Sunday, December 14, 2008
What Happens if Joe the Contractor Gets Hit by the Proverbial Truck?
Many contractors are owned and operated by one key individual, the owner. Further, usually the vast majority of the owner’s net worth is tied up in the stock of the company he or she owns. It is imperative, for many reasons some of which I’ll outline here, for every contractor to have an operational succession plan in place to ensure fluid continuity of the business operations.
Let’s say for example that Jane Contractor employs 150 people between the field and the office. On average, for every employee I would suggest that another 1.5 people are dependent/affected by that employee’s livelihood within Jane Contractor’s company. Some employees are married, some aren’t, some have kids, while others don’t. So I’m suggesting that, including the employee, for each person employed perhaps 2.5 total people are affected by the success of Jane Contractor’s business. That’s a total of 375 people dependent on whether Jane Contractor has a plan in place to ensure the continuity of business whether Jane, the primary driver of success in the company, shows up to work or not. There are many business reasons to have an operational succession plan, but perhaps none more important than the financial security of all of the construction companies employees and their dependents. Most, if not all, of the owners I know are great and compassionate people and this issue might be the highest priority. The knowledge that their own families, their employees and the families of their employees, will be able to have a secure financial future should something happen to the “Top Dog” should be a primary driver in the desire to develop an operational succession plan.
Management should prepare an operational succession plan to also serve as an “insurance policy” which can be shown to creditors. Surety companies and banks are generally two very interested parties wishing to ensure that a construction company can perform on its backlog without total reliance on the Owner/President being involved. I’ve witnessed countless times where a bond company requests a succession plan document only to be met with either lack of a meaningful response, “we’ll get it to you”, “it’s in process”, etc. One main concept that usually occurs to me is that the bond company, bank, etc. are only asking for items the contractor should want to have for his/her own purposes in managing the company and ensuring its success more than anyone else! The bond company is not asking for this document to be a pain in the neck, they just wants reasonable assurance (a written plan) that management has a strategy for performing on its backlog in case of unforeseen circumstances. The bond company’s goals are not inconsistent with what the contractor should want/need for him or herself. If Joe Contractor asks a bond company to vouch for him and his construction company that he has the necessary components in his business (relevant experience, capital, personnel, capacity, etc.) to successfully perform the work, Joe Contractor should ensure he has all the pieces in place to back up that promise to perform on the backlog including a contingency plan in case he isn’t able to show up to work for whatever reason.
Another benefit to the creation of an Operational Succession Plan is that it requires the contractor to think about his or her replacements, as well as replacements for them as they vacate their positions. Further, it calls for cross training those individuals now and actually provides for the beginnings of a natural (not getting hit by a truck, etc.) succession plan. Many contractors think about how to get into the business and build the business, but few think about how they will get out of it. For many contractors a viable exit is to sell to the next level of management. Often times that structure necessitates the owner to take back a note (debt) from the new ownership. The chances that the debt will be successfully paid on schedule (or ahead of schedule) are greatly tied to the success of the ongoing business. The new owners/management will fare much better if they are properly trained and groomed for the roles. By having an operational succession plan in place “in case of emergency” you are also building your future possible exit strategy. It is not lost on me that some may think you could be training your future competition, however I am a firm believer that if you create a fair, fun and successful work environment and treat your employees well you will not face that scenario. As long as those future stars have the knowledge that “your” business will someday be “their” business or in the event of sale or other windfall they will share equitably, they most likely will not leave.
It is clear for many reasons the creation of an Operational Succession Plan is an important, fluid document which should be updated as circumstances warrant. There are many important reasons to have the document in place as discussed above. It may seem a daunting task to create such a plan. If you need help getting started we have created a template you can use (and our clients have successfully done so) as a solid starting point, just email me for your copy. I encourage all owners of construction companies to create an operational succession plan to help ensure a bright future for themselves, their employees and all their families. It could be a key component in the perpetuation of the business they worked so hard to start and build.
Posted by Glenn Carniello, CPA CCIFP at 8:05 PM
Labels: Operational Succession Planning
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