Selling a construction business can be a complex process, and one of the most challenging aspects is handling underperforming assets. These are assets that don’t generate the expected revenue or returns, which can have a negative impact on the overall valuation of the business. For small construction business owners looking to exit, understanding how to address underperforming assets is crucial to achieving a successful sale.
In this blog, we’ll explore how underperforming assets can affect the sale of your business and offer strategies to deal with them. We’ll discuss how to assess these assets, whether to improve or offload them, and how to communicate their impact during the sales process to maximize the sale price.
1. What Are Underperforming Assets?
Underperforming assets are those that fail to meet expectations in terms of revenue generation, cost-effectiveness, or overall contribution to the business’s profitability. In a construction business, these could include:
- Old or outdated equipment that incurs high maintenance costs but doesn’t contribute to revenue.
- Unprofitable projects or contracts that bring in less money than anticipated or result in ongoing losses.
- Real estate that isn’t being used effectively, like unused or underdeveloped property.
- Excessive inventory that ties up capital and occupies space without contributing to sales.
- Staff or divisions that aren’t meeting performance targets or whose potential has not been realized.
While underperforming assets may be a natural part of business life, they can complicate the sales process by potentially reducing the perceived value of your company.
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2. The Impact of Underperforming Assets on Your Business Sale
When selling a construction business, buyers want to see value in all aspects of the business. Underperforming assets can cause buyers to worry about future profitability, leading to lower offers or delayed negotiations. Here’s how they can impact the sale:
Lower Valuation
A buyer will typically assess your business based on key financial metrics, such as profitability, asset value, and projected cash flow. If underperforming assets are included in the deal, they may reduce the overall value of the business, especially if these assets require significant investment or attention to turn around.
Increased Buyer Risk
Buyers are generally risk-averse, and underperforming assets introduce perceived risks. For example, if outdated equipment is included in the sale, a buyer may be concerned about the costs of replacing it. Similarly, unprofitable contracts could make the buyer hesitant to take on the liability, which might result in them negotiating a lower price to offset potential future losses.
Delayed Negotiations or Offers
Underperforming assets can also cause delays in negotiations. Buyers may request that these assets be removed from the deal, ask for warranties, or demand a lower price to account for the risks. This can prolong the sale process, potentially leading to frustration on both sides.
3. How to Assess and Manage Underperforming Assets
Before putting your construction business on the market, it’s essential to assess the underperforming assets and determine how to manage them. There are several strategies to consider, depending on the nature of the asset.
Identify the Root Cause of Underperformance
The first step is to analyze why the asset is underperforming. Is it due to external market factors, like economic downturns or a change in demand for a specific service? Or is it an internal issue, such as outdated equipment or inefficient processes? Understanding the cause of the underperformance will help you decide how to address it.
For instance, if a piece of equipment is underperforming because it’s old and requires constant maintenance, you may want to consider replacing it before listing your business for sale.
Determine Whether to Improve, Sell, or Write Off the Asset
Once you’ve identified the cause of underperformance, you can decide on the best course of action:
- Improve the Asset: If the asset has the potential to become profitable with some investment, it may be worth fixing or upgrading before the sale. For example, replacing old equipment or renegotiating unfavorable contracts can boost performance and increase the value of your business.
- Sell the Asset: If an asset is no longer useful to your business and doesn’t offer potential for improvement, selling it off can reduce its impact on your business’s value. For example, selling unused real estate or surplus inventory will clear up space and reduce liabilities.
- Write Off the Asset: In some cases, writing off an underperforming asset may be the best option. If the asset is no longer valuable or necessary, removing it from your books can reduce its negative impact on your business’s valuation.
Document and Disclose Underperforming Assets
It’s essential to be transparent about any underperforming assets when you begin the sales process. Buyers will conduct their due diligence, and if they uncover hidden issues with assets, it could damage your credibility and cause the deal to fall through.
Providing a clear breakdown of the assets, including the reason for underperformance and your plans to address the issue, will help buyers feel more comfortable and demonstrate that you have a handle on the situation. This transparency can also help build trust and avoid unpleasant surprises later in the process.
4. Strategies to Mitigate the Impact of Underperforming Assets
While you may not always be able to fully improve or eliminate underperforming assets before selling, there are strategies you can use to mitigate their impact:
Offer to Exclude Underperforming Assets from the Sale
In some cases, you may be able to exclude underperforming assets from the sale. For example, you can offer to retain ownership of problematic equipment or non-profitable contracts. This can help raise the buyer’s perception of the business and reduce their concerns about taking on risk.
If you’re selling a construction business with underperforming assets, it might be more attractive to offer a clean sale, without any liabilities or underperforming assets that could hold the buyer back. This could potentially help you secure a better deal.
Adjust the Asking Price Based on Asset Performance
Another approach is to adjust the asking price to reflect the underperforming assets. If you are unable to improve or sell the assets before the sale, consider pricing the business lower to account for these issues. Buyers are likely to make lower offers if they know they’ll need to invest additional money or time to address the underperforming assets.
Consider Seller Financing or Other Incentives
To attract serious buyers despite the presence of underperforming assets, you may want to offer incentives such as seller financing or an earn-out agreement. This can ease the buyer’s concerns about risk, as it allows them to pay a portion of the purchase price over time or tie part of the price to the business’s future performance.
5. How to Present Underperforming Assets to Buyers
When presenting your construction business to potential buyers, it’s important to be upfront and honest about any underperforming assets. Here’s how to approach it:
Explain the Plan for Resolution
Buyers will appreciate knowing how you plan to handle underperforming assets. Whether you intend to replace old equipment, renegotiate contracts, or sell off surplus inventory, make sure to communicate your strategy. If the asset can’t be improved, explain why it is no longer a liability and how it doesn’t affect the overall profitability of the business.
Highlight the Business’s Overall Value
While underperforming assets are a concern, it’s important to emphasize the overall strengths of your construction business. Buyers want to know that the core aspects of the business—such as steady revenue streams, established client relationships, and operational efficiency—remain strong. Highlight these positive elements to balance out any concerns over underperforming assets.
6. Conclusion: Managing Underperforming Assets for a Successful Sale
Dealing with underperforming assets when selling your construction business can be challenging, but it’s not insurmountable. By taking proactive steps to assess, improve, or offload these assets, you can reduce their impact on your business’s value and increase your chances of a successful sale. Whether you choose to improve the assets, exclude them from the deal, or adjust the asking price, transparency and strategic planning are key to achieving the best possible outcome for both you and your buyer.
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Disclaimer:
Any information provided here is for informational purposes only. It should not be considered as legal, accounting, or tax advice. Prior to making any decisions, it’s the responsibility of the reader to consult their accountant and lawyer. N3 Business Advisors and its representatives disclaim any responsibilities for actions taken by the reader without appropriate professional consultation.
