Business Building: Steps To Transition Your Company To The Next Generation
Words: George Hedley
George Hedley
As construction company founders and owners get older, they start thinking about slowing down or retiring, and getting out of the business. Business is stressful, demanding, risky, and takes a lot out of the owner with all the pressures and demands to keep things moving forward, dealing with people, trying to make customers happy, and running a profitable company. Their exit options include closing, selling, or transferring the company to their family. Over eighty percent of business owners prefer eventually transitioning their company to the next generation within their family.
Start the transition plan before it’s too late.
A good plan might take two to three years to put in place. Plus, aging owners don’t want the next generation to get frustrated waiting for idle promises which never seem to happen and therefore leave or move on to another company. Too often I see younger family members who aren’t willing to wait for their fathers or mothers decide to transfer company stock to them. The sooner ownership is transferred to the future leaders, the better off everyone will be as they then take on more responsibility for business growth, profits, innovation, and management.
What do you want to do with your company?
If you would like to someday transfer your company to your family members, answer these questions:
- Will you be willing to let go and trust others to take care of your company without your total or limited involvement?
- Are you ready to walk away from the day-to-day business activities and major decisions?
- When is the best time or right time to turn over ownership, leadership, and management to your next generation?
- Do you have enough money to stop getting a paycheck as the president of your company?
- Do family members want to accept the risks, responsibilities, and liabilities of owning the business?
- Is the best solution for you, your future, and your family to close, sell, or transition?
- Why haven’t you started the transition process already?
Step 1 - Draft your 5 Year business plan.
Once you have decided to transfer your company to your next generation, what will make the transition a success? Companies have a higher value when they are less dependent on the owner to manage the business. In order to build a valuable company, it needs some basic structure, systems and ingredients with a clear written business plan and 5 Year vision including:
- Growth targets
- Core values and principles
- Financial, profit and return on investment goals
- Organizational chart for growth
- Clear position descriptions with accountabilities and responsibilities
- Defined management team
- People enhancement programs
- Regular scheduled strategy and scorecard meetings
- Customer and project targets and goals
- Sales and marketing plan
- Investment targets and goals
To get a copy of ‘Valuable Sellable Business Workbook, email GH@HardhatBizcoach.com.
Step 2 - Determine what the owner wants.
Developing a winning transition plan starts with determining what the owner really wants and needs as a result of ownership transfer. The owner’s desires must be balanced with what’s fair and reasonable for the next generation and allow them to be successful.
Price?
- How much money does the owner want from the transfer?
- What’s the business really worth to an outside investor?
- How to pay for shares - stock transfer, loan or lump sum?
- Timing of transfer
Income?
- How much money does the owner need or want?
- Monthly, payments, terms, interest, duration, timing?
- Salary, benefits, perks and duration?
- Dividends, profit sharing, duration?
- Investments?
Former Owner’s Role?
- What will the former owner’s involvement be after the transition?
- Does or will the past owner work 100% or part time?
- Responsibilities, activities and hours?
Who Get Ownership?
- Who gets ownership, timing, and accepts liabilities?
- Transfer ownership to workers or family in or outside business?
- What % ownership for owners?
- What about spouses and children?
- Timing of succession or transition?
- What do the successors, children, or family want?
Compensation & Liabilities?
- Transfer of risks and liabilities to whom?
- Pay for work & profit for owners?
- Profit split for managers versus owners in or outside business?
- Compensation, benefits, perks and pay for owners?
- Tax consequences of transfer?
- Bank line of credit, guarantees, bonding, insurance, and licenses?
- Long term agreements – mortgages, leases, and equipment?
- Compensation, benefits & perks for key managers and employees?
- Define clear policies, rules, standards of performance, and policies for owners?
- Determine owner hours, accountabilities, and responsibilities?
Step 3 - Determine what’s best for the company’s future.
Who’s the best choice to be the new future leader? Should the company hire an outside President or transition to a family member? And which family member is best choice to run the company? And who wants to be the new leader? Do they have the desire, skills, experience, ability, and respect? Are they willing to take on added liability, risk, extra responsibility, workload, and the long hours?
Can the new leader manage key relationships including customers, subcontractors, employees, bankers, bonding, lawyers, and accountants? Will the new leader be able to handle the family dynamics? And how will important decisions be made, who are the decision makers, and who gets votes at what level?
Step 4 - Put the transition plan in writing.
Draft and prepare the needed documentation, contracts, and buy-sell agreements. Don’t forget to address what can go wrong and what happens if something goes wrong. Develop a contingency plan to address worst case scenarios like death, divorces, bad attitudes, financial hardships, etc.
Step 5 - Determine the leadership team during transition.
During the transition, leadership will eventually transfer to the new owners. Be sure to address and agree on timing, levels of authority, control, and decision making. Include transition of control, the proposed organizational chart and position descriptions, timetable for transition, and how you will communicate the transition plan to your employees and team. Open the books to the next generation, explain and train liability and financial management, and stop comingling owner’s money, expenses, and payments. And to make sure you don’t lose any of your valuable managers, address how you will reward and compensate them going forward.
Step 6 - Determine how you will regularly review the results.
Determine the factors you will review on a regular basis and develop scorecards to track actual results versus the plan. Include the following success factors in your monthly analysis:
- Financial performance and accounting system and practices.
- Dividends, distributions, profit sharing, and return on investments.
- CPA and annual audit policies.
- Compensation and benefits of owners.
- Develop plan for updates and regular owner meetings.
- Create an active Advisory Board of Directors comprised of family and non-family members.
Transitioning your business to the next generation is a step-by-step process filled with emotion and tough decisions which are not easy. If you really want to turn your business over to your family, get started now designing the perfect plan for the future which benefits all parties in a fair, open, and fulfilling manner.
About The Author
George Hedley CPBC is a certified professional construction BIZCOACH and popular speaker. He helps contractors build profitable companies, grow, get organized, improve field productivity, and get their businesses to work. He is the author of “Get Your Construction Business To Always Make A Profit!” available on Amazon.com. To start a BIZCOACH program, sign-up for his newsletter, attend a webinar or workshop, or get a discount at HardhatBIZSCHOOL.com online university, visit HardhatBIZCOACH.com or e-mail GH@HardhatBIZCOACH.com.
George Hedley CPBC
HARDHAT BIZCOACH
Email: GH@HardhatBizcoach.com
Website: www.HardhatBizcoach.com