The construction industry has experienced an ideal business transition environment over the last decade but was hit hard by the COVID-19 pandemic in early 2020. Suddenly, all the growth and opportunity for M&A came to a halt as markets slowed and states went into lockdown. These events left many construction industry leaders wondering when, or even if, they’ll be able to transition their business the way they wanted.
As we move forward and markets begin to come to grips with the “new normal,” construction firm ownership looking to transition their business will need to reset expectations, make difficult but necessary adjustments, and execute on an updated succession plan. Let’s look at the trends, questions, and steps an owner or ownership group should be mindful of.
What are the trends in business transition following COVID-19?
With all of the project and staffing disruptions in 2020 due to the pandemic, it comes as no surprise that many construction firms feel behind in their succession goals. Here’s what’s happening:
- Profitability is affecting transition opportunities – As over half of construction companies transition to existing management or family, disruption in profitability can create challenges with ownership transfer as the future buyers are not able to save up the equity needed to get into the business.
- Delayed transitions that were capitalizing on distributions and growth now face a long, slow recovery especially if new leadership is not properly poised to take over.
- For short-term transitions or current transitions, it is expected that COVID-19 will delay these plans, extend the transition time, and potentially reduce sale proceeds.
- Construction firms will face difficulties in a third-party sale in an uncertain market due to the closely held nature of the industry.
Given the above trends, what are the questions an owner should be asking?
The pandemic has forced business owners to think about succession planning in a new way. In addition to the typical questions – is the business viable, table, sustainable – consider asking:
- Can my business remain stable in times of economic or physical disruption such as the unique challenges of the pandemic or the unpredictability of a natural disaster?
- Can I generate enough cash flow to stay operational in times of disruption?
- Will my business remain sustainable following a disruption?
With the context of current events in mind, the following 10 questions can help you determine how prepared you are for a transition:
- Have your transition goals changed?
- Is your succession plan still aligned with your vision, strategic plan, and operational goals?
- What is important to current ownership right now (legacy, control, financial return)?
- Who have you identified for future leadership? Has this crisis impacted that?
- Are the current and next generation of leaders aligned with goals for growth and vision?
- Are you properly preparing successors for the future?
- Where do risks exist for overreliance on key leadership?
- Has the ownership transfer plan been impacted by the current disruptions?
- Are your buy-sell agreements sufficient and effective?
- Does an alternative ownership transfer need to be considered given the current circumstances?
What are the steps an owner should be taking now?
When you’ve addressed all the appropriate questions, it’s time to lay out a plan. Work with your CPA and trusted advisers to ensure your plan is viable and actionable under difficult circumstances. Your CPA can provide the accountability you need to get things done. No matter what stage your business or succession plan is in, you can:
- Prepare yourself for the reality that your ownership transition may not happen as soon or the way you originally planned.
- Review your financial situation with your CPA to understand where revenue is struggling, expected recovery timelines, and contingencies for future disruptions.
- Develop policies and procedures for CEO incapacitation and train future leaders to handle these procedures.
- Develop policies and procedures for when a significant number of staff are incapacitated and provide the necessary training to fill in any gaps.
- Stress-test your business with your advisors’ help. Play out various what-if scenarios and how you would handle cash flow, staffing, decision making, and project management in times of crisis.
- Get your employees in the right seats and identify/align leaders into the appropriate positions ahead of any transition.
Where do we go from here?
The impacts to profitability and the distractions and disruptions created by the pandemic have set transition plans back and even derailed plans that were already in place. Construction firm owners may have to rethink their succession plans and adjust expectations accordingly, but it doesn’t mean all is lost. For those who choose to see it, these events can be an effective test of a business’s ability to handle the stresses of a transition.
Regardless of current events, the following remains true: Start planning early, outline your key objectives, and prepare the next generation of leaders. Your CPA advisor can help you understand your financial situation now, identify and improve in your problem areas, and develop plans to address any future challenges that could impact your succession planning goals.