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Construction Industry: Business Succession Planning During the Trump Era

Daily Journal of Commerce Oregon
April 2017


Construction Industry: Business Succession Planning During the Trump Era

There is lots of speculation about how the Trump era will impact the construction industry—from the border wall, to pipeline projects, to fast-track future projects, to focusing on infrastructure needs, to proposed tax and regulatory changes. Is your business positioned to take advantages of these possible changes? In particular, do you have a business succession plan that can adapt to change?

The number one root cause of “contractor failure” is poor strategic leadership, according to a June 2016 FMI Quarterly article. The primary example the article gives of this poor strategic leadership is: “[M]any companies get into financial difficulty when ownership changes from one generation to the next. To ensure successful ownership transfer and management succession, owners need to prove that the company can grow and succeed without them.” This is a root cause of contractor failure—regardless of whether the business is family owned or not. The other root causes are:

  • Excessive ego;
  • Too much change;
  • Loss of discipline; and
  • Inadequate capitalization.

 Does this sound right or familiar? Remember, construction is an inherently risky business and it is dynamic.

So let’s focus on successful transition planning and changes in the construction industry. In the construction industry, more than 50% of construction firm owners are over the age of 55, and less than half have a formal succession plan. These business owners know that they need a plan and many think they have a plan in place. But do they truly have a clear plan set up? And have they considered that now is the time to revisit that plan, given the possibility of future change under the Trump era?

Here are some considerations:

  • Updating the Existing Plan. If you have an existing plan, pull it out and revisit it with your professionals (management, lawyers, accountants, bankers, financial planners, etc.) and family. You need to be in a thoughtful position to adapt in a timely manner if a change occurs.

    For example, if tax changes include changes in individual rates or estate or gift taxes, you may want to make some decisions and implement them this year. If infrastructure incentives or tax or regulatory changes enable your business to invest in more equipment or people, will your plan accommodate that change in resources and timing?
  • Communicating Your Goals and Adapting for Change. Many owners “plan” to transfer the business to family or employees. Yet 70% of family business transfers fail due to lack of trust and communication. Communication and alignment are critical, especially when changes are expected. If you do not have the skill or the desire to effectively communicate, find and delegate this important function to someone on your planning team.
  • Building, Training and Incentivizing Your Successors. This is one of the major factors in business transition failures—the lack of adequate training with the right management skills. For a construction business, license/regulatory and surety requirements are critical and skilled craft labor shortages are real.
    • The first decision is deciding what skills are required for the near and long-term needs of the company.
    • The next decision is who will be an owner and who will be a manager based on the company’s needs and the skills of the individuals.
    • And the third decision is how to compensate them, whether it is with equity or other incentives, like profits interests, cash or an employee stock ownership plan (ESOP).

There are many tools and approaches to select from, so it takes thought, planning and communication—especially given the various impacted generations (the silent generation, baby boomers, gen X, millennials, gen Z) and their needs and desires.

  • Knowing What Your Company Is Worth Now and in the Future. This requires a current analysis of the company’s growth potential, asset assessment (real estate, equipment, etc.), management assessment and financial assessment (earnings and bank and surety credit). For many construction businesses, these items are dependent on the owner/founder, so a candid evaluation of the company’s worth without the owner/founder is important. You have to be realistic and flexible.
  • Documenting Your Transition Plan and Emergency Plan. Many of the tools and approaches for a successful exit plan require legal documentation that should be negotiated and in place long before any transfer is to take place. The lack of planning and documenting can lead to unintended consequences and delays. With that said, interim plans and executing a plan over time is prudent—so long as it is periodically revisited. However, in any event, an emergency succession plan should be documented and access provided to those who need to know about it.

Change for the construction industry is expected during the Trump era. Is your succession plan in shape to effectively benefit from the changes?


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