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Exiting Gracefully

Jim Dailey advises on importance of an exit strategy

Jim Dailey advises that an exit strategy becomes important once you have employees, jobs and a reputation you want to preserve. Photo: AKT Group.

Map out your exit strategy early to maintain your legacy.

For a lot of builders, this was an easy profession to get into — all you needed were some tools and a good truck. A few decades later, though, figuring out your retirement can be a surprisingly tricky business.

Especially in the building industry, where a name is often analogous with the company itself, developing a sound exit strategy well before you plan to retire can mean the difference between a satisfying, smooth transition to the next phase of life, or a disappointing ordeal that taints everything you've worked so hard to build.

Evaluate honestly

While most of us can easily articulate why we got into construction — the opportunity to be your own boss, the chance to make something real and lasting, even a fairly flexible schedule that allowed for plenty of boat time on the lake — it's harder to know what you want at the end of your career. Are you looking for a big payout? An assurance that your legacy will continue beyond your name being taken off the door? Are you concerned about who will take care of your employees and customers, and how they'll do it?

"What many builders don't think about is that it is not difficult to get into the industry. But it's a lot more difficult to get out of the business," says Jim Dailey, construction partner at Portland, Ore.–based AKT Group, an accounting and consulting firm that specializes in business transition planning. "An exit strategy becomes important once you have employees, jobs in progress and a reputation in the industry."

The first step toward the exit should be an honest evaluation of what you want from the end of your career.

Prioritize concerns

"Most of my clients in the trades want to walk away with some money and feel like the legacy they created is not being managed by just anyone," says Jennifer Martin, head of San Francisco–based Zest Business Consulting. "You may also care about your past clients, your vendors, subs, employees, and other relationships and want to make sure that they are taken care of at least as well as you have cared for them."

Deciding what you want to leave behind will go hand in hand with how you go about doing it. Which is why Martin advises to question yourself again after you come up with your initial answer.

"Once you decide which route you want to go, give it some thought, and then think about it again," Martin says. "Deciding to close your doors is equally as much of a decision as opening them. You want to make sure that you do it in a way that supports the people who have helped you get to where you are."

But there's only one person who can make that decision: you.

"The objective is really determined by the needs of the exiting owner," Dailey says. "Some owners may not care about the business lasting in perpetuity — they built it to sell. Others we have worked with are on their third generation of family ownership. Whatever the case, the owners must plan for transition and allow enough time to define the best strategy."

When seeking counsel for your transaction, choose someone who specializes in construction. An accountant with little construction industry knowledge might suggest a great tax strategy for business in general that could end up hurting your balance sheet so that it can't support the company going forward.

Consider options

From Dailey's experience, builders ultimately choose one of three options:

  • Twenty percent liquidate, or close their doors.
  • Twenty percent sell to outside buyers.
  • Sixty percent sell to a group of employees.

Liquidating means you sell what you have, whatever else you've acquired for your business beyond the tools and truck you started with. And since construction is a service industry and highly technical, it's hard to find an outside buyer who knows how to operate the business. Which is why the majority choose to sell to employees. But that has its own challenges.

"While the bulk of the opportunity for transition falls to employees, most don't have the money to do the transaction," Dailey says. "That means you need a long lead time to help build the balance sheet. Construction is a unique industry, and bonding companies and banks want to see financial statements to ensure there is a succession plan in place."

That plan might include the owner helping employees fund the transaction, with the ongoing business paying the outgoing owner over time. Doing it the right way means making sure the projects you've already got on the books keep going, so that there's still money coming in after you're gone.

"It's important to create a plan that won't disrupt the balance sheet of the business so it can still fund the ongoing work and provide the cash to the owner," Dailey says.

In other words, to exit gracefully, as with building a house that will last, you've got to plan ahead. And you've got years of experience doing that.