Selling a Construction Company
Selling a construction company is much more complicated than selling a regular business, in no small part because it often indicates you are ready to retire or move into another venture.
Selling a construction company is much more complicated than selling a regular business, in no small part because it often indicates you are ready to retire or move into another venture.
Selling a construction company can be a long and complicated process. Even with a good exit strategy in place, you will face many hurdles, lots of paperwork, and potential setbacks.
As a business broker specializing in selling construction companies in California, retiring business owners often ask how my firm can maintain confidentiality while selling a business and what security procedures we have to protect our clients. After all, employees, credit-granting vendors, landlords, and others with a vested interest want to know.
With an incredible number of construction business owners exiting business ownership for retirement, sellers must make their businesses stand out from others on the market. In this article, we’ll discuss getting the best price for your construction company in California.
What is your motivation for selling? Selling a construction company requires significant time, effort, and emotional commitment. Ask yourself, “Am I positive I want to sell, or am I just thinking about the idea?” Does your spouse support selling now?
A Structured Sale enables the Seller to defer up to 100% of sale year taxes. Taxes can be deferred for a few months up to several years. A Structured Sale can give the Seller a lot of flexibility in managing tax payment options
If you have questions or would like more information about a particular Industry Sector, call us today at (916) 570-2674 or click the link on the below to contact us.
Before listing your construction business for sale, you may have several questions. Some questions apply to the construction market outlook and whether you should keep or list your business. The questions to answer include:
One of the first things a qualified buyer will want to see is your commercially sensitive documents. Getting these in order can take time, so it’s best to start gathering and organizing them long before you put your construction business on the market.
Some of the paperwork you will need includes:
This list is by no means exhaustive. You’ll need to prepare more before putting your business on the market. Once you find potential buyers, they may also request other types of documentation.
Many boomer construction business owners have trouble delegating tasks and do much of the work themselves. While no one knows your company better than you do, ensuring your staff can continue with most of your business’s functions when you’re not there is essential.
Here are some critical tips on selling your construction company.
If you only know how to do a large part of the business, you may turn off buyers. Most construction business buyers want a turnkey company, not an investment where they will spend hours training employees or taking over the bulk of the work. As an added benefit, training your employees ensures that the business can function as you transition out.
Many construction company owners have a business system that is entirely in their heads. You know the ins and outs of your business, and you are the one who keeps everything running. While this may work as long as you are with the company, a potential buyer will want to know what processes are in place.
Therefore, you need to create an operations manual for each process. Please work with your employees to develop this manual by getting everyone to detail precisely what they do. Potential buyers will be impressed with a company ready to go as soon as the change of ownership happens, and your purchase price potential will be greater. As a bonus, if your employees are trained to do what you do, your business will do just fine, even if you have to be out for an extended period or if an employee leaves your company.
If you have neglected cleaning and organizing your facility, it’s time to get it in order. Go over everything, from machinery to inventory to paperwork. Get rid of anything you do not need and clean up everything else. Paperwork should be organized, and the construction office should be neat and organized. Getting everything in order may not be possible, but make your best attempt (or hire someone).
If your California construction company isn’t following local and federal laws, most buyers will turn away immediately. Read up on the laws and go through every step of your process to ensure you are in compliance. Also, make sure that all relevant employees understand the law.
Go through your records and ensure everything is up-to-date and completely accurate. A buyer will certainly do their due diligence, and if it looks like you’re not entirely truthful, they’ll head elsewhere.
Go through your profits and losses records and ensure they align with what’s stated on your tax return. If your records and tax returns do not match, do not try to fix this issue yourself. You will need a CPA to reconcile the two, and you will also need a reasonable explanation for why there was an incongruence in the first place.
A buyer does not want a construction company with many unresolved financial transactions. Ensure everything is current regarding money, as no buyer wants to take on a business with many pre-existing obligations.
If you have any accounts you have not paid, take care of them as quickly as possible. If clients owe you, work to get their accounts current. If you owe anything in taxes, make sure to pay. Also, check to see if your business has any liens in place. When you hand over your business, your finances should be clear and ready to go.
Once you’ve gathered and organized your financial documents, you must review everything with your accountant. Your CPA can review everything, ensure you’re current and tax-compliant, and advise you on errors.
An accountant can also help you create records showing your business’s potential. In most cases, your business’s tax records are set up to prevent you from paying a lot back in taxes. However, once it is time to put your business up for sale, you will want records to show your business’s potential for profits. Let a CPA restructure these records instead of doing it yourself is important.
Additionally, you need to consider the taxes you will pay after the sale. An accountant can help you review the terms and determine how much profit you will have left after paying taxes. It is essential to see how much you will get if you retire, as you’ll want to ensure you have enough to maintain your current quality of life.
The steps to valuing and selling your construction company are complicated. Getting everything in order can take many hours. If you are still working full-time running your construction business in California, you may not have the time to do both.
If this situation applies to you, you may want to hire a business broker. A qualified construction business broker knows exactly what to get your California construction business ready for sale. They can guide you through each step of the process, help you avoid errors, make your construction company more attractive to buyers, and ultimately help you get a better price.
The construction industry includes a variety of contractors and company types. All are needed to complete building projects. These tend to be individuals or organizations contracted for projects like building and finishing individual homes or small business facilities. They include:
Owners of construction companies in California often need certified business brokers to list their companies for sale. These types of construction industry professionals work with the financing and planning of projects. They include businesses like:
Contractors and construction companies work in a variety of types of construction. Before investing in an existing construction business for sale, buyers want to know what type of construction they do. Those types include:
Qualified Construction Business brokers in California are experts in maximizing your business value before selling. Their expertise helps buyers and sellers; they are the best professionals for selling construction businesses. While working with Construction businesses for sale in California, they must manage several tasks.
Qualifying Potential Buyers Through Buyer Analysis
One of their most important tasks is finding buyers seeking growth through acquisition. Potential buyers often include next of kin, employees, single investors, Private Equity Groups, and other corporate investors. M&A trends show that several acquisition-oriented businesses are also looking to buy businesses in the commercial construction industry.
Fortunately, construction business brokers know how to privately share information about private construction companies for sale without divulging sensitive details about the company because of their experience. Sometimes, competitors want to buy construction businesses for sale, so the need for confidentiality matters.
Certified business brokers in California specializing in valuing and selling construction businesses can maintain confidentiality because some deals do not materialize. If you were to release sensitive details in documents and records, competitors would have that valuable information for free. It is wise to follow the advice of your knowledgeable business broker to protect your business’s intangibles.
Your broker knows when to share financial information with a buyer and when to ask a seller for financial information. Before sharing any financial information, the broker might ask the buyer to sign a Confidentiality Agreement or a Non-Disclosure Agreement. The business broker will also vet the buyer by seeing their financial information.
Get The Construction Business Ready For Sale
Along with vetting buyers, the qualified construction broker will also work with the business’s exit plan. They will create and execute the listing confidentially when requested by the owner of the existing contracting business for sale. Once the business is listed, the broker will also work on marketing and originating a deal or managing numerous offers and deals.
The broker is heavily involved in valuing the business to achieve the most accurate value. They look closely at financial records and the intangibles. Once they have the value, they work on a buyer list to find the investor willing to make a deal on a profitable business for sale.
The best brokers focus on creating value before selling the construction business, so they also work hard to maintain the plan’s goal. If something needs to change, your certified business broker will contact you to discuss a strategy adjustment.
Originating the Deal
Your broker will also work hard to market the deal. Their expertise in mergers and acquisitions gives them a reliable list of vetted buyers who might be interested.
The broker will also create a sales package, including a Confidential Business Review (CBR), to generate interest from buyers who might jump on the opportunity. They confidentially discuss the value of investing in contracting and construction businesses for sale in California through targeting and social selling.
If investors show interest in buying California businesses for sale, the construction business broker evaluates their offers. The broker offers the buyers a market-offer analysis with detailed information about construction industry trends. Your experienced broker works to get you the best deal while helping buyers understand the value of your construction company.
Negotiating with Buyer Due Diligence
Sellers must participate in due diligence to share necessary information about the business. Sellers need to show many documents to buyers so they fully understand what you are offering for sale. This due diligence shows that your construction business has been profitable and supports what the seller represents to the buyer.
Before sharing the due diligence, many buyers sign a Letter Of Intent (LOI) as a non-binding agreement about the purchase price and the potential aspects of any deal. Once buyers sign the document, your broker will share a long list of documents you must provide. They include financial documents like:
You will also need to provide business documents like the seller’s claims about the business, including reasons for selling and details about the construction business’s reputation. You will also share documents about soft assets like intellectual property and trademarks. Other necessary documents include:
Construction business brokers can give you advice about sensitive information in some documents. For example, your due diligence document package should not include private details about employees, vendors/suppliers, and customers. You should also only provide the necessary information about contracts with employees, other contractors, and clients after the sale of the business closes.
Due diligence document packages should include lists of assets like equipment, tools, fixtures, and vehicles and their condition. If licenses are necessary, the list needs to include details about related business licenses. Your broker will also share the value of the business so buyers can check whether the asking price is fair.
A broker recognizes that buyers hesitate to make offers when there are warning signs in the due diligence packages. Buyers become uninterested when a due diligence document package does not include the reason for sellers wanting to divest and more. They also lose interest when not given financial statements, employee information, or tax statements.
Other warning signs for buyers include:
Negotiating the Definitive Purchase Agreement
Offering contracting and construction businesses for sale in California involves several steps. The broker works closely with you and your legal advisor, especially while negotiating and finalizing the Definitive Purchase Agreement. This Definitive Purchase Agreement helps both parties reach their goals for the transaction and allows no room for error as it ultimately represents the legal wishes of each party.
A good M&A Definitive Agreement is the lynchpin of a good transaction. Both sellers and buyers exchange much information from different sources, often over many months of conversations. These exchanges are then condensed, with their interests, as best as possible into the Purchase Agreement.
Items a typical Definitive Purchase Agreement may include:
The Definitive Purchase Agreement can have potential pitfalls. Hence, your construction business broker must keep communication open with the Buyer and Deal Team and the Seller and Deal Team.
The M&A Definitive Purchase Agreement must also include details about tax obligations and consequences, especially if shareholders are involved.
Avoiding Pitfalls if you have a Buy-Sell Agreement
What if the seller is two or more individuals?
Many construction and contracting businesses have multiple owners or shareholders. Getting an agreement from a majority of the shareholders about selling the business and being willing to accept an offer can be challenging. One of the shareholders may not be interested in selling the business at all or want something specific; most buyers will not agree. If this is the case, hopefully, a buy-sell agreement will be in place as this will outline what each shareholder needs to do. A few years previously, I had a transaction with nine shareholders. One shareholder with a minority interest initially refused to sell. Eventually, they changed their mind, but it was stressful while this played out.
If no Buy-Sell Agreement is in place and there is tension between the owners and shareholders, deciding the future direction of the business may be challenging. This article provides additional information for an owner or shareholder on how to avoid buy-sell agreement pitfalls. Construction business brokers should help their clients understand the importance of assuming liability so the buyers and sellers know who is responsible for any lingering claims.
The agreement also needs to have information about indemnity clauses regarding operations. For Construction Companies, concerns about environmental liability, breaches of warranties, and other issues need to be factored into the indemnity clauses of a Definitive Purchase Agreement.
Buy-sell agreements can be confusing, so learning how to understand buy-sell agreements and how a buy-sell agreement can save a business is helpful.
Buy-Sell Agreement Benefits
A buy-sell agreement benefits both the buyer and the seller and other stakeholders, such as vendors, employees, and partners. These legal documents act like insurance policies for the people involved in a business transaction. Buy-sell agreements can protect people who start a new business or buy an existing business in the building industry.
A legally binding buy-sell agreement protects the business when a new partner is brought to the table and if one of the stakeholders dies before money changes hands. A well-crafted agreement also prepares the company for changes in laws, technology, and other industry stressors and strains.
Your broker understands the legal intricacies of buying and selling a construction business in California. A unique aspect of California real estate law is that businesses must run an escrow before the sale closes. Rogerson Business Services, specializing in local business mergers and acquisitions, understands the state’s requirements.
Negotiating the Terms
Your broker will negotiate the terms of the sale and include them in the buy-sell agreement. At this point, the buyer knows you have an emotional attachment to the business and has priced the deal with that in mind. They also know that the seller values the down payment and cash they will receive.
As the deal approaches closure, the buyer knows there are still negotiating opportunities. At this point, an experienced broker is necessary because they do not have an emotional attachment to the business or its assets. They will keep the negotiation moving to set the terms and close the deal.
Finalizing the Contract
The certified business broker will finalize the contract by verifying that all required documents are complete. They will also check that all required legal documents are fully executed and that no new liens will be placed on the business. Once the contract is set, the sale can close.
Closing the Deal
The certified construction business broker has checked the documents, followed laws, and prepared the buyer and seller for the transaction and transition. The construction broker will facilitate the translation so the transition is as smooth as possible.
Once the deal is finalized and closed, the broker ensures that the proceeds are appropriately distributed to the seller. They also ensure the buyer can access vital information such as employee records, customer contracts, and vendor details.
If you have questions or would like more information about a particular Industry Sector, call us today at (916) 570-2674 or click the link on the below to contact us.
Rogerson Business Services is a business brokerage service based in California.
If you are ready to sell your California business, let us know your questions. Whether you are selling a medical practice, an HVAC business, a landscaping business, or any other business with gross revenue greater than $2 million, contact us today to learn about our successfully selling your business program.
We’re happy to talk with you about the process of selling your business. Give us a call or contact us when you are ready.
