will stay in the family and go to the next generation. Whatever path a company follows, continued success depends largely upon whether it has prepared for the transition with an ownership and management succession plan.
A smooth transition is more important than ever, industry experts say, since organizational stress can be a company's undoing. Yet only 44% of construction business owners have a formal plan to transition themselves out of the business, according to the "Ownership Transfer and Management Succession Survey" published by industry consulting firm FMI Corp. last year.
Furthermore, only 47% of survey respondents believe they have capable, strong managers who could run the company in their absence, and just 64% have a formal plan in place to ensure continuity of operations in event of their death.
"In our experience, succession planning is often neglected or mismanaged in the industry, and this is especially true now," says Timothy R. Sznewajs, senior managing director in the Denver office of FMI Capital Advisors Inc. "In recent years, business owners have focused on cost-cutting, survival and recovery. They have had less time to plan for successions."
The industry's ambivalence toward succession planning is echoed in a 2011 FMI survey of surety providers, in which 45% of respondents indicated that less than half of their construction firm clients have a formal continuity plan in place, and nearly 80% of respondents rated the quality of their clients' succession plans as "low" or "average." The survey showed that owners younger than 47 are putting formal plans in place, but a significant number of owners older than 47 have not begun their transitions.
"Some owners simply do not want to think about their retirement or deaths. The idea of not running their business is inconceivable for them," says Eileen M. Day, a partner at Stinson Leonard Street LLP, Minneapolis. "What many don't realize is that a good succession plan is an important part of their legacy."
Big Shoes to Fill
At its simplest, a succession plan determines who will fill the owner's shoes when he or she retires or is unable to manage the business. But the transition is far more complicated than just choosing a successor. A good plan, experts say, considers all elements of the transition, including management, financials, customers, employees, infrastructure and the business environment. "Owners don't have to reinvent the wheel," Day says. "There are professionals who do this for a living and can guide them through the process. They just need to find the right person with the right personality to get them to the table and get them talking."
Owners can then dive into the financials and determine how much the company is "really worth," she says. "The financials reveal all the issues and show the weaknesses that need to be addressed, the holes in management that need to be filled. If planning a third-party sale, the owner can have an appraiser or an accountant look at the business and determine how it looks from the outside looking in," she adds.
In recent years, valuations have softened, forcing some owners to defer retirement for a few years or adjust expectations about their retirement lifestyle. The recent FMI survey found that 48% of construction company owners are delaying retirement while 52% are not confident they'll have the financial resources to retire comfortably. Advance planning for the transition is equally important, says Tim Skelly, managing partner at Minneapolis-based CliftonLarsonAllen Wealth Advisors. He says the common misperception is that a succession plan is what happens after an owner retires, but a succession plan should actually begin years, even up to a decade, before the owner's exit. Planning ahead allows owners the opportunity to minimize estate and inheritance tax implications. One of the biggest pitfalls, he says, is waiting until the last minute.
"Some owners take an 'I'll cross that bridge when I come to it' approach, and then they're surprised to learn that they can't make a quick exit," Skelly says. "Many owners assume there will be an immediate market for their company if they plan to sell, but that's often not the case. Or, owners wrongly assume a certain person wants to own and manage their company, but not everyone wants the risk and responsibility, especially in this economy."
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