Build Your Exit Strategy Long Before You’re Ready to Leave
For general contractors who are heavily engaged in day-to-day operations, exit strategies do not land among their top priorities. They’re too busy managing people, projects, equipment, vendors, creditors, customers, and prospects to think seriously about succession planning. Or they may simply believe that a family member will fill their shoes when old age, illness, or exhaustion calls for retirement.
In reality, it takes time and energy to craft a succession plan that maximizes business valuation and sets the stage for the company to thrive. With a 70 percent failure rate of business transfers to a second generation, it takes time to find the right leader to assume control of the business. And it takes time to consider the impact on all of the stakeholders (e.g., employees, customers, community contacts) and the company’s ongoing ability to attract business.
An exit strategy is a process, not an event. Here are a few thoughts to help set goals, assess options, and develop a plan.
Set Goals for Your Exit Strategy
The planning process for an exit strategy starts with a clear vision for the end game. A few questions to consider:
- When are you looking to get out of the business?
- How much income will you need to maintain your lifestyle and provide for the hobbies, activities, and travel that you’d like to enjoy? Do you need to “cash out” in order to fund retirement?
- Do you expect the company to continue? If so, are you looking for a complete transfer of interests at a defined point in time or a gradual shift in ownership and control?
- How will the company sustain its reputation, vital business relationships (bonding companies, creditors, suppliers, subcontractors, clients), and key employees once you are gone?
- How will a transfer of business interests impact your wealth management and estate plans? Will it provide for your dependents and establish a path for fair and equitable treatment among your heirs?
If your company is a family-owned business, this vision should be shaped in dialog with loved ones. Open communication gives you the opportunity to surface personal and professional interests while communicating the importance of a successful transition. A relaxed timetable lets you address sensitive family issues and build consensus on a course of action.
Consider Your Options
There are three types of exit strategies for most closely held companies: Internal Transfer (or Sale), External Sale, and Liquidation.
If you are looking to transfer ownership to a family member or seasoned employee, identify candidates with leadership potential and assess their interest in running the business. Provide exposure to all aspects of the day-to-day operations and the management responsibilities that come with them. Give them a sense of the challenges they’ll face and the decisions that they’ll have to make. Offer them the opportunity to acquire the skills, experience, and judgment necessary to do the job. Consider how their management style might align with the company’s future leadership team. As you narrow the search to the best-qualified individual, provide a suitable compensation structure to sustain interest until you are ready to step down.
If your company does not have an avenue for an internal transfer, explore the possibility of selling your interests to an outside buyer. Prospects may be limited given the difficulty of finding individuals with the requisite skills, experience, and financial backing. Such individuals must also possess the management skills to retain key staff. The more lead time you have, the more likely you might find a match.
A liquidation strategy calls for a gradual retreat from the business to satisfy outstanding obligations and provide for the sale of tangible assets. While in some sense simple due to the absence of a negotiated sale, it leaves business associates, clients, and employees hanging. Moreover, it does not enable the owner to reap a financial benefit from the company’s reputation (“brand identity”) in the community.
Develop the Plan
Surround yourself with trusted advisors who are intimately familiar with the construction business. Your business consultant can provide an independent assessment of market potential and evaluate the company’s prospects given its reputation, core competencies, clientele, and leadership team. Your tax advisor can develop strategies to minimize tax liabilities for you and future generations, especially when the business remains in the family. And your corporate lawyer can help you structure the deal to reflect the desired ownership, voting rights, and estate plan.
This team of advisors will illuminate the path to sound personnel, corporate, and financial decisions that will reap the greatest benefit. They can balance your needs with the ongoing requirements of the business. And they can help both sides of the transaction manage their respective cash flows, tax liabilities, and overall financial well-being to best advantage.