What Is A Succession Plan?
A succession plan involves building the value of your company and developing a strategy to replace yourself while protecting the future of the company and its profitability. Fewer than 30 percent of all private companies ever transfer to the second generation, which means that 70 percent fail. The odds are even more difficult for second-generation companies that are transitioning to a third generation. Meanwhile, the Small Business Association notes that 75 percent of a typical business owner’s net worth is tied up in the company, and only 22 percent of owners report planning for their succession or exit.
Why Is Succession Planning Especially Difficult for Roofing Companies?
Many roofing contractors avoid succession planning because they do not believe they can derive value from their company, which frequently, is shown to be true in valuation formulas. Roofing contractors have few assets to parlay into a sale or transfer, and often have lingering liabilities if they haven’t insured the workmanship of the roofs they’ve installed. Unlike service customers with a regular roster of customers, roofing jobs are typically one-off jobs.
Is a Management Buyout Right for You?
A long-term plan to develop a strong management team is a good way to ensure your company can someday “buy” you out. Succession planning is about finding the right people and getting them onboard. Developing this type of plan can take from three to 10 years. New managers need time to understand how to run the business, make mistakes, learn from those mistakes and find their own path to leadership.
How Can You Increase Valuation/Appraisal?
A key strategy for increasing the future valuation of your company is to ensure that any of your long-term liabilities and risks are mitigated through comprehensive workmanship warranties designed to limit your long-term risk exposure. Unmitigated long-term liability risk is the main reason many roofing companies do not successfully transition.
Additional Tips for Succession Planning:
- Have a good financial plan so you can understand what the future income needs will be for the company.
- Get a business appraisal so you understand if you have a value gap. In other words, if you have not saved enough money for retirement, the shortfall is going to come from the sale of the business.
- Get a good management team in place so it can support you in generating the income the business will need to pay you out. This step typically takes the longest — anywhere from two to 10 years.
Proper succession planning is about more than your future bottom line. It helps create a vibrant, innovative work team through continuous improvement and adds value to the company.
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