For most construction business owners, the sale of the company is the largest and most impactful transaction of their lives. The proceeds will likely be the main funding source for the next phase of their lives and provide financial freedom for them and their families.
While every business owner has different goals and objectives when it comes to transitioning out of their companies, there are plenty of common challenges along the way. Retiring owners can put themselves, their families and their businesses in a better position to succeed by avoiding a few common mistakes.
1. Waiting Too Long to Plan
If there is a kryptonite to the entire transition planning process, it is most certainly time. More specifically, a lack of sufficient time. An appropriate amount of time to plan for and execute a well-defined transition process is the gateway to success. There are innumerable challenges to an owner leaving the business; that is why so many businesses fail to transition successfully.
Why, then, do many owners aspiring for retirement provide themselves and their advisory teams so little time to plan for the future? The answer likely lies somewhere between being unfamiliar with the planning process and being too busy to think about it. So, let’s take this opportunity to review exactly why adequate time is so important to this part of the process.
- You need time to fully explore and evaluate your transition goals—What is most important to you? What does this process need to provide for you and your family? Are you ready to stop working entirely or simply step away from ownership?
- You need time to fully explore various exit paths—Do you plan to sell the business to a co-owner, key employee(s) or a family member? If so, you must examine how the deal will be funded and if the next generation is a good fit to lead the business. If you plan to sell to a third party, you must evaluate whether your business is marketable to a professional buyer or competitor. Your advisory team needs time to help you fully research and analyze your desired or ideal pathway to give you the best chance at receiving maximum value.
- You need time to complete a financial needs analysis—For many owners, there is one major unknown that drives uncertainty, stress and, inevitably, procrastination: How much money do I need from the sale of the business? This is the exact question that the financial needs analysis is designed to answer. This calculation takes a deep dive into such breakdowns as lifestyle spending, assets outside the business, income, debts, Social Security benefits and estate planning. Once completed, you will have a clear picture of how much money you need from the proceeds of the business sale. Your financial planner, certified public accountant (CPA), attorney and the rest of your advisory team can then continue executing the transition plan with these figures in mind.
- You need time to build the value of the business, if necessary—It may seem counterintuitive to discuss building your business during the transition process, but it is imperative. The last thing that many owners want to do when considering retirement is invest more time, effort and money into the business. However, consider the following scenario. After a thorough financial needs analysis, it is projected that you will need at least $3 million from the sale, after taxes and expenses. Wisely, you hire a business valuation expert who calculates the value at $2.3 million, if sold today. What do you do? Sell it anyway and hope for the best? Reduce your retirement lifestyle and spending? Toss your transition goals out the window and continue working for an unspecified number of years? Fortunately, there is an alternative—you can increase the value of the business, but this can only be done with ample time to execute an efficient plan. A few examples of how this can be done include improving sales, profits and cash flow; restructuring company leadership and management; diversifying customer base, building efficient systems for sales, training, recruiting, billing, quality control, reporting, etc.; completing a comprehensive audit of the company financials and improving weaknesses in financial controls; creating a realistic growth strategy for the business that doesn’t involve you.
2. Neglecting Business Health
Whether you plan to sell the business to a third party or transition it to someone you already employ, you will directly benefit from selling a strong company. Not only does the company need to be healthy, but it also needs to be able to maintain and improve its health without you. Remember, all buyers want to see a business that nearly runs itself, and few are looking to buy themselves a job. Unfortunately, many owners default to the transition process because the business is stagnant or cash flow is unstable.
Reliable and improving cash flow is vital to an internal transition. It is unlikely that your successor has the cash to buy the business from you—most internal sales rely on company profits to buy you out over time. You want as little risk to receiving these checks as possible. This requires you to eliminate as many obstacles for the new owner(s) as you can.
Reliable and improving cash flow is vital to a third-party sale. This is what the buyer is interested in purchasing. All buyers ask, “What am I buying?” The answer should be clear: stable and growing profits.
3. Not Setting a Timeline
A common challenge that many owners face is fitting the transition planning process into the other demands on their time. This is expected and also why outsourcing much of this work to an advisory team is so valuable. However, even the best team will struggle to hit a moving target. So, one of the very first steps in the process is to solidify your transition objectives and, more specifically, your time frame for leaving the business. Detailed timing objectives, such as the ones listed below, are important for each member of your planning team and for those working within your business.
- Your CPA will need to know your time frame in order to accurately project future cash flows and help with tax planning on the transaction.
- Your financial planner will factor your time frame into the financial needs analysis and future cash flow plan.
- Your attorney will work on legal agreements, business succession strategies and personal estate planning, which all revolve around your particular transition goals.
- Your successor/owner will need an open line of communication with you about the transaction, how it will work, how they will pay and what is expected of him or her.
- Your employees and management team will need to know when to expect changes and what the future of the company may entail for them.
As long as a specific time frame is established early in the process, you and your advisory team will be better positioned to handle any challenges that come your way.
The first step to a successful transition plan is taking the time to lay out detailed and specific goals. What is the time frame? Who is involved? What is important to you about leaving the business? Why now? Answering these questions and communicating early and often with your advisory team will help you to avoid mistakes and maximize the return on your investment in the business.