Aug 26, 2022

How to Best Position Your Company for Sale

Many construction business owners wouldn’t dream of retiring. The business is their most precious creation and they plan to work until their last day on Earth.

Others, equally proud of what they have created, want to ensure it enjoys a life beyond them – and that they enjoy a life apart from their business! They take pride in seeing the business in the finest shape it has ever been – and are handsomely rewarded for it. That’s not by chance, so let’s take a look at how it happens.

What’s Your Business Worth?

A better question might be ‘What do you want it to be worth?

Just as you can prepare a home to maximize the sale price, so too there are many ways to improve the valuation of your company. Some changes may only be on paper, others require looking at how you do business. This is why it’s vital to start the process 5 years or more before you want to exit – giving you time to make improvements that may benefit you greatly.

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Here are the stages I recommend:

1. Assemble Your Team

Prior to a sale or transfer, these players will be vital to the outcome. Engaging them sooner gives you time to respond proactively to their guidance.

  • Business Sale Broker. Use one who is an expert in your industry. They will be familiar with a variety of ways to structure the deal in order to satisfy your needs and those taking over the business.
  • Appraiser. Often working in coordination with your broker, these two can advise you on how to unleash the hidden value in your company.
  • CPA. Taxes from a sale can be a huge issue but there are workarounds, discussed below.
  • Bonding Agent. Explore with them the impact of a sale on your banking and bonding relationships. Who will hold the contractor’s license after the sale needs to be discussed and planned well in advance.
  • Family Financial Advisor. Read below on why this role is vital to satisfying your own needs.
  • Exit Planning Quarterback. This role coordinates all the others, has experience in exit strategies, ensures nothing falls through the cracks, and serves as an advocate for the business owner. For three decades, FDP has served our clients in this capacity.

2. Evaluate & Improve on Paper

Your financials are similar to a résumé used to seek a job. Most potential buyers will first evaluate your company on paper before ever expressing an interest to meet and look deeper.

  • Set a personal target. Start by creating a financial plan to determine how much after-tax income you need to live on for the remainder of your life. Taking all of your assets and investments into account, this will help you determine what the minimum amount of money you need from the sale/transfer of the company. This starting point may direct all the efforts that follow.
  • Get an appraisal. This makes sure your expectations are realistic. The process will also help you to identify weaknesses in the company – and how to remedy them now. For example, are you too concentrated in one industry or have only one large client? Both of those may potentially reduce the value of your company.
  • Clean up your P&L and Balance Sheet. Remove personal items and recategorize them so that your appraisal is accurate.

3. Consider Types of Buyers

There are two types of buyers for your company – insiders (employees) and outsiders (third parties). Inside buyers account for approximately 80% of construction business purchases.

  • Sale to outsiders. A business sale broker that is an expert in your industry will have contacts they can reach out to for potential buyers – in a low-key manner so that word doesn’t get out prematurely.
  • Sale to insiders. Identify key people who might be able to run the company in your absence. This could be one person or a group of people. You will want to mentor these individuals over time and share some level of financial information with them. The key here is building their commitment to the success of the company so they don’t just leave and become your competition.The biggest obstacle is that they likely have little money up front to buy your company. Put plans in place for the next five years to first tie them to the company and, second, help them with the financial means to buy it. (For detailed strategies, see the Compensation Hierarchy graphic in my article from the last SCCA issue, Attracting & Retaining Key People in Today’s Tight Employment Market)
  • Is an ESOP right for you? An Employee Stock Ownership Plan is a tax-efficient method to exit your company and transfer the ownership over time to your employee base. The cost of establishing this strategy is high but the long-term benefits can be substantial, especially in today’s marketplace with high construction company valuations. Existing officers of the company continue their roles and their compensation includes stock over time. Don’t try and go this alone. Use appropriate professionals that specialize in ESOP transactions, such as The Navigators Group at FDP.

4. Structuring the Deal

There is almost no limit to how a sale may be structured, so it all depends on satisfying the needs of both parties.

  • Cash, Installments, and Stock. Although an all-cash sale is ideal for most sellers, the reality is that cash is usually just part of the deal. Installment payments or stock often make up the difference.
  • Asset versus entity sale. In the construction world, who carries the liability is a crucial consideration in a sale or transfer. The accounting treatment differs: an entity purchase means the buyer assumes all liabilities known and unknown. An asset sale removes the liability from the buyer for past actions and contracts and it remains with the previous owner.
  • Consulting. Staying on to consult for several years not only helps ensure the deal is successful, it can offer a way for you to extract value in the form of consulting fees.
  • Taxes. Inevitably this can have a huge impact but there are workarounds. Try and move as much of the purchase price into tax-deductible payments made by the purchaser. That means things like consulting agreements, leasing a building you may continue to own, medical and auto payments, or deferred compensation payments for past services. Shifting compensation into tax deductible payments reduces the ultimate cost, increasing the chance of a positive outcome.
  • Contingencies. Implement contingency planning during the period leading up to a sale. An example would be to implement a “Retention Bonus Plan” for your key-people that would serve to tie them to the company should you die unexpectedly before the sale.
  • Insurance. What happens if key players in the company die after you leave? You can insure the sale and payment stream by having the company purchase a “key-man policy” that will provide the cash necessary to complete all or most of the sale.

 

Start Now!

As you can see, preparing to sell your company is something to be undertaken long BEFORE you are ready to walk.

FDP has three decades of experience helping to guide successful contractors through the exit process. If I can help you think through what is perhaps the biggest sale of your lifetime, please don’t hesitate to call or email with questions or comments.

By Mark A. Chandik

First published in the Southern California Contractors Association Magazine, July 2022

Reproduction Prohibited without Express Permission. Copyright FDP Wealth Management. All rights reserved. Advisory Services offered through FDP Wealth Management, LLC, a state Registered Investment Advisor. Securities offered through Valmark Securities, Inc., Member FINRA/SIPC | 130 Springside Drive Suite 300 Akron, OH 44333-2431 | 800.765.5201. FDP Wealth Management, LLC is a separate entity from Valmark Securities, Inc. If you do not want to receive further editions of this weekly newsletter, please contact me at (949) 855-4337 or e-mail me at info@fdpwm.com or write me at 8841 Research Drive, Suite 100, Irvine, CA 92618. FDP Wealth Management, LLC, Valmark Securities, Inc. and their representatives do not offer tax or legal advice. You should consult your tax or legal professional regarding your individual circumstances. Indices are unmanaged and cannot be invested directly in. Past performance is not a guarantee of future results.

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