If you own an electrical contracting firm, the odds are, you haven’t created a succession plan. Consider this: You have invested years in building a successful business. Your intent is to hand the reins of the business to others while you ease into retirement. However, lacking a formal plan, you may discover that the light at the end of the tunnel is a locomotive. Statistics provided by the NECA Management Education Institute indicate that 90 percent of American business is privately owned, and that the life expectancy of a successful business is 24 years. More than 50 percent of these business owners have multiple offspring. However, less than one-third of family businesses succeed into the second generation. Not surprisingly, most roadblocks to planning are psychological, not physical or economic. Owners fear change. The possibility of turning over the business to others places the issue of their own mortality on the table. Those who have grown businesses from scratch suffer the same trepidation as a father giving away a bride. Nonetheless, considering the options, successful planning may be vital to the continuance and maintenance of your business in its current form. Why plan? One product of succession planning is the orderly transfer of the business, and avoidance of legal and financial snarls. A second is continuance of your direction and leadership during the transition, and retention of key managers. The process offers managers a transition period, during which they have an opportunity to begin calling the shots with assistance from a mentor. Existing employees are relieved of the uncertainty associated with an unforeseen event. Suppliers, bankers, bonding companies, and clients are less reactive. Plus, determining a purchase price in a stable environment is less harrowing than in a crisis. Doug Wheeler of Wheeler Electric, Idaho Falls, Idaho, described the situation when his father was injured and unable to conduct the day-to-day affairs of the business. “Dad had an accident at age 63, while still owning the majority of the stock. Fortunately, we had a plan in place and my brother and I were able to execute a stock purchase plan and assume management of the company,” continuing a thriving enterprise. Meanwhile, dad and mom suffered no loss of income. Our findings With this as background, we attempted to determine how contractors are facing this challenge, and found several owners in various stages of succession planning. Their firms employed 25 to 600 employees, with sales of $5 to $70 million. Firms were 25 to 85 years old. At one end of the spectrum are owners wallowing in a sea of indecision that has prevented establishment of a plan. At the other is the chairman of the board of a company in its third generation of successors. In between are plans that have been established and failed, and those still undergoing fine-tuning. At age 65, Marty Kilfeather has “no time” for planning, which he agreed translated to “no urgency.” His firm, Eastern Electrical, Inc., in Chantilly, Va., employs 100 people, including two sons who are now vice presidents. A minority stockholder who has been a partner for 12 years would execute a buy-sell agreement in the event of Kilfeather’s death. Kilfeather attributes the lack of planning to the fact that, “It is easier to procrastinate. I am not ready to face the situation. I am in good health, active in the business,” and not certain he’s ready to give up control. What about his two sons’ future? A will ensures that family distribution will not be a problem, but will the business survive? Will his sons want to continue working for his partner? He said he doesn’t know. Ed Sedita’s experiences are the opposite of Kilfeather’s. “I’ve had two plans that failed and am faced with the possibility that one of these days I’ll just shut down and walk away.” At 63, Sedita’s firm, Leed Electric, Inc., in Norwalk, Calif., is 21 years old and has 25 full-time employees. His first succession plan was established in 1990, six years prior to a partner’s anticipated retirement. The newcomer, according to Sedita, “was not in the electrical business, but was a successful project manager for a general contractor. He stayed four years and left for more money now [rather than equity in the future].” The second plan brought a son-in-law into the business. “That plan lasted six months. Either he didn’t like the business, or was the wrong guy.” Sedita has a pension to fall back on, plus ownership in the company’s property, but had hoped to phase out of the business gradually before reaching age 65. “It’s not my first choice, but a sale is always an option.” More successful were two plans that met the objectives of Mr. Owner and his brother. Twelve years after the duo took over the business, Mr. Owner’s three sons were in the business, but Mr. Brother had no interest in being partners with the trio. When the firm’s attorneys and accountants were unable to produce a successor plan, a consultant was hired. The result was a purchase plan funded with insurance. When Mr. Brother unexpectedly died four years later, insurance proceeds helped the corporation purchase his stock. “That wasn’t the best way to handle the transaction,” Mr. Owner said, because his sons held no ownership interest. A second plan was established in 1996. Under its terms, gifts of stock and performance bonuses produced partial transfers of the business to the sons. Other children will receive equal inheritances from other assets. Mr. Owner then hired a total quality management (TQM) facilitator to produce an internal analysis of the firm. That effort resulted in development of management teams and an executive committee that produced a mission statement, corporate vision, and long-range goals. “The business has improved, but I’m gonna stay to see it through. The company has to grow enough that the three boys can stay out of each other’s way,” Mr. Owner said. Three years after taking the reins of D.L. Smith Electric in Kansas City, 33-year-old Shawn Smith is living up to expectations to fill his father D. L. Smith’s shoes. Serious planning began in 1994 with D.L., Shawn, and brother Steve, who later chose to leave the company. The agreed-upon plan was developed by the firm’s CPA and attorney, and provides that Shawn will purchase company stock with bonuses. Insurance and annuity contracts fund a deferred compensation plan established for D. L. The end result is a plan that eliminates the possibility that Shawn will work for siblings. Though satisfied with the arrangement, Shawn suggests that “an impartial third party might help in these types of negotiations.” “A consideration in going into business with Dad is that I know he wants to be treated fairly. His perspective may be different than mine. And, I need to be respectful, because he’s still Dad,” Shawn said. When it comes to valuing the company, Shawn advised, “Plan for inflation. Run different ‘what if?’ scenarios [through your mind] that would affect purchase price. We tended to consider the worst-case scenario and the minimum amount Dad will receive. I’d suggest you also envision the best-case scenario and how that affects the price. “I am very pleased with the way the entire plan has been developed and executed. D.L. has stressed that we built this business with the people around us, and that it’s important that we keep the same values. Our customers see that, too.” D.L. gave his perspective. “My options were to retire, transfer the business, or sell. I was motivated by horror stories about death, taxation, and liquidation.” He described his approach as follows. “I went to the Meninger Foundation Institute for family-owned businesses. They produced a report that told me how everyone feels, and what they’d do or expect if D. L. was gone. We then made the employees part of the transition effort and got their input. Found out what stressed people out. I want our employees to be part of our future and part of our decision making. My current role is letting go, and I’ve had to learn to delegate. That was difficult, because my inclination is to micro-manage.” At the other end of the spectrum, Don Gardner is chairman of a 600-employee firm that installed a succession plan in 1973. He became president in 1986 of Hooper Corporation in Madison, Wis., and retired to the chairmanship in April 2000. His former role is now filled by one of 16 shareholder/managers. “None of the stockholders are family members, since the firm has a conscious policy averse to nepotism, though it is not averse to hiring talented family members,” Gardner said. The succession plan includes a buy-sell agreement that establishes the purchase price, and an incentive compensation plan. “The bonus plan includes cash plus stock until a specific cash compensation level is reached, at which point the balance of the bonus is paid in stock. “The president usually is the largest stockholder, though no individual can own more than 25 percent of the stock.” He added, “Stock value is based on book value, rather than market value. I would favor a change that would set in motion a culture to review that more frequently. Just because we’ve been doing it that way for two decades doesn’t mean it’s not worthy of more frequent review.” The plan is so flexible that it was copied by a firm 1/12 its size. Gardner’s admonition is this: “The founder must back off and look at the company in a sharing fashion. Get people motivated by profits. Don’t be afraid to overpay good people if they’re worth it. Use stock as a recruiting tool.” Two days after our conversation, Sedita offered a final thought. “Start planning at an early age before you get conservative, rather than waiting to age 65 when you might be more risk averse.” Then, with good planning, that light at the other end of the tunnel may be a ray of sunshine, instead of a locomotive. LAWRENCE is a freelance writer based in Bozeman, Mont. He can be reached at [email protected].