Construction Succession Planning

Learn more about construction succession planning with this short, four minute video with Kristin Bailey, CPA, CCIFP, CCA. She’ll offer tips on succession planning for construction businesses and identify the main methods of sale, and how they might affect your construction accounting

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Construction Succession Planning Transcript:

Hi contractors, Kristen Bailey, certified construction industry financial professional at KatzAbosch.  This spring, our construction services team is focusing on succession planning.  This is a topic that’s easy to put off until tomorrow, next year, the year after, but a successful transfer of ownership is not an event that takes place at a single place in time. It’s a two-part process. It’s important that you allow enough time for these processes to be successful.  The first part is designing a plan that’s best for your company, and the second part is implementing it.  

There are a lot of complex structures out there for ownership transfers and it can be overwhelming for a closely held construction company. Keeping it simple at times can be challenging, but here at KatzAbosch, we can help. A successful transition begins with the assessment of the current owner’s goals. How much is needed to retire? Will the sale be to a key employee, a family member, or a competitor? Will you be able to sell and walk away, or do you need to hang around for a bit to ensure a smooth transition? Each one of these questions presents a different path forward. 

Many of our clients transition ownership to family members, and for this, stock gifting is very popular. There’s no immediate tax effects, which is a big plus, but this also doesn’t allow for a future cash flow stream for the previous owner.  Another agreement would need to be put in place such as an employment contract, deferred compensation agreement, or, if the owner also owns the building the company operates out of, a long-term lease can be signed.  Stock gifts also require evaluation of the company as of the gifting date so that is an added cost to this method. 

Another popular method is known as oldco newco.  A new company is created with the new ownership structure and then as of a certain date, contracts are bid awarded and performed in the new company and the employees are transferred over. The old company completes its jobs, collects this AR, pays its AP, winds down its operations. Besides the collection of the AR, this strategy also does not allow for a future cash flow stream for the owner.

Finally, the most obvious method is the sale of the company. So you can sell the company to family members, key employees, or a third party.  The sale can be structured as an asset sale or a stock sale. An asset sale benefits the buyer. They’re not buying all of the old skeletons in the company closet, they’re just buying assets and the goodwill of the contractor. A stock sale will benefit the seller. They’ll be able to get capital gains treatments, which equals a lower tax rate, and they can even defer the gain to be picked up as cash is collected in the future. Now, the cash for this sale can either come from future earnings of the company, i.e. the seller finances it, or the new owner of the company can seek bank financing. But, you want to consider. Does this owner have enough credit and assets to get a loan to buy the company, be the guarantor on the line of credit, and identify the bonding company? If a high sales price is your main desire, selling to a third party might be your best option.  If the sales price is not the main concern, consider if you’re willing to sell for less to ensure the company is not strapped for cash during the transition. The benevolence of the seller can go a long way toward the longevity of the company.  

We do have a webinar coming up to go over this in more detail later in March, and we have on our website, a previously recorded session with Rick Kohr from Evergreen Advisors. So, if you’d like more information, check out one of these sessions or give us an email. We’ll see you next month!

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