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?