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Leading to Leave

Succession Planning Done Well

BY KATIE KUEHNER-HEBERT

Succession planning can be daunting — but if the current principals determine early on who can best lead the company after they leave, and if they groom them thoroughly, the transition to the next generation leaders can be smoother.

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PASSING THE TORCH

Take Rosendin Electric Inc., an AGC of California member, one of the largest electrical contractors in the United States, headquartered in San Jose, California. On January 1, the top three executives — CEO Tom Sorley, President Larry Beltramo and Executive Vice President Jim Hawk — stepped down from their management positions and a new executive team stepped in.

Mike Greenawalt of Tempe, Arizona, became CEO, and Paolo Degrassi of Anaheim, California, is the new president, while Sorley and Beltramo will remain on the company’s board through 2020, serving as mentors for the new team. Hawk’s position was restructured into two positions, with Matt Englert of San Jose becoming chief operating officer of the company’s western division, and Keith Douglas of Sterling, Virginia, becoming COO of the eastern division. Justin Tinoco was named executive vice president of field operations.

However, the leadership transition actually started a few years earlier when the three former executives engaged the would-be successors to work on the future structure of the organization, Englert says. The prospective leaders met in secret locations across the country, discussing how the company would move forward, and how the leadership would reflect that.

“We were asked to come together and work on a sustainable structure which promoted organization, personal and professional growth for our employees,” he says. “This started with redefining our mission, purpose and core values, developing a very focused and intentional strategic plan, and then we sprinkled in a number of psychoanalytical assessments for each of us, for good measure.”

The biggest obstacle the would-be successors encountered was getting to know each other and “truly understand each other’s gifts, strengths and talents,” Englert says. While the three former executives worked closely together for more than three decades, the next generation was located in different offices across the country and ran separate business units.

“We had to learn how to communicate effectively — personally and then as an executive committee,” he says. “We had to learn about each other and grow together.”

The leadership transition was also made smoother by the former executives inviting the next generation in on meetings with the company’s bank, surety companies, legal counsel, insurance carriers and brokers, Englert says. By the time the succession team was announced, important relationships had already been built.

When the COVID-19 pandemic resulted in the nation’s lockdown, Rosendin’s new team found that the crisis emphasized the need for constant communication.

“We weren’t necessarily prepared for a pandemic,” Englert says. “However, the work and growth we went through personally and professionally together, created a unity and bond, which has given us the strength and ability to lead through these very difficult times.”

Now, the new executive committee’s focus is finding ways to maintain the “awesome and amazing culture” fostered by the former team.

“I firmly believe that it is the culture of our organization which will attract and retain some of the brightest and most gifted individuals to our company,” he says. “And, it’s the talented and gifted people we have in our organization which attract the most reputable and innovative clients in the world.”

HOW TO DEVELOP AN EFFECTIVE SUCCESSION PLAN

During the Great Recession of 2008 and 2009, many professionals left their fields and now there’s a huge gap in the succession of executives in many companies, says Pamela A. Scott, executive coach and founder of MentorLoft in Atlanta.

“Many business owners want to retire, but they have not prepared their firms,” Scott says. “The boomers are leaving, but many have not done a good job of preparing a new generation of leaders for their firms.”

In her work with C-suite executives, Scott asks two questions: Who is going to replace the executives when they leave? Do those upcoming leaders know what they need to know in order to successfully run their company? Most of the time the answer is no, so she works with the existing leadership team to identify the next generation of people who can eventually lead the company.

But there can be challenges to this, Scott says.

“For example, let’s say a firm has an employee named Bob, who is a top-notch project manager,” she says. “The firm leaders decide they need to promote Bob to be a supervisor of a division, with the idea that he can one day become the COO or CEO. But the problem is, Bob has no idea what it takes to perform at the C-suite level. His education didn’t teach him how to be a CEO. He doesn’t even know what he needs to know.”

When company executives develop a succession plan, they should first detail what each C-suite role requires to determine what skills the next generation of leaders need, she says. Then when they select employees to groom for leaderships, they can identify skills gaps and what the employees need to do to prepare.

The next step is creating a leadership development plan, which includes equipping next generation leaders with the experience and knowledge to do the senior level jobs. Many assessments are available to help a company create that plan. 

“For example, next generation leaders may need to strengthen their people skills, particularly if they work in technical professions,” Scott says. “An emotional intelligence assessment identifies a person’s abilities to manage himself or herself and others, as well as how they handle stress and make decisions. Someone can be really good at making decisions, but not at developing and managing interpersonal relationships.”

Many companies designate existing leaders to be mentors for the next generation, as well as hire outside coaches to help new leaders develop, she says. “This support is critical for helping a next generation leader prepare for moving into the C-suite.”

FAMILY SUCCESSIONS AND THIRD-PARTY SALES

On choosing the next CEO, particularly if family members are to be considered, owners must be realistic and conduct a proper assessment of skills to determine if the candidates can handle the role and responsibility of leading the business into the next chapter, says Todd Feuerman, director, audit and accounting, at Ellin & Tucker, a public accounting and business consulting firm based in Baltimore.

If family members are currently too young, owners can opt to have a seasoned executive to temporarily assume the CEO position for a period of time until the family member obtains more experience and is ready, Feuerman says. But owners have to make sure that whoever they bring in, the person is properly incentivized with some benefits as if they are an actual owner of the business.

“The most successful transition plan I’ve ever seen was one in which a non-family member was named a minority owner, and the heirs apparent son and daughter maintained majority ownership,” he says. “The family members reported to the non-family member CEO who assisted the family and the company with all major decisions, but that person was significantly incentivized, so it worked out for everyone.”

For third-party sales, owners should make sure they have the proper financial advice from either a CPA or a financial counsel, Feuerman says. The professional should have experience in consulting construction companies, as the industry is particularly complex. As such, the professional should understand all of the nuances of construction and is able to properly structure deals.

The COVID-19 pandemic is actually impacting succession planning, he says.

“Overall, the message for transitioning the ownership and management of a construction company hasn’t really changed, but the pandemic has affected third-party sales to other construction companies and private equity firms — the valuations have changed,” he says.

While the construction industry is in “very good shape,” the multiples (the metric used to determine the valuation of a company currently for sale) have been lowered due to the uncertainty created by the pandemic — would-be buyers don’t know the mid-term and long-term effects on the selling company’s operations, Feuerman says. Moreover, banks aren’t willing to lend as much money right now for acquisitions.

Currently, most transactions are at a standstill for a number of reasons, he says. The valuations aren’t high enough in a third-party sale to another construction company or a private equity firm, and buyers are also putting a pause on acquisitions now. Valuations will likely go back up at some point, but there will still be some reduction in valuations because of COVID-19 for some time.

Feuerman’s advice is for companies to hold off selling now. Continue to pay attention to how valuations are doing as the economy comes back — valuations will likely start to be softened currently with potential improvement by the end of 2020 or early 2021,
assuming COVID-19 becomes somewhat controlled. “By the end of the year we will have a better feel of what the impact of COVID-19 will be on future-forward valuations of construction companies,” he says. “However, for aggressive buyers, now is the time to look for a deal — there’s no better time from the
buy side.”