Will you sail into the sunset, or just walk away?

Will you be one of the lucky ones: A home builder or renovator able to sell the business and retire in comfort? Here’s the bad news; according to recent U.S. research, less than half of privately owned businesses with revenues less than $50 million will ever get sold. The rest, like most small owner-operated contracting firms, simply close down, with the only saleable assets being equipment, and maybe a shop and the land under it. After years of effort that is truly a worst-case scenario.

Paradise awaits…for those who plan!

You need a plan, and a good hard look at the way you do business
The good news? It doesn’t have to be that way. However, business owners make a plan to sell and develop strategies to boost image and profitability. For example, increasing the amount you invest back into the business (instead of paying yourself a large bonus), seeking jobs that are more repeatable and profitable, and taking internal steps to improve efficiency and track project make sense at any time, but also  enhance the attractiveness and value of your company when it’s time to sell.

Do I stay or do I go?
Chances are your relationship with past clients and reputation in your area are meaningful assets. In fact,  well-known Saskatoon contractor Dave Anderchek of J.A.B.A. Construction figures that when the time comes, his business will be worth 3 ½ times more if he were to stay on board. “Dave Anderchek is the brand” he told Canadian Contractor in a December 2014 article, going on to say that he foresaw a two-year transition before his employees, and hopefully his son, could take over the reins. Developing a brand or ‘franchise value’ apart from one person’s personality would obviously help make that transition quicker, to the benefit of all concerned.

“One day, son, all this will be yours!”
“What?…The curtains?”
(Monty Python & the Holy Grail)
Even a succession plan that seems obvious needs forward planning

So, what’s it worth?
Whether you have a family succession plan, or intend to sell your business to employees, a newcomer or a competitor, understanding the value of your business is critical to your financial future. That value changes over time too, as the business evolves and hopefully grows. Making a conscious effort to focus on more prestigious, more complex, and less seasonal work, or making systemic improvements to your operation to improve profit, all combine to ‘fatten the pig for market’.

Valuation expert Tim Farquhar (CFA, CPA) a partner at Rubin Brown in St. Louis MO, suggests a company’s worth can be calculated one of three ways; Asset Approach, Market Approach, or Income Approach. Each has its purpose and can be properly assessed by an independent business valuator for its merit in your situation.

Is your profitability volatile, or easily repeatable?
Unfortunately, many small business owners simply use valuations such as 2.5 times net income or four times cash flow. However, this is overly simplistic; you’re likely to underestimate the value the market might actually be willing to pay. Greg Caruso, a partner with Harvest Business Advisors in Columbia MD. says such formulas are meaningless anyway, unless the seller can demonstrate what he calls a sustainable play. “A business should be like an ATM machine: there’s a system, and the money comes out, and an ordinary person could step into that system and get a continuous, extraordinary result.” Some buyers might also be looking at synergies, areas where your business is complimentary to theirs and offers opportunities for exponential growth.

There are a number of ways a business can be enhanced and made attractive to a potential buyer, but it takes planning. Talking with valuation specialists is a good start. Be prepared though; their recommendations will likely cause you to tweak the way you do business.

What’s your exit plan?
Do you have an on-going strategy to increase your business’ value?

Interested in reading more?
Check the November/December 2014 issue of Canadian Contractor
for John Caulfield’s article ’Dreaming of Cashing Out?’ (page 20)

follow John on Twitter 

@john_bleasby