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There is a lot of speculation about how the Trump era will impact the construction industry 鈥� from the border wall, to pipeline projects, to fast-track future projects, to a focus on infrastructure needs, to proposed tax and regulatory changes. Is your business positioned to take advantages of these possible changes? In particular, do you have a business succession plan that can adapt to change?

The number one root cause of 鈥渃ontractor failure鈥� is poor strategic leadership, according to an FMI Quarterly article published in June 2016. As stated in the article: 鈥溾�� many companies get into financial difficulty when ownership changes from one generation to the next. To ensure successful ownership transfer and management succession, owners need to prove that the company can grow and succeed without them.鈥� This is a root cause of contractor failure 鈥� regardless of whether the business is family-owned. The other root causes are:

• excessive ego;
• too much change;
• loss of discipline; and
• inadequate capitalization.

Does this sound right or familiar? Remember, construction is an inherently risky business and it is dynamic.

So let鈥檚 focus on successful transition planning and changes in the construction industry. In the construction industry, more than 50 percent of firm owners are older than age 55, and fewer than half have a formal succession plan. These business owners know that they need a plan and many think they have a plan in place. But do they truly have a clear plan set up? And have they considered that now is the time to revisit that plan, given the possibility of future change under the Trump era?

Here are some considerations:

• Update the existing plan. If you have an existing plan, pull it out and revisit it with your professionals (management, lawyers, accountants, bankers, financial planners, etc.) and family. You need to be in a thoughtful position to adapt in a timely manner if a change occurs.
  For example, if tax changes affect individual rates or estate or gift taxes, you may want to make some decisions and implement them this year. If infrastructure incentives or tax or regulatory changes enable your business to invest in more equipment or people, will your plan accommodate that change in resources and timing?
• Communicate goals and adapt for change. Many owners 鈥減lan鈥� to transfer the business to family or employees. Yet 70 percent of family business transfers fail due to lack of trust and communication. Communication and alignment are critical, especially when changes are expected. If you do not have the skill or the desire to communicate effectively, find and delegate this important function to someone on your planning team.
• Build, train and incentivize successors. This is one of the major factors in business transition failures 鈥� the lack of adequate training with the right management skills. For a construction business, license/regulatory and surety requirements are critical and skilled craft labor shortages are real.

First, decide what skills are required for the near and long-term needs of the company.

Then decide who will be an owner and who will be a manager based on the company鈥檚 needs and individuals鈥� skills.

Finally, decide how to compensate them, whether with equity or other incentives, like profits interests, cash or an employee stock ownership plan (ESOP).

There are many tools and approaches to select from, so it takes thought, planning and communication 鈥� especially given the various impacted generations (the silent generation, baby boomers, gen X, millennials, gen Z) and their needs and desires.

• Know the company鈥檚 worth now and in the future. This requires a current analysis of the company鈥檚 growth potential, asset assessment (real estate, equipment, etc.), management assessment and financial assessment (earnings and bank and surety credit). For many construction businesses, these items are dependent on the owner/founder, so a candid evaluation of the company鈥檚 worth without the owner/founder is important. You have to be realistic and flexible.
• Document the transition plan and the emergency plan. Many of the tools and approaches for a successful exit plan require legal documentation that should be negotiated and in place long before any transfer is to take place. A lack of planning and documenting can lead to unintended consequences and delays. With that said, interim plans and execution of a plan over time is prudent 鈥� so long as it is periodically revisited. However, in any event, an emergency succession plan should be documented and access provided to those who need to know about it.

Change for the construction industry is expected during the Trump era. Is your succession plan in shape to effectively benefit from the changes?

Carmen Calzacorta is a shareholder with Schwabe, Williamson & Wyatt and co-chairwoman of its business transitions practice group. Contact her at 503-796-2994 or [email protected].