Successful roofing contractors know how to run a business and possess the ability to adapt and compete in a constantly changing work environment. However, exiting a business requires an entirely different set of skills.
The knowledge gained in managing and growing a business will not necessarily prepare you for exiting a business. In other words, what got you here… will not get you there.
Having a well-structured, written exit plan is the essential first step. This complex process requires specialized advice from your accountant, business appraiser, tax adviser, corporate attorney, estate planner, financial adviser and insurance advisor, among others.
A common problem that can transpire during this process is the lack of coordination among the specialized advice communicated by the various professionals.
Coordinating and understanding the often disjointed advice can be overwhelming to a business owner who is unfamiliar with these concepts and terms. Therefore, having an adviser who understands and can coordinate the moving parts is critical to your success.
The U.S. Small Business Administration states: “At any given time, 40 percent of U.S. businesses are facing the transfer-of-ownership issue. The primary cause for failure … is the lack of planning.”
Most owners have more than 70 percent of their wealth trapped inside of their illiquid business. Many studies show that fewer than thirty percent of business owners will actually sell or transfer their company. Many simply end in liquidation, or with 10 percent of their company’s value.
I’ve identified six common “traps” that first-time exiting business owners tend to fall into and often lead to financial and/or emotional agony.
Trap 1: It’s Not That Hard
The exit can be complex and taxing on a financial and emotional level. You can’t spend 30 to 40 years of your life building a business without a strong emotional attachment. Business is not just what you do…but who you are.
Building your business is a daily challenge—it requires a flexible plan and the ability to adapt, execute and compete in your ever-changing marketplace. Successfully exiting your business could, however, prove to be even more challenging than simply running your business.
According to Ran One Consulting Group CEO Ronen Shefer, an average of 80 hours are spent writing a business plan to grow a business while, on average, only six hours are spent planning the business exit.
Your business is your largest investment. Take the time to plan, revise and execute your exit strategy—it will save you time, money and headaches in the future.
Trap 2: I’ll Just Sell My Company
Selling is only one of several exit strategy options available to an owner who desires to step back, or exit entirely from the business. Alternatives to selling to a strategic buyer include the option of a management buyout, creating an Employee Stock Ownership Program, exploring “gifting” strategies and selling partial company interests to a private equity group.
All are viable options for the owner and should be considered by their advisory team. However, only after the owner has established and clearly communicated his or her goals should an exit strategy be selected. Once all options are explored, an informed exit decision can be made.
You need to prepare for other options even if you want to sell. Why? According to a U.S. Chamber of Commerce study, fewer than 20 percent of companies that go to market actually sell. According to FMI, it’s more like 10 percent in the construction industry.
The most common type of exit for a contracting company is a management buyout. An exit goal for many family construction owners is to sell to their family members, managers and/or employees.
These internal exit options, if properly structured, can offer the most tax efficient options. Unfortunately, many advisers use cookie-cutter methods that will clobber buyers and sellers with taxes that can exceed 55 percent.
Trap 3: Procrastination…This Won’t Take Much Time
The typical response I receive when I ask an owner when he or she wants to retire is, “In five years.” When I ask the same question two years later? You guessed it, the answer is still five years. This is a clear indication of how difficult and emotional getting out of a business can be.
The procrastination comes from two very common characteristics. First, the process itself is very intimidating. Fragmented advice can lead to confusion and an inability to make a decision.
Secondly, the owner’s fear of outliving his or her money in retirement factors in. Only after an owner can envision his or her financial future can the planning and execution of the exit process proceed.
The truth, however, is that an exit strategy should ideally be created along with a business plan, and then be assessed and adapted as necessary over the life of the business. A properly-written exit plan should provide the owner with one common goal supported by several smaller goals that structure the overall strategy.
There’s one similarity among all business owners: they’ll all eventually leave their business. The question is, will the owner control the process or will the process control the owner? Providing an adequate amount of time and effort will help achieve greater odds of success.
Many sellers procrastinate until they’re finally ready to exit. They do not understand that the process can take up to two years and the departure up to 12 years, especially with a structured management buyout.
Exit planning is about much more than monetizing the business. It’s also about protecting what you’ve built until the transaction takes place. It’s prudent to have the company in sale-ready condition should you decide that your exit timing has changed due to external factors such as health, family issues or just the desire to get out.
Trap 4: I Just Need My Accountant
I’m sure you have an excellent accountant that guided you through financial difficulties over the years. However, an exit planner is a trained holistic adviser who has studied several disciplines and understands the variety of “tools” used in the process. Think of them like an architect who understands every part of constructing and designing buildings, but probably can’t wire or install a furnace.
Exit planners create a blueprint for the business owner and their advisers to understand and coordinate the process in order to meet the owner’s goals. The exit planner does not write the legal documents, recommend investments or prepare estate planning documents. Exit planners are designers and process consultants.
After the plan is written, it can take several months for the owner to pick the path. The plan is then given to your professional advisers for execution with the exit planner and the owner coordinating the process.
Trap 5: Not Coordinating Business and Personal Wealth
A complete exit plan should encompass three crucial aspects in the owner’s life:
- Business Planning: Valuation, succession, taxes, transfer options, and litigation.
- Personal Planning: Owner’s goals, family-legacy plan, and emotional ties to the business.
- Financial Planning: Overcoming the real fear of outliving your money, protecting your family in the event of a catastrophe, and taxes.
The good news is that advisers can prove much of the planning. The bad news is that the lack of coordination between these focus areas can lead to unanticipated consequences. Those can include:
- Destruction of the family unit
- Liquidating the estate to pay taxes
- Litigation among other business partners
- Costly legal bills
- Most importantly, the obliteration of the business
Trap 6: Exiting can be Very Taxing
The exit is also very taxing financially. You can surrender more than 55 percent of your harvest to taxes on state and federal levels. Additionally, each path has a different value, tax consequence and financial compromises.
Remember, it’s not what you get for the business that matters, but, rather, what you get to keep. Exit planners have a variety of tools that help support the owner in achieveing results in several areas, including:
- Internal revenue codes
- ESOPs
- Trusts
- Individual insurance companies
- Life insurance
- Qualified plans
- Time savings
Using these various legal tools can significantly reduce or, in some cases, eliminate taxes.
With a properly planned exit strategy, the owner knows which options will provide the greatest net profit. This puts the owner in control of their financial future and feeling confident in retirement.
