How New York City Construction Firms Can Position Themselves for Leadership Transitions
By Phil Ross, CPA, accounting & audit partner, Anchin, Block & Anchin LLP
After nearly 15 months of shutdowns and restrictions, New York City has taken a major step forward. Seventy percent of the city’s residents are now vaccinated, and restrictions significantly reduced across the area’s commercial spaces, from offices and retail to dining and hospitality.
Mask mandates have been lifted and the hum of the metro area’s business districts is growing loud again. With an expected increase in demand for building upgrades and repositioning services to meet new market needs, as well as new projects across housing, infrastructure and healthcare, the construction sector is poised to see a more robust pipeline.
During the pandemic slowdown, construction firms were understandably more focused on the short term. But with the market back on the upswing, now is the time to refocus on long-term goals and strategies.
A major part of this is ensuring you have an internal organizational pipeline to continue growth well into the future and maintain your firm’s legacy of success. This is just as important as creating a business development strategy and building up a backlog of projects. Transitioning a construction business for the next generation and beyond is one of the most crucial tasks faced by owners and management — and yet it is also one of the most sensitive and difficult challenges they will face.
It’s no surprise, then, that many firms don’t deal with the issue explicitly. According to a recent survey of construction company owners conducted by the Construction Financial Management Association (CFMA) and FMI Corp. (FMI), more than 90 percent of owners intend to transition the majority of equity internally, but only half of them have a formal plan in place. This may be partially due to the fact that more than two-thirds of owners are not confident that their potential successors are ready to lead their firms within the next three to five years.
A successful transition is complex, from future-proofing the firm’s financial, business and management systems to making sure its next leadership team has the right people with the right skills in the right positions with the right expectations and incentives. This problem involves the unpleasant task of navigating interpersonal dynamics, which is especially difficult for family-owned companies. In addition, it entails admitting what you can’t predict and ensuring that your firm is resilient and has the people in place to understand market shifts and risks for the near and long terms.
COVID-19 has put the vast majority of management focus on the short-term success and survival of construction firms. But as the economy recovers quickly, now is the time to take stock of your planning. While the financial aspects of transition are certainly important, other factors are frequently underestimated and can be the crack in an otherwise solid foundation.
Here are some crucial aspects to consider:
Optimizing Operational, Financial Efficiencies
Improving earnings and cash flow are the foundations of any business transition. These are also the primary sources of transition funding and therefore are the main factors of how much companies can afford to pay out to exiting owners.
Done properly, a successful transition allows a company and its future owners to afford to buy out retiring owners at a reasonable amount while leaving sufficient capital available for other needs, such as capital investments, performance bonuses and other incentives to retain the next generation of leaders and position them confidently for future growth. Consequently, a departing owner should receive a fair price and also leave the company in a sound financial position.
Organizational Culture, Leadership Development
Construction companies must reaffirm and embed a coherent set of values and a strong, straightforward culture to guide the firm’s strategy. Additionally, owners must take an active hand in identifying next generation of firm leaders and to prepare, train and coach them to think and behave in ways that continue the trajectory of success.
They also need to continue to create buy-in to the continued mission of the firm and earn the confidence of the company workforce. While the next generation may conduct business differently, an embedded culture will enable the firm to replace the talents and skills of current owners. Whether it’s rainmaking, firm-level management or strategic thinking, having this culture is key to positioning the company for sustainable growth and profitability.
Talent Retention, Compensation
More than simply owner compensation, it’s crucial to create financial and other incentives that help the company maintain continuity by holding on to its key talent and to motivate these employees to preserve the company’s success and culture. These plans help ensure that the company retains its next-generation of firm leaders and continues to generate the profits and cash flow to fulfill whatever buy-out obligations the company makes to its retiring owners.
Ultimately, each firm will need to develop customized solutions that address unique financial and strategic needs while being sensitive to the psychological, emotional and interpersonal dynamics at play in transitions. It is helpful to look at how similar firms have addressed transitions and assess what works and what doesn’t and apply these lessons within.
Still, each company is unique and presents its own singular challenges and opportunities during transition planning. Now, especially coming out of the pandemic-related slowdown, there is no better time than now to think about how to preserve and grow owners’ legacies for whatever the future holds.