Most contracting companies employ about 20 workers—maybe even fewer. Among the challenges all owners must ultimately figure out is the question of what to do with the company when it’s time to retire. Experts offer suggestions—including making employee stock options part of the succession plan.
According to financial expert, Scott Eichler, it’s best to begin thinking about the ultimate plan for your company proactively and early—way before you actually plan to walk away from the action. The longer you procrastinate, the fewer options you’ll have: “If you’re 30, 40, 50 or 60, you need to begin answering this question today. Procrastination is just going to make it more difficult.” Eichler’s advice, shared in Construction Dive, includes considering an employee stock ownership plan: “If your business earns more than $1.5 million, you should strongly consider an employee stock ownership plan. However, if your business’ earnings are smaller, there are a number of other useful tools. We often find that something like a cash balance plan is a useful tool when combined with a buy/sell agreement.”
Of course it’s also key to identify the person who will actually succeed you—and it is best to do this ahead of time too. Don’t overlook people you already know well—including those already working with you. As experts point out: “Ideally, this person is someone you enjoy working with and can spend three to five years transitioning relationships. In the end, that is the benefit someone is likely buying: They want to transfer the trust that you’ve built with your clients.” Summing up, Eichler reminds us:
Relationships, relationships, relationships. Our industry is all relationships. Unless you have proprietary tools, processes or other assets that have patents, you are selling the relationships you’ve established. The best buyers of those relationships are the people that already have some form of relationship with your clients. Those are employees. Construction companies are notoriously difficult to sell to a third party. More importantly, the IRS encourages this behavior and provides huge incentives to sell to your employees. More often than not, we find that owners who sell to their employees are able to walk away with more money than from selling to a third party. This phenomenon is tightly connected to those tax benefits.
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