- Buying an existing construction company has many advantages.
- Before purchasing one, however, it’s important to consider the potential liabilities.
- It’s a good idea to protect yourself from liability when buying a construction business.
If you want to own a construction company, an existing business may look like the ideal choice. Taking over a readymade business with customers, employees, contracts, and a reputation can mean a quicker road to profits.
It can be a boon to take over a construction company without having to do the “dirty work” of getting things off the ground. Don’t forget you’re also inheriting someone else’s “headaches.” It’s important to weigh the pros and cons of buying an existing construction business.
Pros of Buying an Existing Business
“Buying a construction business with a proven track record can enhance your chances for success,” says attorney William Eigner, a partner at the West Coast-based business and litigation law firm Procopio, Cory, Hargreaves & Savitch LLP practicing Construction and Infrastructure Law.
Here are the top benefits of buying an existing business.
- Quick profits. “Starting out with the assets of a company, including employees and a project pipeline, equipment leases, vehicles, and insurance policies, means you can realize revenue much sooner than someone beginning a business from scratch,” says Eigner.
- Ready cash-flow. Setting up a startup generally involves a period of one to three years when the owner is paid very little, if anything. With an existing business, you can generally draw a reasonable salary from the get-go.
- Built-in brand. Any marketing and brand building the prior owner has done is yours to capitalize on. Having an established name in your market goes a long way toward ensuring your business stays competitive and successful. An established reputation—if it’s a good one—makes it easier to get new contracts.
- Cultivated business relationships. Existing construction businesses feature customer and vendor lists that took the prior owner years to build. This feature alone might make buying an existing business preferable to starting from scratch.
- Seasoned employees. The workforce that often comes with a business sale means you’re ready to serve customers immediately. It may be that some of the employees hold specialty licenses that you don’t have; an additional bonus, notes Eigner.
Cons of Buying an Existing Business
Of course, buying a business also has its drawbacks. Consider the following cons.
- You still require a general contractor’s license. When a sole owner sells a contracting business to you, the license is not transferrable and can’t be included in the sale. You must have or obtain your own license before legally offering services.
- Vast experience required. For continued success of the business, it’s imperative that you have the required know-how. This isn’t the time to learn the ropes. If you’re still green, it’s best to first gain experience by working for other construction companies in various capacities.
- It can be costly. In order to purchase a successful business, you must provide a substantial amount of cash or get funding. Starting your own business generally involves fewer out-of-pocket expenses.
- Potential dissension in the ranks. People tend to bristle at change, even if it’s for the better. You need to be prepared for this. At first, existing employees may not react well to having someone new at the helm, especially if you change procedures and expectations too quickly. This could cause existing employees to jump ship. On the other hand, existing policies may not jibe with your new ideas.
- You’re exposed to liability. The former owner was bound to have collected liabilities while running the business. According to Eigner, these may include “latent construction defects and environmental problems for which you’re now responsible, contract claims, employee issues (even claims for past sexual harassment), retirement plan issues, and tax problems.”
If you decide to buy an existing construction business, Eigner suggests purchasing the company’s assets rather than the equity or stock in the business, which may relieve you of some liabilities.
“It’s also a good idea to have a large part of the purchase price characterized as an earn-out to ensure that the seller has not misrepresented,” says Eigner. “Naturally, sellers want to minimize escrows and earn-outs, while buyers want to protect themselves from undisclosed liabilities. In that case, also consider representations and warranties insurance.”