Click here to print: Developing a Proactive Business Succession Plan

by Jason G. Dykstra

(as published in the Idaho Business Review, February 2011)

Those who plan do better than those who do not plan even though they rarely stick to their plan.

- - Winston Churchill.

Particularly in a volatile business climate, the owners of many closely-held construction businesses often find their time monopolized by addressing the crisis of the moment, whether rushing to finish a current project on time or bidding on the next project. 

Such “management by crisis” is often critical to the continued success of a business.  Nonetheless, it is just as important to occasionally take a deep breath and gaze out the window or the windshield and think about the future, for both you and your business.  Decide where you would like to see yourself and your business in both the relative short term and in the decades that lie ahead.  Set some goals and objectives that can become the cornerstone of a business succession plan.  From these goals and ideas you can begin to develop a planned exit strategy from your business.  

Sooner or later, everyone wants to retire.  For business owners, what will happen to their business when they retire presents the paramount issue for business succession planning.  This takes more than just an estate plan.  In the United States, less than half of all small businesses survive to a second generation of ownership.  In the construction industry, the statistics are even lower.  Crafting and implementing a well-considered business succession plan can help ensure a smooth transition of your business into the future. 

The process of creating a business succession plan can provide a great opportunity to reflect on what has made your business a success and to consider how to address the challenges faced by your business.  Moreover, implementing your plan can give you the peace of mind of knowing that while there will be challenges; your business is prepared to transition into the future.   

Ideally, your plan should facilitate a smooth transition between your ownership to the future owners and managers of your business.  This might seem pretty straightforward.  A business succession plan could entail your children taking over the business, a core group of key employees buying the business, or selling the business to a third party.  But even a seemingly straightforward plan can quickly prove challenging and complex. 

First, you must seek to insure the security of your own financial future as part of your plan.  Many business owners’ single largest investment is their business.  Therefore, a business succession plan should seek to minimize post-transition financial risks to the former owner of the business.  For example, an owner would not want to retire and subsequently learn that the new owners cannot make their promised payments under the buy-sell agreement for the purchase of the business.   

Next, a business succession plan may need to address the future management and ownership of the business, which can involve minimizing the potential for future family discord and minimizing the taxable consequences of the business transition.  Accountants and attorneys can provide invaluable advice on how to best value and structure the transition.  For transfers to family members there are many strategies that can minimize the taxes related to the transfer of the ownership of a business.  For sales to key employees, an Employee Stock Ownership Plan (“ESOP”) can provide a business owner with a good way to sell all or a portion of a business.