Whats your business worth? - Contractor Talk - Professional Construction and Remodeling Forum

ruskent · 01-06-2007, 11:57 AM

What is your busienss worth? After reading a couple books over the last few weeks, i been thniking alot about what my business is worth. Basicly i'd saw my business is worth almost nothing right now. I AM the business.

So i been giving alot of thinking about how to build a business that is worth something, so i can one day sell it to a private equity firm.

So is your buisness worth anything? What are you doing to ad value to your business so you can one day sell it for alot of money?

Matt

ultimatetouch · 01-06-2007, 12:22 PM

Quote:

Originally Posted by ruskent

What is your busienss worth? After reading a couple books over the last few weeks, i been thniking alot about what my business is worth. Basicly i'd saw my business is worth almost nothing right now. I AM the business.

So i been giving alot of thinking about how to build a business that is worth something, so i can one day sell it to a private equity firm.

So is your buisness worth anything? What are you doing to ad value to your business so you can one day sell it for alot of money?

Matt

I am probably about where your at rite now. I just started puting money out there last year. I spent 12,000 in advertising. Waiting for word of mouth to come around is just sickening. This year im setting my budget to 35,000-50,000. I intend on growing a real business. Especially when im selling at least 5 out of 10 jobs and getting good money for these jobs. I am going to remove myself from the field and deal with the customers and sales. I am planning to get 15 leads a week and being modest close 3. At this point I will just be on the way to building a business that I should of a few years ago. I dont like to you use the excuse "oh im young" thats bull crap so do it now.

thom · 01-06-2007, 12:26 PM

Matt, for most of us, our business is us. There is little to no value beyond us. We are the focus.

To make a business valuable (go public for instance) you must become large enough to be self sustaining and probably (though not necessarily) operate in more than one market. It certainly can be done. It takes a lot of time and dedication. It also takes a business plan that is is standardized. Not likely to happen for custom builders. Then, it takes a business that continues to operate just fine even if you and a couple of other key employees walk.

PressurePros · 01-06-2007, 01:14 PM

Thats the issue with valuating a service company where the owner IS the company. Its not really worth much more than its tangible assets (ie tools). On the other hand, a company that has the roles of estimator, laborers, salesforce, craftsmen and foremen clearly defined outside of the owner has resale value. Just another reason why one should always be working to get out of the field and running the business geared towards growth.

Owning a business and being self-employed are two different beasts.

mahlere · 01-06-2007, 01:29 PM

the only way your company (IMO and those of others I've spoken to) will be worth real money to anyone is if there is a system. If you can go on vacation for a month, and that company runs fine, it's worth money. If you can't take an afternoon off without all hell breaking loose, your company is worthless to anyone else.

john elliott · 01-06-2007, 03:29 PM

This is the correct way to value a company-

Figure the cost of replacing yourself with an employee with the appropriate skills and able to cope with that level of responsibility.

Multiply the money that your company made for the last three years, subtract the cost of the employee described above, add the value of any tangible assets. That's how much your company is worth to an investor (which is anyone who is interested in buying, because they will be investing).

The three years is a multiplier which will vary depending on the type of work you do, the area, the economy etc etc, but the principle is the same

John

Richard · 01-06-2007, 03:56 PM

Quote:

Originally Posted by ruskent

So is your buisness worth anything? What are you doing to ad value to your business so you can one day sell it for alot of money?

Nothing for both questions...my business is what it is. I do not want to get large, and I'm ok with that. As far as selling it for a lot of money...ehh, let's just get through next week

Danahy · 01-06-2007, 05:04 PM

Since we are the business, for most of us it's hard to value it. I know someone who's selling his business. He met someone that he is training for 1 yr to become "him"... The new guy works for an average wage, and is training to become the "guy". After the year, the first guy helps to set up a new customer base for the second guy, as well as convert some of his existing customers over to the new guy.

1st year - training
2nd year - Does estimates / marketing / customer building
3rd year - makes % of second guy
4th year - makes % of second guy
5th year - makes % of second guy
End of year 5 guy 1 signs over his business to second guy...

Sounds complicated, yet simple to me... It seems like it would be too easy to just start thier own from scratch (for the second guy), but then again, the second guy is buying the first guys knowledge, reputation, and customer base....

Stone Mountain · 01-06-2007, 05:05 PM

I am 56 years old. I have been in this business for 27 years. Last season we did $1.5 million. I sold most of it.
In past years, I have had a pretty good income, and a few toys.
Recently, because of a breakup with my partner, I basically started from scratch, but because of my knowledge and experience, and some good people and workers, we've done well.

However, just like Ruskent above, I have been wondering what happens 10 years from now. My kids will likely not take over, and without me what would someone pay me for the business?
Probably nothing.
So, I am doing what many other people in similar situations have attempted. I'm setting out to franchise my business. So far, it's looking good. Lots of money to get it going, but I think it'll work.

5 years from now, when I have 10 or 20 or 50 units, I will have created a self sustaining, growable entity that someone can buy for some ungodly number of millions of dollars!

We'll see how it goes.

mahlere · 01-06-2007, 05:34 PM

stone,

it'll be worth something simply because of the systems. if the systems are right, it's a viable entity without you. That's what all franchises are, systems, and that's why people will buy them.

ruskent · 01-06-2007, 05:51 PM

I read more books in the last 6 weeks then i read in my entire life. Instead of getting some bs job in the off season making 10 bucks an hour, i decided to put my mind to use. Thats why i asked this question.

The books really made me think about what a business really is. If any of you guys ever have any down time i'd recommened sitting down and reading some books.

Some of the books i read made me think past what i thought i might be capable of achiving in business.

I know for a fact i do not want to work hard for 30 years and then have the busienss dissolve when i decide to retire. That has to be the worst feeling in the world. Spending your whole life working on a business and then see it just shut down.

Matt

Mike Finley · 01-06-2007, 07:07 PM

Quote:

Originally Posted by mahlere

the only way your company (IMO and those of others I've spoken to) will be worth real money to anyone is if there is a system. If you can go on vacation for a month, and that company runs fine, it's worth money. If you can't take an afternoon off without all hell breaking loose, your company is worthless to anyone else.

That's the way I see it too. Gotta be system run, so that somebody can step in and keep running it if they would buy it from you. If the business is set up right and public doesn't know that a new owner is running it, then even better.

One thing I have learned when I was looking to buy an established business a while ago is just how hard it is to actually sell a business that is sellable. Just because you have something worth something doesn't mean you can just turn it over. There is a major problem with a business that is worth more than a certain amount and less than a certain amount. A business worth 50K is pretty easy to sell, lots of people can scrape up that in a variety of ways, a business worth 50 million is easy to sell to, another company buying you will not have a problem getting the money. But a business worth 500K is not so easy to sell. Most of the time you see the owners taking a note on them for 10 years and taking only partial cash down payments. That 250,000 to 1,000,000 is a rough one to cash out of I think. It could take you quite a while longer than you might think.

#CARRIERMAN · 01-06-2007, 07:47 PM

Hi ruskent

I am treading into unfamiliar waters here. But I believe any buisness is worth no more than the sum of its assets. A good buisness will draw true professionals too it. I know that the crap sometimes rolls in the door also. When you find those people who are your assets, when you promise them something you need to follow through. A prime example is the situation I am in. I was promissed by the owners of the company I work for some controlling stock in the company. The reason they made this offer, is in four years I have been able to take their service dept from a ragtag bunch of hoodlums and turn it into a viable buisness. We have added 3300 customers to our pool of customers. Here is where I say follow through, I now have excepted a job with another company that owed me nothing but saw the potential. They have no problem with giving me what I am asking for. Yet the company I have worked ten years for has got to reap the benefits, where are they going to be this time next year without my ablilitys?. Assets come in many forms, physical, financial, etc. But to make a company viable, the most important are the personell. The company's that have been able to thrive know that, when this is forgotten you can destroy a company in a matter of years. Enron anyone?

Carrierman

mahlere · 01-06-2007, 08:00 PM

to some extent carrierman. but a truly valuable business does not rely on the people operating it, but rather the systems that they follow.

Think there is any employee in a single McDonald's that makes that store worth $2 mil? Nope, it's the fact that the system is so simple, you have to try to screw it up.

Now in the trades, I will agree that having good people does mean alot. But good people are attracted to good companies. And good companies have good systems.

But, I can assure you, that 1) if the company you were with had good systems in place, you'd have gotten your stock, and 2) if they have a good system in place, you are totally replaceable so they aren't worried.

However, my guess is, no system and lots of worry. But what do I know.

#CARRIERMAN · 01-06-2007, 09:06 PM

Hi mahlere

You made a very valid point, what I was more reffering to is the craft trades. But even in the food service industry your people can add to the value. Like the example you used with McDonalds. Poor service, food quality, inventory loss, etc all go back to the choice of employees. The unfortunate thing is the food industry is allowed more leaway, where skilled sector is required to be more accurate. But you did bring up some very valid points, thats the true beauty of this sight. The amount of minds that contribute is a beautiful thing.

Thanks
Rusty

Gordo · 01-06-2007, 09:57 PM

$0.00

ruskent · 01-06-2007, 10:12 PM

Carrierman made some very good points. A business needs to hire good people.

To grow a business the owner has to be able to delegate. I think what might limit most small contracting business is not having the right people on board that know how to run a company. I always wanted to be a big business and i hope i am capable of the goals i have. I used to think the goals i had were just dreams. I'd think there is no way i could do this or that and so on. Then i started to realize i'm not going to be in it alone. I'd have good people right by my side leading the way. Telling me what to do, not the other way around.

I think that is the key to building a successfull business. You have to accept that you do not know everything and hire people that excel in the things you don't.

I just read Sam Waltons biograph last week. It was the best book i ever read. One of the things that made walmart so successful was its distribution system. Sam knew NOTHING about distribution. He hired people that ran distribution for other companies.

Matt

PressurePros · 01-06-2007, 10:29 PM

Quote:

Originally Posted by #CARRIERMAN

Hi mahlere

Like the example you used with McDonalds. Poor service, food quality, inventory loss, etc all go back to the choice of employees. The unfortunate thing is the food industry is allowed more leaway, where skilled sector is required to be more accurate.

Thanks
Rusty

I'm just yanking your chain a bit Rusty, but have you been to McDonald's lately? It's labor force doesn't exactly represent the cream of the labor pool. They have systems that keep positions defined (a sixteen year old is not going to count deposits and make bank runs nor is a mentally disabled person going to be placed on a register)

I do understand from where you are coming. You can't just fire your lead carpenter and have him replaced with someone of equal value by the end of the week. Again, another reason why businesses operating on the trades have less value than a bricks and mortar retail operation doing the same net dollars. (the triple net income valuation does not fly)

A trade business can have every system in the world set up but I, as an investor, would look at it and think
• Employees hate change. What if Monday morning after I take over four guys walk on me (maybe some of them were personal friends or relatives of his)? Will the operation still run?
• What if I meet with the next thirty leads and I cannot close as many sales as Joe Promodeler did?
• What if Joe was a marketing genius, but I can't market to save my life?

This is why I mentioned above, all jobs have to be defined (and filled)and the owner has to be hands off. If you pick up a hammer, do estimates, meet with leads or take part in anything but upper level management tasks the business is YOU and therefore you are worth money, the business is not.

Franchising an operation is where its at. But then, you aren't selling painting or remodeling per se, you are selling franchises so other people can become self employed.

**Teetorbilt** · 01-06-2007, 10:38 PM

For most that I see here, the sale of a business is not viable. A quick test is 'Does your business own property?'. If not, knock off 80% of what you think that it is worth.

mahlere · 01-06-2007, 10:41 PM

Quote:

Originally Posted by Teetorbilt

For most that I see here, the sale of a business is not viable. A quick test is 'Does your business own property?'. If not, knock off 80% of what you think that it is worth.

that has nothing to do with it...all that has to do with is the value of your property....if you business is unsaleable, do you think someone will buy it just to get your property? Not in this day and age.

If you can go on a month's vacation, and your business operates as normal, you have a system set up that does not require you. Now, you have something that is saleable. Property is a seperate issue.

I mean, I have a company that is just me an a helper. We do $100,000/yr gross. But, I happen to own a piece of property that was given to me by my parents when they died. The property is worth $1mil. Does that mean that my company is now worth $1.1 mil?

Would someone who wants my property just buy my company for an extra $100,000 because of the property?