BUYING
OR SELLING A CONSTRUCTION COMPANY? to
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By Allan Vander Hamm What are some of the most important steps to consider when buying or selling a business in the construction industry? Do you know what the company is worth? How long does it take? Who should be involved? The process is complex, emotional and time intensive. Critical steps include choosing your transition team, establishing business value, marketing the benefits and opportunities, successfully negotiating, and completing a smooth transition. Completing a business sale is similar to completing a construction project. You follow a building plan that clearly specifies the end product. You use your professional skill and experience to identify the required procedures, perform them in the most efficient manner, and complete the project within budget. If you don't follow a building plan chaos results, costs go through the roof, quality drops, profit suffers, and your image is damaged. These same concepts apply when selling your business or buying a new business. A well thought out plan will result in a better deal, reduce wasted time, minimize potential deal-killers, and give you more control. The first step in your plan is to bring together members of your transition team. Assembling a team of professionals qualified and experienced with business sale transactions will generally net you more money and reduce stress. A CPA specializing in business valuations and sales will help you determine a reasonable price and transaction structure to generate the best financial return while paying the least taxes. If you’re a buyer, the CPA can assist with ‘due diligence’ to confirm that seller representations about the business are in fact true. An attorney with transaction experience will help draft agreements to protect your interests while moving the process forward. A broker or merger and acquisition specialist can assist with marketing, pricing, negotiation, building momentum, and bringing the parties together. A good negotiator, whether it is you, the broker, CPA, or attorney, is often the key that locks up the deal. If a transaction happens quickly or over many months make sure your team understands your priorities. Without agreement and common goals each member will focus on their expertise. The broker wants to complete the transaction quickly and at the highest ‘price’ to receive the highest commission. The CPA will be concerned with the terms and structure of the deal to get you the most after-tax dollars. The attorney is focussed on protecting your legal interests without giving away any ground to the other side. The next step is business valuation. It will provide you with economic and industry specific data, names and information about comparable companies and potential acquirers, an evaluation of company strengths and weaknesses, and detailed financial analysis to determine economic cash flows and fair market value of assets. If you're selling, the information helps with creation of a marketing package, developing negotiation strategies, creating beneficial deal structures, overcoming buyer objections, limiting possible deal killers, and completing due diligence with minimal problems. A business valuation is a tool to strengthen your negotiating position because of the comprehensive knowledge that you and your team gain about the business and acceptable price ranges. Valuation of a business in the construction industry includes both general and industry-specific considerations. General considerations include using three main generally accepted approaches to derive value. The first is a market-based approach. This is based on the premise that prices for comparable publicly traded or private company sales most directly indicate the value of the company being valued. Common ratios used for comparison, after adjusting for size and other differences, include price/sales, price/earnings, price/equity, and price/cash flow. The second valuation approach is based upon fair market value of the net assets in the company and applies to most smaller firms. For a company to create ‘goodwill value’ above net asset value requires that people, systems and procedures be in place to generate continuous sales growth and profits. Examples of factors that add to goodwill include continuing customer relationships, depth of management and delegation of duties, low employee turnover, and special techniques, processes and procedures that are difficult for competitors to copy. If it is easy for someone to start a competing business by buying some equipment and bidding on the same projects the company probably has little value above net assets. A valuation will identify whether the company has characteristics necessary to create goodwill value above the value of the net assets. The third valuation approach is based upon expected future net cash flows to the owner. Historical cash flows are used to help estimate future cash flows. Just like in the stock market, the most an investor will pay for a company is the present value of all expected future cash flows, after adjusting those cash flows for risk. The higher the risk, the lower the present value. Marketing a business for sale usually includes developing a marketing package and program to identify and attract high-quality buyers. A merger and acquisition professional will use information from the valuation, site visits, and discussions with management to create an attractive presentation package. Based upon the industry niche, sales, size, quality, and special competencies, the company may be directly targeted to specific potential buyers, advertised in industry magazines and trade journals, placed on various Internet sites, shopped to professionals, and so on. Marketing costs and timing should be agreed to before brokerage agreements are signed. Unless someone comes directly to you to make a deal, or you go directly to someone else to buy a company, the time from marketing to closing frequently takes from six to nine months. However, a deal could take several weeks or a few years! As a general rule of thumb, expect three to six months to value, market and screen prospects, a few weeks for negotiations, and several weeks to line up financing, complete due diligence, and close the transaction. An intermediary, whether the broker, CPA, or attorney, should be used to screen prospects for financial and managerial ability to acquire and run the business. Those who pass the screening should be required to sign confidentiality and non-disclosure agreements before learning the name of the company or seeing any detailed information. Many companies have lost employees, customers, and business value when it becomes known that they are for sale. Confidentiality is of primary importance until the deal is closed. Once the buyer is qualified negotiations begin. Expect a roller coaster ride. You may want to be directly involved in negotiations or work through an intermediary. This depends upon your experience and temperament. Negotiations often become very personal and emotional so use your transition team as a buffer, an idea generator and to buy time. Once negotiation progresses to some level of agreement, a Letter of Intent or a Purchase and Sale Agreement will be prepared. The Letter of Intent is usually a short document that lays out the basic agreement between the parties. The Purchase and Sale Agreement is the definitive document that lays out all terms, conditions, representations and warranties related to the transaction. Your team attorney is crucial during this process. After the Purchase and Sale Agreement is signed the transition begins. This includes transferring leases, obtaining bank financing, and completing the due diligence process to remove contingencies to the sale. Due diligence in most cases means that the buyer hires a CPA to perform ‘agreed-upon procedures’ to confirm that the operational and financial representations made by the seller are correct. After all contingencies are removed the deal is closed, usually by a third party independent attorney. Negotiations often do not end until all papers have been signed at closing. Competent transition team assistance helps minimize last-minute issues. Selling or buying a business is an exciting process. If you work from a plan, develop a competent transition team, market both the strengths and opportunities offered by the business, utilize sufficient business valuation information to strengthen your positions, and work towards win-win outcomes you can make more money, have some fun, and improve your lifestyle. Allan Vander Hamm, CPA, ABV, is Director of Business Valuation and Litigation Services and member of the Estate and Transition Group at Berntson Porter & Company, PLLC in downtown Bellevue. |