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ColumnsExit Planning

Your Sale Options in a ‘Roofing Exit’

An overhead view of an owner’s exit options in the roofing industry

By Kevin Kennedy
Kennedy's Notes on Roofing Exit
November 9, 2023

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.”

The Options

Owners essentially have four sale options, each with a different value, tax obligation, and compromises.

  • External Sale:

    • 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.
  • Internal Sale:

    • 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.

Key Questions

You only have one chance to get the exit right.

  1. What are my personal, business, and financial goals?
  2. When do I want to retire independent of my business?
  3. How much money do I need for my business to retire?
  4. What is the value of my business (depending on the type of sale) and after-tax value? Is my company sale ready? 
  5. How much money do I need from the “after-tax” sale to live independently from the business and into retirement?
  6. What are my various tax strategies to reduce and possibly eliminate taxes on internal and external sales?
  7. Have I implemented a succession plan for the company to perform without my presence?

  8. Do I have tax savings investment strategies to pre-save for retirement and to make me less dependent on the sale price?
  9. 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.

KEYWORDS: ESOP exit planning management roofing industry strategy taxes

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Kevin Kennedy is the founder and CEO of Beacon Exit Planning. He is a former roofing contractor, construction industry voice and thought leader for exit planning and succession. Kevin is also a co-author of the Amazon #1 Best Seller “The Contractor’s 60 Minute Exit Plan.” Reach him at kjkennedy@BeaconExitPlanning.com or www.beaconexitplanning.com.

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