By Heather Parbst of CliftonLarsonAllen
Originally published July 28, 2023
Key insights
· Poorly executed owner transition can lead to delays, cost overruns, and quality issues, which can damage the reputation of the company and affect future business opportunities.
· Owner transition involves personal readiness, financial readiness, and business readiness—and preparation is the key to a successful transition.
· Strategies for successful owner transition include building an advisory team, decentralizing the owner from the business, identifying personal and financial goals, determining the value of the business, and working with advisors to build a detailed transition plan.
Running a construction business often requires owners to be in the midst of operations on a daily basis. Owners can play a critical role in the construction process, from planning to project completion. This leaves little time for forward thinking regarding how or when to leave the company you’ve built.
Because owners have spent their lives focused on growing their business, not leaving their business, they may find themselves on the precipice of a transition unsure of how to prepare themselves—or their business—for what comes next.
Why is owner transition important in the construction industry?
Owners are the driving force behind construction projects. Often, they initiate projects, provide funding, make critical decisions, and oversee project delivery. Therefore, when an owner changes, the entire project delivery process is affected.
Owner transition can lead to delays, cost overruns, and quality issues, which can have significant implications for all stakeholders involved in the project. That doesn’t touch on the personal stress and strain a poorly executed transition can have on the owner, as well as money being left on the table.
Owner transition can also present opportunities for growth and expansion in the construction industry. New owners may bring in new ideas, resources, and strategies that can improve project delivery and enhance the competitiveness of construction companies.
Challenges involved in owner transition
Consider a transition through three lenses: personal readiness, financial readiness, and business readiness. Owners will often jump past the first two and become focused on the logistics of the actual transition structure. This can be quite problematic.
Personal readiness evaluates whether the owner finds meaning and purpose after they step away from the business. Without it, owners could find themselves on the other side of a transition navigating regret and loss of identity.
Financially, owners need to know how the sale could impact their long-term financial goals. Sometimes the question is less about “What is my business worth?” and more about “What do I need my business to be worth to get the payout that can help me achieve my goals?”
And finally, the business itself needs to be ready for transition and, if pursuing an external sale, attractive to a buyer.
Owner transition within the construction industry can include additional complications.
Legal issues
Ownership of construction companies is subject to legal requirements and regulations during the transition process. Failure to comply can lead to legal disputes and financial losses.
Financial considerations
Owner transition can be a costly process that requires significant financial resources. The new owner may need to invest in new equipment, technology, and personnel to enhance project delivery.
Cultural differences
The new owner may have a different organizational culture and management style that could conflict with the existing culture and style of the company. This can lead to resistance to change and affect the morale of employees.
Project disruption
Owner transition can disrupt ongoing projects — leading to delays, cost overruns, and quality issues. This can damage the reputation of the company and affect future business opportunities.
Strategies for successful owner transition
Preparation is the key to a successful transition. Begin actively preparing for the transition at least three to five years prior to the anticipated exit.
Build an advisory team
Your financial planner, tax advisor, business consultant, exit planning advisor, and attorney should all be engaged with the process. Make sure these individuals are available to collaborate.
Decentralize yourself from the business
The more the company is dependent on the owner to operate it, the less value it has to a strategic buyer and the harder it is for a successor to assume the reigns.
Involve stakeholders
Owner transition affects all stakeholders involved in the construction process—including employees, contractors, suppliers, and clients. Stakeholders should be involved in the transition process where and when appropriate to address their concerns and interests.
Identify your personal and financial goals early
Determine what’s most important to you. Continuing your legacy? Providing for your family? Or something else? This is your touchstone through the process and can help you choose the right path for transition.
Determine the value of your business
For many construction owners, the value of their business may lay solely in their assets. This is dependent on many factors. Develop an early understanding of what you would be selling in a transition and how much it is worth.
Prepare your leadership team
Make sure you have strong management that can successfully navigate change. The quality of leadership and culture play into what a strategic buyer will pay for your company.
Prepare your successor
Strong succession planning is key for an internal or external transition. Truly evaluate your successor’s skillsets, behavioral style, and personality. Make sure you’ve thought through a thorough knowledge transfer, and engage them in the process.
Don’t stop just at the owner’s successor. An aging workforce without adequate succession planning is a red flag for a buyer and creates challenges for new leadership. Plan for those transitions as well.
Work with your advisors
Build a detailed transition plan or roadmap and bring in necessary support to assist you and your team in executing that plan.
A business transition is often the biggest financial transaction of an owner’s life. With adequate planning, owners are more likely to achieve freedom, peace of mind, and a transition that truly is the celebration they have been working for.
Heather Parbst is Director of Ownership Transition Advisory for CLA. She partners with owners, leaders, and organizations to successfully navigate leadership transition, meet personal goals, grow value, and build strong leadership and culture. She can be reached at heather.parbst@claconnect.com or 407.244.9385.
The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, [investment] or tax advice or opinion provided by CliftonLarsonAllen LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader’s specific circumstances or needs, and may require consideration of nontax and other tax factors if any action is to be contemplated. The reader should contact his or her CliftonLarsonAllen LLP or other tax professional prior to taking any action based upon this information. CliftonLarsonAllen LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.