Tuesday, December 17, 2019

Ready To Sell Your Construction Business? Check Out These 10 Important Steps

Selling a business, any business, is a lot harder than starting a new business. The first day of a new business venture is full of excitement and plans on how you will become the best thing anyone has ever seen.

After that, the reality of operating your business becomes your excitement. For some the day to day operations are the best thing. We've all been there.

But at some point you begin to get the feeling that you want to sell what you've built. Now the hardest part of your business' life cycle begins.  

Here are Ten major steps to follow for a successful sale:

1.  The very first is to determine why you want out of the business.  This may sound like it's easy, but you have to ask yourself some tough questions.  Did you get hurt on the job and need to find safer work or maybe your son or daughter doesn’t want the business. Maybe you are ready to retire.  The worst reason to sell your business is because you woke up one morning and said "This business sucks and I want out of it now!"

Factory owners usually want to sell for a couple of the same reasons. Heirs that don’t want the business or retirement but there may be other reasons you want to leave the industry. Maybe you are losing market share or you are having a tough time keeping your factory updated with the latest equipment.

Aside from the dollar amounts involved, both the factory owner and the modular builder with a model home center needs to know exactly why they want to sell.

2.  What will you do after the sale?  If you are a builder that does not have any developments to either sell or retain after your sale, what are you planning to do?  I've heard lots of builders say they are just going to do small jobs around town and go fishing whenever they want to.  This rarely works out.  You may be too young to make a living this way or too old to get affordable health insurance. Unless you've got something else to replace the income from your business, you may not be able to sale.

Factory owners that contemplate selling usually have some sort of after-sale life in mind. Maybe some community service work, consulting and even missionary work. Some may even decide to get back into a different business.

The worst thing for either is to not have an after-sale business plan.

3.  How much are you going to ask for your business?  After you've decided to sell, you need to decide how much to ask for it and there are several ways to determine the price.  You could use the cost of assets plus profit of homes under construction plus good will. Or maybe average the profit you reported last three years and use a multiplier.  I'm sure there will be the builder or factory owner that determines the price by throwing a dart at a bunch of prices.  One of the best ways is to ask professional with experience selling modular home factories and retail modular building businesses. 

4.  What are the tax consequences of selling your business?  Your accountant will help you figure out your tax burden and this is determined by how your business was legally set up...sole proprietor, LLC or whatever.  Be prepared for a surprise, taxes always seem to throw a monkey wrench into the stew.

5.  Spruce up your business!  Before you take prospective buyers on a tour of your homes under construction and a look at your books, make sure everything is ship shape.  Your office and work areas need to cleaned up and ready for inspection. I’ve seen production lines that were filthy and dimly lit with workers leaving tools lay where they were last used. Clean up your work sites or in the factory.

Things that you might overlook are your P & L statements, L & A statements and your past tax returns.  Talk with your accountant to make sure your business is presented in the best "legal" light.

6.  Promoting your sale!  This is a tough one.  You may think that first people you want to talk to are the people that already know you and make a deal. That usually doesn't work and even if it does result in a sale, it probably left a lot of dollars on the table you could have gotten. If you are a builder with a sales center or a modular home factory owner, going the professional route should be your first choice in selling your business. Yes, there is a fee involved but in 99% of sales, the sales prices was much larger and justified hiring a professional.

DO NOT use a local Realtor with a CCIM designation as they really don’t understand the modular housing industry and you will tie up selling your business for up to a year.  

The one thing you have to be cautious about is word getting out that you are selling and prospective home buyers turn away.

7.  Wheeling and dealing.  Here is where the rubber meets the road.  You've been presented with a buyer.  If you are retail modular home builder, do they want to pay you a lump sum or installments after a down payment?  What happens to your model home center? Do you sell it along with the business or keep it and long term lease it to the new owners? Do you want to negotiate keeping an asset such as some assorted power tools to use when you subcontract to others? 

Factory owners face similar questions but on a larger scale. Will they be part of the new factory? Will there be a non-compete clause that forces you out of the housing industry altogether or will the new owners allow you to do consulting?

Be prepared to spend quite a bit of time in this part to the sale.

8.  Signing over your business.  My only advise here is to use a good business attorney usually recommended to you by the professional helping close the sale.   The lawyer will make sure that your wishes are put in writing and all the legal stuff is correct.

9.  Transferring your business.  If you are a retail builder with work in process, you'll have to get mortgage banks to agree to the transfer and vendors may want paid in full before they let you off the hook for your company debts.  Again, this is best done through your attorney and accountants.

10. Completing all the legal paperwork.  You have forms to file with the IRS, your state and local agencies and transfers of assets.  These must be completed!

Last but not least, you have to be prepared for not finding anyone to buy your business. Millennials are not looking to get into new home construction like the generation before them. If you are trying to sell your modular factory, you may not get an offer anywhere near what you can afford to take.

In these cases, shuttering the doors and turning off the lights for the last might be your future. 

Like I said in the beginning of this article, "Selling a business, any business, is a lot harder than starting a new business."

Gary Fleisher is a housing veteran,
editor/writer of Modular Home Builder blog
and industry speaker/consultant. 


Shawn Corkrean said...

The typical scattered site, single family modular businesses seems to be very difficult to sell. What are you actually selling? There are assets such as an office, model homes, equipment, contractor relationships, etc, but nothing someone couldn't go acquire on the open market. Most businesses are run by the owner's intuitive understanding of their complex business. Unless you have been mentoring a future buyer within your company, prospective buyers will struggle to understand your methods.

You essentially will be selling potential future profits based on the reputation of the business(the brand). Even if the business has strong profits, good luck with that given no one understands how to operate your business without you.

If someone wanted to get in the business, it seems an easier path is to simply start fresh under their own banner. As we know, there haven't been too many people willing to do this in the past 10 years.

Unless something changes, this issue is going to be a significant problem for the industry. Let's say baby boomer modular builders retiring account for a 15% drop in business in the next 5-10 years. If you are a factory owner, what does a 15% reduction in orders do to your profitability? We all start to go into a viscous downward cycle from there.

I don't mean to be so doom and gloom. I just think the traditional single family, scattered site modular business model needs some updating.

Anonymous said...

The same thoughts apply to the scattered site building business unless they have a land position for home building by the potential acquisition buyer. The NAHB documents that he mean production for home builders is 5-7 homes a year unless you have the capital and will to develop a down stream of contacts or lots you are disadvantaged to sell since "goodwill" only goes so far.

We all follow the National Home Builders but if you look at their underlying business models they are selling land positions using home designs people want to purchase for their lifestyle. Even the franchise companies focus on land positions while offering marketing/design/operations consultancy.We have seen the focus of Clayton in their acquisition practice of identifying land positions with solid management teams

Shawn congrats on your Iowa footprint