Yo I love working with companies in the construction industry. Who doesn’t love supporting those people who build our communities and the future of Arkansas? From a valuation standpoint, construction companies have significant tangible assets, such as equipment, real estate, and strong cash flows, which go a long way toward establishing a reliable value. On the other hand, these businesses often also involve complicating factors. It can be problematic to find value for ownership challenges, poor corporate structures or incomplete documentation. So what should a business owner pay attention to in this field? I’m so glad you asked.
First things first: when you created your business, you chose a corporate structure. It’s critical that your company matches the right one, and the default option probably isn’t what you want. Taxes, control, partner ownership, size and geography all play a role here. Additionally, some companies need to change their corporate structures several times throughout their life. Make sure you get good advice and then review the structure every few years to make sure it still makes sense.
Another thing: your corporate structure will require some documentation to be adequate. You will need several documents, but the first ones that come to mind as an appraiser are your bylaws or operating agreement. These documents explain how the business should be run and who makes decisions. Your banker, your lawyer, your human resources people, and yours truly will likely want to see, in writing, who has the legal authority to transact business on behalf of the company.
It is not unusual for a company in this industry to have multiple owners, and in the event that there are multiple owners, it is not unusual for there to be restrictions on how ownership can be sold or transferred. This is important for several reasons, one of which is that it can have a huge effect on the valuation of your shares in the company. If your company’s ownership cannot be freely sold to a third-party buyer, I may be forced to discount the value of your shares due to lack of marketability.
Another commonly overlooked topic is how to protect yourself in the event of your partner’s death or permanent disability. You must have a written contract, known as a purchase/sale agreement, that explains what to do in that circumstance. Imagine your current business partner and how well you work together. Now think about your spouse and imagine trying to work with that person in the same capacity. I’m guessing that while you may really like this person, there’s a good chance he won’t individually replace the dynamic you had before. Honestly, they may not want to associate with you anyway.
With this in mind, it’s common sense to have a plan in place. Your partner’s family can receive the value of their shares in the company, while the appropriate party can take control of those shares for the good of the business. Oh, and in case you’re wondering, don’t try to make it up yourself. Look for a professional who knows what he is doing. It will be worth the cost to have all the T’s and I’s crossed and dotted correctly on the front.
Victor Werley, CFP, ChFC, CDFA, CVA, MAFF, CFE, CEPA, is a financial consultant in Little Rock and founder of Pinnacle Advisors. Werley has been in practice for over 20 years and has managed hundreds of business transitions for himself and his clients. He has spoken to numerous groups in the business and legal fields about business valuation, how to structure good deals, and many other topics. He is passionate about small businesses and helping Arkansas’ economy.