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Planning ahead

I have lost count of the number of times I have said this, but I recently found a new reason to say, “Your closest competitor is not the next contractor down the road from your operation.”

The first time I used this line of reasoning was sometime around 1978, at the Drainage Contractor Workshop in Indianapolis, to illustrate that the biggest competitive threat to contractors was the sales-savvy machinery dealer who would persuade the farmer to buy new iron rather than spend his money more wisely by investing in tile drainage.

Now I say it for another reason. Maybe that contractor down the road is, in fact, your ticket to a healthy retirement. How is this?

Let’s start with some perspective. There are fewer contractors around now than there were 10, 20 or 30 years ago. They are, in many regions, installing as much or more pipe with fewer machines than they did previously. They have more productive equipment, better technology and crews who have been coached and fine-tuned towards productivity as a daily goal. What’s more, they are likely providing their customers with better quality installations.

Now, let’s now look at your customers. They are farming more acres than before, they have more sophisticated equipment than before and they know better than ever how to make money producing their crops. They have the wondrous GPS-based yield monitor that tells them what we’ve been saying all along: tile drainage pays. And, if they are worth their salt, they will soon be thinking, “Joe the contractor must be thinking about retirement soon. When he quits, who’s going to install tile on my farm?” If his contractor has not started his retirement plan, to pass along the business to his son or daughter, other family member, key man, or whoever, he will begin thinking, “I’ll have to look for another or buy my own piece of expensive iron.” Let’s not kid ourselves here: I’ve heard some farmers have already started doing this!

For these reasons and more, contractors need to think about their own short- and long-term futures and the impact their decisions will have on the industry at large. If future demand for tile drainage work cannot be met by contractor capacity, other less-qualified operators will fill the void. Contractors need to have a plan and need to work their plan.

I spoke recently on this topic to the Land Improvement Contractors of Ontario. Many of them have already passed the stage of handing on their businesses, but some have not. I suspect the situation is no different in the United States and other parts of the world. My message was: determine now that this has to be done. Then, get expert financial advice to make the transfer as seamless as possible and to reduce your tax exposure the best way you can. Meanwhile, make the financial burden on those who are taking over as low as possible. At the Ontario meeting, a local financial advisor, Ken Farrow, of Farrow Financial Service, based at Belmont, Ont., offered some tips in this regard. We presented several scenarios to represent typical contracting operations at the LICO conference. Farrow offered some advice to fit each of these scenarios, and advised seeking expert assistance from financial advisors and tax planning consultants.

Case study no. 1
Father and two sons (or sons-in-law): two drainage machines and crews, 3.5 million annual footage.
Have already begun shared ownership transfer
Have been expanding the business base (more than tile drainage)
Want to expand further, exploring options

Case study no. 2
Father, no second-generation that wants to take over: one drainage machine and crew,1.5 million annual footage.
Option: key man wants to take over
Consideration: buy new equipment, share costs with key man wanting in
Option: sell out to neighboring contractor who is looking for growth
Consideration: operate until the machinery wears out, then close down
Consideration: buy new equipment, share these costs with nearby contractor as part of business transfer
Can you “get along” with the other guy during the phase-out?

Case study no. 3
Two brothers own the business, one wants to retire (or exit). One son wants to get in: one drainage machine and crew, 2.5 million annual footage. Father wants to treat both his sons equally, perhaps also a daughter who does not want to enter the business.

Each contractor has a territory within which his business is generated. Going back to that Indianapolis workshop, we presented how to do this. On a regional map, draw a circle around your home base to encompass your customers. This is your trading area. Now draw a circle around the trading area of your nearest neighboring contractor and the next one, and so on. Some of these will overlap, (perhaps more than you’d like!). If you close down your business, which one of these will take over your territory? Perhaps your best retirement bet would be to approach one of them, who might have children already coming into the business, so that you can phase out while letting them phase into your area. They might buy out your equipment and pay you an honorarium as you ease out. They might need some of your financial stability to help finance this, but you may stand to gain from this too. The trick here is to think outside the box when looking for a solution. If you harbor ill feelings toward the one fellow who is the most likely to make a success of this because he’s been a tough competitor for so long, maybe it’s time to start the healing process.

Most successful strategies are those that have been well planned and executed over a reasonable time frame. Succession plans are no different. At the end of the day, ask yourself what it is you want to leave behind. Do you want to retire with financial security? Do you want your customers to think you have done your best to ensure they continue to get the type of service you built your livelihood on? If the answers to these questions are yes, then begin planning now, if you have not already. Envision the situation that fits your operation. Then, begin a plan with your own financial advisor. Once you have your plan started, you can explain to your customers that you have secured the future of your service to them and now you can reap the rewards throughout your retirement.