For many construction company owners, the business represents years, sometimes decades, of work.

It may also represent a significant portion of the owner’s personal wealth.

That makes succession planning more than a question of who will run the company next. It can involve leadership, ownership, taxes, personal financial planning and the long-term value of the business.

And those issues are generally easier to address when the owner has time and options.

First, Define What “Succession” Means

There isn’t one standard succession path for a construction company.

An owner may want to transfer the business to family, sell to employees or another contractor, pursue an outside transaction or gradually reduce their involvement while another leader takes over.

Before focusing on transaction mechanics, owners should think about the desired outcome.

Consider:

• Who should own the company in the future?
• Who is capable of leading it?
• Does the owner need proceeds from the business to support retirement?
• Is maintaining the company’s legacy important?
• How quickly should control transfer?
• Does the current owner want to remain involved?

Those answers help shape the financial and tax planning that follows.

Build Leadership Before You Need It

Ownership succession and leadership succession aren’t always the same thing.

Someone may be capable of performing the technical side of the work but still need experience managing employees, reviewing financial results, maintaining customer relationships or making strategic decisions.

Developing future leaders early gives them time to build those skills while the current owner is still available.

It also reduces the company’s dependence on one individual.

That matters because a business that relies heavily on its owner for customer relationships, estimating, financial decisions and day-to-day problem-solving may be more difficult to transfer successfully.

Understand What You’re Actually Transferring

Owners often have an idea of what they believe their company is worth.

The eventual value of a construction business, however, can be influenced by numerous factors.

Those may include historical earnings, backlog, customer concentration, equipment, management depth, bonding capacity and dependence on the current owner.

The succession-planning material Katie provided similarly identifies earnings, backlog quality, customer concentration, WIP performance, management depth and owner dependence among factors that may affect a construction company’s value. DBC – August Construction Blogs…

Understanding the company’s financial position earlier in the process can help an owner identify areas that may deserve attention before a transition.

Consider Taxes Before the Deal Is Set

How ownership changes hands can have different tax consequences.

The appropriate structure depends on the business, buyer, owner and transaction.

That’s why tax planning should be part of the succession conversation before a purchase price and structure are finalized — not after the documents are signed.

Early planning gives the owner and advisors more opportunity to evaluate available options and understand how a potential transaction could affect both the company and the individual.

The source material also emphasizes that transaction structure and timing can materially affect tax treatment and that planning becomes more limited after an agreement has been finalized. DBC – August Construction Blogs…

Think About How the Transition Will Be Funded

Identifying the right successor doesn’t necessarily mean that person has the resources to purchase the company.

A transition could involve outside financing, seller financing, company cash flow or another funding structure.

Whatever the approach, the financial arrangement needs to work for both sides.

The current owner may be relying on proceeds from the business for personal financial goals. At the same time, placing too much financial pressure on the company could make it harder for the next generation of leadership to invest in equipment, employees and working capital.

Connect Business Succession With Personal Planning

This is where succession planning and wealth management naturally intersect.

An owner preparing to leave the business should understand how the transition fits into the broader personal financial picture.

How much value is tied up in the company? What income will the owner need after stepping away? How does the timing of a transaction affect other financial goals?

Those questions shouldn’t be left until the final stages of a deal.

Start While You Still Have Options

Succession planning doesn’t mean an owner is ready to leave tomorrow.

In many cases, starting earlier provides more flexibility.

It gives the company time to develop leadership, strengthen financial performance, reduce dependence on the owner, evaluate tax considerations and determine whether the proposed transition can actually work.

A succession plan can change over time. Having one simply gives the owner a place to start.

HCJ CPAs & Advisors works with construction companies and their owners on strategic tax planning, financial matters and wealth management considerations that can become important when planning for the future of both the business and the individual.