The industry witnessed much merger and acquisition activity in 2021 and 2022. Many roofing contractors received calls from business brokers, consolidators, competitors, and private equity groups (investors) looking to acquire commercial and residential roofing companies. These are external buyers versus internal transactions like a Management Buyout (MBO) or an Employee Stock Ownership Plan (ESOP).
The ideal method for a seller to exit the business is to have a comprehensive and cohesive exit plan, ideally years before the exit, which outlines the various options and strategies for minimizing taxes and protecting proceeds from the sale. In addition, the goal should encompass the following:
- A long-term strategy includes protecting the business, accumulated wealth, generational tax exposure, and legacy during the exit process.
- Mitigating tax erosion to all parties: company, buyer and seller.
- An accurate company valuation.
- Includes an income replacement strategy for the seller to meet their post-exit lifestyle needs.
- A review of critical documents such as:
“The ideal method for a seller to exit the business is to have an exit plan which outlines the various options and strategies for minimizing taxes and protecting proceeds from the sale.”
- Buy-Sell Agreement: define valuation formulas and funding mechanisms for death, disability, divorce, and departure.
- Review your wills, trusts, and estate documents and work with your advisors to update and coordinate them with the exit process and company harvest.
- Suggest tax-efficient savings plans outside the business to increase liquidity.
- Review, illustrate, and provide life insurance inside and outside the business to protect the owner, family, and enterprise during the exit process.
- Provide a financial needs analysis illustrating the “number” of liquid assets the owner will require to maintain their post-exit lifestyle.
- Map each exit strategy (i.e., external sale) illustrations based on the owner’s goals with a variety of methods that you can implement to monetize your business interest. The graphics should include valuation and tax ramifications for each scenario.
- Coordination of risk management strategies and structures to protect the business, including buy/sell agreements, insurance planning, disability, retirement planning, and asset insulation techniques. The lack of coordination may lead to unintended consequences.
Remember the most important rules when fielding a call from someone interested in purchasing your company:
- Never reveal your “cards” or provide financial statements to interested buyers.
- Listen and be cordial.
- If you want to move forward, get professional representation to guide you through your career’s most significant economic event.
Here’s what you can expect to pay when retaining that professional representation.
Expected Advisory Fees: External Sale
Business Broker Retainers
Some charge by the month and can range from $5,000 per month for companies under $10 million and $10,000 or more per month for businesses with more than $10 million in value. Others offer retainers for a flat fee of $20,000 to $100,000.
The retainer covers the cost of preparing the written documents and marketing material on your business, conducting the buyer search, and the broker’s time spent throughout the sale process.
Business Broker “Success Fees”
Many brokers use the Double Lehman scale (a standard, industry-accepted formula) to calculate their success fees based on the gross sale proceeds:
- 10% of the first $1 million
- 8% of the second $1 million
- 6% of the third $1 million
- 4% of the fourth $1 million
- 2% of everything over $4 million
With a business value over $5 million, the broker or business intermediary may charge a flat percentage (3% to 6%) of the size of the sale.
It’s essential to work with an experienced M&A attorney in business sales. Rates can range from $300 to more than $1,000 per hour.
Total fees can range from less than $10,000 for a small business sale (less than $2 million in value) to over $100,000 for a sale of $15 million or more.
Your CPA can spend at least 10 to 20 hours on your transaction. CPA rates can vary from $200 to $500 per hour.
Expected Advisory Fees: Internal Sale
Internal/inside sale fees will be considerably lower than for third-party/external sales. You will need a corporate attorney, a valuator, and an experienced accountant. If you decide to sell your business to your managers, employees, or family members, then your advisory expenses are likely to include the following:
You need an attorney with deep experience in family and employee business sales. Billing rates typically range from $300 to more than $1,000 per hour.
For transactions less than $2 million, it’ll cost around $10,000. That increases to $45,000 or more if your business is worth over $5 million or you want to implement advanced estate planning or gifting strategies.
Your CPA will advise your tax planning and spend at least 10 to 20 hours on the transaction. CPA rates can range from $200 to $500 per hour, and the more your business is worth, the more sophisticated your CPA should be.
Other Advisors and Their Fees
A certified valuator should prepare a valuation of the business. A “calculation of value” should cost $4,000 to $6,000.
An estate planning attorney can guide the transfer of assets to avoid potential estate taxes. If the value of the sales transaction exceeds the current lifetime estate exclusion, make specific provisions to mitigate future estate taxes before the liquidation event. It is also important to remember that while the current estate tax exemptions are relatively generous, the amounts are due to sunset in 2026 back to the $5 million threshold. In addition, the portability feature is also set to expire.
Personal Wealth Advisor Fees
Early on, it would help if you discussed how the proceeds of your business sale might affect your retirement or post-sale lifestyle. You must understand how much money you will need from the sale to afford your post-exit lifestyle. Matching that figure up to your estimated after-tax sale proceeds is important.
The annual asset management fee (typically 1% of total assets under management) often covers the cost of planning. Some advisors require an asset minimum, so check with yours before you engage them to prepare a plan for you.
The key to a successful sale is a combination of preparation, planning, and having the best team to assist you with every step.
To help you manage your exit process, we always recommend that owners work with an experienced exit planner to create the strategy and tax mitigation plan. They then act as the quarterback of the advisory team to ensure that all work is coordinated and completed on time.
Tax laws are complex and subject to change. Contact your professionals for tax or legal advice. IRS Circular 230 Disclaimer: To ensure compliance with IRS Circular 230, any U.S. federal tax advice provided in this communication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein.