You work your entire life to build up your company. Then, when it’s time to sell and move on to something else, you discover no one wants your business. Here’s how you can avoid that trap.
1. Start At Least Three Years Out
Getting a business ready to sell is not simple and certainly not something you can do overnight. The time to work on your exit strategy is three years before you want to sell, at a minimum. Ideally, you start working on your exit the day you start.
2. Prepare Clean, Timely Financial Statements
Stunningly, the closest some contractors get to having a financial statement is their annual tax return. You must get monthly financial statements. This includes your income statement, balance sheet, and cash flow statement. If necessary, hire an outside CPA to help prepare them, but note that not all CPAs are familiar with contracting businesses. Locate a good, industry standard chart of accounts to help the CPA or engage Michael Bohinc from Keeping Score, Inc. to advise your CPA. Bohinc is an accountant who grew up in the industry.
The time to work on your exit strategy is three years before you want to sell, at a minimum. Ideally, you start working on your exit the day you start.
Preparing timely financials is only half of the battle. You need to understand them. As Service Nation Alliance business coach, John La Plant says, you need “listen to the numbers.” If necessary, take a class on financial management for non-financial managers. Understanding your financial statements is easy once you learn how. Identify your key performance indicators (KPIs) and manage to them.
3. Clean Up Your Business Practices
There is a tendency for many contractors to run their companies like their personal piggy banks. All kinds of personal expenses seem to get paid by the company. The goal of these contractors is to minimize apparent profit and thereby, minimize tax liability. However, most business are sold based on a multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA). While it is possible, even common, to recast your financial statements before a sale, significant adjustments makes you look less professional, which can lower your valuation.
Another problem is unfunded liabilities. While many potential buyers will overlook these, savvy, industry buyers will not. This includes your warranty exposure, unearned income from service agreements, and so on. Make sure you account for these.
4. Document Your Processes
Your company is people centric or it is process centric. No one outside of the sports and entertainment industries pays a premium for a people centric business. Start documenting your company processes. Take each employee and activity. Identify step-by-step what they do. Step-by-step, what is the process for handling cash or checks? How does a technician approach the customer’s door? What does he say? How does he approach the diagnostic?
When everything is documented, you will see ways to make improvements and become more efficient while simultaneously providing a higher level of service.
When everything is documented, you will see ways to make improvements and become more efficient while simultaneously providing a higher level of service. When someone leaves, the loss of tribal knowledge is minimized and the time to get a replacement up to speed is eased because there are documented processes.
5. Build a Team
If you are god-emperor of your company, no one will want to buy it because all they will buy is a customer list, worn out trucks, old inventory, and the hope that you will stick around and keep running things. That’s too much risk for most buyers.
However, if you have a team of people in place who are strong managers, your company is a business. Buyers are not only more likely to buy a business with a strong team, they are more likely to pay more. The test of the strength of your team is your dispensability. Can you take off for a month to traverse Europe on a Eurail pass and still have a business to return to?
6. Build Your Brand
Companies with strong local brands are more interesting to buyers because a strong brand makes marketing easier and less expensive. Brand equity leads to financial equity. This is one of the reasons you should never rent-a-brand. Unless you own the brand, it’s not yours and neither is the brand equity that goes with it.
Look for Part II in the next edition, which includes the best way to top industry averages for selling your company.
For the ultimate help in crafting a profitable exit strategy, consider the Service Nation Alliance. Call 877.262.3341 to learn about the locations for upcoming Success Days, which are complementary day long business building seminars for contractors. For more information, email [email protected].