Over the next few years, the contracting industry will see more business owners approach retirement. This transition of ownership not only allows younger buyers and longtime employees to become owners, but will also give retiring owners the opportunity to realize the value of the business they have spent years building. With a proper contracting business succession plan, the sale and transition can be smooth and successful.
A succession plan is a vital part of the sales process for any contracting business owner. A major component of the succession plan is the desired purchase price of the business. To maximize the business’s value, the retiring owner should start planning well in advance. Preparing the finances, staff and physical building can increase the number of potential buyers as well as the purchase price.
Here are five ways to make the most of your succession plan:
1.) Prepare years in advance
Typically, the more time you take to organize and prepare the business, the better your return will be. Over the years, your business and real estate, if you own it, have hopefully appreciated and become valuable assets. As you plan to sell, figure out how much money you will need to live comfortably in retirement. If you’re not sure what you need, take time to meet with a financial planner who can help you determine a realistic number. This will give you a better idea of your timeline and how much you need to make from the sale of your business.
2.) Identify a successor
A key aspect of your contracting business succession plan will be identifying a successor. This could be a family member, longtime manager or even another local contractor. When considering your customers, employees and the legacy of your business, it is best to find a buyer that is well-suited to take over. Be transparent with the future owner and share the financial information they will need to secure financing. Furthermore, discuss the transition strategy. Will you continue to work at the business once the purchase is finalized? How will you introduce your clients to the new owner?
Identifying a successor or buyer is a critical part of an exit strategy that is often overlooked. Although you, as the current owner and seller of the business, have done a phenomenal job of creating a contracting business that has a great reputation in the community with significant value, that is only one half of the sale. If you are interested in receiving all or most of the proceeds from the sale of your business up front, it will almost always require the buyer getting a bank loan. This means your buyer will need to be creditworthy. Identifying the buyer and speaking with a banker early on to determine what is needed for them to buy the business is a crucial part of the process and will lead to a smoother sale when it is time for you to exit.
3.) Meet with your CPA
As you plan your succession, meet with your CPA to begin preparing the financials for the sale. The buyer and their lender will ask for three years of prior tax returns and interim statements from the beginning of the fiscal year. A current profit and loss statement and balance sheet will also be required. In addition to providing accurate and up-to-date financials, your CPA will be a valuable resource for structuring the sale and understanding the capital gains tax you as the seller will pay.
4.) Clean up your financial reporting
As the business owner, you will want to get your financial house in order so that your financial reporting is strong and accurate. If you have been running personal expenses through the business that are not easily identifiable, it is important to remove them, as they can negatively affect the value of the business. It is also important to reflect profitability prior to the sale. Ultimately, the purchase price will be based upon a number of variables including asset values, annual revenues, multiples of earnings and other intangible assets.
Evaluate how costs are recorded. For example, lenders look at cost of goods sold (COGS) and administrative expenses as a percentage of revenue, so make sure they are recorded consistently and accurately.
In addition, have the cost structure of the business written out. The future buyer will need to see owner-related expenses such as salaries, pensions and life insurance that may not be inherited by the buyer. Start documenting one-time expenses so the buyer has an accurate understanding of the full financial picture. Recording one-time expenses and explaining them can positively affect the final purchase price of the business.
5.) Communicate with your staff
Staff members are a key part of the business. As you prepare the buyer to take over the business, it is important to communicate the transition with your staff. Likewise, you want the new owner to understand the importance of the team. Even though you are exiting the business, many of your staff will have relationships with the local community and customer base. Their presence in the business and support of the new owner will be extremely valuable in sustaining success. Losing valuable staff to a competitor will ultimately hurt the value of the business, so ensure your staff feels secure during the ownership transition.
It takes a lot of work to prepare your business for a sale, but the efforts are well worth the extra time and attention. Selling your contracting business is a major life event that should be planned out as methodically as you built your business. Using these strategies to ensure you receive the maximum amount possible will prepare you for a successful business transition, as well as a fruitful retirement.
Live Oak Bank: Contact us today
As an experienced lender in the HVAC, plumbing and electrical contracting industries, Live Oak Bank is eager to be a part of the team that helps you achieve your goals for your contracting business. Please contact us at 910-550-2858 or visit the Live Oak Bank website to learn more about our financing options that are specifically tailored to the contracting industry.