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Key Insights

• There is much to consider when planning for your business legacy, including both operational and financial concerns.
• Business transition options for construction include family succession, selling to management, private equity, employee stock ownership plans (ESOPs), and liquidation.
• With so much at stake, it’s smart to start planning early. Services related to succession planning include valuation, wealth advisory, tax planning, and sell side due diligence.

With many baby boomer business owners reaching retirement age, we’re in a very high period of wealth transfer.

One transfer option a lot of companies — including construction — are considering is private equity. It’s difficult to estimate how much wealth transfer will involve private equity investments, as it depends on various factors, including investor preferences, investment strategies, and the availability of attractive private equity investment opportunities.

Private equity has become increasingly popular for high net-worth individuals and family offices seeking to diversify their portfolios and achieve returns higher than stocks and bonds. Some studies are projecting that private equity assets could grow to over $10 trillion by 2025.

Regardless of your opinion of private equity, it’s worth considering all options when weighing wealth transfers and the future of your business.

Business & Wealth Transfer Options in Construction

There is much to consider when planning for your business legacy, including both operational and financial concerns. Explore your options with the following information.

Family Succession

Family succession involves transferring the ownership and management of the business to family members. It can be a complex process requiring careful planning and communication. You may need to identify and train potential successors, establish a governance structure, and put legal and financial mechanisms in place to facilitate the transfer.

You can also consider gifting shares or ownership of the business to your children or other family members. This can be done gradually over time or all at once. When making your decision, consider the tax implications of gifting.

Another option is to use a trust to transfer ownership and management to the next generation while retaining some level of control over the assets. Trusts can provide tax benefits and flexibility over how the business is managed and distributed.

Liquidation

Liquidation can be a difficult and emotional process for business owners. It is important to create a plan and thoroughly research your assets before selling them through an auction, online sale, or direct sale. Also, consider having them professionally appraised to verify a fair price.

Other important considerations include paying off debts and taxes, informing stakeholders, closing accounts, and completing all necessary paperwork.

Employee Stock Option Plans (ESOP)

ESOPs allow businesses to be transferred to employees. ESOPs can provide tax benefits and help retain key employees. They can also be used to fund your retirement.

Converting to an ESOP can be complex and requires careful execution. ESOPs require a culture of employee ownership and involvement. Consider whether your employees are committed to the long-term success of the business and whether they would be interested in becoming owners.

Various considerations include valuation, legal requirements, tax implications, and financing. ESOPs can provide a built-in succession plan for management.

Selling to Management

Selling your business to management can be an attractive option, especially if you want continuity of the business and to reward key employees. Evaluate the management team to verify they have the skills, experience, and commitment to run the business successfully. Consider their track record, leadership style, and ability to work as a team.

There are similar considerations to an ESOP conversion such as valuation, financing, and legal considerations. Make sure to develop a thorough communication and transition plan to transfer ownership.

Selling to Private Equity

Private equity firms are focused on returns, so it’s important to understand how they value businesses and what factors they consider when determining value. Be prepared to provide detailed financial information and projections to support your valuation.

Private equity firms typically invest with the goal of exiting the investment within a few years, although we’ve seen a change in this strategy where some smaller private equity groups have a longer hold period than traditional institutional private equity groups.

Be prepared to discuss your exit strategy and how it aligns with the firm’s goals. Private equity firms often invest in companies with strong management teams. Expect a lengthy and thorough due diligence process to evaluate your company’s financials, operations, and legal status.

Before selling to private equity, it’s important your business is exit-ready. Business readiness includes having clear financials, strong management, and a solid growth plan in place.

Another option that falls under private capital includes family offices. Family offices typically have longer hold periods and more flexibility compared to private equity groups.

Selling to a Strategic Buyer

Strategic buyers often value culture fit more than private equity buyers. When selling to a strategic buyer, it is important your goals align with theirs. Understand their business objectives and how your product or service can help them achieve those goals. Strategic buyers typically go through a similar legal, tax, and financial process to private equity. However, they may consider synergies that private equity groups may not, which include additional changes to the cost structure.  

Business Exit Starting Checklist

Before exploring your various business exit options, here are some initial steps to enact:

• Professionalization — Invest in strong financial reporting and technology.
• Management team — Develop a strategic plan identifying and defining roles and responsibilities.
• Financial reporting — Use a strong internal or external financial reporting function to maintain monthly accrual balance sheet and income statement. Consider a valuation and sell side due diligence process to assess where you stand.
• Tax readiness — Have your tax returns reviewed for various compliance requirements, including state and local, payroll tax, and your income tax filings. This may reveal areas that could use some compliance catch up to avoid surprises during a buy-side tax due diligence.
• Representation — Find strong representation including an investment banker, attorney, and CPA. Your team should be highly trained in mergers and acquisitions.

Conclusion

Business succession planning can be deeply emotional and complex. What you choose to do with your business can impact your retirement, your family’s future, and your employees’ livelihoods.

With so much at stake, it’s smart to start planning early — and with an experienced construction-focused team.

Disclaimer

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, investment, or tax advice or opinion provided by CliftonLarsonAllen LLP (CLA) to the reader. For more information, visit CLAconnect.com.

CLA exists to create opportunities for our clients, our people, and our communities through our industry-focused wealth advisory, digital, audit, tax, consulting and outsourcing services. CLA (CliftonLarsonAllen LLP) is an independent network member of CLA Global. See CLAglobal.com/disclaimer. Investment advisory services are offered through CliftonLarsonAllen Wealth Advisors, LLC, an SEC-registered investment advisor.