My Roofing Company Managers Can’t Afford to Buy Me Out!
I hear this over and over again from roofing company owners: “My managers don’t make enough money to buy the company!” I get it.
The most common exit for roofing contractors is a management buyout (MBO) as there are very few successful sales to competitors or consolidators.
MBOs tend to be the most common transfer method due to the inherent nature of construction companies. The lack of recurring revenue and connection to cyclic economic conditions make construction companies a risky investment by outsiders.
This means a roofing contractor’s most probable opportunity for monetizing the business will come from senior managers and family.
The largest obstacle in executing an MBO is that managers often don’t have the financial ability to pay for the business. This requires the business owner to structure a plan that will allow the business to pay for the transition.
Despite the financial risk, MBOs are flexible and can have significant tax advantages. In certain situations, a properly structured MBO will reap a better bottom-line result than an outside sale because of the tax savings. Remember, it’s not how much you get, but how much you keep.
Key considerations include:
- Knowing the value of your company and exiting without being clobbered by taxes.
- Sales price can be negotiated as opposed to a computed amount in accordance with IRS ruling 59-60.
- Understanding the various tax liabilities.
- Understanding risk-management strategies to protect what you have built.
- Preparing the managers for succession ASAP because it takes time.
- Future cash flow pays for everything, and your managers will drive the profits.
Visualize Your Financial Future: Owners cannot commit to retirement until they can visualize their financial future with an exit plan. This plan calculates the value of the company, before and after taxes, so the proceeds can create the income to maintain the owner’s present lifestyle in retirement. Only then is the owner motivated to pick and lead the team into the MBO process.
Outside Savings: While the owner is still in control, he or she should contribute as much as possible to savings and retirement accounts.
Benefits: The owner can still receive benefits during the sale and have those benefits phased out over time.
Win-Win: An MBO is a win-win for the buyer and seller. Management has the opportunity to build significant personal wealth, and the owner benefits by cashing in on the investment built in the company. Sellers also leave a legacy with trusted stewards who bring a new energy.
Shareholders: The new shareholders must understand that their stock ownership does not necessarily make them the boss. There can only be one boss. Yes, you’re a senior manager and work collectively for the company’s success, but you’re an employee first and a shareholder second. As a shareholder, you benefit directly from the success of the company.
The Golden Egg: The company is the goose that lays the golden eggs. The company must remain fiscally healthy during the buyout and endure economic cycles. During our buyout we kept the payments flexible even though I had annual notes from the buyers. Why? Because the company came first. We were paid out early, even though we reduced payments through 2008, and overpaid during the great years.
Financing: The sale is many times funded by seller financing, the redemption of the owner’s share over time or by outside financing via a leveraged buyout.
Financial Partners: Be transparent with your key financial partners, including your bank and bonding company, as they should be kept in the loop with your transition plan. The company still needs to keep healthy financial ratios and the necessary working capital, but it will look different as money is transferred to the owner in the buyout. Your financial partners will understand and benefit from a well-thought out transition plan.
Personal Guarantees: Get the new management — especially the comptroller — engaged with your financial partners. Banks and bonding companies depend on the owner’s personal guarantees, which will have to be transferred to the new owners near the end of the buyout.
Character Matters: The company associates are your key asset. Promote the best people in the right chairs for the company to perform. The empty chair must be replaced with a person of integrity. Leaders put the company, customers and associates first … not themselves.
Succession: Succession is key as the owner is being paid by the management’s performance. First, managers need to get to the next stage by growing and performing as champions. During this time, they must begin to think like owners and always put the company first. They then will move into leadership, deal with their blind spots, and put their associates and teammates first.
Succession takes time: It is a continuous process, not a single event. The process is about the development of talent and not the typical replacement of talent. Your best players are developed in your internal culture, and owners must provide the curriculum, training and leadership development.
With so many moving parts, a carefully designed exit plan should help overcome many of the barriers that owners will confront. In this process time can be your best friend, so start early and implement slowly.