By Bart Gibson
Two high-profile founders and CEOs picked earlier this year to make major announcements. Amazon CEO Jeff Bezos announced he would leave his post, and Merck’s chairman and chief executive officer Kenneth Frazier announced he would retire as well. On July 5, Bezos formally stepped down as Amazon CEO where he is focusing on new products and initiatives for the company. Frazier officially stepped down in late May.
From these announcements, it appeared that both Bezos and Frazier, as well as their respective organizations, had worked toward transitions to executive chairman for at least several years. Moreover, these announcements illustrate how succession planning can secure the future of a business while freeing up the owner or CEO to explore other opportunities or interests. This news also demonstrated why CEOs, executives, and companies in the construction industry should start succession planning now.
Despite the merits of making a plan, close to 7 in 10 business owners have none in place, according to Rocket Lawyer, an online legal technology company. Nearly 8 in 10 founders say they are too preoccupied with the day-to-day running of their business to make such plans, based on surveys by Wilmington Trust. Four in 10 say their departure is too far off to justify the time and effort in planning. By the time the need for a plan becomes clear, it can be too late to find the best buyer or family successor that shares the owner’s principles.
IMPORTANCE OF PLANNNG
Developing an exit strategy for the CEO, including the selection and preparation of a successor, could take many years. A lack of succession planning can be a costly item for businesses as well as the owner who, as a result, may be forced to sell their business in a hurry at a lower price than expected. An absence of planning may also increase the likelihood of costly disputes among family members.
Succession planning is all about knowing when the time is right to let another individual manage your business. Some would prefer to take themselves completely out of the process while others would like to remain part of the business that they’re so proud to have built. Having a reputable management team in place allows owners and CEOs to be ready for new opportunities and help mitigate risk from unforeseen challenges of leaving a business.
How can succession planning benefit construction owners? There are four distinct ways:
1. MAXIMIZING THEIR BUSINESS’ VALUE
A core priority of most business owners is to maximize the value of their business whether they intend to sell or pass it on to a family successor. In the event of a sale, the amount raised can have a major impact on a number of goals for the business owner. These goals include retirement plans, taxation, compensation levels, insurance, shareholder agreements, and corporate finance strategies. An owner leaving a business to family members most likely would want to ensure their business has the maximum value secured and long-term potential in place.
2. SECURING HARMONY AMONG THE NEXT GENERATION
Succession is a time of heightened risk for business owners whether or not they hand control to family members or sell. An overall wealth plan—including a succession plan for the business and an idea on how to distribute any sales proceeds—can help to avoid or mitigate these risks, while also cementing family relationships across generations.
Disagreements over the next steps to running the business or the appropriate distribution of business assets can cause breakdowns in family relations. For example, owners working in partnership may be happy to hand over to their next generation, but the other partners may be upset with this arrangement. Succession planning can help overcome these problems by dictating how businesses pass between generations.
3. PREPARING TO SEIZE NEW OPPORTUNITIES
Many business leaders set up a company and devote much of their energy to it for the entirety of their working lives. But there are examples of high-profile owners that continually look for the next business opportunity. A good succession plan can help this type of owner embark on a new venture or move into philanthropy on short notice. It’s also worth noting that many entrepreneurs mingle their business and personal wealth. Disentangling these sources of wealth may involve reworking a company’s corporate or legal structure or releasing money through borrowing, not only to free up funds for other ventures, but also to make a business appealing to an external buyer or investor.
4. PRESERVING THE LEGACY BUILT
Many owners have a very clear sense of purpose when it comes to running their business. They often run their operations with a clear vision and operating model, which may or may not be formally documented or shared across the business. Business owners should consider whether this same purpose and vision would carry on as their legacy after they step away from their business. The best way to preserve a legacy is to choose the right successor in the first place, whether it’s an outside buyer or family member.
CLOSING THOUGHT
A well-thoughtout succession plan can be the best way to ensure an owner’s staff is treated well after an exit and that an owner’s values remain core to the running of the business and its financial performance. As demonstrated by Bezos and Frazier, early and rigorous succession planning can set you and your business up for success as you leave the organization.
About the Author:
Bart Gibson is senior vice president – wealth management, The Harris Gibson Group, UBS Wealth Management. Bart has been managing business owners and high net worth families for more than 18 years. He takes the time to understand financial needs and risk tolerance so that a client will feel comfortable and confident with their financial decisions. He can be reached at bart.gibson@ubs.com.
Modern Contractor Solutions, August 2021
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