Wednesday, June 22, 2011

Exit Planning and Business Cycles



One of the greatest challenges for investors is knowing when to sell their stock.  This is no different when it comes to selling stock in the company you’ve owned and operated a significant part of your life.  Generally, it is better to sell your stock when times are good.  The challenge here is that when times are good and you are making money, you are feeling good and less inclined to sell.

Construction is no different than most sectors in that it is cyclical.  If we look back over the last 20 years, we can recall tough times in the early to mid 1990s followed by improvement.  There was a relatively short, perhaps 18 month decline post 9/11/01 followed by some very good years.  These last few years have obviously been some of the toughest any of us have ever known in business.  Many Americans have lost a fair amount of net worth while corporate balance sheets have also taken their lumps.  Chances are great that the valuation of your construction company is less than it was 3 to 5 years ago.  There are also fewer buyers today with less credit available to make such purchases.

Planning for both good and bad times is best done when we aren’t being reactionary.  This process produces the greatest results when emotion is taken out of the equation and we aren’t faced with putting out fires.  Back in September 2008 I wrote “Planning for Bad Business Climates”.  If you plan on still operating your business for the foreseeable future and have no plans to sell in the next few years, I strongly recommend you read that article and create such a plan and put it in the top drawer of your desk for when the next downturn occurs.  Going through the headaches we’ve experienced these last few years, it is clear why having such a plan in place makes great sense.  Similarly, you must also have a plan for exiting your business.  You may have no interest in exiting in the next 10 or so years.  If that’s the case, having the exit strategy in place today isn’t quite as urgent.  I will suggest that if you are in your late 40s or older, you must ask yourself this question “Am I willing to go through another significant downturn in the economy and spend the time and energy to rebuild it again?”  If you answered "Yes!" that's great and you've had the experiences of going through downturns before including this major one.  Experience is always good and generally aids in yielding better results in the future under similar conditions.  However, if you answered “No!”, you must either begin, or continue, to develop your exit strategy.  If you are looking to exit your business on your own terms, at a time determined by you within the next 5 to 10 years, there is much you will need to consider and have in place in order to successfully exit and have your business maintain its value and perpetuate.

There are a number of different avenues one can take in terms of exiting their business and extracting the value created.  The owner can sell to an outside third party, sell/transfer to key internal people/family members over time or in one transaction, form an ESOP, etc. (see Is an ESOP Right for Your Company).  There are many good options out there and should be evaluated to determine the best pathway dependent on the specific circumstances.  Regardless of which path is chosen, one important aspect is People Development within the organization.  The contractor must have people to fill the leadership positions within the company after the owner and other key executives exit the business.  This is common sense and everyone understands this however sometimes this is a great challenge.  There are many factors affecting success in the People Development category including attracting, training and retaining the right people as well as providing them with the ability to gain increasing experience throughout their career.  We know that if an organization doesn’t have the right management team in place after the current owner/team exits, any structure/exit chosen will likely fail.

Keep in mind that different from an exit plan, all businesses also need to have an operational succession plan in place regardless of your intent to sell your business in the near to intermediate term.  Should the key person/people get hit by the proverbial truck (see my article addressing this issue here), you need to have a plan in place to ensure the business and the value that has been built will be maintained and preserved for family members, employees and all those with reliance on the business.  The bond company always asks for such a document to gain comfort that their business interests will be protected in the event the key person is no longer able to perform his or her duties and that business will continue with minimal disruption.

SUMMARY

All business owners will eventually exit the business.  A question I’m presenting at this point in time is whether the owner in his/her late 40s or older is willing to ride out another downturn such as we’re experiencing now.  If not, now is the time to consider how, and when, you will exit the business and determine what you need to do between now and then to ensure a successful exit financially and operationally.