There are unique challenges when it comes to selling a construction or contractor business. These companies bring licensing requirements and contractual issues into play that force entrepreneurs to do some special legwork ahead of time, well before your business actually hits the market.
Potential buyers of these companies have special hurdles to jump as they consider buying your business. Here are some tasks to take before hitting the market for sale:
1. Make buying your company easy for outsiders – Don’t presume all buyers will have the same professional license you do. As a business broker specializing in selling construction, contractor, landscaping, property management and other license-dependent businesses, I’ve noticed many sellers mistakenly assume the buyer pool will be other folks in their industry. Not so. For instance, you’ll find many buyers who live and work closeby and will find your business geographically desirable, even though they’re unfamiliar with your sector. You’ll find buyers who are in an allied or complementary field, or maybe even carry a different contractor’s license than yours. Before you hit the market, write down on a single sheet of paper how you would envision a non-licensed, or other-licensed, buyer might still be a good fit. Then make sure your broker or representative understands these issues and can explain properly it to buyers.
2. Tackle the licensing issue before you hit the market – When the owner of a construction or contractor business does not carry the necessary professional license, he/she can still own the business by having a Responsible Managing Officer (RMO) or a Responsible Managing Employee (RME). It’s this person who serves as the “qualifier” for licensing purposes. Several years ago California cracked down on the practice of “renting” an RMO or RME, where owners were simply paying a fee to a licensee who otherwise had no role in the company. A qualifier must be an actively-involved employee or officer in the company. So, as you ready your business for sale, consider your options. Ask yourself, if the new buyer needs an RMO or RME, who could that be? How can we help tee that up for someone? Could an existing employee or fellow professional fill the role? How about pulling someone out of semi-retirement to fill the role?
3. Update your equipment – In construction and contracting, equipment and infrastructure can have a huge impact on a company’s desirability. When I review a company’s equipment list, one of the first things I check are the dates of purchase. Why? Because owners generally are more comfortable buying new equipment when business is strong and going well. Owners who are struggling opt to repair rather than replace. I also check if there is any pattern of equipment purchases, where new pieces have come in regularly over many years. It sends mixed signals if a company claims to be doing well yet hasn’t bought new equipment or vehicles in a decade.
4. Prepare your equipment list – In addition to improving and repairing your equipment list, owners should spend a bit of time preparing a brief equipment and vehicle list. All tangible assets worth $2,500 or more should be on this list. It should show make and model numbers, year purchased, and the owner’s estimate of fair market value for each item. This should not be inflated, hyped prices which can create suspicion with buyers. Put down the estimated values if you were to throw the items on Craigslist. It also helps if you keep repair logs and can incorporate that information into the equipment list.
5. Understand the differences between an Asset Sale and a Stock Sale – Why should owners care about how a buyer might structure the sale? Because in asset-heavy businesses like construction companies, the ability to depreciate vehicles and equipment can change a buyer’s offer to buy your business by hundreds of thousands, maybe millions, of dollars. An Asset Sale allows the buyer of your business to re-start the depreciation cycle, allowing them to enjoy expense write-offs after they buy the company. A Stock Sale, on the other hand, does not involve a restart. The buyer is purchasing shares of your company, retaining your entity and its tax bases, and therefore not enjoying those write-offs. So a stock buyer will not likely pay as much as an asset buyer. When offers come in, it’s important for business owners to understand the tax and legal ramifications of their side as well as the buyer’s considerations.
6. Diversify revenues as much as possible – It’s easier to sell a company with recurring revenues rather than one-time income. It’s easier to sell a landscaping company which books both maintenance income and design-and-build income rather than 100% landscape construction revenues. It’s easier to sell a company with 200 clients rather than 20. It’s easier to sell a business that stretches over multiple counties than one centered solely in one area.
7. Strengthen your management structure – It’s tough to sell a construction or contractor company where the owner not only carries the necessary professional license but also makes the business decisions and drives the client acquisition process. Do as much as possible to put a manager or supervisor in place who buyers will see as a potentially stabilizing force.
8. Understand the unique nature of contractors – Construction and contractor folks are strong-willed, independent-minded people. They’ve taken considerable time, effort and money to get their license, build a knowledge-base, establish best practices, understand their marketplace, differentiate between sub-industries. Their independence streak inclines them toward wanting to start their own company rather than buy someone else’s. They are naturally disinclined to spend money on a business purchase and would rather take their own shot. So keep that in mind when pricing and marketing the business for sale.