Given the heady merger and acquisition action happening, particularly in the residential roofing contracting space, I thought a short, "Cliffs Notes"-type article would be helpful for firm principals considering their options. It is, by design, an at-a-glance information sheet; let’s dive in.
Your Roofing Exit:
- You will exit your company, intentionally or unintentionally.
- Most owners have 75%-plus of their wealth tied up in their company.
- Traditionally, family, managers, or employees comprise the lion’s share of firm buyers when a principal exits.
- Since COVID, the marketplace has witnessed a significant increase in private equity interest.
Have a plan that considers the following: the sale meets your company goals, leaves a "positive" legacy, minimizes or eliminates tax liabilities, and protects your financial future.
- Exit opportunities increase in value if your company is larger, has strong management with depth, established operational systems, and a pattern of profitable performance.
- The exit plan summary: “How to cash out, eliminate taxes, and retire comfortably.”
Owners essentially have four sale options, each with a different value, tax obligation, and compromises.
- Sell to a competitor.
- Selling to a consolidator.
- Buyers have a strong Industry knowledge.
Owners stay short-term for a one-to-two-year "transition" — with the significant payment frontloaded at the execution of the agreement and the balance to complete held as a retention based on expected performance.
- Some roofing consolidators want a portion invested in the company and to stay for a longer period.
- Owners lose financial/strategic control upon the sale.
- Synergy Value with the most value, but with higher taxes.
Sell to Private Equity [PE]
- Selling to investors.
- PE needs your management skills and for owners to stay.
- Owners will remain an investor as PE usually purchases 75%-plus, and you will hold the remaining value for the next sale.
- The strategy is to grow the company and sell later at a much higher profit.
- Lose financial/strategic control at the sale but continue operational influence.
- Investment value with high value but higher taxes.
- Management buy out.
- Selling to managers with intimate knowledge of the company and risks.
- Key liability is the risk of not being paid based on company performance.
- The payment to the owner is from the company profits.
- Investment value (structured).
- Provides seller flexibility, tax efficiency, and control.
Employee Stock Ownership Plan (ESOP):
- Selling to employees.
- Provides seller flexibility and control.
- ESOPs offer the best tax efficiency of all exits.
Payout to the owner from a structured loan and payment from company profits.
- Fair market value.
- Expensive administrative costs and burdens.
You only have one chance to get the exit right.
- What are my personal, business, and financial goals?
- When do I want to retire independent of my business?
- How much money do I need for my business to retire?
- What is the value of my business (depending on the type of sale) and after-tax value? Is my company sale ready?
- How much money do I need from the “after-tax” sale to live independently from the business and into retirement?
- What are my various tax strategies to reduce and possibly eliminate taxes on internal and external sales?
Have I implemented a succession plan for the company to perform without my presence?
- Do I have tax savings investment strategies to pre-save for retirement and to make me less dependent on the sale price?
- Do I have asset protection plans to protect the company from predators and creditors?
The information provided is not intended to be legal, accounting, insurance, or tax advice. Beacon is a process consultant that provides written plans, consulting, and support programs to private owners for succession and exiting their businesses.