Contractors: How's your succession plan coming along?

A 2024 survey conducted by consultancy FMI in partnership with the Construction Financial Management Association found that 58% of contractors who responded didn't have an "ownership transition plan" in place. What's worse, half of the construction business owners surveyed who planned to retire in three to five years had no plan at all. The data also showed that fewer contractors were developing formal succession plans than when the survey was last conducted in 2020.

With so much on your plate, it's understandable that you might put off succession planning. (Kudos to you if you haven't.) But dragging your feet reduces the odds that you'll be able to hand off the business you've spent years building in a manner entirely of your own choosing. Here's some food for thought — even if your anticipated departure is far down the road.

The case for planning

We get it. You're busy generating bids, managing multiple projects, engaging in strategic planning and doing everything else that's part and parcel of running a construction company. Retirement may seem far off. And addressing other things that might force you out of your leadership role, such as disability or death, isn't easy.

However, succession planning is essential for contractors who want their businesses to carry on after they retire or otherwise leave the company. Beyond preserving the business, it helps secure your family's financial future and ensures operations continue in line with your mission, vision and values. But for that to happen, you need a succession plan that accomplishes your goals, whether those are to keep the company in the family, contribute to your retirement funds, provide opportunities to valued employees or some combination thereof.

Moreover, failure to plan can lead to confusion and uncertainty after your departure — which could, in turn, impair your company's value. This is particularly true for owners who are well known and liked by employees, customers and the community. If you aren't replaced by someone whom you clearly endorse, workers may jump ship and customers might take their business elsewhere. Lack of a succession plan in a family-owned business can also trigger acrimonious disputes between family members that have a ripple effect on employees, customers, vendors, lenders and sureties.

Transfer methods

Your decisions on some key issues will drive your succession plan. Perhaps the most important is how you'll transfer ownership.

For family-owned companies, an intrafamily transfer is a viable option, whether through a gift or a sale. The former offers flexibility. For instance, you can transfer the entire business at once or gift shares over time while retaining some degree of control and income. Alternatively, you can gift or sell shares to an irrevocable trust with family members as beneficiaries.

If you sell your construction company to family members outright, you have several options for structuring the sale. For example, you might set up an installment sale so you can rely on regular payments in retirement and defer (and possibly reduce) taxes. The sale price for family members is usually less than that for a third party, but you may minimize risks such as layoffs or a drastic change in company culture.

You'll need to consider the estate tax implications as well. For instance, gifting would reduce your taxable estate but eat away at your estate tax exemption. The good news is this may be less of a concern with the current federal estate and gift tax exemption set at $13.99 million for individuals ($27.98 million for married couples). Starting in 2026, the exemption will increase to $15 million ($30 million for married couples), with annual inflation adjustments going forward. All that said, gifting can create family drama over "fairness" — especially if you have children who aren't involved in the business.

If your company isn't family owned or you don't intend to pass ownership to family members, you could sell it to a third party or private equity group. However, attracting an outside buyer may require you to first strengthen your financials to make the business more appealing. This can take time, potentially delaying your departure.

Construction companies with strong leadership teams and workforces should at least consider an employee stock ownership plan (ESOP). With an ESOP, you can sell your ownership interest over time to a trust that holds shares for employee-owners. Or the ESOP can use financing to buy shares, with the business contributing cash annually to cover the principal and interest payments. Bear in mind, though, that ESOPs are legally prohibited from paying more than fair market value for shares.

Many paths to take

We've only scratched the surface of succession planning for contractors. The point is, there are many paths to protecting your financial future and preserving your construction company's legacy. We can help you choose the right direction for your succession plan and assist you in making any necessary course corrections.