While embraced by Fortune 500 companies, succession planning isn’t often front and center for private and smaller firms. It can be even rarer in the construction trades as daily operations often overtake time for business development. Succession is more than deciding who takes over when someone, particularly an owner, steps down. Plans need to be strategic, formal and ultimately lead to company growth. Within those efforts are intricate tasks such as grooming talent, creating a path for promotion and properly valuating the company both financially and in the marketplace.


Kevin Kennedy, founder and CEO of Beacon Exit Planning, formed the company based on his own experiences with succession and exit planning. He found himself moving up into executive roles, eventually earning owner status. Upon deciding to leave the company, he needed to create a successful exit strategy so the firm was left in good hands. Kennedy and other partners put practices in place that helped prepare five managers to take over.


“So, you have this dynamic business,” Kennedy said. “You pay employees, pay for your materials and overhead, [plus] other costs of doing business. You may dole out bonuses, use profit to reinvest in your business, even pay yourself a bonus. Money put back into your business is to build [the business]. To do that, you need to be at a sustainable place of reccurring revenue and profits. Few construction companies have that as they are cyclical. It’s hard to ride this cycle out.”


Periods of economic stability tend to be the best time to think about a succession plan. Kennedy and others regard succession and exit planning as linked, but the latter always comes first. Under this scenario, owners need to determine the percentage of their wealth that is trapped inside the business. Attorneys, bankers, certified public accountants (CPAs) and other advisers can help.


“Say your complete wealth is $1 million or more,” Kennedy said. “You determine 70 percent is trapped. To capture that wealth, you might sell the business to your manager, the employees as a whole or a stranger. Each choice has a different valuation and a different tax implication, both positive and negative. With no exit or succession planning, an owner who passes away may leave the company facing a possible devaluation, usually 10 percent of value.”


Knowing where you want go


Dave O’Brien is a director of construction industry services for Weber O’Brien Ltd., based in Sylvania, Ohio. The 30-year-old accounting firm has served homebuilders, developers, subcontractors and general contractors under its Construction Industry Group (CIG). 


“When it comes to succession planning, there are different ideas on how to approach it,” O’Brien said. “We sit down to discover a company’s business model. What are they doing to be successful? Where are they challenged? When we consult, we always ask the owner, ‘Who is going to follow you?’ This question introduces the idea to create a succession plan.”


When O’Brien sits down with an owner, his goal is to gather enough information to clearly define the firm as it currently stands and understand what an exit and succession plan will need to succeed.


“We ask owners, ‘What are your goals?’” O’Brien said. “Would you sell your firm but stay on for a transitional period? Would you leave immediately? Would you transfer management but still own the business? Transfer to a family member? Sell to an outside company? Once they identify how they want to exit, they then can move to the succession plan.”


Top down and all around


The ultimate goal in succession planning is to maintain a healthy, growing company so it lives on as others step in to run the business.


Rob Buckley, business coach for Nexstar Network, St. Paul, Minn., recognizes that, while exit planning often drives succession planning, internal succession is important in its own right. Nexstar is a membership-driven business consulting firm serving residential service contractors.


“Employees may rightfully ask where they sit in the company,” Buckley said. “Maybe an electrician would like to be manager at some point. Maybe that manager would like to assume a senior management position [or] be next in line as CEO. A succession plan can articulate for staff how they can move up in the company. It’s also a good management tool for the owner. One thing we don’t want to see is a business firing on all cylinders and an electrician doing great work with no direction on how to move up. All your employees are valuable assets. They make your company. So how do you value them? How do you evaluate?”


Buckley suggested that a good organizational chart can give employees an idea where they fit today and where they can go tomorrow. It can also reveal gaps in the organization. He stressed the need for a well-considered internal training program where tomorrow’s leaders can emerge.


“Do not start succession planning because of a life event. Do all the hard work now so your plans are there when you need them.”
—Dave O’Brien, Weber O’Brien Ltd.

“A succession plan should include a solid training program, one that gives employees the guidance and needed intelligence required for a new role they may assume,” Buckley said.


A training program can also remedy “brain drain.”


“When long-term or key employees leave, you want a documented process to fill that knowledge back into the company,” he said. “While succession planning can start conceptually, it has to be worked through and committed to paper.”


Buckley has found that succession planning can be a good place to revisit or create a company vision and mission statement. Incorporating a company’s culture in succession plans ultimately serves as a guiding light for subsequent owners and a vetting agent if considering a company sale to an outside firm.


The importance of trust


It can be hard for owners to leave a company that they built, especially if it grew beyond what anyone expected.


“A succession plan succeeds when the CEO is committed to his or her exit,” O’Brien said. “Owners need to feel confident they are leaving their company in good hands, whether it’s an internal management staff they helped groom, family members they mentored or an outside firm they researched and found alignment in vision, culture and future of the company. Trust the team around you. If you give your team responsibility but not the authority to act, you will have a problem. In turn, this includes the management of those that report to them. You need to make it clear if they want the authority, they must take the responsibility to work out problems within their team and peers. They have to be their own ‘fix-it men,’ not you.”


Succession planning can also engender a positive culture shift. For an owner, it should never be seen as a threat. In fact, it should be considered and developed long before retirement. It does require an owner to get out of their own way and leave their ego at the door.


“Do not start succession planning because of a life event,” O’Brien said. “Start to think about your eventual exit of the company and make sure to have a succession plan in place before you reach retirement. Do all the hard work now so your plans are there when you need them. This is a business decision so your company can grow and flourish in your absence.”


Succession planning is an ongoing process, and it is an important one if the owner wants to cultivate the company.


“This is a company document showing how the company is going forward,” Buckley said. “An owner should consider it part of the day-to-day operation of their company, not think of succession purely in terms for who will take over after I retire.”


According to Kennedy, the plan focuses on how owners get their companies to the next level.


“When I was looking at possibly being an owner through succession, we had to think of our company as a team,” Kennedy said. “We sat down and took a hard look at ourselves. Where were we falling short? How could we eliminate errors and get the company operating more nimbly? We had to constantly measure ourselves.”


Continuous succession planning


Such review and action is often called continuous succession planning. Current owners use this to look for emerging leaders. Kennedy said a so-called “360 survey” is a good tool to discover leaders at all levels of the company. Sometimes this is called a “growth review.”


“A ‘360’ is usually a paper survey anonymously submitted,” Kennedy said. “It will show you how your peers look at you as well as those that report to you. The survey usually looks at four or five behaviors. The surveys are followed by confidential meetings with your boss sharing results as to how you appear within the company, where it appears you need to grow, maybe improve.”


For Kennedy, such surveys are part of building a “championship” attitude that creates mutual respect, fosters great teachers and establishes a winning culture for success.


O’Brien said the results of anonymous performance surveys should be shared with all participants.


“Succession planning takes time,” Kennedy said. “It is all about training and retraining. You are developing talent. If people see opportunity, they see the company as part of their future. You may be creating a culture change and that can take a number of years to establish, maybe seven to eight in some cases. It depends where you are starting.”


“Set a 12–18 month process and be patient,” O’Brien said. “There are many variables that will arise in the planning process that no one anticipates. You need to have time to tackle each issue.” 


He suggests engaging trusted advisers to help complete a succession plan. Don’t go it alone.