Your company, your legacy

Choose a succession plan that aligns with your life goals

Editor’s note: The information provided is not meant to be legal, accounting, insurance or tax advice.

Roofing contractors spend decades building successful businesses, establishing their reputations in the marketplace, supporting employees and their families, and contributing to the community. But at some point, every roofing contractor will exit his or her company.

Many business owners have as much as 70% of their wealth tied up in this illiquid asset. When they retire, they are challenged with converting the illiquid business, cashing it out and achieving a secure retirement while avoiding getting clobbered by taxes.

The question is: Can you do it on your terms?

The roofing industry currently is active with external buyer interest. Private equity firms and major industry consolidators are seeking to acquire strong regional companies. Private equity focus remains on small- and medium-sized contractors as well as larger platform companies. But many contractors prefer to pass the business to their management team, key employees or family members.

Whichever path is chosen, if you’re a business owner planning to exit your company when you retire, you only get one opportunity to execute it correctly. The wrong or lack of decision can mean leaving millions of dollars on the table or failing to protect the people you care about most: your family and trusted employees.

What are your goals?

Before engaging potential buyers or assessing valuations, owners must clearly define their business, personal and financial goals. This process aligns the exit strategy with long-term life priorities, not just short-term financial targets.

Ask yourself:

Do I want to retire completely or stay involved part-time?
Is keeping the company in the family important to me?
Do I want my managers or all my employees to have a stake in the company?
Am I looking for top dollar and the right fit?
How much income will I need after the sale to maintain my lifestyle?

Bottom line: Your exit strategy should align with your overall life plan—not just your business plan. Once you’re clear on what you want, it becomes much easier to pick the right path.

Know your options

Once you have clarified your business, personal and financial goals, the next step is understanding your exit options and how each alternative will affect your overall plan.

Most roofing contractors fall into one of two exit strategy categories:

Internal exit: management buyout, employee stock ownership plan or gifting to family
External exit: selling to a private equity firm or strategic buyer

Each path involves tax ramifications and compromises in ownership and valuation. Let’s walk through them.

Internal exit

Internal exits are the most common exit strategies in the roofing industry, particularly for owners aiming to safeguard their legacies, support their families and recognize the management teams that contributed to building their companies.

A common internal exit is management buyout, where key individuals gradually acquire the business over five to 10 years. Because the manager(s) typically cannot afford to buy the company, this strategy must be funded through the company’s profits. The owner remains involved during the transition, mentoring the next generation and acting as CEO while gradually stepping back from daily responsibilities.

Pros:

Seasoned managers understand the business and can manage the risk
Protects the culture, employees and brand
More flexibility and control of the process
More flexible tax mitigation strategies can be used

Cons:

A slower structured payment that takes five to 10 years, depending on profitability
Requires succession planning and developing internal leadership
Increases the financial risk or the risk of not getting paid

If you are considering leaving your business to a family member, remember gifting the business involves tax and fairness considerations. A formal sale usually is more financially beneficial for you and your family.

External exit

After the COVID-19 pandemic, private equity groups discovered the roofing industry was essential, profitable and fragmented. They have been actively acquiring roofing contracting companies, and this exit strategy can result in a faster and more lucrative payday.

External buyers typically look for:

Companies generating more than $8 million in annual revenue with higher profit margins and strong, repeatable earnings before interest, taxes, depreciation and amortization
Accurate and defendable financials
Strong second-tier management that will continue to oversee the business and help maintain continuity
Proven, measurable operating systems and scalability

Pros:

Higher valuations, especially from private equity-backed buyers
Cash at close with potential earnouts
Shorter exit timeline (typically 12 to 24 months)

Cons:

Owners’ and employees’ loss of control
Potentially challenging cultural fit and integration
Changes for employees after the sale

Whether internal or external, you must select the path that aligns with your values, goals and retirement timeline. Without a selling strategy, your future could be at risk in the event of an illness or other life-altering events.

Prepare the company

Most owners say, “I’ll sell when I’m ready.” But companies don’t sell because the owner is ready—they sell when the business is ready.

Key preparation steps to getting your company sale-ready include:

Clean financials: Buyers—especially external buyers—want transparency. That means having financials compliant with generally accepted accounting principles, clearly separating personal and business expenses, and maintaining consistent profitability year to year. Audited or reviewed financials add value.
Strong management team: The business must be prepared to operate without your presence. This involves developing and documenting roles, responsibilities and processes as well as ensuring the right people are in place.
Clear systems and processes: Are your estimating, production, sales and service processes well-documented and standardized? Would a new owner easily understand how work moves from sales to invoices? Clear, documented systems reduce buyer risk and can lead to a higher valuation.
Recurring revenue or service contracts: Recurring revenue increases your company’s value and predictability. Service departments, maintenance contracts and multiyear customer relationships enhance your quality of earnings and attractiveness to buyers.
No owner dependence: A smaller company faces challenges when the owner personally manages all estimating, sales and client relationships. Start delegating these tasks now.
Legal and compliant housekeeping: Update corporate documents, contracts, licenses, leases, insurance and human resources policies. Resolve any remaining disputes or liabilities. You want a clean legal and compliance record before any due diligence begins.

Understand the valuation process

Buyers value companies based on risk-adjusted returns. The multiple applied to your EBITDA (earnings before interest, taxes, depreciation and amortization) is the risk the buyer perceives in your business and the rate of return an investor would expect to achieve when investing in your business. The greater the risk, the lower the multiple; conversely, the lower the risk, the higher the multiple.

Company characteristics that affect the multiples include the company’s size in terms of revenue and profitability, the sophistication of systems and processes, strong management teams and the quality of earnings. Understanding the types of earnings buyers are looking for should be a key motivator toward increasing your company’s value.

Typically, high-profit service departments and negotiated and reroofing work are more appealing to buyers than bid work and new construction.

Remember, buyers are investing in your company’s future cash flow. What you’ve experienced in the past is just that—the past. Building a company that can repeat success year after year makes it truly valuable.

Common industry benchmarks:

Smaller companies ($1 million–$3 million EBITDA): three- to four-time multiple
Mid-size companies ($3 million–$7 million EBITDA): three- to five-time multiple
Larger platforms ($8 million or more EBITDA): six- to nine-time multiple

For example, if your company produces $4 million in EBITDA and sells for five times that amount, that equates to a $20 million enterprise value before taxes and deal costs.

Remember the multiple is not guaranteed—it’s earned by reducing perceived risk and increasing operational strength.

Also, valuation is only the starting point. How the deal is structured, such as how much you receive upfront versus in earnouts or seller financing, is equally important. Two offers with identical multiples may appear quite different once factors such as taxes, timing and payment risks are considered.

Build value

If you plan to exit during the next three to five years, your top priority should be increasing value, not just revenue.

Following are some key drivers that boost value in a roofing company.

Improve profitability: Buyers pay for profits not just projects. Focus on improving estimating accuracy, job costing, reducing waste and optimizing crews. A 1% increase in net margin can add millions of dollars in value.
Diversify your customer base: If one or two clients account for 40% or more of your revenue, that is a risk. Develop a more diverse customer mix across sectors, locations or service types.
Build a service department: Creating a service and maintenance division generates recurring revenue and boosts your valuation. Buyers value steady, predictable cash flow.
Reduce owner involvement: If the business cannot operate without you, it won’t be worth much. Shift key relationships and responsibilities to your management team. Delegate estimating, production oversight and client contact whenever possible.
Invest in technology and systems: Adopt systems that make managing and scaling the company easier: estimating software, customer relationship management, job costing and service dispatch tools.
Clean up books: Have your accountant normalize the financials, eliminate personal expenses and demonstrate consistent profitability. Consider reviewed or audited statements if you plan on a private equity or strategic sale.
Retain key employees: If any of your key managers leave, it can jeopardize a deal. Keep important people engaged with incentives, stay bonuses or long-term plans so a buyer perceives long-term stability.

You must view your company through a buyer’s perspective. Identify what they will value and what they will see as risk.

Address taxes

There is another party involved in the sale: Uncle Sam.

Selling your roofing business without proper planning can result in losing 30% to 55% of your sale proceeds in unnecessary federal and state taxes. This often can be avoided with advanced tax planning strategies.

Following are the types of taxes you may face when selling your business:

Federal capital gains tax: currently as high as 20%
State income tax: as high as 13.3% depending on your state
Depreciation recapture: reclaims before deductions at rates up to 37%
Income tax: varying graduated rates up to 37%
Net investment income tax: 3.8%

But it’s not just about the sales price. Many contractors do not realize how a deal is structured can increase their tax bill.

Following are strategies contractors can use with proper advisory support:

Installment sale: spreads payments (and tax liability) over several years
Employee stock ownership plan: can allow for a corporate 100% tax-free sale to employees
Section 1202 stock (if qualified): eliminates tax on the sale of certain C corporations
Qualified business income rates: varying rates up to 29.6%

Your strategy must be engineered to meet tax codes and be legally in place before the closing date.

Advisory team

In addition to your internal managerial team, you also will need tax and legal advisers to effectively design and coordinate these strategies. The people buying your business are experienced and know how to negotiate deals in their favor. That’s why having the right advisory team is essential.

Who should be on your advisory team?

A multidisciplined exit planning adviser: Exit planning advisers coordinate legal, tax, valuation and succession elements. This ensures your goals stay at the center of the plan.
Mergers and acquisitions attorney: You need a specialist who can negotiate business sales and understand the deal’s risks, representations and warranties.
Tax strategist/advanced certified public accountant: A tax adviser will seek ways to structure your deal to lower or eliminate taxes.
Financial planner: A financial planner can help you understand what you need after the sale, how much income you will require and how to preserve your wealth in the long term.
Sell-side representative: This is a professional who helps facilitate a competitive sale process, identify multiple buyers and negotiate on your behalf.

Don’t try to do it alone. Build the right team to safeguard your harvest, people and peace of mind.

Prepare for succession

Most business owners view succession as simply replacing talent and choosing who will eventually lead the company. However, succession planning is about developing talent and preparing for how the company will operate without the owner.

There is a distinction between ownership succession (who owns the stock) and leadership succession (who leads, makes decisions and runs the business). You need to plan for both.

A smart succession plan entails:

Preparing your successor: Who will lead the business after you? Whether it’s a manager, your child or a team, someone needs to be groomed for the future CEO position. This takes time and coaching not just assigning a job title.
Documenting roles and responsibilities: Your team should have clear accountability. Decision making should be delegated and structured. The goal is to reduce errors, ensure alignment and reduce owner dependence.
Transferring key relationships: Gradually transfer customer, vendor, bonding and banking relationships to other team members. These relationships should be delegated before you leave.
Planning timeline and transition: You need a roadmap that builds buyer confidence and protects your payout.
Continuity of culture and leadership: Your company’s culture is one of its most valuable assets. It encompasses leadership style, company values and team expectations. Capture it, protect it and pass it on intentionally.

Without a succession plan, your company’s future and your retirement are at risk. Time is your best friend, so begin the process years before you exit.

Start now

Too many roofing contractors wait too long to plan their exit. Often, they wait until their health declines, burnout occurs or a buyer unexpectedly appears with an offer with no competition and a tight deadline.

But that’s not a plan—that’s a reaction. Exiting your roofing company is a process not an event.

Whether you sell to managers, family, a private equity firm or national roofing consolidator, you have one shot to get it right. Make it count.