The landscape of ownership transition and management succession (OTMS) planning in the construction industry continues to evolve. While the industry benefits from a strong market, generational dynamics, and a tight labor market are making transition planning more complex and time critical.

The recent election results have brought transition-related trends and considerations to the forefront that business owners need to think about while developing short and long-term transition planning strategies. 

What We Know

Continued Lack of Formal OTMS Planning

Despite its importance, the construction industry continues to lack formal, long-term OTMS planning. According to a 2024 study by FMI and CFMA, 58% of industry executives reported having no ownership transition plan in place.

This lack of planning underscores the risks faced by companies that have transition needs. Beginning the planning process early is critical in mitigating these risks and ensuring a smooth transition.

Growth & Scale Drive New Transition Considerations

The construction sector, especially non-building commercial and heavy civil, has experienced substantial growth in recent years, fueled by investments from the Infrastructure Investment and Jobs Act (IIJA) and the Inflation Reduction Act (IRA).

FMI’s recent insights on infrastructure trends speaks to these tailwinds. Optimism remains high, with hopes that the next administration will further sustain or expand infrastructure-related spending.

Companies experiencing and navigating this growth face a unique challenge — the need to understand how to transition a business that requires:

1. Continued growth and retention of talent
2. Capital investment needs (i.e., capital expenditures or balance sheet growth)
3. Means to structure ownership given new size and scale of operation

The following are key points to consider:

Talent Investment & Development

Revenue growth and organizational expansion require businesses to invest in talent at all levels. Business leaders must continually assess leadership and talent development needs to sustain operations and enable succession planning.  

Ownership as a Talent Strategy

Construction companies are increasingly leveraging ownership structures to attract, develop, and retain talent. While this may dilute existing ownership, the relative growth in company value can benefit all involved.   

Strategic Alignment

As companies scale, it becomes increasingly imperative to integrate corporate strategy efforts with transition planning to steer organizations forward. This often involves blending organizational and exit planning into cohesive efforts.

Transition Opportunities

Heavy civil construction companies have several viable exit alternatives: 

Third-Party Sales

The construction industry mergers and acquisitions (M&A) landscape remains strong as buyers seek to bolster geographic growth and take advantage of population and macroeconomic dynamics. 

Consolidation continues in the sector, and buyers are primarily drawn to companies specializing in the following infrastructure services:

• Traffic control, pavement, highways, bridges, and road
• Transportation infrastructure (e.g., airports, rail, transit)

Employee Stock Ownership Plans

Employee stock ownership plans (ESOPs) continue to become more widely accepted in the sector given their ability to mitigate transition risk, provide strong valuation and tax advantages to sellers, and foster long-term ownership among employees.

Internal Transition

The industry remains heavily comprised of family or employee-owned enterprises. Most internal transitions to employees often prioritize preserving a corporate culture and legacy over maximizing value.  

Growing Importance of Buy/Sell Agreement Provisions

In 2024, the U.S. Supreme Court’s ruling in Connelly vs. United States determined corporate-owned life insurance as a tool for funding share redemptions upon a shareholder’s death must be included in the corporation’s estate tax value. This ruling has significant implications, as it increases estate taxes and reduces estate proceeds received by heirs.

This is impactful to many heavy civil construction companies where corporate-owned life insurance is a common method for funding corporate redemptions of stock from a deceased owner’s estate. 

To address these implications, companies should:

• Explore alternative redemption funding: Consider cross-purchase agreements (where individuals hold key man life insurance), family trusts, or other special purpose ownership vehicles.
• Clarify buy/sell agreements: Connelly vs. United States specifically called out the requirement to have a clearly defined valuation methodology in a buy/sell agreement. This must be both defined and followed to withstand certain IRS scrutiny from an estate standpoint.   

What to Watch For

The upcoming presidential transition may present changes to tax policies that could affect OTMS planning. The 2017 Tax Cuts & Jobs Act (TJCA) provided tax relief to many constituents; however, several tax categories have certain sunset clauses, and uncertainty exists as to how they will ultimately play out.

Key areas to monitor: 

• Corporate tax rates: The existing flat corporate tax rate of 21% is unlikely to change in the near future.  
• Individual tax rates: Given that many industry companies are S corporations or LLCs, individual rates matter. The TJCA reduced the top individual rate to 37% (from 39.6%) and increased certain tax thresholds. The incoming administration does not favor raising current rates, but uncertainty persists.
• Qualified business income (QBI): These deductions, set to expire in 2025, reduce effective tax rates for pass through entities. The next administration favors extending QBI deductions.
• Estate and gift taxation: The current individual estate tax exemption of $13.6 million is slated to reduce to $7 million in 2026. Total estates under these amounts will not be directly impacted; however, it’s unclear how this will be determined in the next administration.

Business owners need to be aware of these dynamics with respect to OTMS and estate planning.

Conclusion

No matter the ownership transfer avenue that heavy civil construction company owners wish to take their company, a healthy level of planning is required to make any transition successful. While this construction segment is buoyed by the fact that numerous exit options exist, planning with a long-term mindset is essential.

Understanding current dynamics and how growth, strategy, and taxation impact your options will guide you in the process.