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6 minute read

The value of succession planning for contractors

By Sovereign Insurance

Building a comprehensive succession plan can be a complex task, but it’s vitally important for construction business owners. A well-designed plan will set the stage for the next generation of leadership, and ensure the successful continuation of the firm’s operations, stability and long-term value.

According to a recent PwC survey, almost half of Canadian family business owners plan to pass on management and/or ownership to the next generation. However, 47% of them don’t have a succession plan in place and 27% have not involved the next generation in preparing for these changes.1 A survey of construction business owners by FMI found that only 22% of owners have a formal plan to transition themselves out of managing the business.2 According to FMI, most owners who are nearing retirement age—and who haven’t begun to plan—acknowledge that they need to get the process underway.

When developing a succession plan, contractors will carefully consider the future of the business they worked so hard to build. But it’s equally important to consider how a succession plan—or lack of it—can impact the business today. For example, failure to develop a succession plan can cost a construction company an important contract if a surety bond for a prospective project is denied. Sureties are especially concerned where multi-year large projects or elderly owners with health issues are involved.

"A survey of construction business owners by FMI found that only 22% of owners have a formal plan to transition themselves out of managing the business." 2

Why are succession plans important to sureties?

Surety companies evaluate construction companies on the overall perception of their ability to complete a given project successfully. A surety company has a vested interest in anything that could increase the risk of a contractor not being able to fulfill its contractual obligations—including succession planning. The surety industry has seen many contractor businesses fail due to ineffective succession plans, resulting in multi-million-dollar losses.

In addition, in some markets, it’s becoming a common practice for owners’ representatives and consultants to ask contractors to show evidence of a business continuity plan while tendering public sector projects. That’s due, in part, to the acute awareness of the industry’s forthcoming exodus of baby boomers, who currently occupy many ownership and leadership positions in the construction trades.

With the construction industry experiencing a record economic expansion in the last several decades and baby boomers retiring or nearing retirement, sureties are being faced with buy-out situations more often. The buy-out, sale and ownership transfer of the company can have significant impacts on an organization’s financial position and operations. 

If you’re ready to get started, here are three key steps to succession planning:

  1. Start early: Whether your business is sold to a third party or passed on to the next generation, the key is to allow plenty of time and start thinking about the process. This puts you in the driver’s seat and allows you to act proactively instead of reactively in the event of unforeseen circumstances.
  2. Develop a team of trusted professionals: Work closely with a consultant/advisor, accountant, tax specialist, banker, legal advisor and surety partner who will help you develop an effective step-by-process, adequately value the business, and assess and minimize tax implications.
  3. Commit to implement: Once you develop a succession plan that suits your needs, ensure that you allow time and resources to follow through and implement the plan—not just shelve it.

While making time to develop a succession plan is easier said than done, it’s well worth it in the end. By having a strong plan in place, you’ll prevent losses to the business today and be assured your company is in good hands in the future.

1 "Retirement pushes Canadian private company owners to keep, sell or transfer their business." PWC Canada, April 9th, 2019
2 2017 FMI, NRCI and CIRT industry surveys, "Third-Party Sale or Internal Buyout? How to Make the Best Choice for Your Firm." Q1. FMI, March 9th, 2017

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