Studies show that over 95% of all construction companies are family or closely-held businesses. Studies also show that only 3 in 10 family businesses survive from the first to the second generation, and only 1 in 10 of those survive to the third generation. Furthermore, these businesses often fail for non-business reasons. In fact, many commentators believe that the biggest threat to the continuation of a closely-held or family construction company business is not estate taxes, but is instead the inability of the next generation to effectively and cooperatively own and manage the business.
With this background, we believe that the following are the 10 Keystones to an effective Succession Plan in the construction industry:
- Start Early
- Succession planning forces owners to make decisions about the future of their businesses, and gets harder the longer you wait.
- Be Conservative
- Move slowly into new territories, whether it be a new aspect of the business, or massive changes in organization structure.
- If it doesn't work, don't be afraid to go back, re-think, and start again.
- Hire and train the best people you can get.
- Give them a chance, and reward them appropriately.
- Have meetings with potential successors (family businesses should set up a Family Council) to allow them to learn and understand your business, and where you want it to go.
- In a family business, if later generations indicate an interest let them work in real jobs, with real expectations.
- Don't be too easy on them, and don't be unreasonably hard.
- Let them do a variety of jobs, and work themselves up; broad experience is often the key to success when your name is on the door.
- If they can't cut it, give them a way out.
- Hire attorneys and other advisors who understand the construction business and are experienced in succession planning — not just estate planning.
- Follow the advice of your professionals, or fire them and hire new ones (and then follow their advice).
- Make sure the Company's mission, goals, and Succession Plans are in writing for all to see.
- The cost of succession planning is more than just paying advisers.
- If a workable succession plan requires restructuring, or bringing in outside managers, or setting aside funds, do it.
- If there is an emotional cost, bear it.
- Litigation, or a failed business, is much more expensive.
- Stock in the business may be worth millions on paper, but if it produces no cash you have a recipe for dissension and disaster.
- Develop a mechanism for owners to sell their interests, including a valuation and funding process.
- Don't ignore estate planning — but don't confuse it with succession planning.
- If the current generation of owners has insufficient retirement funds to exist without a company paycheck they will never quit.
- Providing for sale of company ownership is not enough — set up and fund a retirement plan.
- There can be no succession if the predecessors won't let the successors have a chance.
- Set aside egos, take a risk, and facilitate a legacy.
- Invest in People
- Give the Next Generation A Chance
- Listen to Professional Advisors
- Put It In Writing
- Pay Now or Pay Even More Later
- Provide Liquidity
- Provide for Retirement
- Know "When To Say When" and "Just Do It"
In addition to these keystones, the unspoken rule, and perhaps the one that most closely-held and family businesses owners misunderstand, is that estate planning and succession planning are not the same thing. Estate plans are designed to minimize taxes and transfer wealth. Succession plans are designed to minimize disruption and transfer knowledge and experience. Both are vitally important to the survival of the closely-held and family-owned construction companies.
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