What opportunities are emerging now for sellers that didn’t exist before
What the 1% of contractors that ‘Cash Out’ are doing that the 99% aren’t
What makes a company valuable vs virtually worthless (and why it can be EASIER to build a valuable company in the long run)
Which benchmarks indicate you should consider selling as a contractor
How big a company needs to be in order to catch the attention of significant buyers
The key mindset difference between a contractor who builds a company of value vs the one who doesn’t
Watch Episode 20 of the Contractor Evolution ShoW
Listen to Episode 20
Read a Summary of Episode 20
Building A Business Of Value
Picture two contractors, both have worked hard for decades and both now want to move on to the next stage of their life. Two contractors, putting in the same effort, over the same period of time.
However, here’s the catch: When it comes time to sell their business, their scenarios couldn’t be more different. While the first contractor quickly sells her company for $13 million, the second contractor often struggles to find a way out. Even though his business has been profitable, he realizes that (from the buyer’s perspective) his firm is barely worth the value of its physical assets. How is that possible?
The question is, who, in this scenario, do you want to be?
If you want to be a lifestyle entrepreneur working in a trade you love and make a good living, then more power to you!
But, if you want to build a business of tremendous value that can thrive without you and allow you to cash out and move on, then Kevin Shaw, our guest on this episode of Contractor Evolution, has some invaluable insights to get you there.
Kevin is president and managing director of Baker Tilly Canada Corporate Finance and a top specialist in the mergers and acquisitions of mid-sized companies. He understands the formula to take a contracting company and make it desirable for a buyer.
Our timing couldn’t be better, either. Kevin describes the small to mid market space as currently “white hot,” but he estimates that the vast majority of contracting companies – as much as 99 percent – are selling for far less than top dollar, for reasons that are well within the owners’ power to rectify.
So, how can you build value?
Here are 7 Points To Consider, thanks to Kevin.
1. Cash flow
Specifically, buyers want to see predictability of future cash flow, and one of many ways to achieve this is to have a sales system that closes deals predictably and doesn’t rely on a single star player to drive business forward.
Kevin explains, “If you’re able to create a process that demonstrates how your business operates, it’s going to decrease risk.” Weekly management meetings, goal setting sessions, and other operational rituals contribute to this process.
As an adjunct to systemization, well-thought-out and clear documentation for elements ranging from employee contracts to training systems assure prospective buyers that a company is a worthwhile investment.
A single great product or service may drive sales, but one-trick ponies tend to get hobbled by unforeseen economic circumstances. Just ask any specialist who was slammed by the pandemic. “Diversification of your revenue stream helps stabilize the predictability of future cash flow,” Kevin says.
Do you buy equipment you’ll probably never use? Extend your accounts receivable for no good reason? Carry lots of extra cash? “Remove that type of redundant behavior as early as possible, so you can really show how the business operates,” Kevin says.
6. Sales and marketing
This is almost a no-brainer: a thoroughly structured sales and marketing process executed by a high-performing sales team supports the sustainability – and therefore the desirability – of virtually any business.
Typically, prospective buyers dig into five years’ worth of data to determine if your growth is relatively healthy, or erratic. So if you’re looking to move on in five years, plan your marketing and sales initiatives to make your trajectory as attractive as possible.
Other great tips from Kevin include:
- Reduce your client and supplier concentrations (if your biggest client represents 80% of your profits, that’s a red flag to buyers).
- Ensure your company has a first-rate legal infrastructure (yes, it costs money, but it adds immeasurable value).
- Ensure that your role in the company can be taken over by someone else. “We love hearing that business owners are redundant,” Kevin says.
Finally, we asked Kevin to describe the mindset of business owners who have methodically built huge value into their organizations. His reply was devastatingly simple: “The common thread is that they are very intentional in their goal setting.”
That’s just a brief overview of our show. Kevin was super-eager to share his acumen for the benefit of our listeners; so if you’re serious about creating a real legacy for the long haul, then dig in and enjoy this episode of Contractor Evolution.