April 22, 2022

Attention Contractors: What is Your Business Really Worth?

  • Author: JobProgress LLC
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Starting and building your own business is not for the weak of heart. Being your own boss sounds like the dream, but what many don’t realize is that it comes with a tremendous amount of hard work, difficult decisions, and sleepless nights. The chances of success are slim, and the temptation to hold on to every facet of the business is strong.

But the rewards of success are all worth it, right? One day you will be able to sell your business and sail off into the sunset to enjoy the proceeds of all your hard work. Or will you?

All too often, contracting companies are not sold, they expire. The reasons for this typically lay in the fact that much of a business' success lies in the head and hands of the owner and cannot be easily transferred to someone else. If you are the person who makes all the decisions and provides all the insight, removing you from the equation leaves a business that doesn’t have much value if you are gone.

To get more insight on this, I talked to Patrick Dichter with AppleTree Business Services, an accounting firm that specializes in service-based companies. I’ve paraphrased our conversation below.

If an owner of a home remodeling company would like to eventually sell their business, what do they need to do now to ensure that selling is an option?

First, have clean bookkeeping. Second, increase your profitability. Third, have good systems in place to run the business efficiently. The biggest thing that attracts buyers is positive cash flow and the ease of transferring the company’s processes. If the owner must be involved at all steps of a job, it will not sell for much or maybe not even at all. There need to be defined processes for quoting work, managing projects, communicating with customers and others on the team, and running the company that can be turned over to the new owner seamlessly.

What are some ways to increase the value of a contracting business?

Typically, these types of businesses sell for 2-4 times the seller’s discretionary earnings. For example, let’s say an owner is running a $1 million business and pays himself $150,000 a year on average. Add to that other things that flow through the company like a truck payment, benefits, etc. and his personal income shakes out at $200,000. Multiply that amount by a multiple of 2-4 and you can likely sell for somewhere between $400,000 and $800,000.  This assumes that the business is transferrable as mentioned earlier. If you want to sell for more than that, you can consider:

  • Increasing your cash flow by raising prices or decreasing your cost of goods.
  • If you are writing off every expense under the moon to reduce your tax liability, you may want to adjust that strategy for a while to show more value in the company.
  • Increasing your brand awareness in the market so the new owner knows they are taking over a recognized company.
  • Getting as many 5-star reviews on Google and other sites to make you stand out from your competitors.
  • Hiring a general manager or other key employee to make the buyer feel more comfortable that the company can sustain itself without you at the helm.

What are the top things that devalue a business or even make it un-sellable?

If a business has poor bookkeeping or inconsistent financial management, it makes it hard for a buyer to get underwriting on a bank loan to make the purchase. Banks want to see clean books and know that it is profitable and will continue to be so before they will lend money for a business purchase. Additionally, a potential buyer will want to know:

  • What is in your pipeline and where is your revenue is coming from? If you aren’t using a CRM (like JobProgress!) to track this information, it will make your business much harder to sell.
  • That you have key employees who will want to stick around. Only using subcontractors to deliver your work makes a company less attractive to a buyer.
  • That your revenue comes from a variety of sources. If more than 25% of your revenue comes from one customer, the buyer is taking a much larger risk in buying your company.
  • That you have year-round work. If 80% of your revenue comes during three months of the year, that will scare off potential buyers.

How far in advance of when you want to sell should the business owner start thinking about it and what should they be doing?

In most cases, the owner will need one to two years to get it ready to purchase. Even once you put it on the market or find a buyer, it will take at least six months to go through due diligence, legal, financial underwriting, and the transfer of ownership. Leading up to that point, you should make sure you have clean accounting, a documented process for your operations, and are current on all taxes. The process of due diligence and talking to potential buyers can be tiresome, but the cleaner your financials are, the less painful it will be. Think about it like buying a house. If it is a newer home, the inspection will be fairly straightforward. If it is an older house, the inspection can be messier. Basically, keep your house in order to make the process as easy as possible.

If you eventually want to sell your business, incorporating JobProgress into your workflow simply makes sense. By managing your workflow and pipeline this way, everyone contributes to the company’s operations, spreading the work across the company and taking it out of the owner’s head. This allows the business to function successfully regardless of who owns it and can even increase its value and help it sell faster too. Talk about a win-win scenario!