Seller beware!

I speak to roofing industry groups throughout the U.S. with some regularity. One topic I often discuss is succession planning and selling a business.

This issue is an important one for the industry at large but especially for business owners approaching retirement. Whether one sells to employees, family members or a private equity company, this point in a career is a crucial one.

There is no backspace button on some things in life, and transitioning out of your company is a paramount example of such a situation. Heck, even in marriage, there is the option of divorce and going your separate ways. But when selling your business, there isn’t an option to pause, separate and move forward again. The baby you created and nurtured will be under someone else’s charge and care.

Regardless of what the next life phase entails, every contractor will reach this stage; it’s up to you to determine what it looks like. My hope is after decades of dedication to your business and the industry, this phase is a perfect culmination of your hopes and anticipations.

But life is not often a Cinderella story, and I’m nervous the next phase for many owners of roofing contracting companies may not be one, either.

In my past life in political campaigns, we often said: “You can’t beat something with nothing.” If you want to unseat the status quo, you have to have something better and more promising.

And with the current private equity frenzy, I’m worried some contractors may end up selling their something to a nothing.

NRCA is a nonprofit organization. Most years, we deploy the resources we take in and use them as the industry determines, ending the fiscal year with no “profit.”

But I am receiving daily emails and calls from private equity firms talking about how they are so impressed with NRCA’s success in the roofing industry, they would like to help me take some risk and money off the table. It’s worth noting I am not an owner of NRCA; NRCA has no owners, and there is not an entity to sell.

At first, I found these solicitations funny. But over time, as the emails and calls continued, the humor has shifted to concern and downright alarm. The Wall Street lackey sending me these emails also is sending them to hundreds or thousands of legitimate, profitable, diligent company owners whose entrepreneurship and sweat equity have rightly built a legacy worthy of their efforts.

So I wonder: Are our members selling their somethings to nothings?

As a contractor, you have one chance to secure your future and legacy because it’s likely whatever deal you cut will be your first and last. But what about the person sitting opposite you at the negotiating table? They potentially cut one of these deals every month for years.

That’s a tremendous experience and information imbalance. If you go into a deal with no advisers, that’s akin to representing yourself in court while on trial for murder.

Please don’t do that.

Instead, start early. If you’re looking to retire by 2029, start the process now. You aren’t selling a used truck; the time involved to transition successfully in most circumstances is lengthy.

Talk with a lot of potential suitors, whether key employees, private equity firms or large contractors. Remember, the biggest dollar figure isn’t always the biggest total gain.

And private equity firms are not all alike. Some bet on great management teams to build a business through additional mergers and acquisitions. Others bet on improving a business by helping with analysis/cost cuts/efficiency ideas, and others primarily bolt together companies in hopes of selling the combined, larger enterprise later at a higher multiple.

You have to find the best buyer for you. I remember reading how Netflix had built itself into a moderately successful company and offered to sell to Blockbuster in 2000. Blockbuster had roughly 9,000 stores at the time, and Netflix proposed being bought for $50 million. Press accounts portray it as though Blockbuster may have literally laughed Netflix out of the room. Netflix is now worth roughly $265 billion, and Blockbuster has one location left on the planet (Bend, Ore., which sells mostly iconic merchandise).

This isn’t to say whoever offers to buy your company will go extinct, but how dependent is your future on the buyer’s success? If your retirement hinges on the buyer becoming a seller down the road, make sure you have all your bases covered. Private equity firms use debt for acquisitions, so there is little room for error.

Anyone selling into a roll-up should conduct due diligence on who they are partnering with as far as fellow contactors are concerned and, just as important, their motives. If they run into trouble, construction companies tend to liquidate (Chapter 7) versus reorganize (Chapter 11) in bankruptcy because construction contracts are cancelable for convenience of customers.

Private equity firms often promise to have plenty of capital, but that capital is rarely available when you really need it for a distress situation. This is why private equity companies have a bad track record when times get tough, especially for construction companies.

Are you Blockbuster rather than Netflix? Do you have a reasonable assessment of your company’s worth, or will you dismiss all fair multiples and offers as too low and unacceptable? Are your expectations higher than your company’s actual value?

What about your current staff? Is your primary goal to get as much money out of your business or ensure its legacy lives on? How do your current employees factor in that? If you sell to an employee or family member, what if he or she turns out not to be business-savvy? Are you protected?

You have to be ready. I visited with a contractor recently who is 62. He started his company when he was 19 and built it into an amazingly successful enterprise. Is he really going to want to start answering to others at this point in his career? The older you are, the less your business is worth if you are still a key player in its ongoing success. You have to balance how many years you will be taking ownership-level compensation versus the potential reduction in the value of the company the older you are.

Being emotionally ready to sell your business depends on what your role will be going forward and how intrusive a new owner will be in “helping” you run the business.

NRCA and many others in the industry have produced webinars and hosted roundtables about this important topic. Listen to the stories from the field and not just the sales pitches as you go through your due diligence.

I would love nothing more than to connect you with contractors who have gone through this transition themselves for confidential conversations about the process so you can hear from respected peers about their experiences. Please reach out, and I’d be happy to connect you.

NRCA exists to help the roofing industry and its contractors be as successful as possible. There would be nothing more gut-wrenching than to build a lifetime of success and have it damaged during the final play of the game.

If there is anything NRCA and the industry can do to help you, count us in!

MCKAY DANIELS is NRCA’s CEO.
mdaniels@nrca.net