Construction Case Study - Preparing to Sell Your Business

November 25, 2019

GC NICHE: Construction

TYPE OF INDUSTRY: Construction

GC TEAM MEMBER(S) INVOLVED: Adriane Reams, CPA

DATE PROJECT COMPLETED: April 2019

SITUATION:

The owners of an S-Corporation approached us to analyze the financial health of their business and develop a plan to sell and exit.

After analyzing the finances for the company, we realized that business funds were being used for personal expenses; thus, budgeting cash flow and determining profitability was difficult.  This required discussions on how salary, personal expenses, and distributions could negatively impact the company’s financial health and may make it less appealing for an outside buyer. 

Our responsibility was to develop a succession plan and show that the company was not only profitable but also showed a steady cash flow.

CHALLENGES:

  • Help the shareholders manage the finances of the company for profitability.
  • Identify personal expenses in the financials and adjust company processes in order to separate personal expenses going forward.
  • Adjust financials to accurately reflect the financial position of the Company.
  • Determine appropriate compensation for the corporate officers and other c-suite employees to ensure market-based wages.

CONSIDERATIONS & TACTICS:

  • Reference our article, Critical Succession Planning Tips for the Construction Industry as a tool for discussion with client.
  • Reduce the risk of an audit and unnecessary taxes and ensure the ability to show legitimate business expenses.
  • Work with the shareholders/officers to develop policies and processes to ensure business and personal finances remain separate.
  • Conduct a salary survey to determine proper compensation amounts based on job titles and responsibilities.
  • Handle distributions appropriately to manage personal expenses that may be paid from the business account.

STEP-BY-STEP PROCESS:

In preparing a company for sale or exit there are a few general steps that could be taken:

  1. Work with company personnel to review and determine if expenses on the profit and loss statement are legitimate business expenses.
  2. Analyze business’ finances and determine reasonable distribution amounts (if applicable).
  3. Conduct a salary survey to determine proper compensation and withholding to meet wages based on the market.
  4. Implement changes based on findings from our financial review and salary survey research.
  5. Review financial results from the perspective of an outside third party.
  6. Prepare budgets and projections from the potential successor or buyers’ point of view.
  7. Set-up quarterly follow-up meetings to measure actual results against the budgets or projections.

FINAL RECOMMENDATION AND OUTCOME:

The final recommendation was to establish reasonable salaries based on a market salary survey along with consistent and routine distributions for taxes and personal expenses.  With these suggested changes, the company was able to show higher and consistent cash flow and profitability.

The establishment of budgets and projections combined with quarterly meetings helped create accountability for the exit/sale plan.

Ultimately the shareholders were able to sell their company more quickly and at a higher price than originally anticipated. 

OTHER CONSIDERATIONS OR PERSPECTIVES:

It was important to include their bank in our discussions in order to avoid any surprises or inadvertent violations of their loan covenants.

200 West Roseburg Avenue
Modesto, CA 95350

(209) 527-4220 (phone)
(209) 527-4247 (fax)

https://www.grimbleby-coleman.com/resources/articles/208

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