The barriers to entry are quite low in the real estate and construction industry, so how do you get the value out of it when it’s time to exit? Not planning for succession is planning to fail, and is simply bad business. But it’s easy to do when there’s no deadline and you’re busy working in your business.

Less than 10 percent of business owners have a physically documented succession plan. If you’re one of them, here are three questions you need to ask.

Do I have clear objectives for the transition of my business?

With baby boomers retiring, the majority of businesses in operation today are expected to go through some kind of transition within the next decade. If you don’t have clear objectives for the transition, you can lose much of the value in your business very quickly.

Succession planning involves planning your own exit but also planning for the future of your family and employees — and the business you’ve built from the ground up. As such, it’s important to identify all key stakeholders and find out what they want the future to look like. Working with a professional is critical to ensure decisions will lead to a successful outcome. A professional will have one-on-one conversations to discover whether your assumptions are correct. For example, if an owner assumes their adult child wants to take over the operation and the child doesn’t want to, that needs to be brought to light. There are many things that need to be considered when documenting your objectives to ensure a successful transition.

Have I identified all key employees and created a retention plan?

The ability to retain key employees has never been more important as the war on talent continues to worsen. Many organizations have an ad hoc bonus plan that isn’t based on an actual formula and is viewed as part of base pay. Developing a structured employee profit sharing plan or a plan that gives employees shareholder status allows owners to give employees clear objectives, so they can benefit from the business’s success. It also gets them thinking like owners, so they want to do right by the business.

Finally, it also opens the door for employees to buy the business when the owners are ready to step down, which is often the best option for real estate and construction businesses. Often, owners don’t think their employees can afford to buy the business, but with well-created plans, there are creative ways of making an employee buyout or partial employee buyout work.

Even if you decide to market your business to third-party buyers, retention plans for key employees are critical. If employees are sharing in the profits or are minority shareholders, it’s likely that profit will be higher and your employees will be strongly engaged in the business, which is very attractive.

What would happen to my business if I suddenly had to exit?

It’s important to think about what would happen to your business if you suddenly weren’t there to oversee it. Part of a solid, documented succession plan is an emergency plan that clearly states who is to do what if key people aren’t available. This helps ensure the business can carry on and retains as much value as possible in the event of an unplanned exit.

To learn more about succession planning, visit mnp.ca or contact:

Shane King, CPA, CA
National Leader, Succession Services
shane.king@mnp.ca
604.542.6715