The value of succession planning for contractors

Building a comprehensive succession plan can be a complex task, but it’s vital 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. 

While it’s important to prepare for the future, it’s equally important to consider how a succession plan—or lack thereof—can impact the business today. For example, in some markets, contractors are being asked to show evidence of a business continuity plan while tendering public sector projects. That’s due, in part, to awareness that the last of the baby boomers will soon reach retirement age, and many of them occupy ownership and leadership positions in the construction trades. Project owners want assurance that any given project will be completely successfully and with minimal disruption. 

Certainly, this generational shift looms large. According to a 2021 PwC study, half of first-generation Canadian family business owners expect the next generation will be majority shareholders in five years’ time. With this shift, PwC says succession planning is key. However, only 34% of Canadian family businesses have a robust, documented, and communicated succession plan in place.¹ 

In the construction industry, succession planning is always top of mind, but more work needs to be done. A U.S. survey of construction executives by FMI and Construction Financial Management Association (CFMA) found that 30% of respondents said economic slowdown would affect their ownership transfer plan, 50% do not have an ownership transfer plan, and 66% of identified successors won’t be ready to take over for another three to five years.²

While planning for the future isn’t always high on the to-do list for busy owners, now is the perfect time to start your succession plan. Here are three steps to help you in the process: 

Start as early as possible

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. 

When it comes to choosing a successor, you’ll have to decide if you want to pass the business on to a family member, transition it to a company insider, or sell it to an outside buyer. In addition, you’ll have to think about your level of involvement in the business (if any) after the transition, so you can structure the transaction accordingly. ³ 

Consult trusted professionals

Given the complexity of transferring the business, recognize that you can’t go it alone. Succession planning typically requires significant legal and financial help you make the right decisions and implement the best processes to ensure a smooth transition.⁴

Work closely with a consultant or advisor, accountant, tax specialist, banker, and legal advisor. Your team of trusted professionals can help you develop an effective step-by-process, adequately value the business, and assess and minimize tax implications. 

Commit to implementing the plan

Once you develop a succession plan, allocate time and resources to follow through and implement the plan—don’t just shelve it. 

If you’re passing on the business to a family member or transitioning it to a non-family-member executive, communicate your expectations and start preparing your successor by working closely together. Experts advise having a transition phase of three to five years. This will allow time to transfer knowledge about running the business, as well as prepare key personnel for the change. It’s also important to prepare the right legal documents and ensure that strong internal management and accounts systems are in place.⁵

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. 

Sources 
¹ PwC Canada, “Family Business Survey 2021—Canadian insights”
² FMI, “2021 FMI and CFMA Ownership Transfer and Management Succession Industry Survey” 
³ BDC, “Six steps to effective succession planning”
^4,5 Business Chief, “Succession planning must start early for family-owned firms,” Oct. 8, 2022 

Additional resources:
CCA Conference Seminar Presentation—March 2016—Barnes Strategic IR: “Preparing Your Business for Sale & What to Expect from the Sale Process”