Contractors contact me to talk about their business. That’s why I offer a free 30-minute, no obligation call because it allows them to talk about their business. They’re able to talk about both the good and the bad. We also discuss their goals for their business in the next three to five years, as well as their personal goals.
The most common answers to what they want in three to five years is to fix their business, grow their business or sell their business. Many express the desire to retire right now by selling the business and doing something else. I let them know that I understand the feeling of why they would entertain the notion about selling and retiring especially when we’ve spent 30 minutes talking about their daily challenges.
With a little question-and-answer, it’s also easy to see how stressed many of the contractors I speak to really are. The business has often left them feeling drained to downright beaten up. Some contractors have been lucky enough to have made money and grown the business but what it takes emotionally to keep it all going has become exhausting and that’s the reason they called. They want to regain their sanity. And some have dug themselves a deep financial hole.
Some people are legitimately reaching the age of retirement and there is no heir apparent so they wish to capitalize on their blood, sweat and tears and plan for their well-deserved golden years in a logical manner. However, many of the contractors I speak to are ages 35 to 55. I’ve found that the real reason they are seeking to get out is they are burnt out. They don’t even know what they’d do if they didn’t have contracting work in their life, but they do know how much they want it to all end.
I do share that if they work on their business the right way they may find they don’t really want to sell the business after all. That’s because with good systems in place and the right type of culture it actually becomes fun to go to work again. But to make this happen, they must be committed to implementing the changes required to make their business function without having to be overly involved in every little thing. That’s not easy for us micro managers to accept.
The good news is many 35- to 55-year-old owners have found that when they did the work to take control of their company they ended up where they didn’t want to sell and/or retire. They actually were having fun growing and running their business. Some found they had a much more valuable company to sell. That’s incredibly rewarding when it happens.
How about you?
Have you decided to fix your business, to grow your business or to sell it? All these ideas are worth thinking about whether you plan to make any or all of them come true. Remember, everything begins with a thought. So take the time and energy to think about it and create a plan.To fix your company, you need to start with a 360 degree impartial assessment of what is and isn’t working at your company today, what you are going to do about it in the coming year and in the next three to five years. It’s a combination of short-term and long-term planning that are in sync with one another.
Once you have the lists in place, you must whittle it down to your Top Five and work on those each week. This is one key step in how you make progress on fixing your business.
The best way to grow your company is through smart acquisition. My company was skyrocketed by the consistent use of key acquisitions. And now my clients have been using these same time-tested tools. Acquisition is simply the best marketing dollar you can spend because it’s getting you real customers trained to call a number when they need contracting services vs. traditional marketing that is more of a hope that it will actually get people to call you. Like all things worth doing…you need to know how to do it right.
One piece of the acquisition puzzle is how to figure out what to pay for a company. Here’s the cool thing…the valuation process works whether you’re looking to buy a company or sell your company.
The following is a tiny excerpt of one of the many forms and templates in the copyrighted program calledGet More Calls Now:
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Note you can search the Internet for “valuing
a business”. Know that your understanding of these methods is NOT essential for
buying companies. Understanding the
basic vocabulary can
help you feel more confident at the negotiating table or working with a
business broker. Don’t be intimidated. After
all…a company is only worth what someone will pay for it. The following is only
a guideline. Use your own trusted advisor if you choose to implement this
strategy.
Earnings methods
Earnings means profits or net income. One way to value a company is to consider what future earnings could be realized from this company and pay the seller accordingly. The acronym EBIT or EBITDA is used in this kind of valuation.This valuation takes the company’s profits, often averaged over three to five years, and adds back in Interest, Taxes, Depreciation and Amortization. These items are added back in because the newly merged entity may have a significantly different debt basis and or tax implications.
Depreciation and Amortization are non-cash expenses, and the impact may be greatly different in the merged company. In a company where Depreciation is a significant expense - a service business with lots of vehicles - you might look at EBIT and not EBITDA.
If the owner takes out a salary that doesn’t need to be replaced after the sale, sometimes that is added back in. Other ‘perks’ may be added back in. These are called “add-backs.”
Once you calculate the earnings, the selling price can be a multiple of earnings. s there a common multiplier? You will hear multipliers from two to 10 times earnings. If a consolidator is buying several companies in their market, they may establish what they will use as a multiplier. However, the price of a company is what someone will pay for it.
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An
example:
EBITDA = $100,000 (average of 3 years)
If the multiplier is 3x earnings, the selling price of the business is $300,000. This can be paid over time…in cash…or in a combination of cash and stock in the purchasing company.
Here is a list of the most popular valuation methods:
Cost-based approaches-
Book value
- Adjusted
book value
- Liquidation value
Market approaches using comparables
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Price to earnings
- Price
to pretax earnings
- Price
to cash flow
- Price to book value
Income approaches
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Capitalization of earnings
- Excess
earnings methods
- Discounted
future earnings
- Discounted future cash flow
There are a lot more details about how to value a business than this little excerpt. This will get your started whether it’s how to look at a company you’re looking to acquire or you’re trying to affix a value to your own company to sell it.
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