Time to Plan a Graceful Exit?

It appears that genuine recovery is still some time away for much of the construction industry. Nevertheless, it’s not too soon to start looking ahead at what’s next.

For some contractors, that means looking for a way to exit the company once business improves. The challenge they face is finding a way to step away without sacrificing the value they’ve built.

There’s never a bad time to review your company’s succession plan — or to create one if it doesn’t exist — but in some ways now is an especially good time to do so. Beyond the psychological and emotional reasons that may lead you to consider an exit, there are also sound financial and strategic opportunities that can be realized by taking advantage of the current economic downturn.

ESTATE PLANNING ISSUES

Your business’ succession plan and your personal estate plan are closely related — or at least they should be. Unfortunately, estate planning is often an afterthought for business owners.

Many contractors may not even realize they could have estate tax issues because they don’t realize the full value of their companies. Even though your business’s value has almost certainly dropped in recent years, and even though there may not be a ready market for selling it today, a contracting business with a successful history, sound reputation and strong management team can nevertheless have significant net worth in book value alone.

This matters now, in particular, because the current downturn may present a valuable opportunity to reduce the owner’s estate — and thus reduce the estate’s potential tax liability. If you are a business owner who wants to pass on your family-run business to the next generation, the company’s current lower value could allow you to transfer a larger portion of the business’ stock to family members.

When the company grows again in a few years, that taxable value will have been removed from your estate. So if your business forms the bulk of your estate, moving some or all of the company out of your estate now could result in significant estate tax savings in the future.

It could also save you money in the near-term. For example, if you envision using the proceeds of a life insurance policy to cover estate taxes (a popular estate planning feature), removing a large portion of the estate’s value now could allow you to purchase a much smaller policy.

ENSURING CONTINUITY

Of course, passing a business on to family members is only one of many possible exit strategies. While selling the business outright to a competitor or to outside investors may not be a likely option these days, now could be a good time to consider transferring partial or total ownership to a trusted subordinate or internal management team.

Obviously, in such a scenario you won’t pass on ownership as an outright gift as you might with family members. But today’s reduced valuation of the company could make it more feasible for a management team to put together enough funds to acquire at least partial ownership, allowing you to begin relinquishing day-to-day operational control while still retaining an interest in the business.

Another important aspect of succession planning is developing a continuity plan to address what would happen in the event of your death or disability. One well-established approach is a buy-sell agreement that names certain key managers as successors, and provides a means for them to finance the purchase from your estate through installment payments, outside financing, life insurance proceeds or some other means.

SENDING A SIGNAL

A valuable additional benefit of succession planning is the signal it sends to other interested parties, including lenders and sureties.

A concern for bonding companies is what will happen if the company loses key personnel, especially the owner.

Having a succession plan in place tells the surety you’re planning for the long-term health of the business. This can be an especially important confidence-builder when owners are approaching retirement.

In the same way, a succession plan tells lenders, competitors and, above all, potential customers that you are a well-established and reputable business, and are prepared to move quickly when growth opportunities reappear — as they inevitably will.

THE NEXT STEP

So how should you get started in planning your exit? Begin by assembling a team — including your accountant, lawyer, estate planner and other key advisors — who can help you define your goals. A professional valuation will also be an important early step, since any plan must be based on accurate, reliable data. In addition, a valuation might uncover other useful information regarding your position in the market, potential risks, and current industry and market trends.

Although your primary concern these days might be simply hanging on through the current business cycle, it’s never a bad time to plan for your company’s long-term future — and your own. With qualified professional help, you can use today’s challenging business environment as an opportunity to lay a foundation for renewed growth.

Porter Keadle Moore, LLP is a founding member of ProfitCrew, an association of accountants and business advisors dedicated to helping construction companies build profitable businesses. For information, contact Mickie Huneycutt at mhuneycutt@pkm.com or Adam Polakov at apolakov@pkm.com or visit www.pkm.com.