Want a higher valuation for your construction firm? Start with strong leaders

Want a higher valuation for your construction firm? Start with strong leaders

By Terry Staley, MarksNelson

Consider it a new kind of “change order.”

The generational shifts we’re feeling across the economy are showing up in almost every industry — but especially construction. In fact, it’s estimated that more than half of construction companies today will be changing ownership in the next decade. Yet, a recent study from FMI, a leading consulting firm for the built environment, reports that even among the 38% of owners who know they’ll be leaving in the next three to five years, only half of them have a succession plan in place.

As an owner, you need to start working on your exit plan at least five to 10 years before you’re ready to walk away. Matt Godwin, managing director at FMI, elaborates on why getting ahead of it is so important:

“Many business owners remain ill-prepared … Too often, owners rely on a buyer coming to the table or key employees coming up with a buyout plan; however, passively waiting isn’t a strategy. Taking a proactive approach is essential to mitigating potential transition risks, ensuring continuity and safeguarding the legacy you’ve built.”

So, is an external sale your best option? What about passing it on to someone on your leadership team? Turns out so much hinges on the strength of your bench. And the more you understand the realities of each path and start working with your advisor now, the better prepared you’ll be when it’s time to hand over the keys.

Strong internal team leads to stronger succession plan

While selling your business to an outside third party can be the best way to maximize your profits, the realities of the construction industry can sometimes present some obstacles.

While contractors in the industrial and energy infrastructure fields, for example, continue to be attractive targets, due in large part to the qualifications and experience required, other contractors may not be as lucky, as FMI writes:

“Barriers to entry are extremely limited in many contractor markets. As a result, most contractors face enormous competitive pressures. … The reality is that contractors rarely find themselves in a niche position where price is not a critical driver of an owner’s decision-making process. Because of this dynamic, consolidating markets or driving value through economies of scale is usually a limiting factor for contractors.”

To make matters more challenging, many potential buyers evaluate acquisitions based on what kind of capital investments they’ll have to make. If the punch list starts getting too long, that valuation will continue to drop — or the buyer may walk away altogether.

That doesn’t mean you don’t have time to improve, however. I advise clients all the time on various ways to make their construction business more salable and get more attention from the third-party marketplace. And whether you’re considering an external sale or an internal transition, cultivating your future leaders is a key ingredient to any successful succession plan and the most valuable area of improvement.

Unfortunately, too many owners are short-sighted and not developing their successors, management consultant Steve McGee tells Pro Builder magazine:

“Entrepreneurs are rarely enlightened managers. Dictatorial owners certainly find it hard to keep around anyone who might have the makings of a successor. … Grooming future leaders inside a company requires participatory management and decentralized control. How many builders have that kind of company?”

However, if you’re able to grow a pool of leaders while you’re working toward that exit plan, you’ll ensure a more seamless transition when you leave. And those leadership skills have a positive effect on retention and can build a culture where all employees see a growth path for themselves, which in turn builds a desire for personal improvement.

Also, if you decide to sell, consider that most buyers don’t have skilled operational employees in the wings ready to jump in immediately after closing, which is why potential acquirers usually start with questions about your team: How experienced are they? How long have they been with you? How close to retirement are they? The more you can strengthen that aspect of your business, the more attractive you’ll be.

Other top factors likely to affect your valuation include:

• Types of revenue – It’s no surprise buyers often prefer firms that enjoy a healthy amount of predictable and consistent revenue, instead of primarily project-based work.
• Prime vs. sub – Subcontractors are often chosen based on price and at the mercy of a GC for future work, which is why prime contractors often see a higher valuation.
• Amount of self-performed work – The more you’re able to do in-house, the less risky you’re viewed by potential buyers.
• Diversification – Greater diversity in your projects and clients typically means a higher potential for scalability (and the more attractive you become).

The good news is that with enough lead time, we can help implement different tactics that can positively affect your firm’s valuation — everything from leadership training, incentive plans for positive employee behavior, marketing strategies, operational changes, a boosted online presence and more.

Partner up with a pro for powerful exit plan

Regardless of the path you choose, the time to start planning is now. Remember that your company will always be worth more if you’ve already positioned aggressive leaders to grow the business. If your company can’t function on a day-to-day basis without your constant involvement, there’s more work to do.

Exiting your construction business is likely to be one of the biggest financial events of your life, so start by consulting your financial advisor, who needs to be a part of the early planning and who can help you craft a plan that not only builds a road map to follow but is adaptable as things change.

That plan will not only make your retirement vision a reality, but it will create even more value for your firm today.

Terry Staley is a Certified Exit Planner who works with business owners in the successful exit from their businesses. A successful exit plan includes meeting owner’s objectives including time until retirement, dollars needed in retirement and transferring ownership to a key employee group, family members, ESOP or a sale to a third party. To learn more about exit planning for your firm, reach out to Terry today a tstaley@mnadvisors.com.