Advice on Selling Your Construction Business: Dos and Don’ts Revealed
Are you a construction business owner thinking about selling? Have you ever wondered about the dos and don’ts of selling a business? These are critical questions to ponder before taking that important step.
At N3, leveraging over more than a decade of experience in helping small to mid-sized construction business sellers in navigating the process of selling their businesses. We’ve noticed many owners feeling confused when starting this journey, despite their strong desire to successfully close the deal.
Consider this: Many business owners venturing into selling their businesses are navigating these waters for the first time. They’ve honed their craft in running their enterprise but might lack the know-how when it comes to selling it. If you’re among these business owners, this blog is gold and this is specifically for you. Your business has been more than a source of income; it’s been a legacy, a lifeline for your family. And now, the time has come to pass it on. But are you truly prepared?
For us, at N3, this blog is more than just words—it’s a treasure trove of advice to all the construction business owners out there. In our more than a decade of experience facilitating the transactions and helping the construction business owners to pass on their businesses to the best buyer available, we realized that business owners are adept at what they do best—running their businesses. However, the art of selling their enterprise often remains a critical dilemma. Yet, this sale is possibly their most significant asset, and the stakes are high. Join us as we tap into the valuable insights and expertise on the dos and don’ts of selling a business as the sale of a business might be an unfamiliar territory for business owners, but it’s an asset that demands meticulous attention—one chance to get it right.
Now let’s delve into some crucial questions that often crop up in discussions about selling a business. Feel free to engage and share your thoughts. Starting with what might seem like the most apparent query for business owners, when’s the right time to think about selling their business?
Ideally, it’s best if business owners get things rolling early—right from the start or when they first get their company. But that’s not always how it goes. Sometimes, people are busy sprinting towards their big business goals, especially in the beginning. Whether it means getting things started by setting up strong ways of doing things, working with accountants, keeping records neat, or even using strategies like the 12-week year where they focus on big goals while handling everyday tasks—the main thing is to start early. Don’t wait until you’re just about ready to sell.
To the construction business owners who come to us, we often suggest starting to think about selling your business way before you actually plan to. For example, we often say the best time to plant a tree was twenty years ago, but the next best time is today. Definitely. Reading this blog shouldn’t make you worry about getting ready to sell your business. It’s totally fine not to wait until later. Start taking steps today. By the end of this blog, you’ll probably feel more prepared. Business owners often think about time kind of like how we talked about earlier—maybe setting goals every year.
Let’s simplify things. Imagine I’m a business owner thinking of selling my business and I’ve decided to put it up for sale. How long might it take? Well, it’s a bit complicated. Many things affect this. How big the business is makes a big difference. Usually, smaller businesses sell faster, but bigger ones might take longer. Usually, it can take from four to seven months, but sometimes it can even go past a year. We think it’s best if sales happen within that four to seven-month range. It’s not just about how big it is but also how much it costs—a higher price might mean waiting longer to find the perfect buyer. And it’s not just size that matters; it’s also about the type of business, where it is, and how long its been started.
When it comes to selling a business, timing can vary a lot. Sometimes it takes around 90 days if everything falls perfectly into place—the price is right, the story makes sense, it’s well presented, and there’s a strong demand in the market. But there are cases where it seems like it might happen after a year, especially if the business faces challenges in its industry or if the owner’s expectations are way off.
Usually, it takes about 6 to 12 months, on average. We’ve worked with sellers who initially tried selling on their own and found it tough. Previously a year ago, one of the business owners came to us stating that it was really hard without proper guidance. After very few months, we were able to facilitate his transaction, we helped them quickly find the right buyer for their business, making them really happy to secure the legacy they wanted.
Sometimes, selling a construction business in the market takes a period of more than a year, and it’s tricky to figure out why. Is it because the price isn’t right, or maybe there’s just that one buyer willing to pay a lot more? Selling a business depends on many things—like how big it is and how you’re trying to sell it.
Now, deciding whether to sell on your own or with a M&A advisor is a big deal. Keeping things secret is a big worry for sellers. It’s tough to keep things hush-hush when you’re doing it solo. Getting an M&A advisor not only keeps things secret but also makes sure you’re not setting the wrong price when you enter the market.
A certified M&A advisor with a sound experience, possesses the expertise to accurately evaluate each unique business scenario. Confidentiality and appropriate pricing emerge as two primary reasons to consider involving an M&A advisor in the selling process.
Indeed, there is a high risk of breaching confidentiality when not having someone to oversee and drive the sales process. Without guidance, buyers may take their time, causing potential leaks or delays. Maintaining control over milestones becomes crucial in such scenarios, reducing the risk of information reaching the public prematurely.
PRICE IT RIGHT
Now, let us dig a little deeper and discuss about the pricing part of the construction business, improper pricing can swing both ways, not just landing on the high end but sometimes leaving substantial money unclaimed. Few months back, we even encountered a case where a highly sought-after business was undervalued by over a million dollars, yet the seller was content with the deal. While it’s understandable that some choose to handle sales themselves, it’s not the recommended path. Collaborating with professionals like us grants access to a network of experienced attorneys, accountants, and potential buyers saving you from the difficult task of getting the best buyer, especially when you’re not well-versed in selling a business.
Selling a business demands a lot of time. Doing it alone might distract you from running the business, which can lower sales and profits, hurting the business’s value. An experienced M&A advisor can prevent these issues, making the deal more profitable and saving time. They add immense value during negotiations, justifying all the hard work you’ve put into your business. Running your business should be your main focus, not selling it. Neglecting your business while trying to sell it can make it less appealing to buyers. To attract buyers, having accurate financial records is crucial.
It’s important to revisit your pricing strategy when selling a business. Setting the right price is key to making it attractive. Clear and reliable financial records are a must, along with organized document management and streamlined processes. This organization isn’t just about finances—it’s about how your business handles paperwork, procedures, and employee policies. The aim is to lessen the owner’s everyday workload. Smaller businesses may find this challenging, but as they grow, there’s a chance to delegate tasks, giving the owner a break from hands-on work like field tasks, estimates, or dealing directly with customers.
KEEP YOUR FACE CLEAN
Reducing risk for potential buyers is vital. Having diversified clientele, where no single customer represents a significant chunk of your business, mitigates risk. Equally critical is the evaluation of your workforce—are they competent, content, and motivated? Additionally, your business’s reputation matters; online reviews can significantly impact buyer perceptions. Negative reviews might offer a potential turnaround opportunity for some buyers but could potentially lower the business’s sale price. Returning to the point about clean records, a common mistake among business owners is attempting to minimize profits in financial reports to lower tax payments. While this might seem beneficial in the short term, it can adversely affect the perceived value of the business during a sale.
At N3 business advisors, when we discuss tax strategies with construction business owners, we often ask, “For every dollar you evade taxes on, what’s the actual saving—20 cents, 25 cents, or even 30 cents?” We aim to have a clear view of our financials. Every dollar retained in our books results in more savings. Considering that your business might be valued at a multiple of two, three, or even four, every dollar kept transparently in your records translates into a higher multiple—two, three, four, or more dollars when it’s time to sell. Which is more significant? Think!
In reality, it’s rare to find immaculate financial records. Transparency matters more than perfection. As M&A advisors, navigating through such challenges is part of our job. While having clear records is preferred, it shouldn’t discourage business owners from pursuing a sale. Even if your records aren’t perfect, it’s not a dead-end for selling your business.
MORE ABOUT CASH TRANSACTIONS
Now, let’s address the elephant in the room: cash transactions. Some business owners deal in cash transactions that aren’t reflected in their books. The harsh truth is, you can’t benefit twice from the same money. If cash transactions haven’t been documented, the benefit has already been received, but it won’t reflect in the business’s sale value. In industries where cash dealings are common, it’s crucial to understand that avoiding taxes on cash income might result in forfeiting multiples of business value during a sale.
Consider this, normally businesses often sell at two to three times their value, whereas in the lower middle market, it’s four to six times. For each dollar saved in taxes on unreported cash income, business owners might be leaving behind two to six dollars in a potential sale scenario. These numbers escalate significantly when multiplied by the scale of the business. It’s a choice between saving a fraction or earning substantially more.
In N3, as a responsibly M&A advisors, it’s part of our responsibility to guide our clients, sometimes advising them that it might be prudent to wait, especially if their financials aren’t aligned for a successful sale. To be more accurate, it’s essential to start managing things right from the outset or consider restructuring operations towards the end of the year to ensure accurate tax filings. Honesty and transparency with sellers aren’t just about initiating engagements but doing what’s right for the business in the long run. While sellers might not immediately recognize the value of these actions, they eventually come to appreciate them, benefiting both M&A advisors and sellers alike. An aspect often overlooked by sellers beyond financial disclosures is operational transparency. In nearly all instances, potential buyers prefer being informed about potential challenges upfront rather than encountering surprises during the due diligence phase. Sharing operational deficiencies not only presents an area for buyers to capitalize on but also fosters trust and transparency between the intermediary and the seller.
PERFECTION LIES IN THE EYES OF THE BEHOLDER
We always talk about how important it is to have really great financial records. But it’s pretty rare to find records that are absolutely perfect. A while ago, few years back, we worked with a construction business owner who had everything super organized, but the buyer didn’t like that there weren’t any mistakes to take advantage of. It shows that what’s perfect for one person might not be for another. Some buyers, especially those who know about cash businesses, might like the way those records are, even if they’re not perfect to everyone else. What counts as perfect in financial records changes from buyer to buyer. Even businesses with cash transactions might have records that a buyer thinks are just right. But during evaluations, the financial statements often get adjusted. So, it’s important for advisors to teach sellers what’s okay and what’s not.
Moving from getting the business ready for sale to putting it on the market can be an eye-opening experience for many business owners. Once it’s listed, the wait for potential buyers isn’t like hosting an open house; instead, it’s a slow and careful process. At N3 we assess buyer capabilities, motivations, and start seeking financing opportunities while also preparing the business to be presented in its best light, which helps the sellers in a huge basis.
COMMUNICATION IS THE KEY
As the leading M&A advisors, we ask sellers to genuinely respond to our questions during this time. Though it might seem like a lot, these questions aim to address potential buyer queries in advance, making communication smoother. For entrepreneurs, this process can feel different because they’re used to making quick decisions, but selling a business takes time—usually four to 12 months or more. Being ready for a slower journey helps set expectations. When a business goes on the market, owners might feel a shift in control. It’s crucial to understand the important role of the professional team supporting them. While staying open and consistent in communication is key, sellers might need to let go of control in certain areas once the business is up for sale.
As M&A advisors, we at N3 have noticed that the initial phase post-launch is notably busy. We leverage public business sale platforms, targeting buyers who have actively curated profiles matching their preferences. This proactive marketing helps filter genuine prospects, saving our client sellers time. Our priority lies in disqualifying unsuitable buyers, whether due to financial constraints, lack of industry experience, geographical mismatch, or being categorized as tire kickers—those consistently inquiring without serious intent. This curation prevents wasting the seller’s time with unfruitful discussions or meetings. These are vital points to consider. As the seller engages with potential buyers, they eventually reach a stage where offers start coming in.
WHAT TO NEGOTIATE?
Now coming to another frequent question received from sellers, on elaborating what sellers should negotiate beyond the business’s price?
In a typical deal, negotiations go beyond just settling on the price. Sellers now have choices like keeping some ownership, staying involved after the sale, or working as a consultant. It’s not only about the price tag but also about other important conditions. Imagine a seller thinks their business is worth $1 million but asks for $10 million. The buyer agrees but suggests paying $1 million per year. Here, the terms and conditions matter more than just the fixed price. When one goes up, the other tends to change—like a seesaw. Negotiations cover lots of things: what happens after the sale, legal details, training, promises not to compete, timing of important actions, and more. These talks involve many details, like when things happen, how long they take, getting money approved, transitioning responsibilities, promises not to compete, and how information is shared. It’s a complex back-and-forth between price and conditions, showing how the buyer evaluates risks in the deal.
Consider a scenario where a seller holds a confidential customer list. During the due diligence phase, they might disclose customer names but withhold contact details until much later in the process—perhaps after resolving all third-party contingencies or towards the end of the due diligence period.
During these conversations, sellers usually involve their lawyers early on. Lawyers are important for understanding the details of the sale, making the right legal papers, and using the usual legal terms. Having an attorney is really important because selling a business is a big deal, just like picking the right doctor for a treatment. Lawyers who specialize in these types of deals know a lot about buying and selling businesses, giving important advice to both buyers and sellers.
The role of the M&A advisor here is pivotal—they play a crucial role in initially discussing the likely transaction structures with the seller and facilitating brief early conversations between the seller and the attorney. This ensures alignment in expertise and familiarity, critical for a smooth transaction, leveraging the advisor’s extensive network and experience in such deals.
Earlier, we covered the preparation involved before a sale—preparing diligently, ensuring everything’s in order, and being ready when a contract is in play. Now, let’s dive into the due diligence phase. For many business owners, this might be the first time they encounter the term ‘due diligence.’ It’s pivotal during this phase to discuss not just what information is shared but also when and how much is shared with the buyer. By providing extensive yet appropriately needed information, it fosters an environment of collaboration and assures the buyer that the deal can progress smoothly. During due diligence, it’s not merely about financial documents like tax returns and profit and loss statements; it’s also about understanding the business’s day-to-day operations and its legal aspects. These dimensions together complete the due diligence picture and are vital considerations for a successful deal.
Who’s involved in the due diligence process? It includes exploring the types of customers and their concentration, vendor details and concentration, along with legal disclosures regarding pending and historical matters. As we mentioned earlier, early disclosure often filters out potential buyers who might struggle with the business’s initial challenges, ensuring that those who progress are more likely to reach the closing table.
Getting through this phase often needs someone experienced, like an M&A advisor. Doing it alone might lead sellers to hold back important details or reveal them at the wrong time, causing problems. Being honest and sharing information at the right times, especially about approvals from other parties, makes this stage work better. The time from when the deal is agreed upon to when it’s finalized is tough but super important. M&A advisors are great at handling this part, making things go smoothly even when they’re complicated.
AFTER SALE PHASE
What happens after the sale? That’s when the handover or getting-used-to-it time matters. It’s about the seller helping out after selling the business, so the new owner understands how things work, the business culture, and builds a good relationship. It’s not formal training, more about making things easy for the new owner. How long and how intense this handover period is depending on how much the owner was involved before. If the owner did a lot of important stuff like dealing with customers, managing sales, or leading teams, teaching these things to the buyer takes longer. Making the business simpler to run by stepping back not only makes it easier to sell but also means less time working after selling it.
The transition phase is super important, not only for the buyer before finalizing the deal but also to lower risks afterward. Imagine two businesses, same buyer: one seller offers 40 hours of transition, the other gives three months’ support and stays available. The second one lowers the buyer’s risk, usually getting better terms for the seller. But the seller has to stay positive after selling. If they use the sale to settle personal issues with customers or employees, it could mess up the business. Building trust and making the handover smooth helps both sides. During this time, the seller might help with finance stuff, switch utility bills, collect old payments, and settle debts. But bigger things like changing leases happen after the sale, usually with rules that stop sellers from making big changes before and after closing.
In parting, the importance of seeking honest advice from professionals, including M&A advisors, attorneys, and accountants, cannot be overstated. Transparency and honesty ensure a smoother sales process. For sellers, finding advisors who prioritize honesty aids in making informed decisions and achieving successful business transitions.
At N3 Business Advisors, we transcend the role of mere advisors. For us, each buyer and seller we work with becomes a trusted partner on the journey of business decisions. Our mission? To guide you through the intricacies of selling or purchasing your construction business, ensuring a seamless experience from start to finish. Our forte lies in unlocking the immense potential inherent in the construction industry, translating your business dreams into tangible accomplishments.
When it comes to selling or buying a construction business, there are crucial dos and don’ts that can significantly impact the outcome. Our dedicated team specializes in navigating these intricacies. We understand that selling or purchasing a construction business involves multifaceted considerations—valuation, negotiations, market positioning, and more. That’s where our expertise comes in—to streamline the process and safeguard your interests.
And listen, we’re not just talking at you; we want to talk with you! What should our next blog be about? Your insights matter. Drop your preference:
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- Evaluation. What’s in a number?
- Is Your Business Ready to Sell?
- When Your Children Are the Buyers
Your thoughts will shape our next content, ensuring it matches with your interests. We appreciate your input as we journey together toward your business success.
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Any information provided here is for information purpose 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 declaims any responsibilities for actions taken by the reader without appropriate professional consultation.