Ten Steps to Prepare a Succession Plan

Construction companies are often operated as “family-owned businesses,” perhaps more so than firms in most other industries or professions. Typically, a small one- or two-person operation has evolved into a thriving business with dozens of employees. Sooner or later, however, the founder or the dynamic individual who spurred the growth must prepare to hand over the reins to a member of the younger generation.

In order to ensure the continued success of the business, it is vital to create a “succession plan” that paves the way for sustained growth. Even if the successor will be an outsider, prepare an “exit strategy” that will leave the business in good hands.

Consider the following 10 practical suggestions:

1. Involve everyone at the top management level. This includes board members who are no longer active in day-to-day affairs (e.g., the founder). Do not exclude company officers who may not be related.
2. Put established procedures in writing. Develop both a short-term plan for the next few years and a long-term plan that envisions openings in the future.
3. Choose successors in the prime of their life. Typically, the person (or people) designated to lead the company should be in their 30s or 40s. Consider multiple candidates for top positions.
4. Outline the qualities needed to run the company. Both practical knowledge and management know-how are required. Place a high priority on leadership attributes and the ability to work with others. Evaluate the potential candidates as objectively as possible.
5. Identify the career goals of the successors. Frequently, a family member’s objectives may differ from the founder’s ideas for the future. Try to “get on the same page.” Develop plans to help successors meet their priorities.
6. Handle succession issues with sensitivities. Although certain employees have been bypassed, they may need to be retained. Provide incentives without making any exaggerated implied promises. Continue to support these employees to deter negative morale. Above all, keep the methodology for choosing successors confidential.
7. Make sure that successors are properly trained for the job. Even in down times for the construction industry, it’s important to invest in education and mentorship. Monitor performance to ensure that leadership qualities are being exhibited.
8. Hold regular “succession meetings.” This is an opportunity to identify candidates and discuss the process. If a system has been established, review it with business advisers. Meetings should take place at least twice a year.
9. Consider estate-planning implications. Uncertainty over scheduled changes in the federal estate-tax law makes this a difficult proposition. Construct a plan that addresses both current law and future contingencies.
10. Seek assistance from professionals. Trusted business advisers can provide the expertise needed to pave the way for a smooth transition. Do not attempt to handle all matters on your own.

Note that a succession plan or exit strategy may include various documents such as buy sell agreements, stock option and restrictive stock plans for employees, deferred compensation arrangements and salary continuation plans, and possibly employee stock ownership plans (ESOPs). Other techniques may be employed to take advantage of the estate- and gift-tax rules.

June 2007