Planning a Successful Exit Strategy

Many small business owners have up to 90% of their net worth tied to their business, yet when it comes time to sell, they don't know where to begin. Rather than placing an ad in a local newspaper, calling other contractors in the area to let them know they're interested in selling their business, or sticking a For Sale sign in the front lawn of their building, owners of electrical contracting firms

Many small business owners have up to 90% of their net worth tied to their business, yet when it comes time to sell, they don't know where to begin. Rather than placing an ad in a local newspaper, calling other contractors in the area to let them know they're interested in selling their business, or sticking a “For Sale” sign in the front lawn of their building, owners of electrical contracting firms need to confidentially present their business to serious and financially qualified buyers, says Mike Ertel, a certified business intermediary with the Bradway Group, a Tampa, Fla.-based business brokerage firm.

Preparing a business for sale can be a time consuming and confusing process for owners, he says. If the word gets around that a business is up for sale, the electrical contracting firm can risk losing sales, key customers, or top performing employees. Therefore it's critical that you spend a lot of time preparing for the day when you do sell your business. Here are four steps to selling high and retiring rich.

Start early. You may decide to get out of the contracting business due to poor health, retirement, or financial problems. While some of you may pass the business on to your children or sell it to a trusted executive, others may need to actively seek a buyer for their business.

Regardless of why owners are putting their businesses up for sale, they must spend at least a decade in advance preparing to sell their company, says Kerri Sullivan-Kreiss, president of SullivanKreiss Financial, a Northborough, Mass.-based financial planning firm. By allowing as much time as possible before the actual sale, a business owner will be able to implement well thought out strategies over the long term. “The last thing you want to do is leave yourself a six-month or one-year window because these transitions often take a few years to put together,” says Sullivan-Kreiss, a certified financial planner. “The danger of a last-minute, eleventh-hour strategy is that you might not get the value you were looking for from your company.”

When business owners only have five years or less to prepare for the sale of their company, they can cut some of their options short, Sullivan-Kreiss says. By looking ahead, you can position your businesses effectively and ultimately get optimum market value for the company. And if you're working within a 10-year timeframe, you also have the luxury of engaging in strategic planning in order to save enough money for retirement. To get your business to a certain value in the open market, you can bring in a salesperson to attract new clientele, jump into a new market niche, cut down on your overhead, or acquire another company.

“Business owners pour their heart, soul, and every resource they have into growing their business, and a lot of times, their company is going to be their biggest retirement asset,” Sullivan-Kreiss says. “Planning is absolutely paramount for long-term financial security.”

You should also make decisions that will make the business more attractive to potential buyers and minimize capital expenditures. For example, rather than moving to an expensive new office building, it may be more beneficial and cost-effective to keep the operation in its current location.

Determine the net worth of your business. The value of an electrical contracting business extends well beyond net sales, says Dana Barfield, registered investment advisor for the Barfield Group, a Richardson, Texas-based firm that specializes in providing financial advice to entrepreneurial and family-owned businesses, including electrical contractors. Many owners start their business from scratch and work for 25 or 30 years to establish a successful operation. As a result, they need to do everything they can to protect the value of their business and take care of their longstanding relationships with their customers, he says.

Sullivan-Kreiss says the value of an electrical contracting business is based on a variety of factors that are often difficult to quantify. Your company's reputation, employees' capabilities and qualifications, and past performance all come into play. You also need to evaluate what markets your electrical contracting firm serve and in what regions, and identify your key advantages over your competitors. You then need to figure out how much it would cost your competitors to steal away your large clients or break into your hot market segment in terms of travel, training, and capital expenditures, and then incorporate that amount into the overall sale price of the firm.

Contracting firms turn profits based on services rendered, and as a result, they may have an attractive cash flow but a minimum amount of hard assets. Unlike other businesses, it can be tricky to determine the exact value of an electrical contracting business, Ertel says. “Electrical contractors are profitable in terms of the cash flow that they generate, but the problem that they face is that it can be extremely difficult for a bank to finance them,” he says. “This hurts the price that a private investor can pay.”

Identify potential buyers. The secret to successfully selling an electrical contracting business is to sell it to a familiar person, Barfield says. For example, an electrical contracting firm should identify its major competitors in a certain geographical market who would stand to gain from acquiring the business and therefore be willing to pay top dollar. “A competitor may be a compelling member of your list,” he says. “If there are three electrical contractors and one goes away through acquisition, one-third of the marketplace is swallowed up.”

To protect the interests of the company, you should never approach the potential buyer. Instead, you should send one of your employees, a financial planner, or an intermediary from a brokerage firm to meet with the potential buyer. Confidentiality is critical during this conversation, Ertel says. The potential buyers must sign a confidentiality agreement before disclosing the intimate details of the business. Otherwise, the company can use the information about the sale to its advantage. “Business owners don't want to run an ad in the paper,” Ertel says. “Instead they need to shroud themselves in confidentiality.”

Ask for help from a financial planner, lawyer, or brokerage firm. You may know the ins and outs of running a business after decades in operation, but putting your company up for sale is a completely different ballgame. Rather than risk losing thousands or even millions of dollars during the selling process, you should turn to a professional for assistance. A trained financial planner or broker can help you maximize the value of your business and bring multiple financially qualified buyers to the table.

Because buyers often have more experience than sellers, professionals can help you level the playing field. They can also ensure confidentiality in approaching buyers, speed up the process, and structure the transition to meet the needs of both parties.

“The most important advice I could give any business owner who is thinking of selling their business is to seek professional assistance,” Ertel says. “A trained professional can help you avoid the common pitfalls that many business owners encounter when selling their business.”

Sullivan-Kreiss advises owners to sit down with a financial planner, a certified public accountant, and an estate and business planning attorney to discuss the transition plan. You must ensure that these firms are intimately familiar with the nuances of your business. This team of experts can help you conduct a fair market valuation for your company. By knowing the value of the business today, you can better plan to sell your company in the future. She advises owners to evaluate the value of their business annually by sharing all of their financial records with an accountant and conducting a market analysis to determine their percentage of market share.

Because taxes can take up almost a third of a firm's profits, you also need to be vigilant about tax planning. You can spread out the payments for the sale of the business rather than paying a lump sum. For example, you might have an agreement with the buyers that states they will pay you “x” amount of dollars over a five-year period. The seller would then be taxed on each of the installment payments rather than the total proceeds of the sale.

Another option is to work with a brokerage firm. Just as a recruiter matches a job candidate with an employer, a brokerage firm matches buyers with sellers. Brokers use a combination of direct or targeted mail, trade journal advertising, and Internet deal exchanges.

Ertel says advertising an electrical contracting business on the Internet has several advantages, including relatively low cost, international reach, the capability to attract prospects with the same advertisement for a long period of time, and the ability to search for specific opportunities using a few keywords. He's aware of at least 15 to 20 Web sites that list businesses for sale and says that these advertisements often include a general description of the firm and its assets rather than mentioning the name of the company or its geographic location. Once a buyer responds to the blind ad, the brokerage firm will evaluate the company to make sure that it's financially qualified and a good fit for the seller. After sharing limited financial information with the potential buyer, the broker will oversee the negotiation process between the buyer and the seller.

These services, however, come at a cost. Barfield estimates that a typical broker charges about $50,000 for a preliminary evaluation, and on top of that, the brokerage firm will take about 5% of the first million dollars generated by a sale. A financial planner or lawyer, however, typically charges you by the hour rather than charging a flat fee.

Whether you work with a broker or a financial planning firm to sell your business, it's critical that you start the planning process early, determine the true worth of the business, and identify all potential buyers. If you have the majority of your net worth tied to your business, don't make the mistake of waiting until the last minute to put your business on the market. Advanced planning can mean the difference between pinching pennies during retirement and having a financially secure future.

Sidebar: How to Make a Transition Plan

Owners should ask themselves the following three questions when planning to sell their electrical contracting business:

  • What is my timeframe for closing the sale?
  • What are my long-term financial goals?
  • Will the next generation of leaders be selected internally or externally?

Sidebar: Selling Your Business Internally

When you decide to sell your electrical contracting firm, you may opt to sell it to a third party. But to get the most value out of your business, it's always best to sell it internally, says Kerri Sullivan-Kreiss, president of SullivanKreiss Financial.

“It's the best way to keep your business going and keep up morale and employee retention,” she says. “When it's not feasible, then an outside buyer may be the answer, but you need to look for a buyer who is willing to pay fair market value.”

All corporations have shares, even if they're not publicly traded on the open market. If you own 100% of your company, then you would have 100 shares. When a firm incorporates, a lawyer would present the owner with a share certificate, and the shares' value would depend on how much someone would be willing to pay for them.

When selling internally, you typically have three different options: a stock redemption plan, employee stock options, or a cross-purchase plan. When redeeming stock, a company can buy shares from a departing owner with the funds from the cash flow in the business. In a leveraged buyout scenario, the company will borrow the money to buy the shares from the departing owners.

Employee stock option plans (ESOPs) have been around since the '70s and have gained popularity in recent years, Sullivan-Kreiss says. ESOPs distribute a portion of the firm's ownership to the employees and allow the new leadership to collectively own a majority interest in a firm without having to buy 100% of the shares. Because the employees have the opportunity to participate in the ownership of the company, ESOPs can create goodwill and increase retention. They also allow employees to contribute funds to their retirement plan. When considering ESOPs, an owner must consider the firm's size, cash flow, debt service capacity, and corporate culture.

A cross-purchase plan is made between two different owners who agree to buy each other's stock upon certain triggering events like retirement, disability, or death.

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