Whether you’re considering selling your construction company internally or to an outside buyer, the best strategies involve planning your eventual transition several years in advance. Somewhere between three and seven years in advance is good timing, time enough to identify issues and implement solutions. There are several areas that, if focused on, will help to drive the value of your company higher in the eyes of potential buyers.
The first and most important item to consider is your corporate setup. Any business where the owner wears all the hats and performs most of the management duties is not going to be valued highly by a prospective buyer. A buyer wants to step into the shoes of the owner with the time to run the business effectively. Construction company owners often act as their firm’s lead estimator, project manager, head of the HR department, and in other roles because they don’t have people on their internal team talented enough to handle those duties. It’s important that, several years ahead of a prospective transaction, the owner spend time and resources putting the right pieces in place so that the business can run without him. If a buyer sees he will have to spend long hours just keeping the business running, your business won’t sell for as much as it would otherwise.
Project backlog and customer mix
Obviously, the more work you have on hand the better. When the prospective owner can see substantial revenue already on the books, he will understand the business as profitable moving forward, whether that is through distributions of profits to the new ownership group or to produce the money necessary to make payments on the loan he will use to finance the purchase of the company. Also important, though often not so easy to make happen, is a broad customer base. Having one or two large customers might be profitable for you, but a new owner will see that as a risk. If the company under new leadership is unable to retain a particular customer, it would significantly, negatively impact earnings. As much as possible, start from five years out to take on new customers and diversify the company for prospective buyers.
Accurate, up-to-date financials
Current and accurate financial statements are going to be critical to selling your business. Your prospective buyer will want to look back several years at your financial performance, and if your financial statements turn out to be inaccurate, that could kill the deal, or at least cause a lot of issues throughout the buying process. Many times the buyer is financing this new venture, and the bank is going to want to see a history of financial statements. They’ll also be looking for a minimum of a rolling 12 months of activity. At every point you want to ensure your monthly statements are accurate and with proper adjustments for jobs in progress. Your financial statements must provide a clear picture of what you’re trying to sell.
Equipment upkeep and maintenance
No prospective buyer wants to see a junkyard of old equipment. Your equipment needs to be replaced when necessary, but otherwise maintained in good order so a buyer won’t be looking at a huge capital investment necessary to upgrade all of the equipment at once. It is vital to keep up with your maintenance schedule, work through equipment issues as they arise, and ensure your equipment works well and looks good. Many times the buyer will be looking at using those assets as collateral for a new loan, so they have to demonstrate value.
You should be able to identify expansion opportunities that are available to a prospective new owner. Any new buyer will want to grow the business, want to see a future of expansion opportunities. Even if you don’t want to go down that path, you need to be able to highlight areas of potential expansion and have a presentation ready for buyers to show them that there are other aspects of the business that can be expanded or new areas of work they can go into to provide new sources of revenues.
Even if you’re not actively planning to sell your business, it’s important to do all you can do to make your company attractive to potential buyers. Before you’re ready to sell, it will improve your valuation, and when you’re ready to sell, you’ll have access to more and more willing buyers.