Attention Contractors: What is Your Business Really Worth?
- Author: JobProgress LLC
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JobProgress co-founder, David Buzzelli, sat down with industry expert, Patrick Carr, to discuss the importance of scaling your business. You can watch this conversation in the video above. And to get more insight on this, we 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.