5th November 2024 - Navigating Succession Planning: Essential Strategies for Construction SMEs

Succession planning for owner managed businesses is often neglected until the realities of ageing bite and we wake up one day and realise it is time to start heading for the exit.

Construction SMEs have several options but fundamentally they can be abbreviated to:

1. Trade sale or merger;

2. Management Buy In/Buy Out;

3. Orderly run off of Work In Progress followed by liquidation;

4. Employee Ownership Trust (“EOT”).

There is no magic bullet here.

Construction is an undervalued sector (typically a multiple of 4-6 x EBITDA) with very few exceptions for even the most niche, profitable and cash rich businesses.

Sureties’ Counter Indemnity Deeds have a change of control provision and it is essential to have early engagement with them before any transaction is agreed.

Failure to do so, invokes the right of the surety to request 100% collateralisation of bonds in issue, which clearly must be avoided.

EOTs are very much in vogue yet have received criticism in the construction press, noting a number have quickly fallen into insolvency.

In deciding if an EOT is a viable exit mechanism, there are 3 key drivers:

1. Pride in having built a successful business, often from scratch, and a foreboding of what will happen to the culture and people if the business is sold to a “faceless” third party;

2. Owners often want to stay involved and phase themselves into retirement – you can only play so much golf! Staying involved gives a real sense of ongoing purpose as owners transition personally towards retirement;

3. The sale is CGT free. A third party sale often involves significant earn outs which are routinely not realised and tax is payable on the gain.

For those Construction SMEs who decide that an EOT may be a viable exit mechanism, the following should be carefully considered:

1. Evaluation phase – does the company meet the requirements set out in the EOT legislation?
Feedback phase and action plan to address feasibility;

2. Advisor selection phase – tax, legal and valuation advisor selection to include comprehensive scope (to avoid fee drift), step plan management to coordinate and drive the timetable and advisor fee setting/management;

3. Tax, valuation and legal review/input phase: the deal process is intensive, owners rarely have the requisite “in house” expertise and experience and in any event owners need to keep driving the day-to-day, knowing that they will input into the key decisions;

4. Deal completion phase: ensuring the interests of all stakeholders (owners, employees, external) are balanced. Key external stakeholders get a clear and consistent message properly reflecting the underlying fundamentals and internal plus external communications are effectively managed;

5. Post deal phase: Ongoing independent input particularly to avoid inadvertently triggering a “disqualifying event” and training for the new operating company board.

In short, before undertaking any potential transaction, consult your specialist surety broker.