Ownership transition is one of the most difficult processes that a privately-held construction company will face in its business life cycle. Family, key employees, competitors, financial investors, and investment firms all play critical roles in its success.
While many construction owners prefer to pass their businesses on to family members or key employees via an internal sale; a third-party sales generally lead to the strongest financial gains and provide the most certainty for immediate owner liquidity.
Contractors with the highest value generally have a healthy balance sheet, strong working capital, minimal line of credit borrowings, strong bank and surety relationships, and minimal historical and prospective exposure to severe job losses and contract litigation. Another core attribute that tends to increase value is the contractor’s ability to maintain a strong quality of geographically favorable backlog projects with minimal booking risk and profit erosion exposure.
A third-party sale is typically the best opportunity for the company’s shareholders to maximize value and liquidity while minimizing deal risk. However, the external sale creates the most exposure to future change in operations, employees, and, most importantly, company culture. An investment banking firm experienced with construction-related transactions is often used to facilitate this sale process.
An internal sale requires the new management team to secure funding from a bank or investment firm in order to buy out the current owners, or the existing owners provide self-financing of the transaction. Banks generally frown upon providing debt to be used for owner redemptions and these transactions typically create unwanted owner exposure and unpaid note during the redemption period.
When a contractor is seeking an exit plan, it is imperative to consult with a team of professional advisors including financial, tax, and legal experts highly experienced in construction sale transactions. If a contractor is considering a third-party sale, then it is also vital to identify an investment banking firm or financial advisory firm that specializes in the construction industry.
The best time to sell a construction company is when the construction market and backlog of jobs is strong, with healthy profit margins. And remember, the people are the key to value, so it is essential to ensure the employees who are critical to business development, estimating, operations, and field support continue to run a successful construction company.