Prepare Now For a Smooth Future Business Succession

While the pandemic has brought on unprecedented changes and challenges for nearly every business owner, the construction industry generally has fared well over the past year. Considered essential businesses, many construction companies were fortunate to keep busy working through their backlog during the COVID-19 pandemic.

However, the economic outlook for 2021 is mixed. On one hand, the commercial real estate industry has been hit hard. There is very little demand for retail and office space—a trend that may last well beyond the pandemic. And state budgets have been devastated by the pandemic. But, there is also hope for construction business owners. The Biden Administration has floated an infrastructure bill that could invigorate the industry.

So, it’s a mixed bag for construction company owners today. Given this uncertain backdrop, many construction company owners are considering selling their businesses. In the wake of a challenging 2020, owners who were only starting to think about retirement are speeding up their timeline. The expectation of tax increases has also caused many owners to consider moving up their timeline. It may seem like an inopportune moment to sell. However, those that prepare strategically can generate meaningful returns from a sale.

Plan for all succession scenarios

Construction business owners looking to sell their businesses have a few paths to consider. They could sell to management or family, set up an ESOP or find a strategic buyer.

When deciding which path they would like to take, business owners should start with a valuation to understand the financial stakes. Typically, selling to an outside buyer is the most lucrative option. So, an owner who is strictly focused on maximizing retirement assets may opt for this route. That said, different owners have different objectives with a sale.

Ultimately, when the sale is complete, what is most important to the owner? Some may want to make as much money as possible. Others may want to make sure employees are taken care of. Or, perhaps an owner wants to keep the business in the family. By understanding top priorities and financial implications, business owners can decide which path is the best fit.

Prepare for success

Once an owner knows which route he or she would like to take, there are different steps the owner can take to ensure the sale is successful. It’s important to note that preparing for a sale requires a fair amount of foundation-laying. The most successful owners prepare for a transition years ahead of an eventual sale. It’s possible to fast-track a sale, but owners who think a sale could conceivably be in their future should begin laying the groundwork today. That way, they will not only be ready to kick off the sales process, but they will also be prepared to assess unexpected offers that may arrive.

If an owner is selling to management or considering an ESOP, he or she needs to identify the appropriate talent to take over the business. It’s important to select the right people and help them develop the skills they need to be successful. Running a business requires a unique skill set, so owners should be prepared to start training the next leaders well before the transaction. Identifying a leadership team with the capabilities to successfully manage the business is also important in ensuring financial backing.

Owners that would like to sell to family should look into different ways to hand down the business, which could include gifting ownership, selling the business or a combination of gifting and a sale. It is important to consult with an advisor to understand the most effective option, which can include the sale or gift of a minority interest at a discount. By incorporating estate planning with transferring ownership to family members, business owners can take advantage of valuation discounts and minimize tax exposure.

If an owner is selling to a third-party, he or she should first take steps to improve the financial performance of the company. This effort will help maximize the return on a sale. Owners should work to maintain a healthy pipeline of projects and improve their margins. Unfortunately, many companies have worked through their backlogs during the pandemic. And, with a softer economic outlook for the industry in 2021, refilling that backlog could be challenging. If an owner isn’t able to improve her company’s backlog and margins now, he or she may want to wait to sell and give him or herself time to improve financial performance. Owners selling to a third-party should also keep in mind that the sale will require a thorough due diligence process, and the transaction process typically takes longer than the process of selling to management or passing the business to family members.

Regardless of the path an owner chooses, the key to maximizing the return on a sale is proactive planning. Whether an owner wants to retire within the next few years or further down the road, getting started now, considering the options and preparing for different scenarios will help maximize the chance of a successful sale and business transition.