How Contractors Can Avoid 10 Common Exit Planning Mistakes

How Contractors Can Avoid 10 Common Exit Planning Mistakes

Exiting your business requires long-term, comprehensive planning, whether you plan to pass your company to family members, sell your interest to a partner, or sell the company to an employee group or outside buyer. As with any major planning endeavor, the path to a successful exit can present you with some roadblocks along the way. In the construction industry, planning an exit comes with its own inherent risks and potential hazards. But, with the right plan in place, you can turn things around before the hazard takes its toll. Here’s a look at how you can avoid 10 common mistakes contractors make in exiting their business.

1.    Start planning early, so you can maximize your company’s transferable value.

As a contractor, the day-to-day grind can make it easy to place business matters that don’t feel urgent on the back burner. While it may feel like you have plenty of time, later often comes around sooner than you think. From planning to implementation, exiting a construction business generally takes around three to five years. One of the reasons it’s helpful to begin planning for your exit as early as possible is to increase transferable value and ensure the company’s ongoing financial health. If your company has transferable value, it means company success is not dependent on you as the owner, and a transition would cause minimal disruption to cash flow. 

2.      Perform a gap analysis to ensure you can meet your post-exit financial needs.

You need assurance that you will receive the amount of income you need to live comfortably after your exit, independent from future business cash flow. As you begin to prepare yourself and your business for what comes next, one of the first things you need to know is your business’s current value. By weighing that value against your projected post-exit expenses, you can calculate a baseline on which to set your growth goals ahead of your exit. And consider your options based on the type of transfer. For example, most family transfers are financed or executed over a more extended timeframe than typical third-party sales because of cash flow and liquidity needs. Depending on your financial needs, you could bridge the gap by maintaining ongoing involvement in the business or participating in profits as an owner until you receive the money you need to exit.

3.      Start with in-house opportunities to increase business value. 

It probably goes without saying that maximizing cash flow and minimizing costs will help you increase your company’s value. However, there are more ways to increase business value that go beyond monitoring receivables and cutting spending. Start by reviewing your existing operations for opportunities to improve efficiency and productivity. You might consider analyzing the cost against the projected time savings, revenue increases, and ultimate hike in business value you may experience by utilizing automation and efficiency-promoting software, such as job costing, project management, or customer relationship management programs. Having effective financial controls, a realistic strategic growth plan, and formally documented systems and procedures in place will also increase the value of your business. 

4.      Don’t underestimate the value of your key players. 

Key employees hold significant responsibility for maintaining (and increasing!) your cash flow, customer and employee relationships, and day-to-day operations. Finding good help can be challenging, and maintaining a team that works in harmony is even more challenging. Key employees push several business value drivers in a successful direction, which means they play a critical role in ensuring you receive the highest possible sale price for your business. Incentive plans, such as those for non-qualified deferred compensation, stock appreciation rights, phantom stock, stock bonus, stock option, and stock purchase, go a long way in keeping employees motivated and happy, as do current and deferred cash bonuses. 

5.    Search for value drivers outside of the box. 

For some, now may be an ideal time to acquire customer lists, inventory, equipment, or experienced staff from smaller, less adaptable companies struggling to continue since the pandemic. Obtaining these assets may lead to significant growth. Others may benefit from expanding their geographic footprint, whether on their own or as part of a joint venture or partnership. Weighing fixed costs against the capital needed and looking at market studies and area competition can help you assess your options as well as the risks involved. Advancements in technology have also provided new opportunities for vertically integrated services. Customer diversification or adding service work to supplement your contract work may be good options. Moving manufacturing, distribution, or labor management in-house or implementing prefabrication and modular construction may reduce cost, boost efficiency in resource allocation, and maximize job profitability.  

6.    Ensure the sale or transfer will be a “balance-sheet friendly” transaction. 

All of your open jobs and contractual obligations must be met or reassigned, and the transaction that occurs when you exit your business has to be financially feasible for both you and the new owner. There are a lot of moving parts involved in making all of that happen successfully. Your plan needs to protect your assets and account for your ability to maintain appropriate liquidity leading up to and through the transfer. Business owners also want to keep any potential effects on surety, banking, and credit capacity at the forefront of their exit planning efforts. If you use debt, for example, how will that affect your loan covenants? Debt does not always fall to the new owner. It depends on whether the transfer is made through a stock or an asset sale. In addition to “traditional” debt-transfer matters, there are new ownership transfer considerations for business owners that are Paycheck Protection Program (PPP) loan borrowers as well. 

7.    Tax planning is a critical part of the process. 

Careful tax planning is needed to minimize certain liabilities throughout the ownership transfer, and it’s an ongoing process. For example, in a family transfer, you need a plan to leverage opportunities over time and balance taxes from income, capital gains, gifts, and your estate. Since there is a tax rate increase on the horizon for all of those rates for high-income individuals, timing has become an integral part of minimizing tax liability as well.

8.    Don’t lose your focus. 

It’s too easy to let distractions or fear of the unknown lead you astray from your goals. There may be some recalibration needed as your exit plan progresses, but that doesn’t mean you should abandon your exit plan. Business owners have to reevaluate their current exit timeline and make adjustments as necessary. If, for example, you have experienced changes in your business value, investments outside of your business, or other areas of personal or family financial stability, timing adjustments may be needed to maintain a feasible and successful exit. 

9.    Even the most solid plans require a backup.

Even an exit plan needs a backup plan to ensure appropriate wealth distribution and business continuity. There’s always room for unforeseen circumstances to offset any plan. What if your child does not possess the drive or interest to carry the business? What if something happens to you before the plan comes to fruition? What if the deal you were counting on falls through? It pays off to be prepared with Plan B, no matter how confident you are in Plan A.

10.   Find the right professional team.

Exit planning is a multifaceted process, to say the least. Business owners exiting their companies need access to trusted guidance on everything from business valuation, organizational development, profitability improvement, and strategic planning to asset protection, business continuity, and tax minimization. Since no one person can be a specialist in everything, business owners really need a collaborative team. 

As Certified Public Accountants, the Altus Exit Strategies team members bring the financial consulting and tax expertise of a public accounting firm to the exit planning process. As a Certified Exit Planner, I bring together and lead exit planning teams that include lawyers and other financial and professional advisors. Together, we help business owners create comprehensive exit plans that help them ensure strong legacies and reach successful exits. Contact me today to start your exit plan. 

by David Jean, CPA, CCIFP, CExP 

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David Jean is the Director of Altus Exit Strategies and a Principal at Albin, Randall & Bennett, where he is also the Practice Leader of the Construction & Real Estate and Succession Planning Service Groups. David works with business owners who want to improve their business’s value before they sell through the Seven-Step Exit Planning Preparation™ process. He has worked with companies from $5 million to $50 million in revenue across a range of industries.