Five Steps for Selling Your Construction Business
by Trent Cotney, partner, Adams & Reese, LLP
(Editor’s Note: Trent Cotney, partner at Adams & Reese, LLP, is dedicated to representing the roofing and construction industries. Cotney is General Counsel for the Western States Roofing Contractors Association and several other industry associations. For more information, contact the author at (866) 303-5868 or go to www.adamsandreese.com.)
There comes a time in the life of your construction business when you find yourself ready to sell. Perhaps you are retiring, or maybe you need to move on for financial or personal reasons. Be sure to take the time to accurately value your business, do some research, and get the best deal possible.
Determine the Value
Before you start the selling process, make sure you understand what your business is worth. If you have built up your company for years, it may have great value to you. However, you must approach this process by focusing on what value it may have to buyers, and much of that relies on the financial health of the business. One way to consider value is to look at income. You can check your cash flow and the capitalization of earnings. Or, if your business lacks profit potential, you could list your assets, total their worth, and sell your business based on that tally.
A more lucrative method may be looking at the current market. For this approach, you can review what similar businesses are selling for or have recently sold for. That will give you a point of comparison to determine price multiples appropriate for your business. You can derive a price multiple by dividing the recent selling price of a company by its annual earnings. For example, maybe a construction company in your area earning $300,000 a year was sold for $750,000. The pricing multiple would be 2.5, or $750,000 divided by $300,000. Based on that, you could multiply your annual earnings by 2.5 to derive a potential selling price. Pricing multiples can vary based on the type of construction your company specializes in and your region. You will want to look at comps in your area to get an idea of what to expect.
Put Together a Selling Team
Enlist the expertise of experienced professionals who can help you make the right selling decisions. You will need a business broker to help you pull comps and set the right selling price for your company. This person can help market your business, put you in touch with potential buyers, and negotiate the final price. Brokers usually earn their fees via a percentage of the sale, often 10%-15%. Your accountant can help you organize all your financial documents and ensure they are accurate. If you do not already use an accountant, it will be beneficial to hire one. Accountants usually charge an hourly rate but may agree to a flat fee.
Sales agreements can be complex, so it is in your best interest to hire an experienced lawyer. This professional can ensure that your contracts are valid and the terms of the sale minimize your risk. Attorneys generally charge an hourly rate or might offer a flat fee.
Make a Plan
If you are retiring, you might want to take a year or two to sell. But, under other circumstances, you may need a quicker sale. Most sales timelines are at least six months. Whatever your situation, set a target exit date and work to meet that.
Identify Possible Buyers
Before you begin looking for buyers, consider whether your sale will be confidential. In most cases, business owners prefer to keep their sales private. This approach can help you avoid concerns from employees, customers, and suppliers. If you opt for a confidential sale, your broker can create a blind listing for your company and utilize nondisclosure agreements with interested buyers. In addition, you and your broker could share your plans with a few business contacts you fully trust. They can help suggest potential buyers but also keep your situation under wraps.
If you are retiring or have a unique position in the community, you may feel more comfortable with a public sale. In that case, you may find a buyer easily. For example, a competing business might want to buy your company to increase its presence in the market. Other buyers could include employees in your company, entrepreneurs, or private equity companies.
Close the Deal
After you receive offers, review them with your broker, accountant, and lawyer to decide which ones to consider. Then you can negotiate the term and finalize the details. Once your closing date is set, wrap up the projects in progress and work with the buyer on a transition. This transition will involve informing employees, customers, and suppliers and possibly shepherding some of them to the new owner.