Getting the most for your construction business

Whether you are looking to sell your business or make an acquisition, it is absolutely critical to have a true and realistic picture of what your business is worth.  The following article will guide you through a step­ by-step process designed to help you maximize the value of your business.

Maximize your sell 

As a business owner in the construction industry, you may find yourself in a situation which prompts the sale of your business. We’ve seen a variety of triggers which have initiated the sale process, including the lack of a logical successor, dispute with another shareholder, the need to withdraw built-up cash in the business, an unsolicited offer, poor health, or simply wanting to retire.

If you are thinking about selling your business, start by asking yourself one question – ‘Am I fully committed to the sale of my business?‘ Surprisingly, it is not all that uncommon for an owner who is already engaged in the sale process to withdraw when he or she understands the full implications of the sale. Owners have likely nurtured the business into what it is today and the prospect of letting go may be too much to bear.

Working with a business advisor, you should seek to understand the motivation and rationale for the sale. This understanding will allow you to work together to structure a sale that will meet your objectives.

Once you are committed to a sale, the next step is to maximize the value of your business.  A combination of financial and management considerations will go a long way to getting the most for your business. Consider the following when looking to sell:

• Target the buyers – Knowledge of your industry puts you in the best position to identify logical buyers for the company. These potential buyers should be ranked in order of their likely interest and their ability to actually purchase the business. Consideration should be given to known industry acquirers, previous offers for the business, long-term employees, existing partners and management groups, and companies that might be willing to pay for strategic advantages.
• Identify acceptable forms of consideration – Must it be all cash, or would you be open to potential price-bridging options such as vendor take-backs, leasing arrangements, preferred stock, or earn-outs? How willing and able are you to stay on for a few years, in a consulting role, to help transition the business?
• Assess the personal and corporate tax consequences of the sale – Structuring the sale in the most tax advantageous way is critical to maximizing value. Typically, vendors will want to sell the shares of a business, as opposed to its assets, in order to take advantage of the Capital Gains Exemption that may be available to Qualified Small Business Corporation (QSBC) shareholders. Internal tax minimization strategies prior to a sale should also be assessed – ideally several years prior to the intended sale.
• Tidy up and paint a profitable picture – It is important to make sure that the financial information is readily available and accurate. You may want to consider normalizing the historical financial statements – for example, adjusting for uneconomic management remuneration and salaries paid to non­working family members. A purchaser is buying the prospective future cash flow of the business and a well-thought out financial forecast will go a long way in providing comfort to a potential purchaser in the assessment of the business.
• Diversify management – A business that depends primarily on the personal goodwill of the owner will not be attractive to potential purchasers – and this is a common issue for companies in the construction industry. Assessing the calibre and diversity of your management team will be an important part of any purchaser’s due diligence. It is important to broaden and strengthen the middle management team to maximize the value of your business.
• Assess if the timing is right – If there is no urgency to sell, perhaps value would be maximized when the financial markets become more liquid and there are more potential buyers. Alternatively, there could be industry consolidation opportunities that are best taken advantage of with an offer in hand.
• Recognize that first impressions are extremely important – Whether meeting potential purchasers in person or providing an information memorandum, human nature dictates that the first impression given by the vendor will impact negotiations, and, ultimately, the terms of the deal.

Get the most from your acquisition 

In the same way that the seller should consider their business operations and management situation, a strategic purchaser of a business will assess a company’s value by considering many of the same factors. By reviewing the business’ management and operations, contracts, commitments, the industry, the market, and competitive environment, you will get a good sense of whether the acquisition makes sense with your existing business.

Once you decide to move ahead with the acquisition, the structure of the deal and the ongoing strategic plan will need to be developed. The due diligence will include a legal and financial review. Some of the more common issues uncovered during the due diligence process include:

• An overstatement of inventory value
• Uncollectible receivables
• Window dressing of financial statements including the deferral of necessary capital repairs and maintenance expenditures
• Weak or disadvantageous contracts
• Employee turnover or union contract issues
• Lease issues
• Restrictive agreements
• Unrecorded liabilities including supplier discounts, employee costs, and severance
• Pending litigation against the company

Determining the right price

The value of a business needs to be viewed in an overall context. Generally, if the demand for a particular business is high, the vendor may not want to disclose an asking price in order to create a bidding situation and drive up the price. If the power is with the purchaser, the vendor may have no choice but to state an asking price. The recent credit and liquidity crisis makes assessing the value of a business extremely difficult. Historical results of a business are not necessarily a good indication of expected ongoing performance. This can make a valuation assessment particularly tricky and increases the need for sound valuation, tax, and legal expertise.

Get the right advice

Chartered Business Valuators may perform various roles in the purchase and sale of a business, from helping business owners structure the deal to assisting purchasers with the due diligence process. The degree of assistance that the valuator provides in the process will depend on the particular client’s needs.

While the valuation process may seem daunting, it’s critical that both the vendor and the purchaser have a clear understanding of the business, the industry, and the motivation for the sale. A good valuation professional will work with you to obtain the knowledge necessary to assess the value of the business so you can make informed decisions