Retirement Planning: Should You Sell Your Construction Business?
November 24, 2016
Most entrepreneurs in the construction and trades industry don’t have the time or desire to think about the R word, let alone plan for it. But a leading accounting expert says that if you want your business to fund your retirement, succession planning should be on your mind from day one.
“It’s never too early to plan for the future. If you want to have a business that sells for top dollar down the road, you should run your business with that goal in mind from the outset,” says Ron Coleman, a Canadian accounting consultant, author and instructor specializing in advising the construction industry.
Coleman works with contractors to help them prepare their construction businesses for sale—in the long- and short-term. “My job is to help contractors make more money and have more fun.”
We picked his brain to learn how you can prepare your construction or trade business for a potential payday down the road.
Reality Check: Are You Likely to Sell Your Construction Business?
“Only about 20 per cent of businesses listed for sale actually sell. It’s very hard to sell a business,” says Coleman. “It’s particularly difficult in construction because the owner is usually an integral part of the business. When you take owner out, the value of the company immediately plummets.”
So, the better you are at your trade and the more hands-on you are in your business the less likely you are to build a business that will make money for other people? Yes.
“A lot of small contractors don’t have a business; they have a job,” says Coleman. “You’re not really in business if you’re doing most of the estimating, project management and wearing the tool belt. That’s a job where you’re your own boss. If you’re taken you out of the equation, there isn’t enough left to sell.”
Coleman notes that many small contractors start their own businesses because they’ve been laid off or are unhappy with previous employers. “They’re usually very good tradespeople and that’s why they’re frustrated. They’re probably in an environment where good tradespeople or project managers or contractors have a hard time growing [within an organization].
“They believe they have no alternative but to start their own business and they use their technical skills to drive it.”
If you belong to this camp, you’re not doing anything wrong. But you can’t expect to grow a business that will sell for millions someday either.
“If you’re happy making $80,000 to $100,000, have a few employees and write off a few expenses that’s fine, but you’ll never sell that business,” said Coleman.
How to Build a Construction Business That’s Sellable
Think Big from Day One
If one of the reasons you’ve gone into business is to sell it someday, it’s important to build your business with that goal in mind. Here’s where having a long-term vision for your business can pay off. Coleman says you’ll approach the growth of your business differently if you know you want to sell it for top dollar someday.
“If you start from day one thinking that someday you’re going to sell this business for a lot of money, you’ll start thinking delegation and extricating yourself from the day-to-day work.”
When building a small empire, you’ll want to wean yourself off of working on tools within a year or two and devote more of your time to developing structure and finding ways to continue to grow. For companies that have been in business for five or 10 years and have stalled growth, Coleman suggests firing yourself to kick start a boost.
“Give yourself 90 days’ notice that you’re going to quit. What would you do to make the business successful on the basis that you’re not going to be there in three months’ time?”
He estimates that you’ll quickly shift gears into teaching instead of doing.
Merge or Sell Your Construction Business Mid-Career
If you’ve built a decently sized business and have a handful of employees, you might consider selling or merging your company to retire with a stake in a bigger business later.
You might consider approaching a supplier and asking if they know any of your competitors who might be interested in joining forces. For example, if you’ve got a contracting business and specialize in estimating, it might be worthwhile to find another company that does similar work led by an owner that has special skills in a complementary area, like project management. “This is a good option for a lot of small companies. It’s an efficient way to make a business grow.”
Focus on a Niche
To set yourself up for long-term success, Coleman recommends focusing on a particular niche. “If you’re in the early stages of your business, at least 60 per cent of your business should come from one source.
“If you’re an electrical contractor, you should not be doing a little bit of commercial, residential, service or construction work. Don’t spread yourself too thin. Become focused on one segment to build a reputation for repeat clients and referrals.”
Maintenance contracts are another way to quickly build up value. “If you have 2,000 maintenance contracts, that’s worth a fortune,” said Coleman.
Look for Baby Boomers Looking to Retire
Acquiring a small business that could easily be folded into yours is another efficient way to scale up quickly. Coleman recommends reaching out to suppliers to find out if anyone from a particular generation is ready to call it a day.
He says many baby boomers don’t have an exit strategy. Let your suppliers know you’re young, energetic and want to grow your business. They might be able to connect you with someone in their 60s whose business you could take over. Often in these situations, the owner would stay on for a period of time to mentor a new buyer and set them up for success.
Make Time to Grow Your Business
Delegate project work to staff members so you can work on the important business of growing for the future.
“It’s easy to delegate most tasks. You’re personally doing valuable work only about 20 to 30 per cent of the time anyway. Any job that you do that you can pay someone $50/hour or less should be delegated.”
He recommends starting by freeing up eight hours a week to sit on top of the proverbial mountain to think about your business and taking actions like prospecting, marketing and business planning.
He points to a successful contractor he’s advised who makes $6 million in sales a year and brings home $1 million personally—and works only four hours a day.
“He spends most of his time going through all the work orders. This business does a lot of small service work, maybe $5,000 to $20,000 jobs. The guys in the field draw up a draft construction invoice and he looks over every single one to pick up things that were missed. Because he’s done this work for so long, he can easily spot mistakes on invoices. He either corrects them or sends them back to the guys to correct, so he’s training them to make fewer mistakes.”
Set Yourself Up for Success: Find a Business Mentor
Still not sure if you’re prepared to build a business that sells for big money someday? To help you implement Coleman’s suggestions, consider finding a mentor in the industry to help you with the business side of things you’re uncertain about. No matter what trade you ply, if you own your own business, your primary focus should be on its management.
“You may think you’re in the plumbing business or the electrical business or the home building business, but you aren’t. You’re in the business of making money, and the plumbing or electrical or home building work is the means by which you make that money.
“If you want to sell your business someday… go to work, not to do the work of the business but to teach others to do the work of the business.”