How Family-Owned Construction Firms Can Plan for Succession

Dan Norris Headshot
Daniel J. Norris
Director, Corporate Department
May 1, 2005

The lettering on construction vehicles traveling New Hampshire roads bearing a family name or the “& Sons” insignia indicates to us that many New Hampshire building and construction companies are family businesses. To keep a family business strong through the management transitions associated with the business founder retiring, dying or other turbulent events, planning for the transition before the crises erupts is essential. Family business succession planning should have two main goals, preserving the economic health of the business and preserving (or strengthening) both the economic and social well-being of the family.

To get started with succession planning for a family business, there are a few things to do to begin to understand your alternatives and set your goals.

Set a Timetable for Succession. The business founder needs to evaluate how long it will be until he or she plans to retire and which family members have both the capability and the willingness to assume control of the business. Some of the family business owners I have come across do not believe they will ever retire, despite the advancing age of many of them. Others cannot retire fast enough and are just waiting for a son or daughter to be old enough to legally sign contracts so he or she can take over the reigns. Either one of these strategies, though, could be harmful to the future success of the business. The retirement goal of the founder of a family business needs to be sufficiently planned so that the retirement does not occur too early when the next generation might not be ready for the challenge, but it also cannot be too late such that the founder is seen to be “hanging on.” The timing of the succession must, of course, also take into account the financial position and goals of the founder. As is the case with any financial planning, early planning and implementation should result in greater flexibility. The founder’s personal and business financial advisors should assist with this stage of the planning process.

Define your Future Role in the Business. One of the key goals of any succession plan is to achieve an orderly transfer of ownership and management authority. Hasty or unexpected exits should be avoided; the succession should be gradual if that is possible. If you have planned early enough, the succession plan should guide the next generation through such turbulent events as the sudden illness or death of the founder. The succession might gradually occur over three to five years. During those years, the founder will gradually reduce the time spent at the business and transition important relationships with employees, customers and suppliers to those chosen to be the future leaders. By the end of the succession period, the founder will be retired and the business should continue without any hiccups in operations. (The founder may, of course, maintain a part-time or consulting position with the company so he or she will have some place to go when he returns from Florida in the spring.)

Talk to Other Business Owners. You can look around the room at meetings of local or state contractors, real estate associations or other small business groups and see many of your friends and colleagues who are facing similar issues. Discuss with your peers how they have addressed succession issues and share ideas and concerns about what has worked and what methods or techniques have failed.

Discuss Succession Issues with your Family. The next step is to evaluate the talents, strengths and weaknesses of the members of the next generation to determine who is available to participate in the business and who is most capable of assuming the various management functions. In some cases not all children will be equally talented, so the founder will have to anticipate not providing all children with the same ownership and management authority in the interest of the long-term success of the business.

Discuss Succession Issues with Key Employees. Some of your key employees are probably not family members, though their role in the success of the business now and after the succession may be important. You will want these employees to be confident that their future positions in the business are solid so they will not seek alternative employment out of fear they may lose their jobs as a result of the transition. These key employees should understand the components of your plan relevant to the business operations and have the assurance of knowing their concerns are heard and their services will continue to be valued by the successor owners and management.

Learn the Tax Implications Early. The succession plan will include advice and work from a number of professional disciplines. The plan will include a combination of financial, tax and estate planning advice, insurance consulting and products and corporate and business counsel and documentation. It all starts with financial and tax planning. The financial goals and tax planning will determine what specific succession planning devices are recommended and implemented.

Preserving the financial health of your family business and the economic and social well-being of your family are important goals for a business owner. Proper succession planning can help achieve these goals. If you have not previously implemented a succession plan or it has been a long time since you reviewed yours, get started so your plan is in place before you need it.