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OP-ED: The Process of Preparing a Construction Business for Sale

April 24, 2019

Overview

The construction industry has been booming for several years, and most economic experts say it should have another two years of growth.

As the market settles, changes or consolidates, contractors should consider their options, including preparing their business for sale. Although most construction businesses do not sell to third parties, if a company is positioned correctly, it will be able to respond or follow other strategies.

Selling a business is a process. It can be long and complicated, or it can be smooth and straightforward. To maximize the value of a business, owners must prepare before placing it on the market and negotiating.

To be successful, owners need to prepare and review the company’s legal, financial, operational and regulatory status with enough time to correct any issues or be able to explain them. These are some key considerations in preparing a construction company for sale:

Transaction team

A seller needs to assemble a team that has experience with the construction industry and related mergers and acquisitions. Selling a business is not the same as a construction project. The team members are the owner and family, inside management team, legal advisers, financial advisers/investment bankers and accountants. It takes time to get the team on the same page.

Seller due diligence

Before going to market or providing any buyer with information, the seller needs to perform its own due diligence review to ensure there are no problems that could delay or adversely affect the sale. This gives the owner time to cure the problem or develop a negotiation strategy to address it, and identify regulatory or third-party consents needed to finalize a transaction. In construction businesses, the following areas need attention:

Financial statements and other financial information – Audited financial statements are preferred but not always needed. The more reliable the information, like audited generally accepted accounting principles financial statements, the more solid the valuation. Tax filings and payments must also be confirmed. Quality of earnings reports can be beneficial. Reliable and improving cash flow is vital to a third-party sale.

  • Corporate records – These need to be up to date and in good form. Sloppy records usually signal a lack of best business practices and might engender deeper scrutiny.
  • Material contracts – Whether these are written or oral, transferable or not, and long-term or terminable may impact the company’s value.
  • Material relationships with third parties – Are relationships documented or handshake deals? Will they survive a transfer to a new owner?
  • Assets – What assets are legally in the company or owned by the owner outside of the company? Has the intellectual property and know-how been verified and can it be transferred, or are there employee ownership issues? Should the real property be in the company? What assets (e.g., cars, life insurance, sports tickets, cellphones, company cards) should not be part of the sale? Also, unused or obsolete assets need to be managed.
  • Employees and employee benefits – Is there a union involved and are there change in control provisions or notification requirements? Are there written employment agreements and do they deal with a change in control? Does the owner expect employee flight from news of a sale? Should retention programs be established?
  • Governmental permits and licenses – In construction, permits and licenses are often tied to individuals, not businesses. Often, the owner is the key person, and time and training are needed for transfer. Also, governmental licenses usually have change in control requirements.
  • Legal claims – Can they be settled or insured around?
  • Warranties – Most construction projects have trailing warranty claim exposure. Some historical exposure may be addressed with insurance, annuities or other techniques.
  • Insurance coverage and bonding – Insurance coverage may be obtained for some historical issues or a negotiating strategy can be developed. Bonding and surety issues may be addressed with some work-arounds.
  • Personal guaranties, debt, and long term obligations – These need to be identified and analyzed for alternatives.
  • Real estate and environmental issues – Leases need to be reviewed for transferability. Is real estate part of the transaction? Are there environmental issues?
  • Tax implications – Taxes need to be analyzed from the company’s and owner’s perspectives. The transaction’s structure will rely on the tax implications, including state tax items. Do not underestimate the benefit of good estate planning and gifting.

Valuation

Before a company goes to market, the owner needs to know the valuation range. A financial adviser/investment banker is needed for this. Good financial information is essential, and so is information about normalizing cash flow and possible synergies. Much depends on whether the company has been run as a stand-alone business or more like a family enterprise.

Personal impact on the owner

How will selling the business affect the owner personally, financially and emotionally? Most buyers will want a non-compete agreement from the owner. Can this owner stay away from an industry that he or she has spent a lifetime mastering? It takes time to process this impact. An important value add to the business is the reduction of dependency on the owner. With time and succession planning, this is doable. Family dynamics must also be considered, especially if there are family members who see themselves as successors to the business.

Increase the value of the company

Through the process, areas for improvement can be identified. Some examples are increasing sales, profits and cash flow; restructuring the organization’s leadership and management; diversifying the customer base; building better operational systems; completing an audit of the company’s financials and improving weaknesses in financial controls; and creating a business strategy that doesn’t involve the owner.

These are just some considerations. Preparing a construction business for sale takes time and effort. The effort is essential to a successful transaction, and the process is invaluable to a good outcome.

Column first appeared in the Daily Journal of Commerce on April 23, 2019.

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