Don’t Jeopardize Your Company’s Future: Create a Succession Plan
by
Member of the Firm
Abstract: You’ve worked hard to make your business successful. To ensure it survives after you leave, however, you must develop a succession plan. A thoughtfully implemented plan can pave the way for a nearly seamless transition when you decide to retire. This article discusses various items you need to consider when developing a succession plan, such as how to groom either a family member or another key employee to lead the enterprise and the need to include your family in the planning process. You’ll find the sidebar on employee stock ownership plans (ESOPs) of great value.
Maybe your construction business has been in the family for years, or perhaps you’ve built it from the ground up. In either case, you’ve worked hard to make it successful. To ensure your company survives after you leave, though, you must develop a succession plan.
A succession plan is vital for confirming, communicating and implementing next steps for the business. A thoughtfully implemented succession plan can pave the way for a nearly seamless transition when you decide to retire.
Continuing the family legacy
The key operational issue addressed in any succession plan is: Who will one day lead the enterprise? If yours is a family-owned operation, finding a successor may be difficult. Family members may be qualified but have no interest in taking the reins, or they may want to be involved but not have sufficient experience. To deal with issues such as these, you must take time to encourage and develop future leaders. Early on, identify children or other key employees you believe hold leadership potential and expose them to all aspects of running the business.
Once you identify the likely candidates, give them a well-defined path to find out what they need to do to become the future leaders of the business. Create an environment in which they are assured that their hard work and the time spent learning how to run the business will one day be rewarded with a leadership role and an ownership interests at a clearly defined point in the future. Finally, establish appropriate fringe benefits and deferred compensation plans, as well as incentive pay plans, to help retain them until you decide to step down.
Include your family in the planning process
It’s important that you encourage the entire family, whether or not they’re active in the business, to participate in the planning process and to understand the financial and personal consequences of an unsuccessful succession.
A commonly expressed concern is how to divide equitably assets among your heirs when only some of them will have control of or receive ownership interests in the business. If there are sufficient liquid assets, you may want to consider purchasing life insurance to provide for any children who won’t be involved in the business, thereby giving ownership interests only to those who will be involved. Or, you may want to consider establishing a family trust to own and operate the business, thereby allowing the entire family to share in the risks and benefits.
If handing down your business to family members isn’t the best option, you may want to consider selling the business to an outside party or to your employees. (See the sidebar “Can your employees buy the company?”)
Expanding the focus
No matter whom you choose as your successor, you should involve your accountant, lawyer, insurance advisor and a family business consultant. These experts can help you assess your circumstances and create a plan that accomplishes four goals:
Meeting these goals can be a juggling act. But without a clear succession plan, all the “balls” that you’ve juggled over the years to build a successful construction business can quickly fall to the ground.
Letting go
Passing the baton of ownership and control may be one of the most difficult challenges you’ll ever face, but you need to prepare yourself for the day when you are no longer in charge. If you decide you would like to stay involved with the business after retirement, you can always find a new role for yourself such as mentoring young employees or assisting with marketing efforts. It is only after you truly let go that you will allow the new leader to be seen as the “boss” and to make the big decisions.
The earlier succession planning begins, the better, even if you don’t plan to retire until years from now. Developing and grooming your successor will take time, as will preparing your employees and managers to adjust to a new ownership structure.
Planning is key
Succession planning is just as important as drawing up a will. In fact, estate planning and business succession planning go hand-in-hand, because transitioning a business will have a major impact on your estate and your heirs. A carefully considered and executed plan will ensure the continuity of your legacy.
Sidebar: Can your employees buy the company?
If a successor isn’t immediately apparent, you may want to sell your business to your employees. An employee stock ownership plan (ESOP) is a defined-contribution plan in which your employees purchase shares in your company as an employee benefit. Many companies use ESOPs to motivate and reward their employees, provide an exit strategy for departing owners, and borrow pretax dollars for acquiring new assets.
For construction companies, however, ESOPs may not be as attractive as they appear. That’s because you must record the money you borrow for the ESOP as a liability and debit a like amount to a contra equity account. The resulting reduction in your business net worth may not be operationally significant, but it could affect your bonding capacity. In addition, employees who leave your company may require you to buy back their shares — creating an off-balance-sheet liability for you.
An ESOP requires a formal valuation of the business that considers its profits, cash flow, market conditions and outlook, assets, and other relevant factors. You’ll also need to consider how to fund the ESOP. A Your accountant can help you determine if an ESOP is the right move for you and your business.