Exit Planning Strategies

www.gma-cpa.com

How to Get Real Value for

Your Construction Business

Presented by

Stephen K. Ball, CPA, CVA, CCIFP

David M. Lanchak, CPA, CVA, CCIFP

Succession Reality

• 70% of closely-held businesses die once the

founder is no longer around

• Only 10% make it to 2nd generation

• 20% of those make it to 3rd generation

Source: Association of General Contractors of America (AGC)

Valuation Multiples from Private Transactions

Valuation Multiples — EBIT (earnings before interest and taxes)

Commercial & Heavy Construction Contractors 5.9

Residential Construction Contractors 6.2

Electrical Contractors 5.5

Plumbing & HVAC Contractors 5.2

Roofing, Siding & Sheet Metal Contractors 3.0

Landscaping Services 2.4

Source: Pratt's Stats 2014

Planning for Succession

Assuming the desire to receive fair

value for the business and the desire

to leave a legacy — which would

exclude an outright gift or liquidation —

the owner is typically left with a sale to

a third party, family member, or key

employee or group of employees.

Planning for Succession

An ESOP (employee stock

ownership plan) is an alternative,

but has significant hurdles and

administrative costs. Generally,

it’s not a practical solution for the

average construction company

that has less than $25M in

revenue.

Factors that Impact Value

What Do You Have of Future Value?

• Elevator asset company

• Recurring services or one-offs?

• Why it is better not to have your name on the

business

• Relationships

Third Party Considerations

Hurdles limiting sale to a third party at an

acceptable price to owner:

• More volatile earnings stream given nature of contracts

and challenge to maintain backlogs

• Lack of management of depth and impact on nature of

goodwill

Third Party Considerations

Hurdles limiting sale to a third party at an

acceptable price to owner:

• Potential buyer generally looking to pay lower multiple of

earnings than owner expects

• Strong skepticism of goodwill typically looking at book

value plus earn-out of backlog

Real life stories

Family Considerations

Live Above the Line

Hurdles limiting sale to family:

• Demographic changes from prior generation smaller

families

• Other opportunities for children college

Often sale to key employees is the only realistic

option that involves accepting certain realities

Internal Sales Considerations

• BYOWYOM

• General reluctance to

accept risk like prior

generations did

• Lack of access to

capital

Planning for Internal Succession

• To produce a plan that incorporates a win-win

requires a fairly long buy-out term of 7-10 years

• Requires identification of potential employee or

group with plan for leadership training

• Education, communication, review, education, etc.

— takes time to settle in and give a vision for how

the plan can work

• Value must be realistic with future cash flow

Planning for Succession

Discussion of real life

transfers to key employees

Who is Steve Ball?

• Specializes in working with

contractors and architectural/

engineering firms

• Profitability strategies

• CPA, Certified Valuation

Analyst (CVA) and Certified in

Construction Industry

Financial Professional

(CCIFP)

Who is David Lanchak?

• Specializes in working with

construction contractors

• Exit and succession planning

• Business valuation

• CPA, Certified Valuation

Analyst (CVA) and Certified in

Construction Industry

Financial Professional

(CCIFP)

Who is Gross Mendelsohn?

We’re a CPA and consulting firm

that helps construction

companies grow and become

more profitable

• Accounting, auditing, tax

• Exit planning

• Profitability improvement

• Business valuation

• Technology consulting

Questions?

Steve Ball, CPA, CVA, CCIFP

sball@gma-cpa.com

410.685.5512

www.gma-cpa.com