Succession Planning Strategies for Long-Term Business Success

Part 2 of our 10-part series on Construction Accounting Pitfalls

For construction business owners, your company represents more than just a source of income—it's your life's work, your magnum opus. Whether you've been in business for decades or are just starting out, one truth remains constant: eventually, a transition of ownership will occur. As Will Clark, a tax director and succession planning expert at Brown Edwards, puts it, "You're going to die or you're not going to be around. Something's going to happen."

It's a blunt way of putting it, but it gets to the heart of why succession planning matters so much for construction companies. When done properly, succession planning ensures your business continues to thrive long after you've moved on, providing financial security for you and your loved ones while preserving the legacy you've built.

Why Succession Planning Matters in Construction

For most business owners in the construction industry, your company is likely one of your largest, if not your single largest, most valuable asset. Succession planning isn't just about determining who takes over when you retire—it's about maximizing the value of that asset while minimizing tax implications.

Beyond the financial aspects, succession planning addresses critical questions about your future: What will you do after exiting the business? How will you transfer wealth to the next generation? What happens to your employees, many of whom may feel like family?

As Clark emphasizes, "Business owners don't want to see their life's work wasted or transferred in a way that is out of their control." Without proper planning, years of hard work, financial investment, and emotional commitment could be undermined by circumstances beyond your control.

Understanding Your Exit Options

When it comes to transferring your construction business, several vehicles are available:

External sales involve selling to a third party, often another construction firm or a private equity group. These are typically structured as asset sales, allowing the purchaser to select which assets they want while limiting liability exposure.

Internal transfers pass ownership to your management team or family members. These often take the form of equity sales, where the purchaser acquires stock in the company, assuming both assets and liabilities.

Employee Stock Ownership Plans (ESOPs) transfer ownership to eligible employees of the business, a strategy that Brown Edwards has helped many clients implement successfully.

The least desirable option—and unfortunately the result of inadequate planning—is termination of the business, effectively liquidating assets. This approach fails to capture the true value of your company, offering nothing for goodwill, customer relationships, or your project backlog.

When to Start Planning

The consensus among experts is clear: it's never too early to begin succession planning. Even fundamental decisions like your business entity structure can have significant consequences for your eventual exit strategy.

For mature businesses, succession planning provides time to identify and address factors affecting valuation. "If the valuation comes back lower than you think it should be," Clark explains, "that's a great opportunity to sit with your CPA and management team to talk about why, and then discuss how to remediate that."

Even if you already have a buyer lined up, it's not too late to meaningfully affect the transaction. In one case, Brown Edwards helped a client save $45,000 by making relatively minor adjustments to their deal structure shortly before closing.

Building Your Succession Planning Team

A well-executed succession plan requires specialized expertise. Your CPA should be your first point of contact, particularly if they have an established relationship with your business and understand its history and operations.

Your team should also include:

• Your ownership group and key management personnel
• Your attorney
• Your investment advisor
• Potentially your banking contact and surety company representatives
• A business valuation specialist

A business valuation, while representing an upfront cost, provides an essential foundation for succession planning. An independent, third-party assessment helps clear away the emotional attachment that can cloud judgment about your company's worth. It also establishes a baseline from which to make improvements that enhance value before sale.

The Cost of Not Planning

When considering the expense of succession planning, it's important to weigh it against the potential costs of failing to plan. These costs extend beyond financial implications to include:

• Excessive tax burdens that could have been minimized
• Disruption to business operations
• Impact on employees and their livelihoods
• Stress and complication for your heirs and family members

"Failing to plan is planning to fail" may be a cliché, but it holds true. Every CPA and attorney can share horror stories about succession planning gone wrong—or absent altogether.

Taking the First Step

If you're unsure where to begin, start by having a conversation with your CPA. Be open about your concerns, budget constraints, and goals for both your business and personal future.

For those in management positions whose owners seem reluctant to address succession planning, consider leveraging your CPA's established relationship. Sometimes a trusted advisor can help broach difficult topics that might otherwise go unaddressed.

The construction industry is inherently complex, with numerous stakeholders and moving parts. A well-crafted succession plan acknowledges this complexity while creating a clear path forward that protects what you've built and ensures it continues to thrive.

Whether your goal is to maximize sale value, transition to family ownership, or reward long-term employees through an ESOP, the time to start planning is now. Your business legacy deserves nothing less.