Words: George Hedley
Every construction business owner will exit their company at some point in their life. They’ll either sell, transfer to their children or employees, close it, or die and leave it to their heirs. Most owners don’t like to think about ending, closing, or selling their company until they begin to see the end of their working life approaching. And by then, it’s generally too late to make the necessary changes to create a highly valuable company which is strong enough to attract buyers who are willing to purchase it.
Most construction companies are not sellable!
A viable construction company that makes a profit, has been in business for many years, and is run by a strong owner does not make a valuable business. A company only has value when buyers or investors are willing to pay money to purchase the company. Buyers don’t want to buy a company in which they’ll have to continually run the company, manage operations, supervise people, estimate projects, order materials, sell work, and spend sixty hours a week in the office. Buyers want to buy a business that runs itself and spits out a large positive net profit without their everyday involvement.
Your company is worthless if the company is the owner!
Working harder or making more money is not the only answer to maximize the value of your company. In order to increase the value, your business has to thrive, be managed, and operate without the owner’s hands-on involvement. Only this characteristic will first attract buyers or investors who’ll be interested in your company. After they’re interested, then they’ll look under the hood to see if your company is scalable, organized, systemized, led by strong managers, has great customers, and has a significant potential to grow and create a positive cash-flow and additional profit into the future.
Buyers of companies buy for several reasons. They want to grow or expand into a new area without having to start from scratch. Some want to diversify into another growing market, project type or service. And others are asked by existing customers to handle work in new cities or areas.
Value is based on a ‘buyer multiple’
So even if you’re not ready to sell your company, you want to make it more valuable, right? The fair market value of your company is what it’s worth based on what someone will pay for it in the open market. If it doesn’t have much added value, you wouldn’t be able to sell it for more than the cash left if you closed and sold all of your assets. Companies which are more valuable than just their net cash value or equity, sell for a ‘buyer multiple’ of one to ten times the company average annual net profit.
Factors that reduce the buyer multiple for construction companies include roller coaster profit swings, or margin shrinkage from year to year and from bid to project completion; revenue ups and downs year after year; companies without steady annual growth; no standard systems or use of the latest software or technology; contractors who rely on unsteady sources of contracts or one time customers; lots of continual problems like lawsuits, employee turn-over, or cash-flow issues; and companies too dependent on the owner to keep things moving.
Construction companies sell for an average buyer multiple of two to four times the annual pre-tax net profit depending on many factors. An important factor in determining a buyer multiple is size. The bigger the company, the higher the buyer multiple. Construction companies with $1 to $3 million in annual revenue generate a below average buyer multiple. Companies with $3 to $10 million generate an average buyer multiple, and companies with over $20 million in revenue generate as much as double the average buyer multiple as more established companies with proven track records appear to have less risk. In order to make your company more valuable and increase the buyer multiple, consider these value enhancement factors.
Factors to make your company more valuable or sellable:
- Not dependent on the owner as essential
- Run by a strong accountable management team
- Makes an above market profit margin
- Offers increasing profit and growth potential
- Has business systems, structure and financial controls
- Has competitive advantages over competitors
- Has regular loyal satisfied customers
- Has regular ongoing recurring revenue
- Diverse project and customer base
- Doesn’t require large ongoing investment in equipment
6 Steps To Make Your BIZ More Valuable!
Step 1: Stop depending on the owner!
The owner must stop running the company, managing alone, making all the decisions, controlling the direction, and continually having to remind people what to do. The owner must make it a priority to develop an accountable management team to operate the business. To make this happen, the owner must commit to delegate, let go, and hire professionals to run the company. The owner must stop micro-managing and getting involved with or doing project management, scheduling, estimating, pricing, sales, or purchasing. And then let the team get things done and take responsibility for the future.
Step 2: Stop making low profit margins!
In order to make your company more valuable, you have to make bigger net profit margins. Industry average low margins are easy to make without written business plans, financial targets, tracking systems, accurate up to date job costs, or running your company without a strategy to make higher margins. What are you doing to go after better people, customers, and projects that will generate higher profits?
Step 3: Stop stunting your growth!
Growing your company takes guts, strength, positive innovation, change, and improvement. It takes hiring better players, continual upgrading, new plays, better strategies, and trying new things. When you don’t grow, you’re deciding to take the easy route and continue to do business the same way. You’re admitting you don’t want to deal with the pressure of new people, priorities, systems, or structure. You’ve settled for mediocrity and are satisfied with where you are and what you’ve been able to accomplish with what you’ve got. If your company isn’t growing, the value is going down.
Step 4: Stop winging it!
A key to building a valuable company is to have proven operational systems, standards, and structure to manage people and projects. Your company isn’t valuable if all of your processes are buried in your head and not written out, followed, practiced, preached, and perfected. It’s hard to sell a company without people following implemented and trained systems, standards of what’s expected, and a structure where everyone knows and tracks the results on an ongoing basis.
Step 5: Stop selling the same!
When you win work based on providing the minimum required per the plans and specifications, you don’t have a competitive advantage over your competition except low price. And when you wait for customers to call to ask you to bid or propose on projects, you’re at the mercy of them to determine and control your potential future revenue. More valuable companies offer a unique service, specialty, or service to differentiate them from the competition. They also have a written sales and marketing plan which generates ongoing revenue opportunities, loyal customers, or competitive advantages. Plus they have customer targets and action plans to continually attack customer targets that improve their profitability and steady income flow.
Step 6: Stop spending money!
If most of your net profit is plowed back into the company every year to buy new equipment, there won’t be much leftover for the owners. If you continually work for companies or entities that don’t pay fast enough to allow you to have enough cash available for payroll or to pay your bills, your company can’t operate comfortably. When cash-flow is tight, your company won’t be a valuable entity for the owner. Decide how you want to do business based on decisions which will enhance your cash-flow and not suck all the cash out of your operations.
Take the test!
Valuable companies have traits and factors that make them more valuable and better businesses to own. Oftentimes owners start their companies without thinking about the best way to enhance the value over the long run. Years later they are stuck with what they have become and are then unwilling to do what they need to do to set themselves up for a maximum value exit. To help you determine what your company needs to do to become more valuable or sellable, email GH@HardhatPresentations.com to take the ‘BIZ-BUILDER Value Improvement Test.’ By starting now to do what you need to do to increase your company value, you will set ownership up for a strong finish.
ABOUT THE AUTHOR
George Hedley CSP CPBC is a certified professional construction BIZCOACH and popular industry speaker. He helps contractors grow, make more profit, build management teams, improve field production, and get their businesses to work for them. He is the best-selling author of “Get Your Construction Business To Always Make A Profit!” available on Amazon.com. E-mail GH@HardhatPresentations.com to sign-up for his free e-newsletter, start a personalized BIZCOACH program, attend a 2 ½ day BIZ-BUILDER Boot Camp, or get a discount at www.HardhatBIZSCHOOL.com online university for contractors.
George Hedley CSP CPBC
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