July 29th, 2014 Succession Planning: Build Value into Your Company The construction industry is notoriously cyclical — boom-and-bust patterns seem to repeat at regular intervals. As they look back over the latest cycle, many experienced contractors are deciding they don’t want to struggle through another downturn in five or ten years, and are turning their attention to succession planning. In many cases, however, the value of their companies shrank considerably during the recession, so rebuilding that value is now a top priority. Of course, even contractors with no intention of exiting need to rebuild their businesses’ value, since a strong balance sheet is essential for increasing credit and bonding capacity. What can you do to build the value of your business? One critical step is to build a strong management team. This group of key managers could very well be the future owners of the company. But even if you sell to an outsider, a strong management team will make the business more attractive to a prospective buyer. (See June News Brief) Here are some other important principles that can help you build your company’s value: • Run it lean. If you survived the recession, it’s likely you have already trimmed administrative expenses, disposed of unnecessary equipment, and taken other basic steps to cut overhead. Now’s the time to revisit those efforts to be sure fat isn’t creeping back into your operations. Be sure to take a close look at employee perks like cars and personal items to be sure your company is as lean as possible. • Run it clean. Strip out any non-operating assets that might not be attractive to a prospective buyer. A common example is your company’s headquarters building or other real estate. If your company owns such property, consider carving out this asset into a sister company that can be easily separated from the contracting business. The same principle applies to extraneous businesses or spin-offs, such as a general contractor with a land development or property management division. Often such spin-off businesses can be a drag on earnings, making the core business appear less valuable than it really is. Even if they are making a positive contribution to the bottom line, spinning these off into separate entities greatly simplifies a future sale by making it easier for prospective buyers to understand the actual value of the business. • Grow earnings. Find your high success areas and focus on those niches. Analyze job histories to determine which projects produced the highest margins, and then look to the market to determine which of these niches is also growing in popularity. Many construction businesses are considerably smaller today than they were five years ago, but are nevertheless more profitable because they focused in those areas that are most likely to be profitable for them. • Get your house in order. Make sure your current corporate structure is conducive to a sale. If there are multiple owners — as is the case in most S corporations, limited liability companies and partnerships — be sure the corporate documents include clear provisions for a smooth dissolution of the business. Review buy-sell agreements and other relevant documents with your legal counsel to clarify the roles and rights of minority owners in the event of a sale. Clarifying these issues now can help make the business more attractive to a buyer, and also help avoid last-minute snags or complications. If your intent is to continue and grow your business, make sure employees are in positions that provide the most value to the company. Review insurance policies and credit agreements to ensure that your coverage and credit is sufficient for your current needs. Having too much insurance coverage or a line of credit that is too high may be resulting in unnecessary expenses. • Plan your exit strategy. Before you begin marketing the business, determine your best-case and worst-case scenarios. Will you insist on a stock sale, in which the new buyer simply takes over the company intact? Or would you be willing to consider an asset sale, in which the company is liquidated and its assets and liabilities are sold to the new buyer? There are significant tax consequences in this decision for everyone concerned. The decision will also impact your company’s long-term obligations, including ongoing customer contracts and warranties. Consider consulting with your lawyer and CPA who specialize in construction to consider all aspects of this decision. All these steps take time. Even if you aren’t planning to exit soon, you should start planning now as you continue building your company’s value. For more information, please contact Jason DaPonte or your Sansiveri professional at 401-331-0500.