Author: Ethan Lee, CPA, ABV, CFF
Many business owners in the construction industry seem to think the only option to transition out of their business is to complete existing contracts and then sell the company assets in a liquidation scenario. However, construction businesses are similar to other service-oriented businesses and there are many reasons why they can be desirable investment opportunities for prospective buyers. Advantages of construction businesses include the following:
- Construction is a large part of the national economy. It will not go away as long as people need buildings to live and work in. There is an inherent permanence to this industry.
- Property owners are busier than ever and are less inclined to be do-it-yourselfers. At the same time, trade skills are diminishing in the general U.S. population. These factors will increase demand as the public depends more on hiring these services in the future.
- Recurring revenue is common from business relationships and profit margins can be very high.
- The work itself is fulfilling as it improves cities and communities.
To be fair, there are challenges that go hand-in-hand with the construction industry as well. Some of the more common ones include employee retention, high bonding and licensing requirements, and volatility due to economic pressures and business mismanagement. An awareness of these challenges, and a little planning, can help construction business owners prepare for a successful transition.
One common strategy that addresses the employee retention challenge is to transition ownership to key personnel over a period of time. This strategy involves developing skilled employees that are motivated to learn how to manage the business and become owners. Successful construction companies have taken the initial step of retaining their key employees with generous benefits which typically include paid vacation and a company vehicle. The next step often involves getting those motivated employees into ownership by transferring minority interests in the company and continuing to mentor them.
To illustrate this strategy with a real-life example, we were recently engaged to value a specialty contractor business where the owners were planning to sell the company to key employees through a bonus/compensation arrangement over a 3-year period. The selling owners plan to stay in as consultants during that period to ensure licensing and bonding requirements are met and that relationships transfer to the employee-owners.
We hope this post has caused you to consider the transition plan for your construction business. There are more options besides shutting your company doors and liquidating assets. The only catch is that the alternatives require planning and execution. Cooper Norman can help you with both. With our deep construction industry expertise, we stand ready to tailor a business transition plan to your needs and assist in the execution of that plan.