“The average age of the current owners of electrical contracting firms is increasing, as the baby boomers who began these businesses are approaching retirement,” said Atul Dighe, principal and senior futurist at Social Technologies, Alexandria, Va.
It is estimated that the average contractor is 50 years old with 26 years in the industry, and 43 percent of family business founders expect to transfer leadership within the next five years.
What is the current state of succession planning in the industry? According to a study conducted by Mike Cohn, managing director of CFG Business Solutions LLC, Phoenix, most electrical contractors are not inclined to plan for the succession of their business.
In a survey of 402 electrical contractors, only 40 percent had made plans for retirement. Less than 25 percent said their advisers had suggested that they develop in-house talent to run the company’s future operations.
“There seems to be a mismatch between retirement intentions and plans; although 17 percent of current owners intend to retire within five years, 22 percent are uncertain how succession will occur,” Cohn said.
Why don’t the majority of electrical contractors plan for the succession of their business? Statistics from National Electrical Contractor Association’s (NECA) Management Education Institute demonstrate that even though 90 percent of all businesses in the United State are privately owned, less than one-third of the businesses succeed into the second generation.
The very nature of an electrical contracting business is very deadline- and project-oriented, forcing succession planning to drop down in priority.
“Maintaining the health of the business in the present sometimes means that contractors don’t have the time to focus on long-term strategies,” said Dighe.
It is only natural that people don’t want to contemplate the inevitable. Cohn’s study indicates that 40 percent of those who own an electrical contracting firm have specific plans for retirement or for replacing the senior leadership of the company.
“More than half of the contractors who have not decided how their leadership will be succeeded indicated that procrastination was the main cause,” Cohn said.
When an electrical contractor doesn’t plan for succession, the company is in jeopardy of failing or of being acquired when the existing leadership retires.
“If you don’t plan for succession, you are leaving long-term decisions to someone else and are abdicating control of the future,” said Dighe.
Such planning in a family business can be problematic because the next generation isn’t always interested in participating. And in larger, more diversely held companies there isn’t always someone being groomed to take over in five to 10 years.
What contractors are planning
Rosendin Electric Inc., San Jose, Calif., was founded in 1919 by Moses Rosendin and was subsequently operated by his two sons. The company became an ESOP organization in 1993 and the transaction with the Rosendin family was completed in 2000.
“The choice to become an ESOP was one chosen by the Rosendins,” said Tom Sorley, current president and CEO.
The decision to transfer ownership to the employees not only provided the family with tax benefits that helped them plan their personal retirements, but provided a great opportunity for company employees to gain an equity stake in a sound corporation.
The company’s succession plan is geared more toward development of talent within the company, rather than replacement.
“To avoid crises and ensure confidence in our customers and employees, each member of the Rosendin team trains others who may one day take their place,” Sorley said.
The next president of the company will emerge from a core group of people within the organization that have demonstrated leadership, communication skills and the required core competencies.
Sorley believes that a failure to plan for succession has an overall effect on the industry through a dilution of skill sets.
“Having many firms that fail through the lack of succession planning could lead to customer perception that electrical contractors on the whole are no longer able to provide the high-tech communication systems and infrastructure they need in the long term,” he said.
If there isn’t an opportunity for long-term advancement in the electrical contracting industry for the best and brightest, it will become even more difficult to attract and retain a qualified workforce for the future.
Founded in 1954, Singleton Electric Co. Inc., Gaithersburg, Md., is led by a second-generation family member. In addition, president Jack Singleton’s son, David, who is a college graduate, finished the first year of his electrical apprenticeship training and hopefully will be the third generation to run the company.
In the late 1970s, when Jack and his brother Tom succeeded their father, the family developed a buy-out plan that consisted of figuring out the company’s value at the time and deciding, with the help of lawyers and accountants, what would be needed to structure a sound plan that included financial and leadership positioning.
Without knowing yet whether David will want to one day run the company, Singleton has not actually developed a formal plan for his son’s succession.
“I don’t think that a lack of succession planning by individual contractors has an effect on the industry on the whole,” Singleton said.
Other contractors in the market will fill the gap left by firms that go out of business or get acquired, while construction will not be hindered.
Brothers Fred and John Sargent are the CEO and president, respectively, of Sargent Electric Co., Pittsburgh, Pa., founded in 1907. They took over leadership of the company in 1999, when John became president. Because leadership was so recently transferred, according to Fred, there is no formal succession plan in place.
“One thing is certain: it takes many years of training and grooming to prepare someone for a leadership role,” he said.
The company’s primary focus for the future is to develop a wide breadth of middle- and first-line management level talent, matching the right people with the appropriate jobs.
Sargent also believes that the lack of succession planning on the part of individual contractors would not have an effect on the long-term future of the industry.
“The electrical contracting industry is very easy to enter and easy to grow in a handful of years,” he said.
The biggest problem, according to Sargent, is educating and preparing people to take on the foreman’s role.
“The educational opportunities for filling the foreman’s role are virtually nonexistent, but they need a great deal of training to make the jump from craftsman to being able to supervise others, understanding contract law and running the operational aspects of a project.”
Implementing a succession plan
According to Cohn, the two major components to developing and implementing a succession plan are ownership and management. Succession planning needs to be started prior to retirement as part of an overall contingency plan. The first step is to decide who will own the business and the second is to decide who will run the business.
“Answering these two questions opens the process to deciding between being a company that builds and grows for the future and one that just performs work without looking beyond the next job,” Cohn said.
Addressing the ownership issues includes measuring the real value of the business, deciding what the owner needs for financial security and retirement, deciding the fairness issues between the inactive and active children, and providing for both.
Management issues tend to center around the management team’s competencies and whether the owner is taking the time and making the investment in developing the company’s future leadership.
“This means the owner must be willing to develop competent leaders to take over the business, leave ego out of equation, and think strategically about the health of the business,” Cohn said.
He advises to take advantage of the expertise of a CPA, attorney and outside consultant to facilitate the process and ensure that progress is being made.
According to Singleton, the factors to consider when developing a succession plan include valuing the company and deciding the leadership and management roles of the family members succeeding the current generation.
“Obviously, if you don’t have a continuation plan and the owner wants to retire, the company is put into chaos and will either fail or be sold,” he said.
For Sargent, major succession-plan factors include estate planning, developing talented people with the appropriate skills for future leadership roles, and having an alternate plan.
“You have to face the fact that half your time has to be devoted to the people aspect of running the business, matching the right people with the right talents for the right job, and keeping their career path in mind,” Sargent said.
With its emphasis on development, training is a key factor to the future of Rosendin Electric. The company’s management team works with a group of dedicated employees focused on knowledge management to deliver educational programs that will enhance each individual’s future, as well as the company’s influence on the markets and customers it serves.
“This will be our best source of future leaders to ensure the viable long-term continuity of the organization,” Sorley said. EC
BREMER, a freelance writer based in Solomons, Md., contributes frequently to ELECTRICAL CONTRACTOR. She can be reached at 410.394.6966 or email@example.com.