Construction businesses face a number of unique challenges over their lifecycles. These can include economic swings, competitive price pressures, volatility in material costs, and labor issues. With all these fires to put out, planning an exit strategy is often not high on the list of the owner’s priorities. However, for owners planning an exit sometime in the future, there are significant advantages to taking the long view towards that exit. This is particularly true in situations in which the owner wants to maximize the value of the business to help meet retirement needs, rather than transferring the business to the next generation.
Business valuation
It is critical that owners begin by learning how potential buyers will value the business. There are multiple approaches – the best of which is selling a business that is valued on perceived cash flows, risks assessments, and investment return objectives of a buyer. This is far more preferable than a liquidation approach that relies on the proceeds from selling equipment and other assets. Seeking independent feedback from advisors with experience in construction business valuations can be a critical initial step in the planning process.
The equity in a construction business is often a very substantial component of the owner's retirement nest egg. Discovering that the sale value may differ materially from expectations can have a significant impact on the timing of the owner’s retirement. Most construction businesses have a substantial amount of capital tied up in equipment and working capital; this reality can be at odds with an owner's desire to accumulate personal financial resources as retirement nears. Planning over a longer time horizon will generally yield a better outcome.
Future leadership
A sale of any business, but perhaps particularly a construction business, is materially dependent upon a buyer's assessment of the quality and stability of the management team once the current owner departs. It takes time and effort to groom future leaders, and in many cases this group turns out to represent the most likely buyer opportunity. An owner who intends to sell needs to have a team in place that will earn the confidence of banking and bonding sources.
Financing
In most cases, an owner will need to grasp the concept that the business must be prepared to buy itself. Traditional credit sources are generally not willing to provide financing for the purchase of a construction business, as the unique risks of this industry can make it difficult for a business to meet its debt obligations. Making your company financially “leaner” will help maximize available cash flow and address purchase debt arrangements that a seller often will have to settle for.
A note about real estate
Real estate within a construction company can also present challenges that require advance planning. Placing real estate in an entity that is separate from the construction business is generally a better answer from a sale planning perspective, as the real estate itself will often not be part of the business sale and, structured correctly, can provide the owner with a reliable source of steady cash flow in retirement.
Planning ahead for the sale of a construction business will yield greater value and enhance the financial security of a departing owner. Building a successful construction company takes years of dedication and focus, and the exit strategy is a logical and important step in this process.
Michael R. Viens can be reached at Email or 215.441.4600.