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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
