Exit Planning For Construction Companies
Ten years ago, I spent a great deal of time counseling construction clients about the best tools to survive and mitigate risk. Now, 10 years after the “Great Recession,” I find that a lot of my conversations are centering on succession.
These days, more owners appear to be thinking about some type of management transition, liquidity event, or exit strategy – and rightfully so! But the truth is, with regard to preparing your business for any one of these events, the best practices are no different from what they were a decade ago.
While it’s been great to witness the outstanding growth opportunities that the industry has seen over the past few years, it’s also been surprising to see that some of the lessons that were learned during the last recession have already been forgotten.
In order to best prepare for transition, keep the following critical success factors at the top of your mind.
Vetting of Partners
During the Recession, I saw many successful general contractors and specialty trade contractors step up their screening process when vetting potential partners. This involved financial and performance evaluations when determining who to work for and with. Project owners should be included here as well. Those who didn’t invest enough time in the screening process found themselves at a higher risk of failure. When screening potential partners, don’t be afraid to ask the tough questions, including:
- Credit availability – what is the financing situation? Get permission to call the financing provider.
- Surety & insurance relationship – who are the providers and what is the length of those relationships?
- CPA relationship – who is the provider, what is their reputation and industry expertise?
Because ours is an industry that is currently stressed with regard to capacity, it’s important to be more critical of potential partners. Unfortunately, I’m seeing situations where companies are partnering with unknown entities for the sake of taking on the project. Of course, in order to grow and maximize your opportunity, there will be some situations where this is the case. But the key is to limit additional unnecessary risk by taking proper precautionary measures.
Knowledge Transfer & Internal Transparency
They say sharing is caring, and that mantra holds true in business as well – especially when succession planning is on the agenda. When it comes to business strategy and planning, financial and operational successes & misses should be discussed and a framework for building out this knowledge should be established to bring your key managers into the loop. I can’t tell you how many contractors I run across whose external business relationships and operating knowledge are all tied to one individual. In this case, the lack of knowledge transfer will greatly restrict the ability for the owner to transition and extract value.
Processes & Procedures
To ensure that your operational, financial, and accounting procedures are best-in-class, proper job costing and job tracking are paramount. Do you have weekly job meetings to review progress? Are costs properly tracked and allocated so you can quickly and adequately assess results? Are the “i’s dotted & t’s crossed” when it comes to documentation – i.e. – properly reviewed & executed submittals, contracts, certified payrolls, notices of commencement, notices of furnishing, protecting lien rights, securing lien waivers, properly signed change orders, etc. Your future success depends on your ability to build out solid processes and procedures, which will help guide the company for many years to come.
Whether your succession/exit plan includes an internal management transition, personal liquidity event/cash out, outright sale, ESOP, or any combination thereof, executing on these fundamentals is critical. By doing so, you will mitigate the risk in your business and significantly increase its value. Most importantly, you will set yourself and your employees up for future success in any economy.
If your advisors aren’t encouraging and having these discussions with you, give me a call at 614.314.5937 to discuss. Or, you can email Rea & Associates to speak with a member of Rea’s valuation and transaction advisory services team.
By Doug Houser, CPA, MBA, CEPA, principal & director of construction & real estate services