For many Australian organisations, the question of succession involves the culmination of a generation of hard work. For today's contractors, this often-emotional process has become a significant issue, given Australia's ageing workforce.
The challenges of the construction contracting industry can mean many years of hard labour before companies are established and able to run a sustainable business. It is understandable, therefore, that owners are loathe to hand over the reins to a person or organisation who may end up running the business into the ground quicker than the previous owner can say "I'm retired".
If a family succession strategy is not an option, one of the obvious exit strategies is selling. However, selling a contracting business is not always easy. One of the major roadblocks for contractors looking to sell is that there are no real barriers to entry for competitors looking to grow through the tender process. That is, there is nothing stopping competitors from taking over vendor contracts, rather than funding the acquisition of an established business. The question sellers should therefore ask themselves is 'What can my organisation offer a prospective buyer?'
The benefits of buying another contracting business generally centre around existing infrastructure, skilled labour and management as well as reputation in the industry or market. With these in place and ready to go as soon as the new owner takes over, provided the transition is smooth, the organisation could continue revenue-generating operations. The challenge lies in not only making your business attractive to prospective buyers but in making it attractive to the right buyers.
With that in mind, there are some issues you may want to consider before passing it off to the first buyer who comes along.
- Is your business located in an area with significant infrastructure development? Buyers often seek reassurance of knowing there is a pipeline of potential projects.
- What qualifications does your business have? For example, being accredited with relevant associations potentially adds more value to the organisation and is something buyers may be prepared to pay for.
- Is your reputation worth paying for? If you can prove your organisation has renowned expertise in a certain area (for example, building bridges or roads), you can add value to the business in terms of brand and standing in the industry.
- If your plant and equipment assets are significant – several million dollars in value -companies may be able to leverage that value to sweeten the deal for a potential buyer and push them over the line.
- Key financial measures – for example, EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) – are often important to prospective buyers, while many privately held companies may focus on asset growth. If you are planning to sell, are you focusing on increasing your EBITDA? Your financial advisers may be able to assist you in exploring options/business strategies to improve EBITDA.
From a finance point of view, contractors have a few options to effect the succession process. These include Management Buy-Outs (MBOs), Management Buy-Ins (MBIs) and Leveraged Buy-Outs (LBOs), all of which release value to the exiting shareholders and have the advantage of continuous management following the buyout.
The more a vendor understands about a buyer’s needs and the critical elements a prospective owner is looking for, the more likelihood there is of selling the business to potentially the right party. By getting your house in order, so to speak, and ensuring your business is an attractive prospect for the market, you should be in a strong position to work towards an easy exit from the working environment and into retirement.