How to Avoid These 8 Common Exit Planning Mistakes for Contractors
Originally published on January 25, 2022
Updated on August 17th, 2022
Exiting your contracting business efficiently and with minimal losses requires solid exit planning. No matter who you’re passing it off to, however, there can be issues if you don’t think the steps through. Good planning allows you to fix any issues before they become a problem.
Here’s how to avoid eight common mistakes made by contractors when exiting a company.
- Plan early to maximize transferable value.
Contractors often fall into the daily grind and put off what seem like non-urgent business matters. However, the end of your career can come faster than you might expect. Between exit planning and implementation, you’ll need three to five years to exit your contracting firm. So start thinking ASAP about maximizing your business’s ongoing financial health and transferable value. Doing so demonstrates to others that the company’s success is independent of the owner.
- Do a gap analysis to make sure you’ll meet post-exit monetary needs.
Once you’ve sold, can you live comfortably? Get a valuation to understand what you’ll gain from selling the company; then weigh it against your post-exit expenses. This provides a solid baseline to set business goals before leaving and gives you options when you transfer. A third-party sale may take a shorter period of time, as opposed to transferring to family. If you’re doing the latter, bridge the gap with continued business involvement on your part until the transfer is complete.
- Add in-house options to build company value.
While lowering costs and maximizing cash flow increase business value, there are other options beyond increasing productivity and improving efficiency. Analyze the cost against time savings projections, increases in revenue and the hike you’ll see in business value when you add automation or workflow automation to improve productivity. Develop a solid, realistic growth plan and formally documented processes to increase business value as part of your exit planning strategy.
- Find value drivers outside the box.
Obtain assets to grow your business. These can include customer lists, inventory, experienced staff or equipment from smaller businesses that are struggling. This allows you to expand a geographic footprint, either solely or in a partnership. Weigh costs against capital and consider if area competition can help you assess your options. This lets you vertically integrate (i.e., take ownership of one or more stages in production or distribution) while customer diversification or service work can boost your income.
- Don’t underestimate key employee value.
Maintaining your team and finding good help is a challenge, but your key employees help maintain and increase cash flow, relationships and daily operations. They move business value in a positive direction, making them critical to getting the best sale price for your company. So keep them in mind during your exit planning efforts. Keep them motivated and happy with incentive plans (including non-qualified deferred compensation), bonuses and stock options.
- Make sure the sale/transfer is “balance-sheet friendly.”
This means your open jobs and contracts are met or reassigned. In exit planning, the transaction needs to happen when it’s financially feasible for both you and your company’s new owner. With the many moving parts that have to be in place to make it work, your plan should protect assets and account for the ability to keep liquidity up to and through the transfer process. Keep impacts on surety, banking and credit at the front of your efforts, because they affect who is responsible for loan covenants.
- Tax planning is vital to the process.
Careful and continuous tax planning can help reduce some liabilities in ownership transfer. In family transfers, leveraging opportunities over time and balancing your income, capital gains and gift and estate taxes can make a big difference. With a tax rate increase on the horizon for high-income people, it’s important to use timing to minimize your tax liability by working with a tax and finance professional during the exit planning process.
- Use the best team of advisors.
Exit planning is complicated and requires a breadth of knowledge. Make sure you’re working with a trusted team of advisors who can help you with business value, improving profitability, strategic planning, asset protection, tax minimization, business continuity and company development.
A CPA well versed in construction firm operations and finance is a great addition to that team. If you need help updating your exit planning for tax and financial changes, reach out to James Moore’s Construction Services team.
All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.
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