Is Your Construction Company Ready for Transition?Anchin AlertJune 2, 2021
Successfully transitioning a closely held construction business to the next generation while providing an exit strategy to the current owners is one of the most important and challenging tasks faced by ownership.
According to a recent survey of construction company owners conducted by the Construction Financial Management Association (“CFMA”) and FMI Corporation (“FMI”), more than 90% of respondents intend to transition the majority of their equity internally. However, only 50% of these respondents have a formal plan. Moreover, for many baby-boomer owners the time has arrived to implement their transition, but the survey indicates that more than two-thirds of them do not believe their identified successors will be ready to assume expanded leadership roles for another 3-5 years.
For an industry whose essence is planning and getting things done, why do construction companies struggle so with transition?
One reason for this is that a successful transition involves many factors including: future-proofing the firm’s financial, business and management systems and making sure its next-generation leadership team consists of the right people, with the right abilities, in the right roles, with the right set of incentives and expectations. It also requires that firm leaders navigate interpersonal dynamics and associated emotions, especially in family-owned companies. Firm leaders need to contemplate the long-term future of the firm and attempt to balance multiple, interconnected objectives. Firm owners often don’t know where to start or find that after beginning the process, it stalls, or what was developed previously needs to be reconsidered and revised in response to changing circumstances.
How has COVID-19 impacted transition planning?
Not surprisingly, COVID-19 has forced many companies to put transition planning on the back burner. This is understandable considering that companies are concentrating on current management challenges and are more focused on the short-term. However, the survey indicates that this delay is expected to only be temporary and has by no means reduced the importance of transition planning in owners’ minds.
While the financial aspects of transition are of obvious importance to transitioning owners, the importance of the other factors are frequently underestimated, and if left unaddressed, can become the ‘Achilles Heel’ in an otherwise sound transition plan. Such factors include:
Optimizing Operational and Financial Efficiencies to enhance earnings and improve cash flow - which is the ‘life blood’ that makes the transition possible. These are also the primary sources of transition funding and therefore are the main determinants of how much the company can afford to pay out to exiting owners as they transition.
Done right, this will enable the company to afford to buy out retiring owners at a reasonable price while leaving sufficient capital available for other needs, such as performance bonuses and other incentives for the next generation of leaders, and to offer them an attractive and affordable ‘buy in’ opportunity for the next generation.
Leadership Development starts with articulating and embedding a coherent set of values and culture to guide the firm’s strategy and to prepare, train and coach the next generation of firm leaders to think and behave in ways that will continue the company’s success.
Done right, this will enable the firm to replace the talents and skills of the retiring owners, such as rainmaking, firm-level management, and strategic thinking, and position the company for healthy profitability and sustainable growth.
Talent Retention and Incentive Compensation Plans create financial and other incentives that help the company to hold on to its key talent and to motivate these employees to preserve the company’s success.
Done right, these plans help ensure that the company retains its next-generation of firm leaders and continues to generate the profits and cash flow to fulfill whatever buy-out obligations the company makes to its retiring owners.
Anchin works with construction companies, throughout all phases of the lifecycle, to chart a path towards sustainable transition. Our deep financial expertise and practical experience enable us to help firms develop customized solutions that address their unique financial and strategic needs while being sensitive to the critical ‘soft’ factors of psychology, emotion, and interpersonal dynamics. We often can draw from our knowledge of relevant precedents, such as: how other similar firms have addressed similar transition-related challenges, and what has ‘worked’ and ‘not worked’ for them. The need for proper transition planning in the age of COVID-19 has never been more important.