Every business owner will exit their company someday. Most owners don’t like to think about ending, closing or selling their business until they see their work life coming to a close. And by then, it’s generally too late to make the necessary changes to create a valuable company that is strong enough to attract buyers willing to purchase it. A viable construction company that makes a profit, has been in business for many years and is run by a strong owner does not always make a valuable business. A company only has value when buyers or investors are willing to pay money to purchase the company. Buyers are interested in a business that runs itself and spits out a large, positive net profit without the owner’s everyday involvement.
To increase value, your business has to be managed well and operate without the owner’s hands-on involvement. This will attract buyers for several reasons. Some want to grow or expand into a new area without having to start from scratch. Some want to diversify into another market, project type or service. And others are asked by existing customers to handle work in new cities or areas.
The Buyer Multiple
Even if you’re not ready to sell your company, you ultimately want to make it more valuable. The fair market value of your company is what it is worth based on what someone will pay for it in the open market. If it doesn’t have much added value, you will not be able to sell it for more than the cash that would be left over if you closed and sold all of your assets. Companies that are more valuable than just their net cash value or equity sell for a “buyer multiple” of 1 to 10 times the company average annual net profit.
Construction companies sell for an average buyer multiple of 2 to 4 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. 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, since more established companies appear to have less risk. To make your company more valuable and increase the buyer multiple, consider the following value-enhancement factors at the end of the article.
6 Bad Habits Affecting Value
1. Depending on the owner
The owner must stop running the company, managing the company alone, making all the decisions, controlling the direction and continually reminding 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 delegating and hiring professionals to run the company. The owner must stop getting involved with project management, scheduling, estimating, pricing, sales or purchasing.
2. Making low profit margins
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 and up-to-date job costs or running the company without a strategy to make higher margins. Go after better people, customers and projects to generate higher profits.
3. Stunting your growth
Growing your company takes guts, strength, innovation, change and improvement. It takes hiring better players, upgrading to new strategies, creating better strategies and more. When you don’t grow, you are choosing to continue to do business the same way. You are admitting you don’t want to deal with the pressure of new people, priorities, systems or structure. You have settled for mediocrity and are satisfied with what you have been able to accomplish. If your company isn’t growing, the value is only going to decrease.
4. Winging it
A key to building a valuable company is to have the proven operational systems, standards and structures 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 and preached. It’s hard to sell a company without people following fully implemented systems, standards of what is expected and a structure where everyone knows and tracks results on an ongoing basis.
5. 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 for a low price. And when you wait for customers to call to ask you to bid or propose on projects, you are at their mercy to determine your potential future revenue. Valuable companies offer a unique service or specialty to differentiate from the competition. They also have a written sales and marketing plan which generates ongoing revenue opportunities, loyal customers and competitive advantages. Plus, they have customer targets and action plans to attack those customer targets that improve their profitability and steady income flow.
6. Spending money
If most of your net profit is plowed back into the company every year in order to buy new equipment, there won’t be much left over 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 cannot 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 that will enhance your cash flow.
Take the Test
Profitable companies have traits and factors that make them more valuable and better businesses to own. Often, owners start their companies without thinking about the best way to enhance the value over time. Years later, they are stuck with what they have become and unwilling to do what they need to do to set themselves up for a maximum value exit. By working to increase your company value now, you will set up ownership for a strong finish.
Factors that make your company more sellable
- Not dependent on the owner to run the business
- Run by a strong, accountable management team
- Makes an above-market profit margin
- Offers increasing profit and growth potential
- Operates by business systems, structure and financial controls
- Has advantages over competitors
- Keeps regular, loyal, satisfied customers
- Produces regular, recurring revenue
- Maintains a diverse project and customer base
- Doesn’t require large, ongoing investment in equipment