An Introduction to Succession Planning
Follow these steps to ensure your company thrives during ownership transitions.

Succession planning, like estate planning, is an important yet often overlooked or delayed topic of discussion. People do not want to talk about their incapacitation, retirement or death. To talk about your successor means you have to relinquish control, plan for a sale of a business you have overseen and inherently trust another with one of your most valuable assets. However, construction business owners who have dealt with ownership transitions recognize that succession planning is wisely invested time. Strong management succession will increase the value of your business and provide other important benefits.

Building Value

In most other areas of the business, formal processes and plans are followed to reduce cost and uncertainties and to build value. For example, working leads, recruiting talent and tracking job costs are all step-by-step processes within your business. Succession planning also should be a step-by-step process to mitigate risk and build value.

The first step of the process is to identify key decision makers and succession planning goals and objectives. You’ll need to gather the following information:

  • Who are the current owners?
  • Which top management will be involved in the 
succession planning?
  • Who are the outside advisers to consult?
  • What is the transition timeline?
  • What do you want your legacy and the company’s legacy to be?

Different owners may have different exit goals or timelines. Common topics of discussion usually include items such as future financial security, financial stability for dependents, maintaining family ownership and treating children equitably.

Management may have expectations of future ownership or different roles within the company. Will continuity among advisers provide stability during the transition process, or is it time to seek other counsel that aligns with the vision of the new ownership group? These questions are not easily answered, nor is there a common right 
answer. Every organization and succession plan is different and should be handled accordingly.

Communicating Objectives

The next step—communicating objectives with key members of the organization—is vital.

  • Will management be on board with the goals of the succession plan?
  • Are family members on board with changes of control among generations?

A misstep in communication could cause costly disruptions such as power struggles between key employees or family members and stress for external players, including suppliers, customers, lenders and advisers. If the succession plan includes transfer to a third party buyer, how do you keep key stakeholders incentivized throughout the entire transition?

Groom a Successor

Once you and your team have discussed and agreed upon the goals, you must choose and groom a successor. This is an important part of the succession plan because the successor is the one who is able to utilize the owner’s 
intangible assets. The owner has knowledge, skills and 
relationships that other employees may not possess.

The succession plan reduces the business’ reliance on the owner by transferring knowledge to potential successors. In doing so, the planning ensures that a competent and valuable leader is available at all times.

When evaluating potential successors, you must identify and quantify the right qualities for each position. Evaluate both hard and soft skills as well as behavior. A successor’s behavior, such as natural leadership and ability to work with others, plays an important role in selecting a successor.

Another important quality is the successor’s desire. Even though the employer may have big, bright plans for an employee, the chosen successor may not have those same aspirations.

Employers should determine what motivates the successors and work to help them achieve their own career ambitions. Adequate training and development, necessary leadership experience and quality mentorship will help them achieve these ambitions.

Transfer Ownership

The next and most complex step in the succession process is to decide how to transfer ownership. Contributing to the complexity of the process are the multitude of ways ownership can be transferred. The options include, but are not limited to, gifting stock, Section 303 stock redemptions, buy/sell agreements, employee stock ownership plans (ESOPs) and stock recapitalization.

Gifting stock is an effective way to pass stock to successor individuals and, in turn, reduce the estate of the original stock owner. While gifting stock can seem self-explanatory, you must take into account many considerations, including the annual gift exclusion, future appreciation of the stock and voting versus non-voting stock.

An alternative to gifting is a stock redemption. To qualify for a Section 303 stock redemption, the deceased must have corporate stock that makes up 35 percent or more of their adjusted gross estate. This is a good option for families for which a corporation constitutes the majority of the family’s wealth. Under this code section, a corporation may redeem its stock from the estate on a tax-favored basis in an amount equal to the decedent’s estate taxes and administrative expenses.

In many instances, the redemption may be part of a buy/sell agreement. Buy/sell agreements are also an effective method to transfer ownership. With a buy/sell agreement, the price of the stock is based on a predetermined valuation. With this approach, the agreed stock price is an important component and should be reviewed annually.

An ESOP is another succession planning opportunity that requires annual valuations. An ESOP allows owners to sell up to 100 percent of their stock to a defined benefit plan that is owned by its own employees. The employees of the business become shareholders in the company.

Another choice is stock recapitalization. Both common and preferred stock can be recapitalized, but the benefits of each option vary. Common stock recapitalization enables a shift in voting power to successors who will operate the company.

Preferred stock recapitalization can shift future increases in corporate value to those who own common stock and freeze the value of the estate of a principal stockholder, so the subsequent increases in value go to the common stock held by their heirs. This option provides a lot of flexibility for estate planning.

Estate Planning

Estate planning is the last step in the succession process. However, this step should be considered throughout the planning process.

  • What do I want to leave to my family?
  • Do I have the financial capacity to retire?
  • What are the tax consequences of my succession plan and beyond?

As you can see with the transfer of ownership options mentioned, estate planning is an integral part of each 
option. Owners need to consider all of the alternatives when reaching their estate planning goals.