Do You Own a Business, Job, or Is This Just a Hobby?

July 1, 2011
If your business can't function without you, it's not a business. It's a job.

If your business can't function without you, it's not a business. It's a job.

Does it matter? Sure it does. What happens to your "business" if you get hurt or sick and can't work? What happens to your family, your employees? Would your company last a week without you? How about a month? Six months?

Years ago I received a phone call from a small contractor recovering from an accident. He was in bad physical shape, in his sixth month of recovery. He ran a one-man operation and his "business" ceased to exist. He had little money, less hope, and no future.

Contrast his experience with two contractor friends of mine who got sick this past spring. For months, both sharply curtailed their roles in their companies. While one expects to be back at full speed, the other reprioritized his life and is unlikely to return, though he does plan to mentor key management people.

Each of theses contractors built companies that could run without them. By doing so, they protected their customers, employees, families, and themselves. Each built a business. Each will leave a legacy.

Even if you live a charmed life, remain accident free, healthy, and build a substantial company, the lack of documented processes and procedures can still result in tragedy. If the systems exist only in your head, the company only has value to you alone. Your company may not be salable. If this is the case, it's not a business. It's a hobby.

Recently, another friend of mine was approached by a competitor who wanted to sell. The competitor was established and respected. For more than 30 years the competitor, a husband and wife team, built a loyal customer base and $3 million in annual revenue.

This fact alone should have attracted potential buyers. A consolidator did sniff at the company, but walked away. The couple's children didn't want the business, despite working in it. They grew up in a company that ran their parents, rather than the reverse, and wanted different futures. The couple had no exit strategy and no options.

To paraphrase Gertrude Stein, the company had no "there" there. The financials were in poor shape. There were no service agreements. Lucrative commercial service deals lacked contracts. Business was done on a handshake.

So when the couple approached my friend and asked him to name a figure, he did some research. He knew their reputation and ran a quick check of the permits their company pulled over the last year. The permits were consistent with the volume of business they claimed. Good news.

However, uninterested in acquiring additional debt, my friend didn't want their building or vehicles. He would buy their floor plan on a pay-as-you go basis. Mostly, he wanted their customer list, phone numbers, and the public endorsement of his company by the couple to their customers. He would also hire any of their employees who could meet his standards.

In valuing the company, my friend looked at the acquisition the same way he might look at a marketing campaign. How much will it cost to get a customer?

My friend didn't build a successful business from scratch without learning how to sell and negotiate. He emphasized to the sellers how he was the best contractor to take care of their customers and continue their legacy. He also offered cash. His cash offer for this $3 million, 30-year old, pillar-of-the-community, company was less than $200,000 — far less.

The couple accepted. It was their best offer. After 30 years, how tragic!

Still, they were more fortunate than many contractors. A recent survey of sheet metal contractors revealed that only one contractor in 10 sells his or her company to an outsider. Three times that number simply close the doors and walk away. The rest pass it along to heirs or finance a sale to employees, hoping to get paid before the business is run into the ground. The results are likely worse for HVAC service contractors, who have fewer physical assets than sheet metal contractors.

Someone will buy a business, but not a job or a hobby.

Matt Michel is CEO of Service Nation Inc., which operates the Service Roundtable (a large, private HVAC contractor group) and the Service Nation Alliance, an organization dedicated to helping contractors build profitable businesses with documented, uniform, standard processes, and procedures to give the owners multiple lucrative exit strategies. Call him at 877.262.3341 to learn how you can maximize the value of your company (and get vendor partners to pay for it through equipment and parts rebates).