Be prepared for the day when you may want — or need — to make a transaction.
Selling your business is a complicated process that brings about a range of emotions. Your company is something you have poured your sweat and tears into, and letting go, or partnering for growth, no matter the price, is always bittersweet. That being said, it makes good sense to be prepared ahead of time for the day when you may want — or need — to make a transaction.
Staying proactive and preparing your business for sale before that day comes is paramount to the bottom-line price you will receive.
By focusing in on a few important items, you can immensely improve the attractiveness of your business to outside buyers. The idea is to run your business today as if you were going to sell it tomorrow.
Get Your Books in Order
Having your financials in order and in accordance with Generally Accepted Accounting Principles (GAAP) should be done well in advance of selling. It allows for consistency when comparing to prior periods and competitors in your industry. This includes making sure that your financial statements are reliable through accurate and timely reporting.
We oftentimes see that larger companies, have CFOs handling this role/responsibility while smaller companies are using a bookkeeper. Whichever way you are handling your financial reporting, you should be working to keep your books in order, it will make your process smoother and easier when you are ready.
Deals in the contracting space are usually done based on the trailing 12-month EBITDA [Earnings Before income, Taxes, Depreciation and Amortization (and add backs!)] times a multiple — EBITDA x Multiple.
The multiple is influenced by a multitude of factors including the size of the business, the market in which it operates, its service contract base and its key management team.
Multiples have been on the rise in the last several years and we are now seeing companies that would have been paid 5x for the business several years ago are now receiving offers at 7x.
Over the course of the last year, we have seen larger businesses sell for double digit multiples. We always recommend to contractors that they should know what their business is worth and check into that valuation on a yearly basis.
While this may look time consuming and expensive at first glance, there are other, less expensive ways to accomplish this. As mentioned above, however, the higher the revenue number, the higher the multiple.
Watch Your Expenses
When a business is in its growth stage, costs tend to be on the higher side. However, when the business is in the mature stage, it’s important to control costs. Look to control your expenses and focus on removing any redundancies.
A lean, cost-efficient operation is attractive to buyers because it shows that you know how to run your business and that they will not have to come in and try to overhaul what you have already done.
Most transactions in reality are partnerships whereby a private equity company is looking to pay you to partner with you and your management team to help grow the business along with their other contractor holdings. They see your business as less valuable when you are not as efficient.
Build Bench Strength
When buyers are looking to acquire a business, they need to know that the business is not reliant on one person. When an owner has created a strong “bench” of key managers who are able to run the operation on their own, it allows the buyer to feel at ease with the transition of the business after the sale.
While you usually want to eliminate redundancies, this is one area where the goal is for you, the owner, to become redundant yourself. A good question to ask yourself if you are trying to figure out if you have a strong bench is, “How long can I (as the owner) be away from my business and it keeps moving in the right direction?”
Can you take a 2-week vacation and your staff doesn’t need you? How about four weeks or more? We know many owners that live in different states and check in with their managers weekly to review the KPIs.
The less you have to be involved in the day-to-day operations of your business the better your bench strength (management team).
Beef Up Service Contracts
Buyers love the idea of a fence around a customer base that service contracts represent. This is recurring revenue that prospective buyers will be able to count on in the years ahead, which will allow them to focus on other growth efforts within the business.
In addition, an expansive customer base that has low customer concentration, to the extent possible, is very appealing to buyers. For example, if you are a residential HVACR contractor, having thousands of maintenance service agreements shows a buyer that if they helped you add plumbing, you have a potential built in service base.
A seller once showed us that they are guaranteed to be in the home at least 2x per year and, with almost nine different services they could offer, they would get 18 selling opportunities per year per maintenance agreement they had. Because of this, they rarely had a shoulder season.
The bottom line is that the higher the revenue number, the higher the multiple and the larger the valuation. By expanding through acquisitions that allow you to eliminate back office positions and take advantage of increased buying power, it is easy to see that one plus one is sometimes greater than two.
Although this is a more challenging route, when executed properly it could pay huge dividends at the time of your transaction. If you would like to discuss making an acquisition or how to avoid some of the pitfalls, please feel free to reach out to me directly and we can discuss what you are looking for and how it can integrate and grow your business.
Develop a Growth Plan
A feasible growth plan that will allow prospective buyers to exploit new opportunities is a very attractive piece of a business.
Whether you’re considering expanding through acquisition, as mentioned above, or planning to grow organically by tapping into underdeveloped markets, buyers always want to know how they will build on their investment and what their next steps could be.
A passive, reactive approach where a business attempts to shore up these items as they are looking for prospective buyers will result in a lower valuation, since it’s already too late and the track record won’t be considered reliable.
Acquisition activity in the contracting space has been heating up in the past few years, and by focusing on these factors and staying proactive, you’ll be ready when the opportunity presents itself to sell your business at the highest possible valuation.