When selling your construction company is the best option
| February 04, 2014 |
[Editor’s Note: This is Part Three in a four-part series chronicling the stories of real contractors who are making hard choices about their end game in the business: liquidate? Sell to family or employees? Seek a third party buyer?]
If you’re in the market to sell your business, you may be in luck, especially if you’re in a geographical or market growth area.
“We see companies being more aggressive on the buy side to get positioned in markets that are showing signs of recovery,” says Chris Daum, senior managing director of industry consultant FMI. “They’ll acquire a contractor in a target market so they can gain that contractor’s knowledge, client base, project resume and skilled workforce.”
An attractive buy
But first your firm has to be attractive to buyers. “Just looking to get out is an unsellable position,” Daum says. “Unless you offer something special, you may be unable to sell. The odds of selling the business and walking away are very low unless you have put capable management in place and have a proven track record.”
For those who are looking to sell, Daum advises you operate the business like you are going to keep it forever. “Work on your people and build your team,” he says. “The same issues that will help you grow are the same factors that will make the company attractive to a third party buyer.”
One trap of sellers, says Stevens, is that people start leaving the business mentally, and while they’re not paying attention, the profits go down and the sale doesn’t go through.
And owners are better served to start the process early, so there is a succession process in place while you are still in a leadership position. “You have to start sooner rather than later,” Daum cautions. “If you wait too long you will have limited options.”
Getting ready for the sale
Contractors wanting to sell need to start with a financial audit, done by a reputable financial firm, Stevens says. “This will give you a credible assessment of your finances and assets, and it’s easy to do.”
Not so easy is hardwiring the processes you use—for example, how you go about planning a job. Systemizing your knowledge means when you leave your know-how won’t go with you.
The transaction has to work for both the parties, but the number one thing a buyer will be looking at is a seller’s people, Daum says. “Construction is a people-driven business. A seller has to have the leadership in place that has strong customer relationships and the loyalty of the workforce.”
Which is why culture plays such a critical role. “Even if the buyer and seller are two totally different types of businesses, there must be a cultural matchup,” Daum says. “There has to been an appeal in the way each company approaches their work.”
Create a buyer “hit list”
Stevens recommends sellers consider using an auction approach facilitated by a construction business advisor. “But such an advisor has to know construction, because potential buyers will spot it right away if they don’t. The advisor has to know about your equipment, your ratios and be well versed on your company.”
After educating himself on your company, the advisor draws up a small hit list of potential buyers, which the seller vets to eliminate any unsuitable buyers. The advisor then contacts all potential buyers, and follows up on any interest.
When it comes time for face-to-face contact, everyone signs a “non-disclosure with teeth,” Stevens says. This auction process helps the seller’s price. “If you have five people looking at the business,” says Stevens, “and one guy gives you a low number, you can just pass. And it gives you a sense of reality about what your firm is worth when several are making offers.”
Stevens advises contractors to be market driven and rational. “People get so proud of what they have; if you say you’re not going to sell it for less than $10 million and it’s really worth $6 million, you end up cutting the discussion off after the first meeting. But if both parties want the deal to happen, they’ll figure out a way to make it happen.”
The deal needs to happen quickly—within 90 days, Stevens says. “A lot of things can happen in the interim: a key employee leaves, someone gets divorced, or some crazy economic event, all of which could affect the deal.” No one can know about the pending deal unless they are shareholders.
If you’re the buyer…
Buyers have to be careful, and proceed with a well-formed strategy.
“If the company being bought is broke or broken,” Daum says, “it could be an opportunistic situation or it could be your worst nightmare, potentially putting your own company at risk. Unless you know the situation very well, or the market or people in that company, you need to be extremely careful.”
One trend that may impact the buying-selling process is the increasing pressure on regional contractors, one of six key trends FMI noted in its 2014 U.S. Markets Construction Overview.
“The market has gone to both sides of the barbell,” Daum says, with small, nimble contractors on one end who are able to serve local niche markets.
At the other end are the huge builders that can bring a large project resume and specialized team into the market. “I know of one contractor who couldn’t stay put doing $40 million wastewater treatment jobs after the bigger firms started chasing those projects,” Daum relates. “He was faced with selling out or shrinking his company.”
Stevens, however, feels that highway contractors are well positioned in the seller’s market: they have the equipment expertise, the contracting methodology and the skilled employees. “Heavy highway contractors are more process and engineering oriented,” he says, “so you can take a group of people and get them into a process that works. And the fixed assets will be there regardless if some of the employees leave.”
But realize the market is limited: “Loosely speaking, there are probably around 1,000 viable firms that can or want to buy a $5 to $10 million highway contractor. It’s a very small, specific audience.”
When you explore all options, Daum says, one pathway becomes evident. “We like to approach things in a holistic way, looking at all the options: selling it to the kids or to management, selling it to outsiders, or even winding the business down and liquidating.”
The Future of Your Company, a 4-part series