Retirement is changing. Because we're living longer, healthier lives, we require more income to maintain current lifestyles for a longer time. That requires planning, and for remodelers, as for owners of other businesses, the sooner you start, the easier it will be to meet the needs of your own retirement.
Whether you want to exit with cash flow or sell for a lump sum, there are several things that consultants, owners, and industry analysts agree are necessary to do it successfully. Among these are the need for the owner to be separate from the business and for the business to have as many systems in place as necessary to ensure its sustainability.
“Setting up systems that ensure making a profit is a repeatable process is something that has value, something you can sell,” says Leslie Shiner, a senior industry advisor for Intuit Construction Business Solutions. “Setting up a business based on your own charisma and skills will not create a company that can produce income after your departure.”
The experts also agree that the owner should establish an exit strategy during the early stages of setting up shop. If you're not yet ready to think about retirement, you're not alone: 335 of the 500 contractors and subs surveyed by software developer Intuit at this year's International Builders'Show said they had no exit strategy. That said, you should start planning now.
The length of time it takes to get out is related to the complexity of the business, but experts recommend being prepared to spend 5 to 10 years extricating yourself from your company. Ultimately, you may not control the timing of your exit — market shifts, ill health, or disability may force you out. No two situations are exactly the same and knowing when to leave is a personal decision.
Long-Term Buyout Five years ago, Bo Steed, who had been in business since 1978, decided he was ready to pass his company on to someone else. He asked each of his nine children, none of whom worked in the business, and he tried working things out with a key employee; all to no avail. But in 2002, his eldest son, who had been an officer in the Navy and later was laid off from a managerial job at Sprint, decided to give it a try.
Steed set up a buy-sell agreement and did a three-year evaluation of earnings in order to value the company's 500 shares of stock. In the first year, Steed and his wife gave their son — as a bonus — 10% of Steed Remodeling. In the years since, Steed says his son has taken profits from that 10% and bought additional stock.
“The [second year] we gave him 75 shares so he had a little more than 20% of the company, and he has 50% of the business as of January 1, 2005. He will purchase an additional 30% next year,” Steed says.
The elder Steed will retain 20% of the company's net profit (and keep 20% of the liability). “I'll work as a consultant a little bit and help keep the company name,” Steed says, referring to the fact that he's well known in their Kansas City, Mo., community. “We gain good, qualified leads from my social activities.”
Steed feels confident that his son is the right person to run the company. “At a young age, he was in command of a lot of people and responsible for a lot of things in the Navy, and he has integrity.”
Industry consultants caution, however, that bringing in someone from the outside is difficult because he or she may not know the company culture. Steed admits that this is one of the things about which he is uncertain, but so far the company “has done better and is more profitable.”
Steed's case may be unique in that his son took over from the outside, but moving anyone into the owner's position warrants careful consideration. “Typically, an employee has no cash [to buy into the business] and may not have the management or the entrepreneurial skills to run the business,” Shiner says.
Shawn McCadden agrees, and he ought to know: McCadden recently transferred ownership of his Arlington, Mass., company, Custom Contracting, which he owned from February 1990 until May 2004. “Bringing someone in with skills is difficult, but to bring someone into the culture is more difficult than growing people from within,” McCadden says.
Finding the right candidates and helping them develop leadership skills were integral to his successful exit strategy, he says. At their entry into Custom Contracting, every one of McCadden's employees was aware of his exit intentions. This helped motivate them, he says. They knew they would either develop and grow or get left behind.
McCadden is both lucky and smart. Lucky because he had been able to work in his father's remodeling business to learn the ropes, and smart because he recognized what worked and what didn't and took that knowledge with him. “When I started my business it was with the intention for it to be turnkey, to provide me with passive income and/or the ability to sell it,” he says.
By beginning his business with an exit strategy in place, McCadden could design systems that would aim him toward his goal. He identified seven systems — financial, marketing, design, production, personnel, communications, and sales — and saw that they were interdependent. “If I got to a fork in the road, I had a big picture of how the business worked; I maintained my exit strategy when I chose a direction.”
McCadden, who is now the director of education for DreamMaker Bath and Kitchen, sold Custom Contracting to his general manager. “The agreement is a 10-year note with escalating payments,” he says. “As the [new owner] increases his business, he can pay more.”
Why didn't he just keep his remodeling business and let it run itself? Liability, he says. “We signed the paperwork and the deal was done. He owned the business and owed me money. I no longer owned the business and had the promise of payment.”
McCadden acknowledges the risks: “If he doesn't pay me, I get the business back, but what value does it have if it's failing?” But he has confidence in the new owner, who is a “person of integrity, and his goal is to have an exit strategy for himself.”
Rosie Romero, former owner of Legacy Custom Builders in Scottsdale, Ariz., has a similar story, but he created an internal board of directors with the idea of training employees to become owners. “We let the board grow to the point where it could run the company, read financials, project income, extrapolate the cash flow forecast, and over a period of 4½ years I was out of the day-to-day operations,” Romero says.
Eventually the person hired as president of the corporation, along with three employees, bought 94% of Romero's stock. For his remaining 6% Romero sits on the board. The company pays him separately for a marketing agreement that includes promotion on Romero's radio show (which he has been hosting for 15 years), public appearances, and television, including a handyman tip of the month on a local news show.
If you retain a portion of the business, there's still plenty in it for a buyer: He or she gets your knowledge and client base, and doesn't have to put up all the money at once says Stanley Feldman, president of Axiom Valuation Solutions in Wakefield, Mass. He adds, “Depending on the nature of the business there will be taxes owed to the government. If you can see the sales price in the form of an income stream over time, the amount of tax you pay is going to be lower than if you sold the business outright for the full amount.”
