Preparing an Interior Finishing Contractor for Sale

Backlog and the people who give you work

The first request from a buyer is usually the backlog, which is the list of signed jobs not yet finished, with contract value, billed to date, remaining work and expected margin. Alongside it goes a pipeline of bids out and the history of bids won. A contractor who wins a steady share of what it bids on, at margins it can explain, looks healthy. One who wins too much work probably underprices it, and a buyer will read the job cost reports to find out.

Buyers also want to know who sends the work. Many finishing contractors depend on a few general contractors or homebuilders for most of their revenue. That is normal, and it is also a concentration risk that the buyer will price. Years of repeat work, with a superintendent who asks for the same crew on every project, is worth a lot. Work that came from the owner's friendship with one project manager is worth less. Our post on customer concentration explains how buyers weigh it.

Commercial and residential work behave differently. Residential work from production builders can be fast and thin, tied to housing starts and interest rates. Commercial tenant improvement work is steadier in some markets and slower to pay. Repair and remodel work for property managers and homeowners carries better margins and more small jobs. A buyer will ask for the revenue split and what the owner expects each segment to do next year.

Job costing and work in progress

A contractor's books should be able to answer how much each job made. Buyers ask for job cost reports comparing the estimate to the labor, material and subcontractor costs that came in, plus a work in progress schedule showing contracts billed ahead of or behind the work performed. Those schedules reveal whether the company has been borrowing from future jobs to cover today's costs, which is a common problem when cash is tight. Contractors who bill ahead of the work look more profitable than they are, and a buyer's accountant will adjust.

Retainage is another detail. Many contracts hold back a portion of each payment until the project is complete, and a contractor with a large amount of retainage owed to it has money tied up that the buyer must either buy or finance. Change orders also get attention. Buyers want to see how many were approved, how many were disputed and how quickly the company collects on extras.

Accounting method matters too. Smaller contractors sometimes keep books on a cash basis that makes a quarter look different from the work done in it. A buyer needs the numbers on a basis that matches the work, which usually means an accountant restating the history. Start that early, because it takes time and it affects the price. Our post on quality of earnings reports describes the review a larger buyer may order.

Crews, subcontractors and equipment

The crews are the product. A buyer will ask how many installers, tapers, painters, tile setters or finishers are on the payroll, which are employees and which are paid as independent subcontractors, how long they have stayed, and who leads each crew. Classification is a sensitive point in construction, with rules that vary by state, and your attorney confirms what applies. Buyers look for consistent paperwork, certificates of insurance from each subcontractor and workers compensation coverage that matches the crew on site.

Safety records also come up. Insurance carriers rate contractors on claims history, and a buyer will ask for loss runs for several years, the company's experience modification rating and the written safety program. A strong record lowers insurance cost and helps with bonding. A poor one is a cost that continues after closing.

The equipment list tends to be short and varied: trucks and vans, scaffolding, stilts, spray rigs, sanders, floor grinders, tile saws, dust collection and trailers. Buyers want age and condition, any liens on financed vehicles and a plan for replacing what is worn. Material suppliers extend credit, and the buyer will check whether those accounts are in good standing and whether the supplier will keep terms after a sale.

The contractor license and bonding

Most states license contractors, and in many of them the license is held through a qualifying individual, often the owner, who has passed an exam and met experience requirements. That makes the license one of the harder items to move. The buyer or someone on the buyer's team may need to hold a license of their own, or the owner may need to stay as the qualifier for a period. Rules vary by state and your attorney confirms what applies. We bring this up in the first conversation with an owner, because it shapes who can buy the company and how long the owner stays on.

Bonding comes next. Commercial work often requires bid, performance and payment bonds, which are underwritten on the financial strength of the company and its owners. A new owner has to qualify on their own, and a surety may need time to review. A buyer who cannot get bonded cannot bid on the jobs that make up a big share of the backlog, so we ask early whether the buyer can. Our post on how long the owner stays after selling covers what a transition period looks like.

What tends to sink a sale

Finishing contractors lose deals for familiar reasons. The owner is the estimator, the salesperson and the person every general contractor calls. The profit on the books is higher than the profit on the jobs. Backlog shrinks while the company is on the market. The license cannot move. The buyer cannot be bonded. A key foreman leaves with part of the crew when the sale becomes known.

Employees in this trade talk across job sites, and competitors hear quickly. We market a contractor without naming it, and buyers sign a nondisclosure agreement before they see any detail that identifies the company. The timing of what the crews hear needs a plan, covered in our post on when to tell employees.

How to get ready

Put the books on a basis that matches the work, and make sure job cost reports exist for every major job. Build a backlog report that updates monthly. Move estimating knowledge out of your head and into a documented process, and bring at least one person along who can price a job and talk to a general contractor. Sort out worker classification. Collect insurance, safety and bonding records. Talk to your surety about what the company's financial statements will need to look like.

Business Advisors of America prepares a valuation from your records, builds the package a buyer and lender will expect, and screens buyers for experience, licensing and bonding ability. If you are looking at selling an interior finishing company, a short call with us is the place to start.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.