At CG Capital, we have met with many individuals who own businesses and often discover as these individuals approach the finish line to sell or exit their company, the fire in their bellies that got them to where they are has faded over time, which in many cases can damage the enterprise value of their business.
Certainly, we understand and empathize with the fact that everyday challenges of running a business are demanding and at times can wear you out. We’ve certainly seen it with several construction business owners we’ve worked with. Securing bids, managing your team onsite as well as in the office, adapting to new regulations, reconfiguring your day due to delays, supply restraints and inevitable unplanned circumstances can be daunting. It takes resilience to run your business over the course of a given day. So, it comes as no surprise that when the time comes to sell your business, one can easily take their eyes off of their target.
My own experience with a business sale
In the fall of 2000, I received a great life lesson about exit planning and succession that relates to having your “house in good order.” My prior broker-dealer at the time sold its investment banking division for approximately $2 billion in cash and about $1 billion in stock of the acquiring firm. I was shocked to read that morning’s headlines announcing the sale. Initially, my thinking was “WHY?” Why in the world would anyone, especially in our industry, sell the very house that provided key investment research and trading efficiencies?
It was not until later that day, upon listening to a senior partner of the firm explain their rationale for the sale, that the whole turn of events made clear sense.
To start, the senior partner explained he ran and managed each division of the enterprise like the most beautiful house on the block. Keen attention and focus were expected to be followed by each member of every division; metrics were measured regularly in each category; and a careful watch was required on the industry as a whole. Staying ahead of industry trends, maintaining efficiency with technology, and keeping positive morale and team culture kept our business valuations at the top end of the industry.
Metaphorically speaking, each division was a “house,” and we wanted our house to attract home shoppers’ attention. Therefore, the interior and exterior were kept in pristine condition. Keeping with the house analogy, in the event someone is driving by and happens to want what we have, and an offer is made, the owner must give it serious consideration. In the instance of our investment banking division, our buyer was willing to pay a multiple of four times our imputed value.
The senior partner concluded by asking me, “Dennis, is your house for sale?” I said, “No!” Then he said, “Well, if I offered to pay you four times its value, would you sell?” The lesson was learned.
If you own a business in the construction industry, perhaps the house analogy strikes a chord with you. Regardless of what type of business you own, the takeaway lesson is we all need to keep our “house” in good order. Consider a business in your industry that is run so well (maybe it is yours) that your trade industry would like to showcase it as an example to aspire to. If that business was approached today, would they sell?
For those business owners who may not be positioned for a sale, consider the following three best practice ideas to help get your “house in order.”
1. Know your number!
To be clear, everyone has a number they believe their business is worth in the event they decided to sell. Most people, when considering a fair value, opt to take the bias mindset of a seller as they want to get the highest valuation possible and forget how they would act as a buyer if the tables were turned. Your number may or may not be in-line with what the market is dictating. Typically, the primary reason for the disconnect is such that most entrepreneurs have not had their businesses valued by a certified third-party valuation expert.
Consider this interesting fact: You can go to a bank for financing, provide your financial information, as well as what you believe to be the value of your business to be worth, and the lending institution in most cases does not challenge your valuation. Does this mean the value you assigned to your business is being agreed upon by the lending institution? Most likely not, as most businesses are personally guaranteeing their loans; therefore, the valuation in the grand scheme is moot from the lending institutions perspective. Therein lies a false sense of security in the valuation that you may or may not carry with you.
In preparing for a thorough evaluation of your business, consider what elements increase the value of your business:
- Where does the majority of your revenue come from?
- How diversified are your customers?
- What is your reputational value of your firm?
- What are the trends in the economy and industry at this time?
- Who manages the organization? What are your employees’ skills?
- Who audits and prepares your financial statements?
If you decide to hire a valuation expert, be prepared to have a much greater level of information available for the analysis. The above bullets are to get your mind around the valuation process and provide context as to what would be required to “know your number.”
2. Realize that everything is for sale!
You should always run your business as if it’s for sale. Denzel Washington said it best: “Luck is when an opportunity comes along and you are prepared for it.” In the construction world, for example, those contractors who entered the pandemic with solid financials as well as a robust pipeline of work generally found it easier to navigate through the COVID pandemic.
Inevitably, industry cycles go through boom-and-bust periods and the critical take-away is regardless of the narrative you should be running your business as if it were for sale.
- Build a great team: Your people are your business.
- Invest in your business: New equipment, new technology, employee training and education, marketing and leadership.
- Know what makes you unique: Do you have a niche and solid process(es)?
- Be organized: Have a clear system for keeping projects on budget, maintaining margins, and properly utilizing labor.
3. Focus on innovation and avoid disruption.
Companies that stay current with the times will be best positioned for the highest valuations. Key trends to follow for 2022 and beyond:
- Embrace technology: Innovations lead to enhanced efficiency, and efficiency leads to greater profit margins. Smart contracts can offer a shared system for all parties involved in a project, from buying to tracking and paying for services, thus leading to speedy closeouts, greater security, efficient project tracking and automated supply chains.
- Use Augmented Reality: For construction companies, “AR” can aid in project-staging and creating a 3D visualization of the preconstruction project for buyers and tenants.
- Go green: Sustainable development has been shown to offer competitive advantages in such areas as hiring, sales and performance. As for construction companies, green building will become more mainstream via Ecotec and sustainable construction.
- Employ software solutions: Software is useful for operational efficiency, budgeting, storage, payroll and HR and monitoring inventory.
Small businesses are an essential driver to our global economy, providing millions of families’ income, benefits and career paths. What an exciting time to get your “house in order” and position your firm for an “exit, sale or succession” on your terms!
Partner, CG Capital
Dennis D. Coughlin, CFP, AIF, co-founded CG Capital with Christopher C. Giambrone in 1999. He has been in practice since 1996 and works with individuals nearing retirement and those whom have already retired. Proud of his humble upbringing, Dennis shares his advice with the same core principles that he was raised with. When not in the office, you will find him with his family enjoying the outdoors.