Optimising Business Value: How to Prepare for a Successful Exit with Peter Searle

In this episode, you will be able to:

• Maximise your business value with strategic exit planning.
• Secure long-term contracts to boost business worth.
• Utilise tangible assets for a secure retirement plan.
• Achieve a successful exit through effective financial planning.
• Expand your business services through strategic alliances.

Common Exit Strategies
Exit strategy is a paramount consideration for any entrepreneur, more so for construction industry business owners. The majority might opt to pass on their business to a trusted individual already working within the premises. Due diligence is required as the next-in-line needs to have a firm grasp of the business’s ins and outs and can manage it effectively post-transition. In his conversation with Darryl Bates-Brownsword, Peter Searle sheds light on the most frequent exit strategies in the sector. He shared how most exits involve transitioning the business to someone already within, often through a management buyout. If this isn’t viable, acquisitions are considered to acquire the right individuals to facilitate such a transition. Peter emphasised the necessity of trust and confidence in the next-in-line to take over the business.

Expertise Documentation and Technology Adoption
In an industry heavily reliant on practical expertise, there’s a lot to gain from documenting knowledge and adopting technology. Advancements in tech present exciting prospects for streamlining processes, ensuring comprehensive documentation and improving payment collection for subcontractors. Establishing a system where the business doesn’t completely hinge on one person and ensuring core competencies reside within the business structure is a crucial aspect. Peter Searle echoes these facts. He noted the slow adoption of technology in the construction industry, highlighting how it creates room for significant improvement. He shared his belief that adopting tech to streamline processes, proper documentation and improved payment processes for subcontractors can contribute to overall business efficiency. Peter stressed that creating a system where the business doesn’t rely on only one person’s expertise is key to ensuring continuity and smooth transition during an exit.

Long Term Contracts for Revenue Predictability
For businesses that work project-to-project, it’s worthwhile to secure long-term contracts to ensure steady revenue flow and business predictability. This approach not only smooths out revenue streams, but it also makes your business more attractive for acquisition. By having guaranteed work lined up for the future, potential buyers can rest assured of continued income after the transition. Peter Searle puts a spotlight on this by explaining how having long-term contracts allows a business in the construction industry to create stability and increase its attractiveness to potential buyers. He believes that long-term contracts are an excellent mechanism for generating a consistent revenue stream, consequently making the business more attractive during acquisition talks. It’s a fail-proof strategy that guarantees longevity and sustains operations in the long run.

Welcome to the podcast that’s dedicated to helping business owners to prepare for an exit so you can maximise value and exit on your terms. This is the Exit Insights podcast presented by Succession Plus. I’m Darryl Bates-Brownsword and today I’ve got Peter Searle talking with me. Peter’s a bit of a guru when it comes to working with businesses in the construction sector. So welcome and thanks for joining me today, Peter.

Yeah, good morning, Darryl. Thanks for having me on the show.

Yeah, Peter, look, the reason our planning put together today was there’s a lot happening in exit planning at the moment. And I think I’m getting the feeling that business owners are becoming more and more aware and they’re starting to understand that if they do want to get or reach all of their goals and aspirations when it comes to exiting their business, and they do need to prepare, I think that awareness is increasing and so we’ve got a lot of business consultants out there who are helping business owners prepare for exit, and I’ve spoken to a few of them over the course of this podcast. But what I’m interested in about today’s conversation is that you don’t try and do it for everyone you’ve niched down. You just focus on industries that work in construction, such as architects and planners and what have you. So how did that come about?

Well, it came about because my background is in the industry. So I spent over 30 years in corporate life working for one of the tier one contractors. And an opportunity came up when I was just mid fifty’s to exit. And what I decided to do was help some of the subcontractors with their business plans and all their sort of their growth plans. And I suppose because of my age and who I knew in the industry, I got approached by a lot of the subcontractors that or the owners who were the same age as me or thereabouts, because we’d known each other for a long time. And the first thing when you go in to help them with their growth plans is, well, where do you want to be, what do you want to do? And because of their age, it wasn’t necessarily all I need more. The first thing might have been on their mind was they needed more work or they needed to sort out claims or whatever. But as this discussion evolved, the bigger goal was, well, what are you actually going to do in five or ten years time? How are you going to get out of the business? So what’s the business going to look like? How’s it going to be structured? What do we need to do to achieve that five or ten year goal. And that’s how it came about, really. It was by people that I knew and the age group that I’m in, really. And from that, I found it very interesting that it grew from that, really.

Okay, so from your perspective, how much awareness is there in the construction sector that exit planning is a requirement if they do want to, I guess, sell their business or get some sort of compensation for their business and what they’ve built up over their left? Because when they do leave, because I’m guessing across the construction sector, we’ve got a real span of types of businesses from, as you say, subcontractors to quite small businesses, up to some really significant construction companies with many, many employees and millions of pounds of revenue.

Yeah, there is a big spread of businesses. I probably focus on businesses in the small and medium size for the purpose of this discussion, because the larger businesses, it’s a different kettle of fish when they look to buy or sell. But for the small and medium-sized businesses, because the way construction is structured and it’s a very cyclical industry, goes up and down, businesses actually tend to have very few employees, and most of the work is then subcontracted. And even the subcontractors, they’re using lots and lots of subcontractors. So you might just have an owner, a bookkeeper, and maybe one person or two people running around the sites keeping check on what’s going on, everything else. They might have 15, 20, 30 people out there actually doing the work that are all actually individual trades for them or separately employed with the support side, like the architects and the structural engineers and all the other people, then they do tend to acquire people, and they operate very much like a professional services business would like an accountant or a solicitor or lawyer’s practice. But they’ve got their own problems now because of the way the economy is. There’s similarities to some sectors, but not to others.

So when you’re working and someone’s engaged with you, Peter, and they’re from the sector, what are the things that you look out as? I guess opportunities for them to build value in their business and to make it easier to exit and more attractive to be acquired. What are some of the common things that keep showing up in this sector?

Yeah, some of the common things is to try and get some foresight on the work that you’ve got coming in. So for contractors and consultants, a lot of the work is project based. As soon as the projects have finished, obviously the work is finished. So there’s no longevity, no foresight. So one of the things is to start trying to get on PSLs for supply chain lists, where there may well be regular work and frameworks, public sector frameworks, or frameworks for private companies. So you can see that you’ve actually got something that’s special and unique for three to five years down the line. That helps. The other one that helps is if people can start to acquire some sort of asset, their offices or yards, so that they’ve got a physical asset that they can separate out from the business and put into their pension pot. That’s another one. But you can do that with all sorts of different things. Scaffolders, the tube and fitting. They run all subcontractors and subcontractor gangs, but somebody’s got to own the tube and fitting. So you can build up a big asset with the tube and fit in and sell that at the end of the day, the steel can command quite a good price, the tube.

So when you say build up asset, are you saying build up stock?

Yeah, a tangible asset. In that case, for a scaffolder, it would be. And property would be an asset that could be sold separately or rented back to the business. If you pass the business on to people in the business, for instance, so it then becomes a rental income. So those are the sorts of things that you can do.

Yeah. And I guess when we’re dealing with business owners of SMEs and we’re helping them with their exit plans and their exit planning, I guess there’s two sides, isn’t there? One is identifying where their assets are and what’s really going to fund or be available to fund life after work. And there’s property investing and there’s investing in your business. Often what we see is that when businesses are acquired, that the acquirer is interested in the business and the operations of the business, they’re not necessarily interested in the property. And the property is a great asset for the owners to have and in their pension, as you suggest. But an acquirer of a business may not be interested in your property. They want to know that you’ve got a long term lease, if that’s a requirement. But otherwise, they don’t want to buy real estate, they want to buy a business.

That’s right. And I’ve worked with businesses where their accountants haven’t actually even explained to them that they can split the property out of the business, because sometimes, quite often, people start out with one accountant and they grow the business, but they don’t realise they’re actually outgrowing the expertise of their accountants. I’ve turned around to people and said, well, you’ve got this property in the business. Why didn’t you take it out? That can become your pension font and the business continues and we deal with how we deal with that. But you’re going to need an accountant that actually knows what they’re doing with transferring this into a pension fund and all the VAT that goes with it. And you’ve got to bring in some specialists in that case. And they don’t realise that these other specialists are actually out there that can help with all these different things.

Absolutely. When it comes to planning your exit, regardless of what industry you’re in, you need to understand your personal finances and your personal financial planning. The first thing we always want to explore is what do I need to maintain my lifestyle? What will provide funding for that lifestyle once I stop working and generating an income through my business?

That’s right

What’s my business going to be worth? Yeah, what’s my business going to contribute if I exit my business? If I sell my business, what is it worth and what will that contribute to my pension or super pot, depending. on where I am? And then what could it be worth? And then once you’ve got all of that sorted, you want to start making sure that you’ve got the right tax advice and legal structures in place, and then you need the right lawyer who’s going to help you with the deal, because that can make a significant difference as to what you structure in the deal and how that can proceed or not, depending on the risks.

Yeah, that’s right. And I find one of the things that I end up doing quite a bit is actually going through all the different professionals that are involved in a sale of a business with people, depending on the type of business and the expertise that they will bring. Because a lot of people that have been working in the business going to day to day doing the work on site or in the office, producing the drawings and what have you, they just don’t engage with all the other professionals that are needed for a sale. And this is a big eye opener for them, really, to see what needs to be done going forward.

Absolutely. Like any other business owner, by the sounds of it, they’re great at selling their product. They’re not necessarily great at selling their business because they’re only going to sell their business once.

No, that’s right. But the other thing that also, I think is if you compare it, say, to manufacturing or something where you might have a factory with a big team of people or something with construction, because you’ve got so many different teams of people coming together, relationships are vital. And also the other thing that happens is that as one trade works its way through a project or one of the professionals work their way through the project, what they find is they bump up against adjacent trades or professionals. And there’s the opportunity, because there’s people of all different ages in the industry to start looking at combining with another business that’s complementary to your own with the view to buying out. So you might have say for instance, electrical contractor that’s doing very well, they need, when they’re on site or the main contractor expects from them to coordinate a lot with a mechanical contractor and they will want to try and reduce their risk. So if you can have a contractor that does mechanical and electrical is a big selling point. So an electrician that’s maybe say in his forty s or forty five fifty, say if he goes out or he’s working regularly with a mechanical contractor that’s in their say 30s, then they could look to combine those businesses and he could do some sort of earn out with the younger person knowing that he’s in good hands. And those sorts of combinations in the industry are all over the place because there are so many specialists. A planning stage. When you’re going for planning application on, on a project, you might need a transport assessment, you might need an ecology assessment. So there’s opportunities for specialist ecologists or transport people to join up with those businesses and people can start to initiate those connections an early stage.

Okay, so one of the things you’re suggesting as an exit opportunity is to make yourself attractive to be acquired by what’s effectively a next door product.

Yeah. Or acquire a next door product so that they can then eventually acquire one yourself. Yeah, that’s right. And there’s so many, everybody’s trying to reduce risk. So when people start out in the industry, they’re very focused on their niche. We were talking about niches earlier. It’s an easy sell if you’re niche, but as businesses get bigger and the projects get bigger, people want to reduce risk. So your next door neighbor in the sequence is an attractive proposition to combine with. And it can be quite close because people can be look at an office, you got the ceilings, be a ceiling fixer and then the next step is we’ll come do ceilings and we’ll do the dry lining for the petitions and do the two. And it saves all the coordination for the trade above. And that’s how you can grow. And if you do it strategically, you can always do it with somebody that can buy you out.

Yeah. Okay. So Peter, what are you seeing are the biggest blockers or the things that businesses I guess, are or aren’t doing that are preventing them from being acquired or saleable?

One of the things is that a lot of people don’t recognise what the buyer is going to look for. So they don’t set out to try and sort out what is their real selling point, what gives them an eye for the future. People need to look at it and say, yeah, this is what I’m actually doing. I’ve got work coming in. But what is it? What makes it attractive? I mean, it was a business I was looking at the other week. The way it had been packaged up to sell made it look quite a large business. But when I went to see them, they had a lot of interest, but they hadn’t managed to make the sale. But when I went to see them, it turned out they were actually a very small niche of the market. And when you looked at what they were actually doing, they were providing for sort of like the next level up, but they were doing it on a very regular basis with no formality. And if they could just turn that into some sort of formality, like we are on the PSL for five contractors doing maintenance work. Those five contractors have got ten year maintenance contracts. Suddenly what looks like just an ad hoc maintenance company is, wow, they’ve got five large, five or six large contracts here that potentially are five to ten years long. It’s a very attractive business, but they were being sold as, oh, they just do a little bit of maintenance on this particular element of a building.

Okay, so what we’ve got so far, I think if I can just pull some of this thread together, is the number one thing you really want to look at is your revenue. What does your revenue look like? Have you got long term contracts? Can we smooth out and make the revenue more predictable than it is otherwise and remove some of the lumpiness and long term contracts are the best way to do that. The next one is to explore, have we got some strategic alliance with other organisations if we’re doing a lot of subcontracting and potentially can we acquire or introduce and expand our range of services or expertise in our organisation so that we can compete on bigger and more comprehensive components of projects and contracts? I guess the next one I think we’re going to touch on is perhaps the people. Have we got, what are the people? And you touched on already, the process or a methodology? If you’ve got an industry niche and you’re known for your niche. Is all of that expertise of your niche and your knowledge of that particular area, does it reside in someone’s head or is it in the business? Is it documented in the business? So whoever acquires that business can continue with that knowledge. You didn’t use those words, but I think that’s what you alluded to. Is that fair?

That’s fair, obviously, because a lot of the industry is very practical. It’s people with the right certificates and certification and training and everything, knowing the subcontractors that have got the right accreditation. But the industry, certainly the SME level, is being fairly slow to adopt technology. And there are big opportunities out there for the introduction of technology, for keeping of records and sorting out the contractual arrangements, for making sure that people are actually getting in all the money that they’re due. It’s too easy for lots of the subcontractors to say, yeah, I’ve got a problem on this job. I don’t really know how to go about getting paid. It ends in disaster. They either lose money on a project or they ultimately go bust. So actually making sure that you’re capturing all the monies that are due to you through the contract and having strong focus on the contractual side of it as well in contracting is paramount. And that needs a strong commercial side in a business that can be visibly seen. And it also goes through to when somebody starts looking at the business. I can remember sort of looking at acquisitions in corporate life. You get the accounts, you get the management accounts. So that’s not enough. You’ve actually got to go and visit the sites because the management accounts might be showing overvaluations or undervaluations, and somebody’s got to do a true valuation of what’s really going on, on the job. And a buyer will look at that.

Yeah. So we need to know our financials, I think, is there. That’s strong. Peter, and what’s your experience? What are you seeing is the most common ways that these industries in these sector are actually exiting? Are they trade sales? Are they EOTs? Are they mergers? What’s happening?

The majority, I would say people pass them on to somebody that’s working in the business. So somebody within the business will buy them out.

So an MBO type of thing.

Yeah, some form of MBO. And if that’s not possible with the people that are actually there, then you’ve got to start looking at doing the acquisition so that you acquire the people that will do the MBO. So those are the sorts of sequences that are probably the most common because it is about the people and it’s the people that get the work in. So a business’s reputation is absolutely paramount and how people connect with other people to get the work in. So the MBO route is actually quite popular.

Okay, and what about EOTs? Are you seeing much happening there?

They are becoming very popular with construction people. Construction people look and say, oh, well, I’ve built this business up. These people are in here. I want to give something back to them. They see the tax advantages and everything of an EOT, and they go down the route of an EOT thinking the business is going to be in good hands because they’ve worked with the people and the people have helped them build the business. I think where the concern is with those types of exit structures is that those people that are very good at working in the business and delivering the goods aren’t necessarily good business owners. And that is the real risk, is that it takes a different mindset to actually run a business, to actually work in a business. No matter how good people are working in the business, they can’t actually run the business. And you see some of these, the exit will occur, there’s a deferred payment, and then two years down the line, that deferred payment is gone because the staff have actually not been on the ball enough with the actual running of the business and have been too concerned with producing a really good quality product or customer service. And the money is just flushed away.

Yeah.

I think that’s the real risk.

We see a lot of risks. I think EOTs are a great structure. If you’re already exit ready and you’ve done the preparation, they can be a great solution. What I’m seeing and what I’m hearing in the marketplace is that people are trying to exit their business via other means, and then as a last resort, when they can’t sell their business via other means, they’re going, well, let’s sell it to an EOT.  And then you bump into all the problems that you raise there, that the management team in place aren’t really a management team. They’re great operations people at getting the job done, but not at Managing a business. So then there’s a real risk with the owners actually getting the money out of the business without working an elongated earn out period themselves still being in the business after it changes hands, just to make sure they get their money.

That’s right. And I think that’s possibly one of the reasons EOTs are becoming popular in the industry is because construction is very cyclical and they’re difficult businesses to sell. So what you’re saying is a last resort is actually moved up the priority list quite quickly if people haven’t really got their act together and sort of thought about how they are going to exit.

Yeah. They need to create a culture in the organisation up front, a lot more transparent so that the EOT is going to be in safe hands or the business will be in safe hands once the EOT owns. I mean, let’s pull this all together so that we’ve captured the conversation. The essence of your expertise. Out of all the things that you do with businesses and the things that we’ve discussed today, what’s the key element? What’s the one key message that you’d love listeners to get out of our conversation today?

For me, the key element is don’t leave the exit planning too late. You’ve got to start looking around for the right people potentially in construction to be how to make your exit with the people that you can trust with the business.

So start thinking about it early years ahead.

Yeah, find out about it.

Excellent. 

Start thinking about it.

That’s always good advice. Peter, thanks for joining me today. Appreciate you sharing your thoughts. Thanks on the Exit Insights podcast.

Thank you.