Coming out of the great recession, numerous companies across a wide range of industries have experienced tremendous growth, leading ownership to rethink long-term individual and business goals. For construction business owners, exiting their role as an active owner to retire or pursue other business opportunities is more attainable and logical now than any other time in recent memory. In addition to the role current market dynamics play, such as an extended real-estate development cycle over the last decade, developers pushing back against rising costs, and the fact that many baby boomers are approaching retirement, makes succession planning an especially popular issue right now.
There is not one solution that fits all, but if you’re a construction business owner who is contemplating their exit strategy, here are some fundamental next steps you should be considering. This does not happen overnight, so the sooner you begin the process the sooner you will be able to begin to develop your plan and accomplish it.
1. What Matters Most?
It’s important to first decide what your primary goal is: leave your company in the most advantageous position to build on your legacy, or leave with the most robust financial package possible. Ideally, any owner would like to accomplish both. However, you need to recognize the potential for these objectives to conflict and decide which side you will favor should push come to shove.
To achieve either goal, you will also need to consider both short-term and long-term objectives which may also conflict, such as maximizing current earnings versus reinvesting in equipment and technology.
2. Will You Pass It On or Bring It to Market?
Next, an owner must consider whether you would like there to be an internal transition within the company or an external sale. This involves analysis to determine if there are qualified internal candidates to assume leadership already within the company. If not, you may have to start looking elsewhere for new leadership to put your company in the best position to succeed moving forward and/or be as attractive as possible to an external buyer.
When weighing these options, owners should consider that in larger markets like New York where competition is tight and the complexity of doing business is high, exit opportunities can be more limited. Additionally, buyers are less interested in a business that gets most of its work through a bidding process. With this in mind, it may be best for owners of businesses with a strong flow of work and capable internal talent to devise an exit strategy that transitions ownership to internal parties, while partially compensating exiting ownership with future revenue.
To prepare internal successors, you should start training them in all aspects of the company now. They must learn how to “think like an owner.” This takes time for them to develop and in the event you do not have the future leaders internally, it will take even longer to first find the right people. There are also various compensation strategies to utilize to incentivize the future leaders.
Alternatively, with a prolonged economic boom and subsequently record development growth in many markets, there may not be another time as advantageous as now for an external sale. With many new companies and heavy competition in your given industry, mergers and acquisitions may come with more favorable terms and less urgency now as opposed to during an impending market downturn.
Additionally, there are many companies outside New York that are looking for opportunities to enter the New York market.
3. What Are You Worth?
Finally, owners need to determine how you will achieve the best valuation for your business and what thresholds must be met to make your exit feasible for long-term personal financial goals. The business must be best positioned and able to give evidence of current and expected cash flow. Appraisers often value construction companies by earnings, value of upcoming and backlogged transactions, equipment and other factors.
The business’s physical assets, niche areas and human capital must be thoroughly evaluated before deciding future steps, and actions should be initiated for improvement wherever necessary. Does your firm have the infrastructure and controls in place to allow successors or buyers to succeed in the near future and long term? From the age of your equipment to the niche areas you work in to the technology you utilize—you may need to invest back into the company significantly to achieve your preferred exit.
Considering how many years business owners put into building their company, they should exit it on their own terms. To do this, exit planning and succession actions should be taken sooner than later and be continually reevaluated.