Jim Dailey explains the exit approaches and strategies for contractors. While having a business plan is critical to a contractor’s success, many builders do not plan for the inevitable: what to do with your company at the end of your career.
Q: Why is it important, especially in the construction industry, to have an exit plan for your business?
A: What many contractors don’t think about is that it is not difficult to get into the industry. Buy a truck, get a business license and start doing the work. It is much more difficult to get out of the business. An exit strategy becomes important once you have employees, jobs in progress and a reputation in the industry.
There are three types of exit strategies for most closely held construction companies: liquidate, outside buyer, or sell to employees. Outside buyers are rare and generally are another construction company or contractor. The construction industry is highly technical and it is hard to find an outside buyer that knows how to operate the business.
If the bulk of opportunity for transition falls with employees, most do not have money to do the transaction. The owner needs to allow long lead time to help them build a balance sheet. Construction is a unique industry and the use of financial statements by bonding companies and banks are critical to their business. If something happens to the key owner, there should be a succession plan in place to continue the work that is on the books.
Q: What should the objective of an exit strategy be? Maximum cash upon exit, the perpetuity of the business going forward, or something else?
A: The objective is really determined by the needs of the exiting owner. The objective should be aligned with exiting owner’s goals and long-term goals of the business. It is important to create a plan that will not disrupt the balance sheet of the business so ongoing work can continue to be funded.
Some owners built their business to sell and may not care about it lasting in perpetuity. In any case, the owners must plan for transition and allow enough time to define the best strategy.
Some key questions to fully understand the priorities of the owner and the goals and objectives for the business are:
- When are the owner(s) looking to get out of the business?
- Do they have key employees capable of taking over the business and do they have the capital required for the transition?
- What is the financial condition of the business and is the owner(s) dependent on the equity in the business for retirement?
- What are the future growth opportunities of the company?
- Is the owner(s) willing to accept the terms of the exit?
Q: What kinds of professionals can assist you in creating an exit strategy? Is this an area for a lawyer, accountant or a business strategist?
A: Having the technical knowledge in business transitions or accounting is not enough. Since construction is a unique industry, the team of advisors needs to fully understand the industry and its requirements. An accountant with little construction industry knowledge may suggest a great tax strategy but it may hurt the company’s balance sheet and not be able to support ongoing work. Since new ownership requires a team approach, the bonding company and bankers need to be involved in the process as well. These two components are critical to a being able to support the ongoing business needs. Aldrich suggest that construction company owners surround themselves with key trusted advisors that understand construction and have deep industry knowledge.
Q: Should you have a plan for the first day after you purposefully put yourself out of business?
A: Yes, one of the biggest mistakes is not to consider how the owner is going to plan for retirement from a financial and personal perspective. Will the owner want to be involved ongoing on a consulting basis? How will they spend their time? A personal retirement plan goes along with the financial plan which drives the decision on how a buyout is structured.