Why You Should Have an Exit Strategy

Why You Should Have an Exit Strategy

Astonishingly, exit strategies aren’t very interesting to most contractors.  At least, they aren’t interesting until they’re ready to exit and by then, it’s too late.

Turning Your Company Into a Salable Business

Most contracting companies cannot function without the owner.  That makes them jobs, not businesses.  No one will buy a job.  Maybe someone will buy your customer list if it’s priced low enough, but no one will buy your job.

A business, on the other hand, is fully salable.  There are a surprisingly large number of people who might be interested in it, provided it has sufficient scale and a solid local brand, as long as you aren’t required to make it all work.

To make yourself unnecessary, you must turn your people centric company into a process centric business.  When a company is people centric, there’s upheaval whenever a key person leaves, because the information about that person’s job is in his head.  Whoever replaces him has to figure everything out from scratch.  The new guy will do things his way, which may be completely different from how the old guy operated.  Upheaval.

In most contracting companies, the most critical person is the owner.  That’s why your company is not worth much without you.  The second someone takes over, it’s complete upheaval.

So start creating processes.  Direct everyone, in every position to document what they do, step-by-step.  Sure, they will grumble and may even resist, but it’s too important.  It’s your future.

An interesting thing happens when you start documenting processes.  You find ways to improve them.  When you see the steps in black and white, you start to question some of the steps.  You find ways to become more efficient and also, more thorough.

The documentation should include your job.  Eventually, you want to grow your business to the point where you can afford a general manager and make yourself unnecessary.  Then, you will truly have a salable business. 

Of course, once the business reaches that point, you might question why you would want to sell.  Good question.  After all, the business largely runs on its own with a little oversight from you.

Consider Your Exit Options

Let’s say you reach the point where you do want to exit completely.  Depending on the size of your operation, you have a few options.  If your business grows above $5 million the options get a little better.  Above $10 million, they get better still.  Moreover, larger businesses attract higher multiples.

Contracting business owners can sell to family, employees (by note or ESOP), strategic buyers (e.g., another contractor), or private equity.  There is a lot of private equity in play these days, but your business should be north of $10 million to really be attractive. 

Selling to family or employees may take place over a long period of time.  If this is your path, you should begin consulting with attorneys and accountants long before you push the go button.

If you want to sell to a competitor, start nurturing relationships with potential acquirers early in the game.  It’s okay to talk with several.  They may or may not be located in your community, which is one of the reasons it’s important to attend national meetings.

If you plan to sell to private equity, more than three years out you should start cleaning up your balance sheet and income statement.  Start treating the business like a public company instead of your personal piggy bank (e.g., a bass boat is not a business expense, even if you can make a legitimate case for it).  If your business is larger than $10 million, consider engaging an investment banker to help you solicit multiple offers from outside the industry.

Act Like You Want to Sell, Even If You Do Not

Working on your exit strategy does not take a lot of time, if you plan in advance.  The actions that you take to make your business salable are coincidentally the same actions you would take to make your business more profitable, efficient, and easy to run. 

Whether you ever plan on selling your company or not, you should act like you are selling.  A better business will be the result.

 

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