As construction company founders and owners get older, they start thinking about slowing down or retiring, and getting out of the business. Business is stressful, demanding, risky and takes a lot out of the owner with all the pressures and demands to keep things moving forward, dealing with people, trying to make customers happy, and running a profitable company. Their options include closing, selling or transferring the company to their family. Over 80% of business owners prefer eventually transitioning their company to the next generation.
Start the transition plan before it is too late. A good plan might take two to three years to put in place. Plus, the aging owner doesn’t want the next generation to get frustrated with idle promises that never seem to come to fruition. Too often I see great younger and middle-aged family members who are not willing to wait for their fathers to make a decision about transferring the company to them. The earlier ownership can be transferred and future leaders take on responsibility for business growth and profits, the better off everyone will be.
What do you want to do with your company?
If you would like to someday transfer your company to your family members, answer these questions:
- Are you willing to let go and trust others to take care of your company without your involvement?
- Are you ready to walk away from the day-to-day business activities and decisions?
- When is the right time to turn over leadership and management?
- Do you have enough money to stop getting a paycheck?
- Do family members want to accept the risks and responsibilities of owning a business?
- Is the best solution for you, your future, and your family to close, sell or transition?
Step 1. Draft your five-year business plan
Once you have decided to transfer your company to your next generation, what will make the transition a success? Companies have a higher value when they are less dependent on the owner to manage the business. To build a valuable company, it needs some basic structure, systems and ingredients with a written business plan and a clear five-year vision including:
- Growth targets
- Core values and principles
- Financial, profit and return on investment goals
- Organizational chart for growth
- Clear position descriptions with accountabilities and responsibilities
- Defined management team
- People programs and goals
- Customer and project targets and goals
- Sales and marketing plan
- Investment targets and goals
- Regular scheduled strategy and scorecard meetings
Step 2. Determine what the owner wants
Developing a transition plan starts with determining what the owner wants and needs as a result of the transition. The owner’s desires must be balanced with what’s fair and reasonable for the next generation and allow them to be successful.
Price: How much money does the owner want from the transfer?
- What’s the business really worth to an outside investor?
- How to pay for shares—stock transfer, loan or lump sum
- Timing
Income: How much money does the owner need or want?
- Monthly, payments, terms, interest, duration, timing
- Salary, benefits, perks and duration
- Dividends, profit sharing, duration
- Investments?
What will the owner’s involvement be after the transition?
- Work 100% or part time
- Responsibilities, activities and hours
Who gets ownership, timing and accepts liabilities?
- Transfer ownership to workers or family in or outside business
- What about spouses and children?
- Timing of succession or transition
- What do the successors, children, or family want?
- Transfer of risks and liabilities
- What percentage of ownership for owners?
- Profit split for managers versus owners in or outside business
- Compensation, benefits, perks and pay for owners?
- Tax consequences of transfer
- Bank line of credit, guarantees, bonding, insurance and licenses
- Long-term agreements—mortgages, leases and equipment
Step 3. Determine what’s best for the company’s future
Who’s the best choice to be the new future leader?
- Hire outside president or transition to family member?
- Which family member is best choice to run the company?
- Who wants to be the new leader?
- Desire, skills, experience, ability and respect
- Are they willing to take on added liability and risk
- Willing to take on extra responsibility, workload and hours
- Can the new leader manage key relationships?
- Customers
- Subcontractors
- Employees
- Bankers, bonding, lawyers and accountants
- Family dynamics
- How will decisions be made?
- Who are the decision makers
- Who gets votes and at what level?
Compensation, benefits and perks for key managers and employees.
Put plan in writing—documentation, contracts and buy-sell agreements.
- What can go wrong?
- What happens if something goes wrong?
- Develop a contingency plan
Step 4. Determine leadership during transition
- Levels of authority, control and decision making
- Transition of control from decision maker to advisor
- Proposed organization chart with key positions
- Position descriptions
- Determine timetable for transition
- Communicate transition plan to team
- Reward key employees and managers
Step 5. Develop scorecards to track results
Financial performance
- Dividends, distributions
- Profit sharing
- Return on investments
- Compensation and benefits of owners
Define policies, rules, standards of performance, positions, policies.
Accounting practices
- Open books to next generation
- Explain liability and financial management
- Stop co-mingling of owner’s money, expenses and payments
- CPA and annual audit policies
Develop plan for updates and regular owner meetings.
Create an active advisory board of directors comprised of family and non-family.
George Hedley, CSP, CPBC, helps contractors grow and profit as a professional business coach, popular speaker and peer group leader. To get your copy of Hedley’s BIZ-Principles and BIZ-Vision Worksheets, email gh@hardhatpresentations.com. Hedley is the author of “Get Your Construction Business to Always Make a Profit!” and “Hardhat BIZSCHOOL Online University” available—on his website. Visit www.hardhatbizschool.com for more information.
