Judgment Day

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"I call that moving money from the left pocket to the right pocket," says Bill.

Yes, Feldman says, but it's not good to have so much cash -- $1 million -- on the books. That's an asset he's not putting to work. He should only keep as much as he needs to run the business; the rest should be paid out. He can always lend money back to the company in a crunch.

Feldman points out that converting to an S corporation from a C corporation would save him big money on taxes. Owners of C corporations are taxed twice: once on the corporate earnings, and again whenever the earnings are distributed to the owners. S corporation owners are taxed only when the earnings are distributed.

It's not like Bill has never thought of this. The trouble is that if he makes the switch, he has to inform his bonding company -- bonding is much like insurance -- and if he does that at the wrong time, it's like poking into a hornet's nest. It seems that whenever Bill has considered converting to an S, it's been at times when the bonding companies have been struggling. Recently, Bill says, two major bonding companies have stopped writing construction bonds, so the people at Hartford, his bonding company, are getting nervous. His advisers have told him, "You don't want to go to Hartford and say, 'Bill's recuperating from angioplasty, he's thinking of retiring, the economy's tough, he doesn't have any big work on hand, and we're going to make a Subchapter S change. Oh, by the way, we still want an unrestricted bonding line of $30 or $40 million.'"

"But if you said we've just had a change in tax status..." says Feldman.

"Then they're going to look at everything else," responds Bill. "They'll say, 'What's his backlog? Why's he doing this? What's the economy like? What's our risk?'"

They drop the subject and move on to what becomes the toughest part of the conversation. In addition to finding a way to bring revenue back to the 2001 level, Bill has to find ways to cut costs. That means reducing some of the generous benefits he's been giving his employees, including 100% health coverage and a pension plan funded entirely by the company at 8% of salary. Feldman and Winsby have calculated that bringing benefits in line with industry benchmarks would create $450,000 in savings. "That's the reason I'm thinking about bringing somebody new in," says Bill. "Shuffle the deck. I'm a pussycat. I've had people here 20 years. I've gone to their weddings. I've gone to their divorces. I've gone to their christenings. How do you say to them, 'I'm going to cut your insurance'? They're family."

Even so, in 2002, when things started looking bleak, Bill laid off 30% to 40% of his rank and file. "Construction is construction," he says. "People turn over. They're transient people." But he decided not to lay off any managers or others who were part of a nucleus he considered key. He's well aware, however, that that decision came with a price. And he's already taken some small steps, such as announcing last year that there would be no wage increases. Gas allowances have been cut back as well. And where he offered a choice between an HMO and PPO health plan in the past (everyone took the PPO), he is now requiring employees who pick the PPO to pay the difference in cost. He's also exploring a 401(k)-style pension plan in which the company matches employee contributions.

Finally, they return to those last two pages: the Status Quo Scenario, where the business sells for just $1.5 million, and the Value Enhancement Scenario. This number is far more encouraging. If Bill does everything Axiom proposes, Feldman and Winsby believe his contracting business can fetch a price of $7.5 million.

At this point, Bill drops a bombshell. For the first time, he tells Feldman and Winsby that he actually had an offer from a utility back in 2001. Utilities had recently been deregulated, and this firm was setting up an infrastructure subsidiary. The executives found Bill's expertise in dealing with the military and government contracting very attractive. They offered him $8 million. The deal was almost done; they were just haggling over Bill's life insurance policy and the excess cash and cleaning up a few details. "And then September 11 happened," says Bill. "And that's all she wrote."

Feldman points out that this was an example of a large company being willing to pay a premium -- the acquisition value Winsby had mentioned at the beginning of the meeting. Winsby adds that a huge utility's financing costs would be much lower. "They didn't need to finance," says Bill.

As the meeting ends, it's clear that Bill wants to take whatever steps he needs to get that higher valuation. Axiom is available for further consulting, helping Bill package his firm to potential buyers. Feldman and Winsby agree that they will make some adjustments considering that the financials have been audited and that different agencies of the U.S. government can be counted as more than one customer. A week later, Winsby reports that those adjustments resulted in bumping up the Status Quo Scenario figure to $1.8 million, and the Value Enhancement Scenario figure to $8.4 million.

And in that week, Bill has made a few decisions. He says he's going to try to find someone who can bring the revenue back to the $20 million range. It won't be easy. Most of the people with the right experience to tackle the big projects are in Bill's position -- founders ready to retire. "Our firm is too large to be small and too small to be large. It's going to be hard to find the right person -- but not impossible," he says. Bill's using a headhunter to find an employee at a larger company who's interested in moving on and getting an equity stake. He says he'll be interviewing the first candidate the next day. i

Sales Tips: Get those family members off the books!

Clean up your accounting books; make them as transparent as possible.
Clean up the physical appearance of your facilities, just as you would if you were selling your house.
You may have been, with your accountant's approval, running personal expenses through the business and writing them off. Stop.
Prepare a list of your customers. Include how long each has been a customer, how much each is likely to spend, the names of the key contacts at each place, and the nature of your relationship with them. Is the relationship easily transferred to a new owner or not?
Prepare a list of key suppliers. Who is easy to replace, who's more difficult?
Be able to show how much it costs to deliver a product or service to a client.
Have an employee manual that states rules of behavior and what is expected of employees.
Have a document that explains how all the machines in your business operate and who to contact for repairs if they break.
Get those family members who are nonessential off the books. Or at the very least, identify them.
Have your business valued every year. Be prepared for an unsolicited bid.
Be prepared to stay on in management for one to 10 years after the sale. The most crucial resource in your business is you.
Do all of this at least three years before you want to sell.