Succession Planning for Construction Companies: Propelling You to the Next Generation
July 19, 2016
As the saying goes, nothing lasts forever. And that probably goes for your construction company. Then again, with the right succession plan in place, you can do your part to ensure it continues down a path of success for at least another generation. From there, it will be your successor’s job to propel the business further into perpetuity.
So when should you begin planning your succession? Well, it’s never too early to start thinking about stepping down — even if you have no intention of doing so. Here are some key points to consider.
Drawing up your plans
If you want to be sure your business will continue successfully after you leave, you’ll need to draft a succession plan as meticulously as you carry out your building plans. Succession planning isn’t easy for a number of reasons.
Unlike estate planning, which is essentially determining the distribution of assets through wills and other tools, succession planning involves people — people in the family, people in the company and, potentially, people outside of either.
You must ask yourself who is best suited to run the business when you depart, and what ownership transfer plan will treat you and all your heirs fairly. This includes knowing when you want to retire and how much income you’ll need to do it.
Preparing your successor
Another critical component of a successful business transition is preparing the next generation to take over. If younger family members are interested in construction, let them work for you in real jobs with real expectations.
Teach them to build projects the way you want them built, and teach them to run your business the way you want it run. And, if they genuinely can’t cut it, give them a way out. Sometimes the best way to ensure a construction company’s longevity is to let someone outside the family run the company while your heirs stay involved in some other capacity.
You can further reduce the chance of friction if you include your family in the succession planning process. Help them understand your values and goals for the business and listen to their suggestions.
So how do you actually go about “changing the guard” at your company? The simplest way is to sell it, if family members can afford it and want to buy it. You can also transfer ownership by gifting it over time, but there are potential gift tax liabilities associated with this approach — and it won’t generate an income stream to carry you through retirement.
A trust may be a better alternative for transferring ownership without creating harsh tax obligations. One option is a grantor retained annuity trust (GRAT), which will provide you with income for a term of years and then distribute the remaining assets to your beneficiaries.
The transfer of assets into the GRAT is a taxable gift, but the annuity you receive reduces the value of the gift. However, a drawback is that, if you die before the end of the annuity period, the trust assets will be included in your estate, the tax advantages will be negated and your beneficiaries will receive nothing.
Whatever means you choose, put your succession plan in writing. Along with selecting a vehicle (or vehicles) to transfer your assets, state whether and how you’ll stay involved with the company after you leave. If you try to stay too involved, you may inadvertently inhibit your successors from succeeding. Then again, many former business owners stay on as consultants and are quite helpful.
Construction company owners are usually proficient in both the boardroom and on the job site. As such, you no doubt have a lot of knowledge to pass on to your successor. So be sure to put that person in the best position by taking a patient, thoughtful approach to your succession plan.
The Smith and Howard team can provide invaluable assistance regarding the income and estate tax impact of your approach. For more information about Smith and Howard’s construction service industry, please contact Sabre Linahan at 404-874-6244 or simply fill out our contact form below.
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