Every business has a business owner, and every business owner has a different path to their success. Leaving a lasting legacy is a highly valued goal of each business owner, and succession is how that will be accomplished.
Succession planning is essential for maximizing the value of the company and the amount of wealth that owners can pass on their heirs. It will also give the owner a thoughtful and organized way to cash out of the business when the time is right. With the right guidance it can provide powerful benefits for business owners and their families, as well as the next generation of leaders within the business.
Based on the “New Industry Study Says Firms Must Begin Management Succession Planning Early” by Jake Appleman and Scott Duncan and 2017 FMI Survey take a look at the information below.
Succession Planning as a Whole
Succession planning provides guidance on how the company will continue to operate after the current owners/leaders relinquish control of the business. It helps create and implement an exit plan that prepares owners/leaders to exit the company with adequate financial resources for retirement, including thinking about the tax impacts of transitioning the business and the estate, when the time comes. And lastly, it provides current owners opportunities to direct how the future of the company might look after a transition to the next generation of owners/leaders.
Why Might a Business Owner Pass Down Their Heirloom
Every business owner will eventually have to come to the realization that they need to pass down their legacy. Some owners might pass on earlier than others, but some of the reasons are as follows:
- Owner is contemplating retirement
- Next generation of leadership is ready for increased responsibility
- Sudden events (death, accident, disability)
- Acquisition or merger
- Rapid company growth
- Unexpected buyer at the right price
- Adding or losing key members of the management team – baby boomers continue to retire in large sums
Types of Transition Strategies
There are many ways business owners can choose to pass on their heirloom – some more traditional than others.
- Transition to family – business stays intact and family maintains controlling ownership influence; ownership can be sold over time to appropriate parties.
- Asset sale /stock sale / liquidation – particularly effective for contractors as it relates to the sale of heavy equipment, real estate, etc.
- Employee stock ownership plan (ESOP) – provides employees opportunity to participate in ownership of the company, buying in over a period of time, which helps to alleviate the potential financial burden of an asset or equity sale.
- Third party management / absentee owner – the current owner(s) wish to retain the benefits of the company as an investor only. They remove themselves from day-to-day management responsibilities.
- Selling to management – key management is offered shares in the company and business stays intact.
Succession Planning Key Facts
Most people would expect that a large majority of business ownership transitions stay within the family, but in fact only 51% actually do, although 82% of contractors would prefer to transfer or sell ownership to their family.
Studies have shown that firms with clear visions and strategies for the future are more likely to have a formal ownership transfer and succession management plan in place. In order for succession in the industry to be achieved, it will require embracing nontraditional means of development and cultural shifts. However, research has shown that only 22% of contractors have a formal plan in place for transitioning themselves out of their business, while 53% of successors will be ready for the leadership roles within three to five years.
There are many reasons for the lack of success planning that is happening in the construction industry. Business owners don’t want to relinquish control of their business or are reluctant to step down from what they have built. They know that it is a long-term process and may not see immediate benefit or simply, the successor is not ready to take over the business.
This type of thought surrounding the topic is natural, but also why it is crucial to have a succession plan. These types of plans need to be set in place early on which will help with a smooth transition of passing on the business, because unexpected events happen and circumstances can change quickly.
If you have any questions regarding succession planning, please contact us at teamdkb.com and a DKB member will be happy to help.