Succession is a Big Deal
The magnitude of the succession issue is staggering. Seventy percent of construction enterprises are family-owned. As more than 9 million baby boomers retire in waves, the founders and first-generation baby boomer owners of all types of companies around the US are about to orchestrate the largest transfer of wealth in American history. More than $11 trillion is tied up in the value of these family held businesses (including construction companies) making succession more than just a personal affair but rather a national economic issue.
What’s This to You?
If you are a construction professional in a construction enterprise, recognize it or not, you are living in the glacial and unrelenting progression we call succession. Most of us prefer not to think about it or in denial that we are all slowly on our way to retirement, and someone else is going to have to take our place. Founders think they will live forever, and long-time managers are sure they are indispensable. Both, therefore, tend to ignore the creeping reality that our company will move on without us some day.
Who’s Watching the Store?
Just about all construction companies are closely held and many of those are family businesses. It should be of great concern that more than 50% of successions in ownership and management fail. There is great risk in construction businesses leadership transition from the first generation to the second and even more with third generation. Why then do otherwise successfully managed closely held and family-owned construction companies ignore succession issues and engage in almost no succession planning? Historically most family-held companies will include the next generation in ownership. Some plan to sell to employees and few plan a direct sale to a third party as a strategy for exiting the business. Some construction companies will simply cease to exist when the first generation retires or passes away.
Why Ignore Succession Issues?
Like most management problems, it’s psychological. According to a paper by Simplar’s Anthony Perrenoud, Ph.D. the key factors include:
- Health of the executive is a key factor – the fewer health problems the greater the resistance to plan for succession.
- Hard-working executives with few outside interests identify only with their company and are resistant to plan for succession.
- Executives who do not delegate responsibility have little interest in planning for their succession and difficulty even identifying a replacement.
- Executives that fear aging, retirement, and death are extremely resistant to succession.
- Executives that resist advice and consultation usually oppose planning for succession.
Facing the Music
According to a report by Clifton, Larson, Allen Wealth Advisors: When forced to face the reality of impending succession, family-held construction company executives reveal genuine concerns.
- How can I avoid selling to a third party and provide for the welfare of my trusted managers and employees?
- How can I develop the next generation to manage and lead in today’s complex business environment without my continued involvement?
- What incentive can I give key employees to remain with the company through an ownership and management transition?
- What will be the long-lasting legacy of my business for the community, employees, and the construction market?
- When I retire, do I have the finances necessary to maintain my lifestyle, including my hobbies, activities, and daily expenses? Have I provided for my spouse and family?
We plan to discuss these concerns in future blogs. Understanding how to value a company for sale or succession is key to starting a smooth transition. Training next generation family members and other key executives to manage effectively after a succession event is paramount to an enterprise’s survival. Last, but by no means least, dividing the wealth of the firm equitably between management departing and management remaining is a critical calculation. If you don’t leave enough fuel in the tank, the flight will not safely reach its next destination. Watch this space for further discussion.