Originally published in Construction Business Owner
By Shane Brown and John Beeble
Most construction companies are led by larger-than-life, charismatic leaders. Often, they have built their businesses from the ground up based on strong professional contacts and their reputations within the industry.
So when it comes time for that leader to retire, a thought out and well-crafted succession plan is essential to preserve the value of the general contractor company.
Amazingly, only 24 percent of contractors have a formal plan for transitioning
themselves out of their businesses, according to Gregory Caruso of Harvest Business Advisors. The situation is even worse among general contractors where the reputation of the leader is often a significant part of the firm’s value.
Succession planning is especially important for construction firms because they don’t have access to capital markets like other economic sectors. General contractors and sub-contractors rarely sell to strategic buyers because of the significant individual financial guarantees that are often required, and private equity investors prefer businesses that are less cyclical.
Nevertheless, construction leaders put off discussing succession, wary of a professional and emotional conversation that raises notions of mortality. Others delude themselves that employees will buy the firm, giving no serious thought to how that deal will be financed. By the time most leaders think about how to get out, it’s too late. In the end, even for firms with annual revenues exceeding $100 million, the typical outcome for those without a succession plan is selling their company for less than optimal returns or simply winding down operations and turning off the lights.
When the owner creates a formal transition plan, that outcome changes dramatically.
Planning starts with a discussion of goals – owners seeking a legacy may prioritize employees or family members taking over the firm. Those that want to maximize financial returns must boost growth today and make future growth plans. Timing of the transition also is important; someone that needs to cash out in three to six months will probably have to liquidate assets, while someone with a decade to plan will have all options available to them. The best plans take five to 10 years to put in place and should include four aspects:
Mentorship: Identifying the next leader or leaders with the right skills and temperament is an essential first step. Those persons may be inside the firm, but if no insider fits the bill, owners should be willing to recruit from another firm. Once possible successors are identified, the current leader should actively provide mentoring — a mix of formal leadership training, skills enhancement and executive coaching. Becoming a leader is not something that happens by flipping a switch. An individual’s growth requires adding responsibilities gradually using specific, measurable, attainable, realistic, and time sensitive career targets. That includes targets for adding new clients — vital in determining the successful continuation of a company after the leader of a general contracting business steps aside.
Organization: General contractors are often led by a superhero – a leader that does everything. Firms are often started by a technical, hands-on specialist such as a carpenter, electrician or plumber and lack professional management processes and procedures. Any succession plan starts by transitioning from a model where one or two people run every aspect of the firm to one where managers are appointed in key roles throughout the organization and are given real authority. Succession requires creating a deep, scalable bench that can grow the company and develop relationships with outside firms.
Strategy: The No. 1 goal after any transition is to ensure that new contracts continue coming in after the old boss is gone. That means putting in place a strategic plan for growth that is regularly updated. That can involve such things as diversifying the firm’s sources of revenue, expanding into adjacencies, adding service revenues to offset economic cyclicality and a plan for investing in capital equipment. Having a variety of rainmakers on staff will also help growth plans. That’s especially important because future earnings are what will finance the debt needed for the transition.
Finances: With capital market options limited, unless management or family members have deep pockets, exiting the business can be challenging. Unfortunately, ownership transition is not a one-size-fits-all scenario. For some, Employee Stock Ownership Programs (ESOPs) present a viable solution, but they do not work for all situations. A variety of partnership models have been utilized as a means of transferring both leadership and ownership over time to a newly created entity. Partnership models allow for customization of a plan to fit all parties involved in the sale or transfer of the business. Any solution takes years to put in place and only works optimally when a firm has steady earnings because in all cases, it is future earnings that drive the transaction. This means that having a strategic plan in place to keep the company growing is vital.
Too often, owners think that they will sell their firm to management but don’t examine the cold, hard financial implications of that. Transition requires an honest assessment of the company’s value and its future prospects. Owners cannot fool themselves about the value of the company and then expect others to put money behind that fantasy.
A good succession plan has a lot of moving parts and takes considerable time and attention to detail. For contractors wondering when is the best time to start, the answer is always “now.”
Shane Brown led the construction industry practice at EKS&H for more than 10 years and has served construction companies for 20 years. John Beeble is president of Beeble Company, a consultancy he founded after a 35-year executive career in commercial construction.