Succession Planning for Construction Companies
Document Type: Guide
Version: 1.0
Last Updated: February 2026
Distribute To: Owners, Board, Key Executives
Purpose
Provide a framework for succession planning to ensure business continuity and maximize value.
Why Succession Planning Matters
Statistics:
- 70% of construction companies don't survive to 2nd generation
- Average owner age in construction is 55+
- Many owners have no formal succession plan
- Key person risk is significant in construction
Benefits of Planning:
- Business continuity
- Value maximization
- Employee retention
- Client confidence
- Reduced risk
Succession Options
1. Internal Succession
Family Transfer:
- Next generation takes over
- Gradual transition
- Family dynamics to manage
- May require outside capital
Management Buyout (MBO):
- Key employees purchase company
- Often seller-financed
- Employees know the business
- May lack capital/experience
ESOP (Employee Stock Ownership Plan):
- Employees become owners
- Tax advantages
- Motivation tool
- Complex to administer
2. External Sale
Strategic Buyer:
- Larger competitor or PE firm
- Often highest value
- Quick transition
- May change culture
Financial Buyer:
- Private equity
- Growth capital
- Management often stays
- Exit expected in 5-7 years
Merger:
- Combine with peer
- Shared ownership
- Expanded capabilities
- Cultural integration
3. Liquidation
Wind Down:
- Complete existing work
- Don't pursue new work
- Distribute assets
- Last resort option
Succession Planning Timeline
10+ Years Out:
- Identify potential successors
- Begin development
- Document processes
- Build transferable value
5-10 Years Out:
- Formalize succession plan
- Develop successors actively
- Reduce owner dependence
- Build management team
3-5 Years Out:
- Commit to exit path
- Engage advisors
- Financial preparation
- Transition responsibilities
1-3 Years Out:
- Execute transition
- Client relationship transfer
- Financial structuring
- Legal documentation
Post-Transition:
- Support successor
- Consulting role (if desired)
- Monitor earnouts
- Enjoy retirement
Building Transferable Value
What Buyers/Successors Value:
| Factor | Low Value | High Value |
|---|---|---|
| Revenue | Declining | Growing |
| Profitability | Below market | Above market |
| Backlog | Short | 12+ months |
| Client concentration | over 30% one client | Diversified |
| Key person | Owner-dependent | Strong team |
| Systems | Paper-based | Technology-enabled |
| Reputation | Unknown | Strong brand |
| Safety | Poor EMR | Excellent EMR |
Building Value:
Reduce Owner Dependence:
- Delegate client relationships
- Empower management decisions
- Document processes
- Systematize operations
Strengthen Management:
- Develop leaders
- Create accountability
- Incentive alignment
- Retention strategies
Improve Financials:
- Consistent profitability
- Clean financial statements
- Strong working capital
- Appropriate owner compensation
Document Everything:
- Written procedures
- Technology systems
- Client information in CRM
- Institutional knowledge captured
Successor Development
Internal Successor Criteria:
| Attribute | Assessment |
|---|---|
| Technical competence | Can do the work |
| Leadership ability | Can lead others |
| Business acumen | Understands financials |
| Client relationships | Trusted by clients |
| Industry respect | Known in community |
| Desire | Wants the responsibility |
| Capital | Can fund acquisition |
Development Plan:
Successor: _____________________________________
Current Role: __________________________________
Target Role: ___________________________________
Timeline: ______________________________________
Development Areas:
1. ____________________________________________
2. ____________________________________________
3. ____________________________________________
Experiences Needed:
☐ P&L responsibility
☐ Client management
☐ Banking/surety relationships
☐ Employee management
☐ Strategic planning
Mentoring Plan:
_______________________________________________
Review Frequency: ______________________________
Financial Considerations
Valuation Factors:
Construction companies typically valued at:
- 2-5× EBITDA (varies widely)
- Premium for recurring revenue
- Premium for strong backlog
- Discount for concentration risk
- Discount for owner dependence
Deal Structures:
| Structure | Description | Use When |
|---|---|---|
| Cash at close | Full payment | Strong buyer, clean deal |
| Seller financing | Payments over time | Buyer needs help |
| Earnout | Based on future performance | Bridge valuation gap |
| Equity rollover | Retain ownership stake | Strategic buyer, growth |
| Installment sale | Tax-deferred payments | Tax planning |
Tax Considerations:
- Asset vs. stock sale
- Capital gains vs. ordinary income
- Installment sale benefits
- ESOP tax advantages
- State tax implications
Consult tax advisors for specific situations
Key Person Planning
Identify Key People:
Beyond owner, who is critical?
- Lead estimator
- Top superintendent
- Key project managers
- Controller/CFO
- Business developer
For Each Key Person:
- Document their knowledge
- Cross-train others
- Retention strategy
- Backup identified
- Key person insurance
Advisor Team
Succession Planning Team:
| Role | Purpose |
|---|---|
| CPA | Tax planning, valuation |
| Attorney | Legal structure, contracts |
| Financial Advisor | Wealth management |
| Business Broker/M&A | If selling externally |
| Insurance Advisor | Key person, buyout funding |
| Surety | Transition planning |
| Bank | Financing relationships |
Common Mistakes
| Mistake | Impact | Prevention |
|---|---|---|
| Starting too late | Limited options | Plan early |
| No successor development | No internal option | Invest in people |
| Owner too involved | Not transferable | Delegate |
| Poor financials | Low value | Clean up early |
| No documentation | Knowledge lost | Systematize |
| Family conflict | Business suffers | Address early |
Related Documents
- Business Planning
- Financial Management
- Key Person Risk
- Management Development
Template provided by support.construction. Plan your exit before you need it.