Planning for Succession Management

Whether you are contemplating an immediate internal transfer of your business, or have the luxury of time to plan for such succession, the ownership transfer of a closely held construction company is an immense challenge.  Here are a few key items to consider when contemplating a sale to key employees or family: 1) Align future ownership with future management responsibility.  The most successful internal sales occur between owners and those individuals who have a direct impact on the day-to-day operations and profitability of your firm.  As an owner, you understand the direct correlation between ownership and accountability within a closely held firm – your plan should create and harness this powerful link. 2) Goals and objectives come before structure and price. Shared goals that are openly communicated among participating parties are critical.  Ensure that the future owners of your business each have similar objectives with regard to managing operations, building equity, and distributing earnings.  Once this foundation has been laid, an advisor can assist in selecting the right structure (ESOP, Subchapter-S Buyout, Permanent Joint Venture, etc.) to meet these needs.  Do not try and fit your internal transfer process into an existing structure just because that is the method you are most familiar with.  Internal sales are much more likely to succeed when shared goals drive the process and transaction structure, rather than the other way around. 3) Prepare for that which can not be anticipated.  Just like in constructing any project, internal sale plans invariably encounter unanticipated bumps in the road – both bad and good. Bad jobs, bonding constraints, unforeseen market opportunities; none of these can be planned for but will likely occur during the course of your ownership transfer.  Build flexibility into your plan to accommodate necessary course corrections. 4) Profitability is critical.  Your employees likely do not have the financial resources available to purchase your company, so most of the money will come from the future profits of the business.  If your company is profitable, almost any internal transfer technique will work.  If your company does not make money, ownership transition will not take place unless you are willing to give your company away. 5) Cautiously approach strategic initiatives with an eye towards your long-term ownership transition goals. A timely ownership transition will likely impose cash flow constraints upon your business, which can limit strategic objectives.  Before your transition plan begins ensure that your strategic objectives align with your ownership transition objectives.  6) The earnings capability of the business and your timeframe as an owner for exiting are far more important than any theoretical value for your business.  You may value your company at $1 million, but this valuation is meaningless if there are not interested outside buyers and your employees are only able to pay you $500,000 over the timeframe you have set for the buyout. Ultimately, an internal sale to key employees or family can be a rewarding alternative for all parties. Owners who choose to sell their companies to key employees or family may have personal motives which that are frequently as compelling as their financial objectives. They may take pride in seeing their names remain on the door, giving their children or loyal employees a chance to own what they do, or providing continuity of a unique corporate culture. The attractiveness of the internal sale process is that it offers you as an owner a great deal of flexibility with regard to roles, responsibilities, compensation, and other deal components. For more information on this topic, please join us in Miami, Florida on May 13th and 14th. Registration is now open. For more information, please contact Carrie Harper via email at harperc@agc.org.