Planning Your Exit as a Contractor
Ever dream about the day you can trade in the keys to the truck and workshop, sell your business, kick back and retire?
Well, guess what? Dreaming won’t get it done. Whether you want to keep your business in the family or sell to the highest bidder, selling your business to fund your retirement takes a lot of planning. And if you’re like most business owners, you’re not doing much of that.
Eight in 10 business owners (83 percent) surveyed in 2013 either had no plan to sell their businesses or had not documented or communicated it, even though many had 80 to 90 percent of their wealth tied up in their businesses, according to a report commissioned by the Exit Planning Institute (EPI). The company has certified more than 800 “exit planners” since 2001.
“Only 20-30 percent of businesses that go to market actually sell, leaving up to 80 percent of those without solid options to harvest their wealth and ensure economic continuity into the next generation,” EPI notes on its website.
Business brokers say that percentage drops even lower for construction businesses in which the owners still do the majority of estimating, managing projects and wearing tool belts.
It’s tough to sell a business like that because you, the owner, are the primary asset. That’s a fine way to earn a living until you wake up one day to find yourself trapped by your business.
If you want a business you can sell for enough money to fund your retirement, you need to build your business with that in mind. That requires progressively delegating more and more tasks to employees so you can focus on the big picture.
If you are nearing retirement and only have a few employees, you may want to consider merging with another firm in exchange for some cash and an ownership stake, says Ron Coleman, a Canada-based consultant and business broker who has helped hundreds of construction contractors sell their businesses. While this may not produce a big chunk of cash to fund your retirement, it’s better than not selling at all.
If you’re just starting out, Coleman offers the following tips:
- Planning Your Exit as a Contractor? Focus on a niche so you can develop expertise that will give you a competitive advantage in a smaller slice of the market and enable you to develop an effective value proposition and command premium pricing.
- Avoid work that typically goes to the lowest bidder.
- Pursue work with recurring revenue streams, such as installing HVAC systems or other home improvements that require regular maintenance. Buyers will pay a premium for businesses that earn a significant percentage of revenue from repeat customers because the costs of acquiring new business are much lower.
If you’re in your 40s, consider the following:
- If you’re in your 40s and are planning your exit as a contractor, consider acquiring another business to scale up quickly. Judging from net, there are plenty available. Suppliers may be able to connect you with prospective buyers or willing sellers. After all, more than two-thirds of American businesses are owned by baby boomers, the youngest of which will hit retirement age in 2031.
- Give yourself two years to wean off using tools so you can start focusing on developing structures and systems and training employees who can run the business day to day. This will make the company more attractive to potential buyers and free you up to focus on strategic issues, including your exit plan. You might start by dedicating one day a week to developing new business, marketing and other forward-looking activities.
Whether you are starting out or in your 50s, if you are planning your exit as a contractor you need to decide why you are in business. If selling your business one day is a key component of your retirement plans, you need to transition from working in the business to working on the business before you can exit the business.