Electrical Contractor Partner Buyouts and Succession Planning
Not every electrical contractor changes hands through a sale to an outside buyer. Partners may part ways, with one buying out the other. An owner nearing retirement may want to pass the business to a key employee, a family member or a group of managers who already know the company. Each situation raises its own financing and planning questions. This article covers partner buyouts and electrical contractor succession planning as two separate topics, since they often begin from different circumstances.
This is general information for owners of existing, operating electrical contractors. Ownership agreements, tax treatment and licensing requirements vary, and owners should work with qualified attorneys, accountants and financial advisors. Nothing here is legal, tax or financial advice.
Part 1: Partner Buyouts
A partner buyout occurs when one owner, or a group of owners, purchases another owner’s interest. Reasons include retirement, disagreements over direction, health or personal changes, or one partner wanting to step away from day-to-day work.
Start With the Ownership Agreement
Many companies have an operating agreement, shareholder agreement or buy-sell agreement that addresses how an owner’s interest is valued and purchased. These documents may set a valuation method, payment terms and triggering events. Where no agreement exists, or the agreement is outdated, the partners will need to negotiate terms, often with professional help.
Valuing the Departing Partner’s Interest
Partners frequently disagree on value. An independent valuation can provide a neutral starting point. The factors are similar to those in any sale, including documented earnings, revenue mix and customer relationships. Our guide to electrical contractor valuation explains these factors.
Licensing and Roles
If the departing partner is the company’s qualifying license holder, the remaining owners must plan for a replacement before the partner leaves. The departing partner may also handle estimating, key customers or the surety relationship. See our article on electrical contractor license transfer.
Financing a Partner Buyout
Depending on the situation, a buyout may be funded with the remaining owners’ cash, a loan, payments to the departing partner over time or a combination. Lenders will review the company’s cash flow, the remaining owners’ experience and the effect of the new debt on the business. Eligibility for SBA or conventional financing depends on the structure, the ownership change and lender review. See our article on SBA loans for electrical contractors.
Part 2: Succession Planning
Succession planning is a longer-term process of preparing the business, and its next owner, for a change in leadership. Planning ahead gives an owner more options and helps protect the value they have built.
Possible Successors
- Key employees or managers: people who know the business, customers and team
- Family members: who may already work in the company
- A management group: several employees buying together
- An outside buyer: if no internal successor is ready or interested
Preparing the Business
- Developing the next generation of licensed leaders and identifying a future qualifier
- Gradually transferring customer, builder and surety relationships
- Documenting estimating, scheduling and job management processes
- Keeping clean, organized financial records a lender can review
- Retaining the electricians and foremen the business depends on
Our guide to electrician retention discusses keeping the team through a transition.
Funding an Internal Succession
Internal successors often have experience but limited capital. Transactions may combine a lender-financed loan, a successor’s equity contribution and seller financing. Our article on electrical contractor seller financing explains how seller notes may fit. Lenders evaluate whether cash flow can support the debt and whether the successor is prepared to lead.
If an Outside Sale Is the Better Path
When no internal successor is ready, owners may prepare for a sale to an outside buyer. See our guide on how to sell an electrical contracting business.
US Professional Funding helps buyers, partners and successors finance ownership transitions of existing, operating electrical contractors. Learn more about our electrical contracting acquisition financing.
