4 essential strategies for construction succession planning
Company founders and long-time owners approaching retirement face a pivotal moment.
As much as retirement is a transition in your personal life, it’s also a transition for your construction firm. To secure both your retirement assets and your business, you need careful and proactive planning.
Effective construction succession planning starts with a strong leadership pipeline, efficient tax strategies and a proactive approach to wealth preservation. Addressing these key aspects can help create a smooth leadership transition that benefits all stakeholders involved.
1. Starting early
Starting your succession plan today is a key investment in the future resilience and sustainability of your organization.
Proactive planning offers the greatest flexibility, allowing your company to update plans for unforeseen circumstances. And it makes it easier to identify and develop future leaders who align with your company’s vision and values.
Additionally, starting early motivates your team by helping them understand they are part of the long-term plan and giving them time to grow into their roles.
2. Developing a leadership pipeline
Creating and maintaining a leadership pipeline, especially for critical roles, can help minimize disruption around your succession.
An effective leadership pipeline starts with identifying high-potential employees who have the capacity to take on greater responsibility. Current leadership often makes the mistake of looking for the most outgoing or energetic people, but these individuals may not necessarily be the most capable. Talent assessment tools can help you avoid bias and provide more objective reviews of leadership potential and skill gaps.
After identifying your high-potential employees, commit to investing in their development.
Construction firms should create tailored development plans that focus on scaling transferable skills and closing any skill or experience gaps. This can include continuing education, stretch assignments, special projects, mentorship and leadership development programs. You also need to ensure that future leaders have the necessary skills to transfer relationships with third parties such as key customers, banks and the bonding company.
To maintain your leadership pipeline, offer continued opportunities for professional growth, including giving employees exposure to new skills and experiences. Regularly discussing growth opportunities with employees and involving them in decision-making can keep them engaged and give you a more accurate picture of your firm’s leadership readiness.
3. Understanding tax implications
Ownership succession can take various forms, each with distinct legal and tax implications. For instance, transferring ownership to family members might trigger transfer taxes, while selling to a third party could lead to income or capital gains taxes.
To help minimize tax liabilities during succession, you can consider implementing strategies such as:
- Gifting: Gifting business interests during your lifetime can be an effective way to keep the business in the family while reducing estate taxes. Transferring ownership with long-term gifting strategies helps you maximize the lifetime gift exemptions and annual gift exclusions.
- Trusts: Trusts such as grantor-retained annuity trusts can be used to transfer business interests to beneficiaries while minimizing tax consequences. They also give you greater control over how your assets are used and distributed.
- Selling: Tax-efficient buy-sell agreements can help minimize capital gains taxes and other potential tax liabilities.
- Employee stock ownership plans (ESOP): An ESOP can offer tax advantages and provide a way to transition ownership while potentially enhancing employee retirement benefits. However, they also come with complex regulations and ongoing responsibilities that need to be carefully considered.
During succession, it’s also crucial to ensure that all necessary licenses and permits are transferred or updated to reflect the new ownership structure. This may involve filing for new business licenses, updating contractor registrations or obtaining new bonding and insurance coverage.
4. Preserving wealth
Preparing and protecting your retirement assets is an integral part of succession planning and can help you enjoy a comfortable retirement while safeguarding your financial legacy.
Construction firm owners often have a significant portion of their wealth tied up in their business. For your exit strategy, evaluate where diversifying your assets can help you reduce risk.
Another important consideration is tax planning. It’s essential to work with financial advisors and tax professionals to develop strategies that minimize tax liabilities during the ownership transition. For example, you can use tax-deferred retirement accounts, such as 401(k)s or IRAs, to maximize savings while reducing current tax burdens. Additionally, exploring options like Roth conversions or charitable giving strategies can further optimize the tax efficiency of your retirement assets.
How Wipfli can help
At Wipfli, our professionals are here to give you straightforward advice for navigating succession, risks, taxes and other critical areas of your business. From homebuilders and other specialty contractures to architecture and engineering firms, we go beyond traditional accounting services to provide comprehensive support that can help you improve performance.
Reach out to discover how we can help you secure a better future for you and your firm.