I love working with businesses in the construction industry. Who doesn’t love supporting those people building our communities and the future of Arkansas? From a valuation standpoint construction businesses have significant hard assets, such as equipment, real estate and strong cash flows that are a huge help in establishing a reliable value. On the other hand, such businesses often come with complicating factors, as well. Ownership challenges, poor corporate structures or incomplete documentation can be problematic to find a value for. So what should a business owner in this field pay attention to? I’m so glad you asked.
First things first: when you created your business, you chose a corporate structure. It is critical to match up your business with the correct one — and the default option is likely not the one you want. Taxation, control, partner involvement, size and geography all play a role here. Additionally, some companies need to change their corporate structures multiple times throughout their lifespans. Make sure you get good advice, and then revisit the structure every few years to make sure it still makes sense.
Another thing: your corporate structure will require certain documentation to be proper. There are several pieces of paper you will need, but the first ones that springs to mind to me as a valuator are your bylaws or operating agreement. These documents spell out how the business should be run and who makes decisions. Your banker, your attorney, the HR folks and yours truly will absolutely want to see, in writing, who has the legal authority to transact business on behalf of the company.
It is not unusual for a business in this industry to have multiple owners, and in the event that multiple owners exist, it is not unusual for there to be restrictions on how you can sell or transfer ownership. This is important for several reasons, not the least of which is that it can have a huge effect on the valuation of your shares in the company. If ownership in your company cannot be freely sold to an outside buyer, I may be forced to discount the value of your shares due to a lack of marketability.
Another commonly overlooked issue is how you protect yourself in the event of the death or permanent disability of a partner. You should have a written contract, known as a buy/sell agreement, that spells out what to do in that circumstance. Imagine your current business partner and how well you work together. Now think about their spouse, and imagine trying to work with that person in the same capacity. I assume that while you may really like this person, there is a good chance they are not a one-to-one replacement for the dynamic you had before. Honestly, they might not want to be in partnership with you anyway.
With that in mind, it is just common sense to have a plan in place. Your partner’s family can receive the value of their shares of the company, while the proper party can take control of those shares for the good of the business. Oh, and in case you were wondering, please do not try to make this up yourself. Seek out a professional who knows what they are doing. It will be worth the cost to have all of your T’s and I’s crossed and dotted properly on the front end.
Victor Werley, CFP, ChFC, CDFA, CVA, MAFF, CFE, CEPA, is a financial consultant in Little Rock and the founder of Pinnacle Advisors. Werley has practiced for more than 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 business deals, and many other topics. He is passionate about small businesses and helping the economy of Arkansas.
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