When forming a construction business, few people realize that it is almost as hard to exit the business as it is to get started in the first place. It makes sense when you think about it, by the time you are ready to exit your business, you have built decades of important relationships. There is an identity that all contractors take on to some extent with their business that is hard to separate from, and starting a construction business and exiting one both involve risks and venturing into the unknown. Fortunately, there are countless other construction owners who have plodded the path before, so you don’t have to go into it blindly.
As a surety agent, we are often brought into the conversation with our contractors to help them sort through the process and balance the needs of the company’s ongoing surety bond needs. The goal of this article is to highlight, at a high level, some considerations that every contractor will have to think about, including their surety bond program, and to touch on the 4 main options that contractors have.
What is most important to me when exiting my business?
When I ask this question of the contractors I work with, you would be surprised at how many don’t have an answer right away. A lot of business owners get caught into the details very quickly trying to “solve” the problem rather than fully understand what their own goals and priorities are. This one question of your main priorities will help shift your focus on the options for exiting your construction business.
For some people, their employees are their greatest concern. For others it’s money or legacy of their business, and a few want to be able to continue working in a reduced capacity. There are no right or wrong answers, but being honest with yourself and having clarity on your goals will, again, guide you on the path that makes the most sense.
When do I want to retire or at least have the option of retiring?
Coming up with an exact date of when you want to retire can be a challenge, because there are so many variables and moving parts. Sometimes it is better to know a range or timeframe that you at least want the option to exit, and you can then use this date to work backwards on your planning as you start to look at the options.
What do I need financially when exiting my business?
The greater financial independence and success you have in your career, the more options you will have to decide how you want to exit your business. Construction companies have a lot of financial requirements, not the least of which is maintaining adequate capital to support their surety bond program. If you don’t need the capital from the construction company or from the sale of the business right away, that gives the company the ability to continue standing on its own to support its operations and bonding needs, which opens doors for options.
To that end, the more that contractors can create a plan early on to build net worth for retirement outside of the company, the more flexibility it creates with options.
When exiting a construction business, the 4 main options are:
- Sale to inside party – This includes a key employee or group of employees.
- Sale to third party – Can include private equity companies, competitors, roll ups, or a company in a different trade looking for a strategic acquisition in your particular construction specialty.
- ESOP – Short for Employee Stock Ownership Plan is a qualified retirement plan that enables employees to own stock in the company.
- Wind down – With this option, the departing shareholder(s) wind down the company’s operations, fulfill all financial obligations, and once all of the work is complete, close the doors.
In the remaining articles in this series, we will go through each of the 4 options above in greater detail citing pros and cons, and common considerations for the construction bond program.
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