Major Risks in Your Roofing Exit

These six exit strategy pitfalls could create financial risks before and during your exit and retirement. Learn how to navigate one of the largest financial events in your lifetime

Owners know how to run a roofing company but have never exited or sold a business.

Managing your financial risks before and during your exit is critical to your retirement, your family and legacy, as this will probably be the largest financial event in your lifetime. As you will learn, most owners fail to exit, and those that do tend to overpay in taxes with their company, buyers and sellers.

Why? Exiting requires an entirely different set of multiple skills. The knowledge gained in managing and growing a business will not necessarily prepare you for exiting a business. In other words, “What got you here will not get you there.”

First you need a well-structured, written exit plan. This complex process requires specialized advice from your accountant, business appraiser, tax adviser, corporate attorney, estate planner, financial adviser, and insurance adviser, among others. A common problem that can transpire during this process and derail an exit strategy is the lack of coordination.

Advisers are good at talking with you, but not very good at talking with each other.

Coordinating and understanding the common disjointed advice can be overwhelming to a business owner who is not familiar with these disciplines, concepts, and terms.

Therefore, having an adviser who understands and can coordinate the moving parts is critical to your success.

Most owners have more than 70% of their wealth trapped inside of their illiquid business. Many studies have shown that fewer than 30% of business owners will actually sell or transfer their company. Many end in liquidation, or 10% of their value. My advice to avoid falling into the traps listed below, of course, is to understand them and then plan ways to execute your exit plan.

Exiting is Emotional

The exit can be complex and taxing on a financial and emotional level. You cannot spend 30 to 40 years of your life building a business without a strong emotional attachment. The business is not just what you do, but who you are.

Building your business is a daily challenge — it requires a flexible plan and the ability to adapt, execute and compete in your ever-changing marketplace. Successfully exiting your business could, however, prove to be even more challenging than simply running your business.

Your business is your largest investment. Take the time to plan, revise and execute your exit strategy — it will save you time, money and headaches in the future.

Just Sell?

Selling is, in fact, only one of several exit strategy options available to an owner who desires to step back, or exit entirely, from the business. As alternatives to selling your business to a strategic buyer, you have the option of a management buyout, creating an Employee Stock Ownership Program (ESOP), exploring “gifting” strategies and selling partial company interests to a Private Equity Group.

All are viable options for the owner and should be considered by the owner and his or her advisory team. However, only after the owner has established and clearly communicated his or her goals should an exit strategy be selected. Once all options are explored, an informed exit decision can be made.

You need to prepare for other options even if you want to sell. Why? According to the Worldwide Business Brokers, fewer than 20% of the companies that go to market actually sell. According to FMI, it is more like 10% in the construction industry.

The good news is these internal exit options, if properly structured, can offer the most tax-efficient options.

The most common type of exit for a contracting company is a management buyout. An exit goal for many family construction owners is to sell to their family members, managers and/or employees.

The good news is these internal exit options, if properly structured, can offer the most tax efficient options. The bad news is that many advisers use cookie-cutter methods that will clobber buyers and sellers with taxes that can exceed 55%.

Procrastination

The typical response I receive when I ask an owner when he or she wants to retire is, “In five years.” And when I ask the same question two years later? You guessed it: the answer is still, “In five years.” This is a clear indication of how difficult and emotional getting out of a business can be.  

The procrastination comes from two very common characteristics. First, the process itself is very intimidating. Fragmented advice can lead to confusion and indecisiveness. The second characteristic is the owner’s fear of outliving his or her money in retirement.

Only after an owner can see his/her financial future can they proceed with the plan and execute the exit and succession process. The truth, however, is that an exit strategy should ideally be created along with a business plan and then be assessed and adapted as necessary over the life of the business. A properly written exit plan should provide the owner with one common goal supported by several “mini” goals that help support the overall strategy.

There is one similarity among all business owners. They will all eventually leave their business. The question is, will the owner control the process, or will the process control the owner? Providing an adequate amount of time and effort will help achieve greater odds of success.

The planning process can take up to two years and the departure up to 12 years, especially with a management buyout.

Many sellers procrastinate until they are finally ready to exit the business. They do not understand that the preparation process can take up to two years and the departure up to 12 years, especially with a structured management buyout.

Exit planning is about much more than monetizing the business. It is also about protecting what you have built until the transaction takes place.

It is prudent to have the company in sale-ready condition (succession, buy-sell, estate planning, etc.) should you decide that your exit timing has changed due to external factors such as health, family issues or just the feeling that you are ready to get out.

Having your company in sale-ready condition is just good business that will give the owner more options, improve the company’s value and give the owner more control of the selling options.

Right Advisors

I am sure you have an excellent compliant accountant that has guided you through financial trials and tribulations over the years. However, an exit planner is a holistic adviser who has studied several disciplines, understands the variety of “tools” used in the process and is trained in the exit planning curriculum.

The best way to understand the role of an exit planner is to assimilate this adviser to the duties of an architect. An architect understands and designs every part of constructing a building but probably cannot wire or install a furnace for the house.

Exit planners work in a similar fashion. They design the exit plan, creating a blueprint for the business owner and his or her advisers as a way to understand and coordinate the process in order to meet the owner’s goals. The exit planner does not write the legal documents, recommend investments or prepare estate planning documents. Exit planners are designers and process consultants.

After the plan is written, it can take several months for the owner to pick the path and strategies from many hours of coaching with the exit planner. Then the plan is given to your professional advisers for execution with the exit planner and the owner leading and coordinating the process.

Coordination is Key

A complete exit plan should encompass an owner’s three main planning areas in his or her life:

• Business Planning: Valuation, succession, taxes, transfer options and litigation
• Personal Planning: Owner’s goals, emotional ties to the business, family members involved in the business, and legacy
• Financial Planning: Overcoming the fear and reality of outliving your money, protection for family and spouse in the event of a catastrophe, and taxes

The good news is that much of the planning is being provided by advisors. The bad news is that they are terrible about talking with each other. This lack of coordination between these main areas of focus can lead to unanticipated consequences like:

• Overpaying taxes
• Destruction of the family unit
• Liquidating the estate to pay taxes
• Litigation among other business partners
• Costly legal bills
• Most importantly, the obliteration of the business

Exiting Can be Very Taxing

The exit is also very taxing from a financial perspective, where you can surrender more than 55% of your harvest to taxes on the state and federal levels. In addition, each path has a different value, tax consequence and financial compromises. Remember: it’s not what you get for the business that matters, but rather, what you get to keep. Exit planners have a variety of tools that help support the owner in achieving his or her goals:

• Internal revenue codes
• S Corporation ESOPs
• Special trusts
• Charitable planning
• CLLCs
• Stock vs. asset sales
• Asset protection
• Individual insurance companies
• Life insurance
• Premium finance
• Qualified plans
• Time

Using these various legal tools can significantly reduce or, in some cases, eliminate taxes.

With a properly planned exit strategy, the owner knows — before deciding how or when to exit the business — which options will provide the greatest after-taxes and after-fees net profit.

This puts the owner in control, able to see the financial future and to feel confident that he or she will not run out of money in retirement.

Selling your business is probably the largest financial event of your life. No matter where you are in your business life-cycle, creating and routinely adapting a written plan for your business exit strategy is a critical part of planning your exit. Through examining these six exit strategy traps, you will be prepared to avoid these obstacles during your own exit.

Remember that your business is an investment, and, as with any investment, you must study and plan in order to create the most financially and emotionally profitable outcome. You need a plan in order to beat the odds.