Key Succession Planning Steps for Contractors

By Matt Beerbower

For many contractors, succession planning is a crucial yet often overlooked or delayed conversation topic. Discussion of a successor means relinquishing control, planning for a sale of a business that you have overseen, and inherently trusting another with one of your most valuable assets.

However, construction company owners who have dealt with ownership transitions recognize that succession planning is wisely invested time. Strong management succession will increase the business’ value and set the stage for the next generation of leadership, in addition to providing other benefits.

In many other areas of a company, it’s not uncommon to establish formal processes and plans to reduce cost and uncertainties and build value. Succession planning should be no different. The succession planning process can be broken out into four primary steps, outlined below.

Identify the Key Players & Set Goals
First, identify key decision-makers and determine the plan goals. During this time, the following information should be gathered:

  • Who are the current owners and who should be involved in planning? 
  • What is the transition timeline? 
  • What legacy does the owner wish to leave behind? 

Common topics among these discussions usually include future financial security, financial stability for dependents, maintaining family ownership, and treating dependents equitably.

Communicate Objectives
The next step – communicating the objectives with key members of the organization – is vital. Some critical factors to determine at this stage include:

  • Will management be on board with the goals of the succession plan? 
  • Are the family members on board with changes of control among generations? 

A misstep in communication could cause such costly disruptions as power struggles between key employees or family members and stress for external players, including suppliers, customers, lenders, and advisors.

Groom a Successor
Once the goals have been discussed and agreed upon, choosing and grooming a successor follows.

When evaluating successors, it is essential to identify and quantify the right qualities for each position (e.g., natural leadership and ability to work with others). Another important quality is the successor’s goals. Find out what motivates successors, and work to help them achieve their own career ambitions.

The succession plan reduces the business’ reliance on the owner by gradually transferring knowledge to potential successors. This training process ensures that a competent and valuable leader is available at all times.

Transfer Ownership
The next and most complex step is to decide how to transfer ownership. There are several options available:

Gifting Stock
This is an effective way of passing stock to successor individuals while reducing the estate of the original stock owner. Many considerations must be taken into account, including annual gift exclusion, future appreciation of the stock, and voting vs. non-voting stock.

Stock Redemption
To qualify for a Section 303 stock redemption, a deceased shareholder must have corporate stock that makes up 35% or more of the adjusted gross estate. This type of plan is most beneficial for families whose wealth is mostly derived from a corporation. Under this section of the Internal Revenue Code, a corporation may redeem its stock from the estate on a tax-favored basis in an amount equal to the decedent’s estate taxes and administrative expenses.

Buy/Sell Agreements
In this plan, the price of the stock is based on a predetermined valuation. The agreed stock price is an important component and should be reviewed annually.

Employee Stock Ownership Plan (ESOP)
An ESOP allows owners to sell up to 100% of their stock to a defined benefit plan that is owned by its own employees. Employees of the business become shareholders in the company. This option also requires annual valuations.  

Stock Recapitalization
Both common and preferred stock can be recapitalized, but the benefits of each vary. Common stock recapitalization enables a shift in voting power to successors who will operate the company. Preferred stock recapitalization can shift future increases in corporate value to those who own common stock and freeze the value of the estate of a principal stockholder, so the subsequent increases in value go to the common stock held by the heirs.

With all of the different components and complexity to the aforementioned options, succession planning shouldn’t be pushed to the back burner. While flexibility is important as the plan evolves and undergoes changes, if these basic steps are followed, a successful succession plan can be built from the ground up. 


Matt Beerbower, CPA, is a Partner in the national accounting firm RubinBrown’s Construction Services Group in its Denver, CO office. He can be reached at 303-952-1252 or matt.beerbower@rubinbrown.com.