Business owners are constantly exposed to a variety of risks. Risks that would keep an outsider awake many nights.
You probably have training, policies and systems to overcome risks that you tend to get lulled into taking them for granted and perhaps gain an unwarranted sense of security.
HVAC construction companies are exposed to potentially huge liabilities, yet a part of the company culture is to professionally manage these obstacles. Think of safety. Outsiders just see the lawsuits and high workers’ compensation rates the industry pays. You recognize and manage this risk every day as part of the day-to-day business.
When exiting your company, your risks are more prevalent than ever — but insidious. You take for granted that you will just have a buyer waiting in the wings. Whether the buyer comes from the outside, management or a family member, you need to be certain that you can harvest enough sales proceeds to meet your post-exit financial goals.
The Great Recession has brought many financial hardships. The HVAC sales industry witnessed successful baby boomer company owners leaving a mess for their spouses, family, company and communities.
Why most financial consultants don’t understand your business
Why am I not a fan of most traditional advisers? Here is my story.
After retiring, I went back to school for two years to be certified in my new career as an exit planner. It was then that I discovered that our company’s advisers — with whom we shared more than 30 years of experiences together — advised us with cookie-cutter advice. This routine advice cost our team millions of dollars in unnecessary taxes.
I found out that you don’t know what you don’t know.
But I was just one of three owners of a 200-employee company then… and not a specialist in exit planning and succession. The good news is that I am continually learning new strategies to help owners down the exit path that give me renewed energy and passion for an old guy approaching 70.
Caught in the trap
Seventy percent of your wealth is trapped inside your illiquid business. Because this number is so large, ask yourself how you intend to beat these odds, cash out, retire and not run out of money or alter your lifestyle.
Less than 30 percent of businesses ever sell or transfer. According to Family Firm Institute, 70 percent fail to transfer to the second generation and 90 percent fail to transfer to the third generation.
These are onerous statistics that you can’t afford to ignore for benefit of your family, management and employees.
If you are one of the lucky ones to cash out, then you have the welcoming hands of Uncle Sam waiting for his “fair share” of your harvest. The government’s portion can range from nothing to more than 55 percent, depending on the quality of your financial adviser.
The essential things you need to understand about exiting a contracting company is this:
Because of the re-occurring economic cycles, most contracting company do not produce sustainable recurring cash flows making them too risky for many outside buyers
Less than than 20 percent of all businesses that go to market sell to an outside buyer. The numbers are even worse for ductwork fabrication contractors.
The majority of contracting company sales and transfers are management buyouts that require a strong team, a structured payout over time and a planned succession process
Typical managers cannot afford to buy the company outright so the company ultimately pays for everything through profits. This team will be responsible for cashing out the owner.
Internal transfers can create financial stress on a company. The key with friendly buyers and sellers is to allow flexible payment terms and to keep the owner in control and the company healthy.
This is counterintuitive, but one of several strategies is to use tools that reduce the value of the company. This reduces costs, including tax burden, while getting the owner a fair price. This reduces the financial strain on the company and win-win for the buyer and seller.
Time is your best friend — or worst enemy — in a business exit. A properly designed requires time for the coordination of your financial, business and personal goals. For a management buyout that may mean an initial plan of eight to 12 years to begin the process.
Kevin Kennedy is the founder and CEO of Beacon Exit Planning LLC, a managing partner in Beacon Merger & Acquisitions Advisors LLC, a national speaker and author on exit planning and succession for private businesses. He provides plans and strategies to guide private owners with succession and exiting their businesses. For more information, visit www.beaconexitplanning.com or email KJKennedy@BeaconExitPlanning.com.