In preparing to sell a business—whether retirement is imminent or years away—the main issue is making sure that you still have a viable business to put on the market at the time of retirement. This topic is vast, but let’s start by covering the front-end basics: form of business entity, maintaining the business, regulatory compliance and more.
Creating the proper kind of entity for your business—such as a corporation—is important. The type of entity impacts the business’ value and how it may be sold.
Although, there is some variation of permissible business entities among the various states, there are several basic types:
- Sole proprietorship: A business owned by an individual owner who pays personal income tax on profits from the business.
- S Corp: A type of tax election that allows a small corporation to only pay taxes once at the shareholder level instead of being taxed twice like a C corporation. The protections offered by the corporate structure are the same for S corps as they are for the other types (such as C Corps).
- Partnership: An association of two or more persons engaged in a business enterprise in which the profits and losses are shared proportionally.
- Corporation: A legal entity that is separate and distinct from its owners—and offers some protection of personal assets if properly formed and maintained.
- LLC (Limited Liability Company): A hybrid business entity having certain characteristics of both a corporation and a partnership, but more similar to a corporation than anything else.
Each has advantages and disadvantages. Most of our “mature” general contractor clients prefer the corporate form. The reason is simple: If it’s properly created and maintained, it usually protect the owner’s personal assets from any legal judgment against the corporation in the unhappy circumstance of a successful lawsuit against the business.
What does “properly maintaining” mean
Maintaining the business includes such mundane tasks as record keeping, accounting, contracts and collections. This is the stuff of any viable business, whether construction or not.
We spend a lot of time drafting and reviewing contracts for the simple reason that it minimizes the misunderstandings and resulting disputes (see “Contracts: An underused contractor’s tool, on NARI’s blog). In addition, if you are in a state, like California, that requires notices, be sure to put them in.
Compliance with statutory requirements
Compliance with the various statutory rules and regulations include licensing and compliance with state, local and federal requirements.
The majority of states have some form of licensing of contractors and other construction professionals. Being properly licensed as a business and maintaining this license in good standing is key for survival to the finish line. One would think this is a no-brainer, but sometimes the law of unintended consequences occurs.
One recent example is a contractor client who—because of bad advice—was a sole proprietor, but obtained its license as a corporation. Our client had a dispute with one of his clients, and because of this confusion, the state licensing agency threatened to suspend the license. And, perhaps even worse, the contractor was accused of fraud by his client. The contractor’s client claimed to have gone into the contract thinking that the contractor was a sole proprietorship—and the client could thus reach personal assets. Better diligence would probably have caught the snafu early on and prevented much grief.
Who will take over your business? Will it stay in the family or be sold? If sold, will it be to an employee or outside third party?
The sooner you give this some consideration, the better off you are. The more established the company, the more complicated this is. It is really a matter of years of planning, not months, to do it correctly and well.
The first step is to simply make the decision and set a reasonable timetable. To waffle is often to never sell the company.
Valuing the business
Properly valuing the business is critical and has many components. It includes consideration of earnings, good will, reputation, contractor and customer relationships, referral relationships, active projects/open contracts, extant warranties, inventories of equipment and materials. It can be done by outside specialists or there are a number of useful online sites that allow a value to be generated.
Regardless of using outside assistance or trying to do much of it yourself, one must still consult a professional—there is simply too much to do for the layperson.
In our experience, the key person is your CPA—he or she knows your records the best. Sometimes a good brokerage firm can help. If you have an attorney, they need to know, but frequently they don’t have this type of expertise to help you value the business.
Actually selling the business and rolling on to blissful retirement as the culmination of succession/transition planning is of course the end game.
Of our recent clients who have sold their business, one stands out. He not only met the above criteria, he insisted on using a broker who specialized in selling construction businesses. Oddly, finding such a broker was difficult—he probably interviewed nine or ten. Diligent on making disclosures—he had a very successful sale.—Bryant H. Brynes and Brian Trowbridge
Bryant H. Byrnes, Esq. practices construction law in the San Francisco Bay Area and is counsel to the San Francisco Bay Area NARI Board of Directors. He can be reached at Bryant@bryantbyrnes.com. You can also read additional articles by him on the SFBA NARI website, www.sfbnari.org. “For the Trade.”
Brian Trowbridge, Esq. is an associate at the Trowbridge Law Office in Oakland, Calif., and the author of many articles on construction law. He can be reached at firstname.lastname@example.org. You can find additional articles by him on his website, www.trowbridgelawoffice.com .