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Six Questions to Ask Before You Exit

Nov. 18, 2020
These questions relate to life after contracting, income you can expect from the proceeds and the whole idea of leaving the business.

There is a private equity land run underway in the HVAC industry. Multiples for residential service companies are soaring beyond anything previously imagined.  Many contractors are grabbing the cash while the grabbing is good.  It is only after the sale is complete and the transition begins that they ask themselves, “What’s next?” 

Indeed, what is next?  If you sold your business tomorrow, what would you do with the rest of your life?  This is worth thinking about.  Your initial reaction might be that you would like to go fishing or play golf every day. Trust me. No matter how much you like fishing or golf, anything gets old after a while.

Here are six questions to think about. There are no right or wrong answers. There are only your answers and your answers will be different than the next guy’s.  

1. Will You Need Additional Income?
Before you sell your business, you should crunch the numbers on how much money you need to maintain the lifestyle you desire.  Then, figure out how much you need to sell the business for if you want to attain that lifestyle.

Projections I’ve read on the expected return on the stock market over the next ten years range between 5% and 7%. For bonds, the expectation is 3%. Thus, the return on a balanced, conservative portfolio is going to be 4% to 5%.

Selling your business may mean you are set for life. It may also mean you are merely better off.

A million dollars sounds like a lot of money until you realize that it will only generate an annual return of $40 thousand to $50 thousand dollars. Worse, that represents income before taxes. Even worse than that, the million dollars is subject to capital gains.

Joe Biden is promising to raise taxes. If his party gets control of the Senate, you can bet he will. That means a higher capital gains tax and higher income taxes. In other words, you will walk away with less and it will generate less after taxes.

Selling your business may mean you are set for life. It may mean you are merely better off. Your options vary dramatically based on how you answer.  While this is a seller’s market, it might be better to wait until you grow the business larger. 

2. How Long Will You Stay?
Few buyers want to boot the owner of a company after they buy it. This is especially true for private equity. At the very least, the new owners will want to keep you around for a year or so. Some will incent you to stay with earn outs.

It is a hard adjustment shift from calling all of the shots to asking permission. Some cannot do it. You know your personality. If you cannot handle a different role, then plan on staying the minimum amount of time.  If you think you can handle it, ask how long you want to stay. 

Bear in mind that you will be implementing decisions you did not make and may not agree with. It will feel like someone else telling you how to raise your kid. In truth, it will not be your kid anymore. The business no longer belongs to you.

3. Should You Consult?
It seems almost every contractor who sells a business ponders the role of consulting.  Heck, you were successful.  You successfully built and sold a business.  Why not get paid for your experience and help other people do the same thing?

It sounds good in theory. In practice, consulting sucks. It sucks if you try to make a living off of it. If you think the seasonality of HVAC is tough, try the ups and downs of consulting. You have to scramble hard to get engagements. Then, when you do get work, you are too busy to prospect, so when the work is over, it is famine time again.

If you think the seasonality of HVAC is tough, try the ups and downs of consulting. 

Think about what you are willing to pay for a consultant. Would you want to work for that?  No, would you want to travel, live in a cheap motel, and eat crap food for that, knowing that the next week is income free?

 You may be willing to put up with the lifestyle, but are you willing to put up with the clients? You are going to see some things that need improvement and change with great clarity, but the clients will not do what you advise. You will lay awake at night worrying about your client’s business while he sleeps peacefully because handed you his problems, but still will not act on your recommendations.  It is frustrating. 

 Since most contracting businesses are family affairs, you will get sucked into the family squabbles. Are you ready to be a marriage counselor? Are you ready to deal with the emotional drama surrounding deadweight family members who need to find a new career?

4. Should You Get a Job?
Another option, if you need money is to go to work for someone else.  Manufacturers and distributors always need knowledgeable people.  Who is better than a contractor?  In fact, many contractors make this jump.  It offers steady income and decent benefits.  It is better than taking a job in a big box where you stand on concrete floors for eight hours a day.

If you take a job, no matter who you work for, there is a relief factor. You do not have to worry about payroll. You do not have to worry about technicians. Chances are, you will be able to shut the job off at the end of the day. Your weekends become yours. 

If you take a job, no matter who you work for, there is a relief factor.

 With any job, you still have to transition from boss to subordinate. Can you handle it? There is a point where people who have been self-employed for too long, become unemployable. Is that you?

5. Should You Start Another Business?
Another option is to buy or start another business. If it is a contracting business, you might have to move to a different market or wait for a non-compete to expire. Knowing what you know now, you can start faster and build the business avoiding your prior mistakes. Most contractors who start a second company are even more successful. After all, they have paid their tuition in the school of hard knocks.

 If you do decide to start a different venture, do your homework first.

Who says you have to start a contracting business? If fishing is your thing, maybe you can start a guide service?  Or, become an outfitter?  If you do decide to start a different venture, do your homework first. Do it in the transition period after selling your business.

6. What Else is There?
What if none of the above appeals to you? If you do not need to supplement your income, there are options. One is volunteering. Some contractors devote themselves to mission work, at least part of the time. There are always options for volunteers.

 Some look for hybrid opportunities like working with Service Nation.  We use quite a few retired contractors to act as mentors and run contractor Advisory Boards. It is a way to keep active in the industry, help a few contractors, and earn a little extra. There are many ways to stay involved if that is your choice.

For help growing your contracting business, join the Service Roundtable.  Visit www.ServiceRoundtable.com or call 877.262.3341.  To learn more about the opportunities to work with Service Nation, call the same number and ask for Bob Viering.