Skelly also notes that it was far easier for firms to hand over the reins in a booming economy when some companies made money without even trying. "Now, companies need strong leadership to survive and be profitable. There are more factors to consider, and it may take years to finalize a succession plan and set that plan in motion," he adds.

The challenge with an internal sale is developing a plan that enables both the new and the old owner or owners to achieve their respective goals. Depending on how the transfer is structured, both typically need the company's continuing profitability to get paid. Most internal sales are completed over time, typically five to 10 years, so the former owner can participate in the firm's earnings during the transition.

Family Ties

Many owners prefer to transfer the business to one or more children, but maintaining harmony is not always easy. The interests of one family member may not be aligned with another.

Skelly says a common mistake with family-owned businesses is thinking that ownership and management succession are the same. "Parents always want to treat everyone equally, and while that's fine for ownership, it can be a huge mistake for management," he says. "An owner's son or daughter might not be qualified to manage the company, especially in this risk environment, and when more than one child is involved in the business, things can get complicated."

According to the Family Firm Institute of Brookline, Mass., nearly 70% of all family firms fail before reaching the second generation, and 88% fail before the third generation. Little more than 3% of all family enterprises survive to the fourth generation and beyond. Those that do survive, however, tend to perform well over time compared with their corporate peers, according to research by McKinsey & Co., a global management consulting firm.

Because many construction companies tend to be smaller, the owners are heavily involved in the day-to-day activities and decision-making. When owners leave, they often take with them decades of organizational knowledge and experience. In the years leading up to an owner's departure, a good plan might establish a formal program for the owner to mentor his or her successor and share information with key personnel.

This transfer of knowledge not only prepares the company to operate independently of the owner but also plays into its appraisal. How the company functions—or is perceived to function—without the owner's leadership and knowledge may affect the company's credit and surety ratings during the transition.

Denver-based Haselden Construction is working with the tax and consulting firm EKS&H to develop the company's succession plan for transferring management from two older brothers Ed and Mike Haselden to younger brother Byron and his leadership team. "Our hope is to develop a plan that can withstand the next 15 years," says Byron, who currently serves as the company's president and will be assuming the CEO position.

A key component, he says, is transferring knowledge from one generation to the next. "Preserving our father's legacy is important to all of us, and to do that, we need to train and teach the next generation to run the company," Byron says. "We believe it is our responsibility to grow future leaders within the company."

On succession planning, Byron offers this advice to other business owners: "It is never too early to get started, but it may be too late if you do not start now."