Most contractors have built their businesses from the ground up, on their own terms and on their own timelines. When it comes time to think about selling, or executing a succession plan, having a strategy in place ensures you’re in control and gives you the ability to exit when the timing is right.
According to a recent Canadian Federation of Independent Business survey, two-thirds of small-to-medium entreprise owners are expected to retire by 2016. This same survey found that more than 52 per cent had no formal succession strategy. For those in the construction industry counting on selling their businesses to fund retirement or other future plans, the lack of an exit plan should be a major concern.
“Contractors are busy running their businesses and they don’t take the time to sit down and plan a successful sale,” explains Toronto-based Michael Walker, CF, national M&A strategist and leader, Construction Industry M&A for MNP. “But research has shown that you significantly increase your chance of success if you take the time to determine what ‘ready to sell’ means to you and to position your business for sale.”
According to Walker, the majority of contractors don’t make exit planning a priority until a triggering event occurs. The most common of these triggers have been dubbed by the financial industry as the four Ds of exit planning:
-Death
-Disability
-Divorce
-Distress
“Unfortunately there is usually little opportunity to adequately prepare for transition once a triggering event has occurred. By
making exit planning a priority now, you can ensure that there is an orderly transition of your business when the timing is right, not when an unexpected crisis forces your hand,” says Walker.
Aside from events that are beyond your control, as a contractor you might be ready to transition your businesses if you find yourself concerned about:
-A shift in industry / family dynamics
-The need to further invest in your businesses
-Business demands on family or personal time
-Diversifying wealth or creating liquidity to fund retirement
-Not having fun at work anymore
‘Ready to sell’ is different for everyone
Being ready to sell means examining your personal, business and financial goals as well as ensuring you are on the right path to achieve them.
“In concrete terms, it means determining how much money you’ll need, when you’ll need it, and what additional steps you may need to take in order to achieve goals such as retirement, gifting to children, philanthropy or the financing of other business ventures. It also means planning for unexpected events in order to ensure that your family’s wealth and your personal legacy are protected,” says Walker.
He cites the example of a client who was approached independently by a buyer with an offer before he’d taken the steps to understand the full value of his business. In the context of the market at the time and using conventional valuation metrics, it appeared to be an adequate offer. The business owner was about to sign a Letter of Intent when one of his trusted advisors suggested he speak with a consultant before moving ahead.
The consultant undertook a strategic assessment of the business and, on their advice, the offer was declined. Tactics were changed and the business was repositioned for sale, putting the contractor in control of the process by identifying and confidentially approaching a limited number of qualified purchasers.
The original bidder, now in a competitive situation, significantly increased its offer and the final price paid for the business was more than double the initial bid. In addition, the consultant and his team were able to provide deal structure alternatives that were favourable for the client’s personal tax situation. These greatly increased the proceeds received without changing the
selling price.
Preparing your business for sale
Being ready to sell and therefore in control of the sales process, both from an emotional and a financial-planning perspective, is only half the story. The business must also be ready for transition in order to achieve the best
possible result.
There are a number of steps in positioning your business for sale. These include:
-Determining the potential value of your business
-Examining exit options
-Developing appropriate strategies and transaction structure alternatives for a sale
-Identifying value enhancement and tax planning opportunities, including action plans for their implementation
“Don’t be tempted to skip a step,” says Walker. “For instance, value enhancement and tax-planning strategies can have a profound impact on sale proceeds but often take time, in some cases years, to implement. Far too often, business owners risk missing out on these opportunities because they failed to seek the appropriate advice well in advance of a sale transaction.”
Part of preparing your business for sale is gathering knowledge about the market and potential buyers. By knowing current market conditions and then getting into the mindset of your purchaser, you can tailor your efforts to highlight how the business meets their needs and objectives.
Worsel Vaughn, who worked with Walker to sell his business, says industry knowledge and relationships with potential buyers were very important and played key roles in helping him sell his business.
Vaughn’s company was a typical local business. He made a quality product, understood his supply chain and knew the clients in his market very well. He also thought the best buyers would only be his local competitors.
“We had a broader understanding of the market and knew he’d be limiting his options by keeping a local focus. We were able to bring larger regional and national players to the competitive environment and help create the kind of leverage that improves negotiations across the entire range of buyers. Ultimately he didn’t sell to one of the bigger players, but he certainly benefitted from them being in the sale process,” explains Walker.
Potential buyers of contracting businesses will ultimately look at the strength of the business fundamentals and the relative
certainty of a seller’s future cash flow. There are a number of value-enhancement strategies that you can start to employ in advance with a view to maximizing value on a future sale.
First, if the continued success of your business is tied to your personal leadership—and in most cases it is—enabling the
management team to carry on successfully without you will be of immense value to a purchaser.
“Implement a gradual strategy to augment the management team, and hire your own replacement to shift sole responsibility
away from you. You should also begin to transfer key personal relationships with suppliers and customers, formalizing contracts where possible, so their value resides with the business when it comes time to sell,” says Walker.
To ensure the loyalty of key employees, changes may be needed to incentives and employment terms. Signing key employees to employment contracts with confidentiality and/or non-competition clauses may reduce a purchaser’s risk, thereby increasing the potential for a higher purchase price. With careful management and planning you can ensure that employees stay focused on bottom-line results so you don’t lose that hard-earned value come transaction time.
Similar to cleaning and staging your family home for a sale, your business may need some housekeeping, too. Consider upgrading assets or removing those that may be redundant to the business and for which you may not see full value from a purchaser.
“Stay one step ahe
ad of the purchaser and deal with outstanding filings and remittances. Even if it means spending a bit of money to clean the slate, you should examine your contingent liabilities and settle any disputes against your company before the sale process,” says Walker.
Equally important are the consideration of tax strategies and implications of alternative transaction structures that will affect you personally after a sale or succession. Some strategies need to be planned years in advance; so in addition to a mergers and acquisitions advisor, include a qualified tax advisor on your exit-planning team to advise about tax structure options earlier rather than later.
Many contractors are surprised to learn that informally restating your financial statements for a purchaser is an acceptable practice. By identifying some one-off items as well as irrelevant personal expenses, you present a more accurate picture of historical financial results of the business you are selling. Detailed financial projections should be prepared if significant future growth is anticipated.
Is now a good time to sell?
Timing can be a critical factor in achieving a successful exit. Some indicators that it might be a good time to divest the business, or possibly only a portion of it, are when:
-Market conditions / business performance are attractive to potential buyers
-Your business has strong fundamentals and opportunities for future growth
-Solid incumbent management is in place
-Your industry is viewed positively
-The cost and supply of growth capital is reasonable
-Valuations are favourable
In today’s construction environment, it’s not uncommon to see large contractors acquiring smaller ones to position themselves in higher-margin sectors or to expand their geographic footprint. Construction projects are also becoming increasingly complex and owners and procurement requirements are increasingly demanding. Project risks are being pushed down to contractors, and there is much more competition for smaller and mid-sized jobs.
“In combination, these factors suggest to us that the Canadian construction industry is in the early stage of consolidation,” says Walker. “As such, economic history has consistently shown that those first to market typically make the most successful deals.”
This article was contributed by MNP. Please send comments to editor@on-sitemag.com
