Planning for exit, transition, succession, retirement, or whatever we call it, cannot start too early as the whole process needs to be very carefully planned and managed – time provides a much better outcome
Succession planning for your exit – By James MacQueen
We are currently in the longest upward cycle in the construction sector in our lifetimes. As a consequence, it is too easy to focus on making the most of the growth opportunities and battling the challenges which have come with growth, rather than doing some serious long-term personal planning.
Now, while business conditions are relatively strong, is the time that both planning and actions should be being taken by the remaining baby boomers and
others who are getting close to or should be contemplating retirement and exit from their building industry business.
The end of previous cycles and the global financial crisis in particular showed that achieving an exit from your business during a downturn is a lot more challenging and the amount that could be obtained for the business is significantly less.
So when do you start? The answer is now. Planning for exit, transition, succession, retirement, or whatever we call it, cannot start too early as the whole process needs to be very carefully planned and managed. Time provides a much better outcome.
Doing nothing is the least logical, the most costly, the most destructive of all the options, yet is by far the most popular.
What are the options?
The options in the construction industry are frequently more limited or more complex than in other industries. There are few construction-related businesses that are sold to an investor who does not have the technical knowledge specific to that business, so this severely limits the number of external purchasers that may be suitable.
Further, the personal skills and reputation of the owner are usually critical in the company gaining contracts and work, and the departure of the owner can rapidly erode both the value of the business and its future potential.
These challenges can be overcome, but emphasise the need for both careful planning and to start the process early.
Is there an individual or individuals in the management team or family that may be able to carry the business forward and, with plenty of planning and assistance, purchase the business to let you get your money out? If both of these draw a blank, is there a competing business or an employee there that already has a good reputation that would be interested in purchasing your business due to the skills and relationships within it?
Transition and sale within the management team
This is frequently the best option, but planning and time are critical. Your employees are unlikely to have the funds required to buy you out and finance the ongoing business. It will need a period of very carefully managed transition to both build their skills and reputation in the market, and to extract your funds out of the business and create a separate retirement fund. Financially, this can be a very beneficial option.
Research confirms that a succession plan with the existing team is usually more successful than an outright sale because of the parties’ commitments and investment in time and effort in each other to successfully transition skills and relationships to the new team. The new team have the benefit of access to the experience and wisdom of the retiring owner for a more extended period.
Appointing a professional manager
Sometimes a highly talented professional manager is recruited to bridge the transition and skill development between the owner retiring and family members or less experienced management staff taking full control and ownership. Having the right skills in place at all times greatly improves the chance of long-term success.
This is still only an interim step as you will either want to extract your money or, once you have gone, your family may prefer to extract their inheritance by selling the business.
Sell, in whole or in part
Where extracting the cash is more important than transitioning trusted family or staff, it is possible that more immediate cash is obtained from the outright sale of a business. This is most likely to be a trade sale to either a partial competitor or a corporate employee looking to own their own business.
Sometimes it may be a mixture of a management buyout of some existing staff plus a financially secure cornerstone investor with a desire to work in the business. For some businesses there will simply be no one prepared to take the risk and purchase the business.
No matter who you sell to, the best way to extract maximum value is to develop the people around you so that you can effectively make yourself redundant so that the value attaches to the business in its own right, rather than to your personal reputation within the business.
Once the vision for your plan is established, items on your checklist for managing the process will include:
- • Start planning early
- • Encourage inter-generational teamwork
- • Develop a written succession plan and a written business plan
- • Involve both family, staff and colleagues
- • Take advantage of outside help
- • Establish a training process
- • Plan for your retirement – what are you going to do?
- • Make retirement timely and unequivocal.
There are a lot of behind-the-scenes stages to the process, including developing a plan and process specific to your situation, and communicating and negotiating it. This is followed by a share or business valuation, legal agreements, a shareholder agreement and more.
Tax issues also need to be carefully planned and managed to maximise tax efficiency. An advisor with significant experience in these areas will make a big difference in achieving a smooth and efficient transition that is successful for all parties.
We live in a time of continuous change, so viewing succession as a cloning process is likely to prove a costly mistake and it is not sufficient to just transfer a tried and tested system for running your business to the next generation or new owner.
All plans must focus on the future.
James MacQueen is an advisory partner and the national leader of construction and real estate for BDO New Zealand; the team have considerable experience in developing and implementing succession and exit plans in the construction sector bdo.co.nz