COMMON CENTS CONSTRUCTION

Minding Your Business: Succession Planning

By Bo Mocherniak

Succession planning is an important part of long-term planning for any business, but can be particularly important for family-owned businesses. Since so many companies in the construction industry are family-owned, the issues are particularly relevant.
Many business owners are just struggling through day by day and not thinking that far into the future unless there’s an urgent need. However, poor planning can have a significant financial impact: estate planning, tax minimization strategies, and wealth preservation are but a few of the reasons to start thinking about succession planning.
But the bigger issues might be much more human in nature, particularly where family members are involved. With roughly half of small- and medium-sized business owners in Canada planning to retire in the next 10 years—and 30 percent of those planning to transfer control in the next five—it’s clear that succession issues are at play. But for those who are planning to leave the business to one of their children, our research shows that only 60 per cent have identified exactly who that might be.

Sibling Rivalry
Clearly owners are concerned about whether potential successors have the personal drive and commitment—let alone the skills, training and education—to take on the challenge of successfully running the business. How do you deal with children that are not active in the business? Is the owner really ready to transfer control of the business? How do the founders ensure they have enough funds to live on? Do you need to hire professional management to run the business? These are all issues that need to be considered.
Naming a successor is just a first step. Less than half of family-owned businesses we’ve spoken to said there were mechanisms in place to address and minimize conflict through the rest of the family. Families can literally be torn apart from a lack of clarity on succession and wealth management, particularly when several siblings and spouses work in the business, while other siblings who have never worked in the business still expect to be included in a financial windfall when a parent retires. Emotions can run very high, so it’s best to be clear and up front about how family members outside the business will share in the profits.
The importance of tax planning is well known, and it is linked to valuation. There’s often a desire to keep the valuation of the business as low as possible to minimize taxes, but this isn’t always a good idea. Is a low valuation fair to children that are not in the business? There are other ways to pass the business to a successor in a more tax-efficient manner, such as through the use of a trust.

Letting Go
One of the biggest problems comes when owners are clear about wanting to retire or at least wind down their day-to-day involvement, but can’t seem to relinquish control. They may create confusion by only partially handing over the reins but ultimately undermining their successor by constantly stepping back in. A more formal succession plan can make the transition easier.
Finally, many construction companies—family-owned or not—have complex structures. There might be one entity for each major project, holding companies with real estate or multiple partners who each hope to include their children in the business. Succession planning can be a time for clearing up any governance and ownership issues that might arise from the untangling of multiple business entities. The founder and their partner may be able to work together, but the remaining partner may not want to work with children of the partner that is retiring.
Here are four suggestions to get you started when it’s time to talk succession:
Make sure the business has had an up-to-date valuation. This will serve you well in succession planning, but it also helps with the equalization review for children not working in the business
Don’t delay or wait until there’s a trigger event, like illness, divorce or death, to start succession planning. Family business must be prepared for a tragedy with the right succession plans, wills, and insurance policies. Consider having a business continuity plan in place.
When it comes to planning the transfer of responsibilities, draft a clear list of the key responsibilities and tasks required to run the company. Determine if the children have the skills necessary to run the business.
Meet with the family to discuss your intentions and determine what their long-term plans are.

With over 30 years experience with audit, acquisitions, divestitures and valuations, Bo Mocherniak, CA, CBV, provides services to both public and private companies in Canada and the United States. Bo is National Sector Leader for the Real Estate and Construction Group of Grant Thornton Canada, a member of the Grant Thornton International Real Estate Sector Group and past Chair of Grant Thornton LLP.  He can be reached at bo.mocherniak@ca.gt.com.