There is a lot of misleading information about how construction firm owners should exit their businesses. The information received from the business-continuity and exit-planning experts does not really fit the unique characteristics of the construction industry.
The experts think owners know what they want after speaking with them, and the owners think the experts have some special formula to allow them to exit at maximum value. Because of these expectations, miscommunications and misunderstandings grow exponentially throughout the process, and few really get at the gist of what needs to be done.
The fact of the matter is that the vast majority of construction firm owners must prepare their business for sale prior to discussing and outlining the details of the actual exit. It's a real eye-opener to truly upgrade business personnel and systems to operate at a higher level when planning for an exit as compared to the dysfunctional success that construction firms manage to achieve when they are surviving.
Value standards
Owners should be starting the exit process by first selecting the standards they seek to achieve at the time they sell their business. There are three options available to select from:
1. Due diligence: The highest performance standard is the due diligence standard, where all facets of the business are operating at maximum capacity — people, productivity, systems and profits.
2. Value driver: The next highest performance standard is the value driver standard, where key, selective business elements are produced and achieved, which buyers seek out as guideposts to determine whether the seller is well-run.
3. Best-in-class: The third performance standard is the best-in-class standard, which is when construction firms outperform their competitors but still have more upside for improvement.
Standards are selected because they are indicators of the owners' drive to maximize company value, and standards also provide messages to the outside experts as to what needs to be accomplished to meet their customers' financial goals.
So through this initial exercise of setting standards, customers and the exit-planning team reach a meeting of the minds. As may be deciphered in the standards list above, No. 1 produces the highest company value, and the other two options produce degrees of lesser company value.
Usually the selection of a certain set of performance standards indicates the monies that owners would like to exit with. These monetary expectations are frequently set too low at the beginning of the process.
Timing clash
When owners seek to maximize company value, they are committing to a multiyear time frame for producing business excellence. The lower the company value standard, then less time is needed for business improvements.
Quite often, construction firm owners cannot afford the luxury of spending the time to improve their businesses to the highest performance standards because of the owner's age or the ages of the management team. In these cases, performance standards are lowered, and company value expectations with them. This is the reason that outside experts urge business owners to get started within 5-10 years of their planned exit.
There is a lot to upgrade and align in construction firms — people, cultural values, business systems, technology, sustainable customers and profits. All of these items take time to improve.
Shifting exit goals
As the performance standards are set and business improvements start to sink in, profits will always rise, and correspondingly so will owners' value and monetary expectations. Construction firm owners start to realize that the reason they wanted to exit had more to do with low profits and high risk, and less to do with being tired of the business.
When owners are exposed to profits that are double their typical profit levels, they start to have fun again and often renege on the whole exit plan notion. They wonder who ever thought of it. Often, these owners either want to drop exit planning or extend their careers.
Owners simply never knew they could earn high profits until they started to apply higher performance standards under the guise of exit planning. Like an NFL football game, the question becomes, "Why didn't these owners use the 2-minute drill earlier to score?"
Money or exiting to where?
Construction firm owners are so enamored by building things, constructability, design and engineering that mentioning the amount of money they need for retirement is not that thrilling. They just like the construction industry, and they aren't necessarily excited about having "X" amount of dollars for retirement.
One major reason is that the bonding companies keep owners so tightly wound and concerned about finances throughout their career, that they have that base covered by the time they think about exiting. The topics of creating a legacy or identifying successors can also leave owners with an empty feeling.
To have a successful exit plan, owners need to know where they are going, or what they will be doing to be useful. And, quite frankly, most owners still don't want to exit cleanly. If a new career or a new business can be created for the exiting owners, the higher the likelihood of successful exit plans.
In the construction industry, exit plans are needed more for uncoupling financial liabilities and risks than owners being tired of their jobs.
Summary of obstacles
There is a lot to consider, but owners should target the following key areas to resolve — value standards, timing of business improvements, firming up of exit funds needed or desired, and creating a new career.
If they can sort out those areas, they will produce a successful exit plan where they can get out from under the financial risks of the construction industry and pass the baton to the next management team or outside buyer waiting in the wings to take over the company.
