Succession planning, regardless of the age of owners or management, is not an event, but an ongoing process that needs to begin now. Find out what are the are critical decisions that need to be addressed (but not necessarily resolved today)

1. Written By: Todd Taggart, Partner and Leader, Construction Practice, Grant Thornton; David Chapman, President, The Chapman Group LLC
May 01, 2014
This article was originally published in the
January/February 2014 issue of Construction Accounting
and Taxation.
What do Bechtel and Kiewet — two of the largest
and most successful global contractors — have in
common with your company? Chances are there is at
least one thing: Your business is privately held, just
like these two companies. In the U.S. construction
industry, the number of companies that have
remained private is overwhelmingly higher than
those that have accessed the public markets.
It is likely that these mega-contractors have at least
one more characteristic in common with your
company — they face succession issues. Regardless
of the company size, all privately held contractors
will address the succession issue, ineffectively or
effectively, now or in the future.
This article will attempt to persuade you that
succession planning, regardless of the age of owners
or management, is not an event, but an ongoing
process that needs to begin now. There are critical
decisions that need to be addressed (but not
necessarily resolved today) about the future of your
business, including big-picture questions like:
How long does the current leadership of the
company want to work?
What is the exit strategy of the current owners?
Is retirement for owners and key management
adequately funded?
There are no easy answers to these questions. In fact,
in our opinion there normally are no answers for the
typical contractor for one reason: These questions
have not been addressed or discussed before. The
current day-to-day activities of business owners
consume all their available time.
In order to successfully plan for the future of your
construction company, you need to allocate time and
resources, which may seem overwhelming, but it
really is not. Following are easy-to-follow, logical
steps that will help you put effective plans in place.
The 10 steps of an effective
succession plan
1. Set an action plan with broad outlines
for timing
The process of founding and growing a company is
all-consuming and it’s easy to put off thinking about
long-range issues such as succession planning.
Chances are good, however, that the owner has given
thought to who should run the business when he or
she is gone. Take the time to put those thoughts into
an action plan that contemplates broad ranges of
implementation.
It’s tempting as a parent to think
about giving the business to your
child or children; don’t do it! A
business should always be sold,
even to the next generation.
Start by determining what your business is worth —
a range will do. That value, by the way, is different
than the amount of money you need for retirement.
Understanding whether your business is worth $2
million or $20 million will simplify the process as it
will help you to understand what options are
available. For example, if you have one or more key
employees that you would like to consider selling the
business to, ask yourself, can they afford it? Do they
have outside resources or are they looking only to
their compensation for funding? If it’s the latter,
consider how you feel about your employees
essentially buying your company with your money.
This may be a viable and good alternative, but
understanding those dynamics will help you make

2. the best decision for you and your family.
Having family, especially children, in the business
introduces new layers of complexity. It’s tempting as
a parent to think about giving the business to your
child or children; don’t do it! A business should
always be sold, even to the next generation. Be sure
to think critically and impassionately about the
characteristics and attributes of your children and use
those to match them up with the appropriate
position in your company. This will maximize their
chances for success and your chances for a
successful transition.
2. Take a hard look at your compensation
strategy
The Great Recession of 2008 and 2009 dramatically
changed the landscape for talent acquisition and
retention. Many skilled workers and project
managers left construction for other industries and
will probably not return. The severe down-cycles that
contractors routinely experience make it difficult for
employees to feel long-term security.
As a result, the traditional methods of compensation
will not be sufficient to retain your employees or
attract new talent. By traditional, we mean a salary or
wage plus an annual bonus tied principally to project
performance. It could also mean a totally
discretionary bonus that is not directly tied to any
discernible performance metric (i.e., the ‘Santa Claus’
bonus).
Instead, contractors need to design motivating and
understandable compensation programs for key
employees. And, for key employees, those programs
need to include some type of long-term financial
reward, such as a deferred compensation
arrangement. You should also look at including
noncompete and nonsolicitation terms in those
long-term arrangements to ensure that you are not
funding your key employee’s start-up business when
and if they depart.
In the context of family employees, it’s critical to
separate the roles of employee and owner — and to
compensate each role on a fair and competitive basis.
No one should be paid more — or less — because
they share your last name.
Over the years, we’ve found the
most success with owners who
have a carefully planned transition
from one leader to the next. And
creating an immediate sense of
accountability for everyone can
certainly smooth the way through
the transition for the next
generation of leadership talent.
At some point in the life of the closely held business,
you may not have the right kind of talent in the
partnership or family to staff critical management or
staff positions. Attracting, training and retaining
good people can be a challenge in these situations.
The design of compensation plans, opportunity for
an equity stake and long-term incentives to retain
good talent are all considerations when hiring.
Having said that, we often see family members who
get a ‘premium’ in compensation just because they
are family members; we think that is a mistake. There
are other ways to compensate family
members/shareholders beyond what they get paid to
do their job.
In our experience, it’s difficult for the
partners/family members who founded the company
to let go when bringing in outside talent, especially
executive talent. Likewise, the new hires often feel
like they don’t really have control over their areas of
responsibility because ownership can’t give them
control. Over the years, we’ve found the most
success with owners who have a carefully planned
transition from one leader to the next. And creating
an immediate sense of accountability for everyone
can certainly smooth the way through the transition
for the next generation of leadership talent.
3. Determine who should have equity
ownership
The process of determining who should own an
equity stake in your business needs to consider two
possible scenarios: a plan to deal with the issues
arising from the sudden death or incapacitation of a
principal owner or owners, and a long-term plan
identifying the next owners of your business. Each of
these is its own separate plan and should be shared
with the significant credit providers as well as the
appropriate individuals inside your organization, as
details emerge and become final.
Upon the sudden death or incapacitation of a
principal owner, you need to be able to identify
financial resources that are available to bridge
management and project gaps (for example, life
insurance or a corporate disability policy) as well as
the immediate changes in roles. Specificity is crucial;
the business and your business partners will need to
know who its leaders are.
'Sprinkling’ ownership among a
wide group of employees or family,
no matter how key they are to the
success of the company, creates
difficulties for the next generation of
transfer.
The long-term plan identifying who will own your
business should first address a significant issue —
ownership is not a right and in many cases is instead
a burden. Favored employees or family should not
receive actual ownership (as opposed to synthetic
ownership — see following) in your company due to
their long-term tenure, friendship or family
relationship. That choice must consider instead who
is best poised to lead the company into the future.
Many times there is no apparent successor owner.
This is not necessarily a cause for concern; it just
points to a different ownership strategy, such as

3. shopping the company to outside buyers.
In our view and experience, ‘sprinkling’ ownership
among a wide group of employees or family, no
matter how key they are to the success of the
company, creates difficulties for the next generation
of transfer. Consider instead the use of synthetic
equity — phantom stock plans, restricted stock plans
or some similar tool that will reward key employees
or family in a similar fashion. These options amount
to actual ownership but without the difficulties of
reclaiming those shares in the future.
4. Managing multiple roles in the business
As is the case in most privately-held companies,
family members and business partners have multiple
roles. In the case of a partnership, we often see the
partners bring in friends and professional colleagues
to help run the business. Parents will often want their
children to be part of the business.
Family members who are
employees should behave, perform
and, as already noted, be
compensated just like any other
employee.
As a general rule, we like to categorize the partners
or the family members into three groups: owners,
management and employees. On any given day, the
owners may wear their ‘management’ hats as well as
their ‘ownership’ hat. And, as you might guess,
knowing what ‘hat’ you are wearing and when is an
important part of running a closely-held company.
Too often we see ownership trying to manage the
company on a day-to-day basis when it’s really
management’s job to do that.
Take the case of a family member who is an owner
and plays a role as an employee. In one case, we
found an owner, who also happened to be the shop
foreman, insist on firing the CFO for some mistakes
she made in payroll planning. Even though the CFO
reported to the shop foreman’s older brother, who
also happened to be the CEO of the company, the
shop foreman felt his ownership entitled him to fire
the CFO.
The point is this: Any owner should be clear about
their role as an employee, even though they have an
ownership stake in the company. Family members
who are employees should behave, perform and, as
already noted, be compensated just like any other
employee. The same goes for those who are part of
the management team, which brings with it
additional rights and responsibilities, and
consequently, better pay. Finally, ownership brings
with it the most responsibility and the highest return.
We think it’s very important to consider the pros and
cons of granting ownership to family members.
5. Get started on retirement and estate
planning
Those retiring from a family construction business
often worry, will I be comfortable in retirement? Are
my wills effective? Are my assets at risk?
Far too many closely held businesses have most of
their wealth tied up in the business. This could spell
disaster should anything unforeseen occur in the
future. With its assets often extending far beyond the
company structure, owners should speak to their
advisers as to how to protect their family homes,
their investments and ultimately, the assets of the
business.
Similarly, too few business owners have relied upon
retirement planning to build wealth in a tax-efficient
and risk-protected environment. These are ideal
opportunities for business owners to develop a
separate wealth stream outside the business. Of
course, an important part of this equation is to make
sure your will is up to date. If you have not revised
your will in recent years, it may be ineffective or may
not reflect the latest taxation and asset protection
measures available.
Far too many closely held
businesses have most of their
wealth tied up in the business. This
could spell disaster should anything
unforeseen occur in the future.
One final point here: In our work with many closely
held companies, the ‘senior’ generation sometimes
depart from active engagement from the company
with a plan for their retirement to be actively funded
from company resources. In our experience, when
that happens, the succeeding generations feel
obligated to a ‘mortgage’ to the previous owner and
often get resentful about losing their income/equity
to an inactive owners retirement plan. This sort of
arrangement can work well for some closely held
companies, but we advise caution in the design of
such a plan.
6. If appropriate, explore the best ways to
bring family members into the business
Closely held businesses are often multigenerational
family businesses. Yet studies have shown that fewer
and fewer children are going into the closely-held
family business. It’s not hard to understand why. In a
changing world that brings with it more career
options, the closely-held business often becomes a
less attractive option for many children. But for
those who do choose to follow in their family’s
footsteps, what is the best way to teach them the ins
and outs of the business? And, if they do not have an
aptitude for it, what is the best way to let them go?
Even more important is the conversation we
recommend that families/partners have with their
potential successors. In our experience, owners
sometimes have an unrealistic expectation that their
kids will have the same passion for the business as
they do. This initial conversation is a critical success
factor in bringing family members into the business.
We recommend the next generation talent enter the
business only after they have first gained experience
elsewhere — preferably in an established business
where they can learn through trial and error. When

4. they do join the business, they bring more
experience, perspective and confidence to the table.
Most entrepreneurs view their business as they do
their family members. They will do whatever it takes
to keep them safe and healthy. That very ‘parental’
attitude often hinders the transition from one
generation to the next and creates roadblocks to the
transition for the next generation. We believe a
disciplined planning process can mitigate many of
the problems that come up in the transition from
one generation of the family/partnership to the next.
7. Lay out a strategic plan
Planning ahead does not have to be complicated.
Following are tips for getting started:
Involve your key people — their participation
ensures their commitment to the plan.
Keep it brief and to the point — identify the
issues and priorities and don’t try to do
everything.
Plan off-site — leave the office behind and hire
an external facilitator.
Avoid complex financial analysis — instead,
look at the big picture; cash flows and forecasts
can always be added later.
Create an open environment — your people
should feel free to raise important issues with
impunity.
8. Develop a wealth-preserving strategy
As mentioned earlier, too many business owners tie
up their wealth in the business. This makes sense to a
point — capital is needed to grow a business and,
together with the considerable effort on behalf of
the owner, the return on capital is usually very high.
But a business is inherently risky. Even the most
stable business can go through periods of uncertainty
due to competition, insolvent clients, changing
markets, litigation and workplace accidents. Such
unpredictability puts the owner’s personal wealth at
tremendous risk.
We’ve seen many partnerships
refuse to give control to the
next generation because they
worry about the risk to their
current lifestyle and future
retirement.
In our experience, over-reliance on the business for
preservation of personal wealth can also be a big
roadblock for current ownership. We’ve seen many
partnerships refuse to give control to the next
generation because they worry about the risk to their
current lifestyle and future retirement.
By developing a strategy that focuses on building
wealth away from the business in a lower risk and
return environment, and in a secure and protected
manner where the highest rates of taxes do not apply,
business owners can build and preserve wealth
regardless of the fortunes of the family business.
9. Resolve conflicts
Is the closely held business a blessing or a burden?
Unresolved conflicts related to family or the
partnership are key reasons it can quickly become a
burden. One risk is the potential for conflict to hold
back or destroy the business due to the personal and
emotional relationships among members. Over the
years we’ve seen too many companies sold because
ownership didn’t have a way to successfully navigate
the conflicts that arise in any company.
However, by designing structures, systems,
procedures and guidelines that distinguish between
family and business concerns, it is possible to either
avoid conflict or build in a process for managing
conflict that is acceptable to all parties.
10. Draft a set of operating rules specific to
the partnership/family
How do families work and play together? How do
partnerships whose beginnings were created by
authentic friendships retain the quality of the
relationships while owning and managing a business?
To spell this out, you might want to consider drafting
a set of ‘agreements’ that addresses the expectations
in matters, such as:
Obligations of the business to offer employment
to friends and family
Who is entitled to special compensation or
equity agreements
Do friends and family get employment
entitlements that are different from other
employees
How friends and family fit into the management
structure of the business
Whether friends and family are ‘cut’ for
management roles
How they are assessed for promotion
Such a document is reserved for the family/partners
alone and provides a business-like approach to the
partners’/family members’ future in the business.
It requires a certain amount of initiative and change
to begin the succession planning process for a
closely-held construction business. These 10 steps
are tools to give you a head start on managing
potential problems before they occur, which will lead
to a better, clearer, more profitable and less
conflicted future for everyone.
Conclusion
The day-to-day demands of business make it difficult
to pull back and focus on the future, but it is critical
to do so. You want your closely-held business to
survive, whether under its current or new ownership,
so that it can continue to provide for employees and
stakeholders. Take the time to begin!
See more at: http://www.grantthornton.com/issues/library/articles/construction/2014/05-10-steps-to-effective-succession-planning

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