Are you a construction business owner looking to sell your business? Or are you a dedicated business owner eager to unlock the potential of your enterprise?
Then this is the right place for you. Come, lets discuss about it and have a proper understanding about how to build your business so that you can sell it for millions. There is a step-by-step process to build and to sell your hard work for millions of dollars. In this blog, we are going to share the 15-ingredient recipe to build a business that you can sell for millions. Imagine this is your business. You’ve got products, you’ve got cash flow, you’ve got sales. If you want to be able to sell it for millions, your business needs to look more like this. So today we’re baking the cash cake. You insert the right ingredients, follow the correct recipe, and you will have a million-dollar business to sell. Do yourself a favour, and before you even start a business, make sure you do it right, not wrong.
Ingredient one, set your goals and valuations:
We had a HVAC company owner who came to us seeking help in selling his age-old legacy of 45 years. He was very dedicated and was very much aligned to his father’s objective of starting the business which was handed over to him after 20 years. So the conversation we had with him made us realise this point. Let me tell you, your goals and objectives will tell you what you want out of a sale. You definitely have to start with the end in mind. Normally people start businesses and they think they’re going to run them forever and then they get bored at some point and they want to get out of the business circle. Because running a business after a long time is miserable. And so, if you start early, then you can build to a sale and you can actually sell before you’re miserable. Well, the goal is obvious. The major goal of each and every business owner is simple, to make as much money as possible. And that’s sort of true. It’s actually consisting of two things. We all want money and time. So, you want to make a lot of money, but you want to make it without, for instance, having to stay at the company forever. So, here’s the goals matrix. Money, first as a construction business owner you have to think about this, considering all the factors directly and indirectly related to your business. Consider this in the initial phase of your business and after achieving a certain period of time in business. Next is the transaction timeline, when do you want to sell your business. What is your plan, how long are you planning to build your business empire and after how many years you want to transfer the business to a new owner. The third item is the team, what is your plan about the hardworking team that you have built so far while you are running the business. While thinking about the business you should also consider this important aspect, legacy, let me tell you this, you should only sell your these many years hard work and goodwill to a company which you respect or to an owner whom you think is the best fit for your organization. The last but not the least is the transition, as a construction business owner would you prefer staying on for more than a year if you are going to sell the business which is not yielding anything? Think about this.
Now coming to the next important aspect which has to be thought about on a very serious note as this is very important and this is what gives you a reward for all the work that you have done so far for your construction business. Figure out what is the value of your business. So, in most cases businesses are sold for a multiple of revenue or profit. If you’re dealing with the typical types of businesses the owners would sell it for two to three times profit or two to three times the revenue. And this really depends a lot on various factors. Let me take you through that and show you why. Initially, you have to figure out how much you want for your construction business. Then the next step is to consider how much your business is actually worth today considering all the assets, liabilities, goodwill and everything. And then the most important thing to calculate what’s a plan to bridge the gap between the two.
Let me give you an example for contrary thinking. First, if you are currently owning a construction business and the industry worth calculated somewhere around 5 to 6 multiple for example. And now if you are considering this multiple does that actually mean if you are making a million dollars in profit you can sell your business for 6 million? Not likely, but let’s go to second round of consideration and I’ll show you why. Now considering the domain that we are handling; we do have lot of types of industries coming into the picture. A construction company can be a plumbing company, HVAC, general contractor, landscaping etc. And each industry will be having its own authentic set of aspects and features. Our major agenda is to understand what is a company worth in this industry? Let me give you more clarity about this through a real time example of a plumbing business owner who came to us in 2020. He wants to sell his company for 12 multiple of EBIDTA which is of course a high value. I was curious and asked him why is he asking for this particular value. He told me that one of his friends working in a completely different industry which was media related had sold his company for this particular multiple. So, I made him understand about how this is actually working. Always remember, we should be considering and comparing the business only with those in your same domain and industry type. Or else that doesn’t make any sense on the longer run. Okay, now let’s come back to the actual discussion of the hour and how to value your construction company. See, to make it simple if it’s high growth, you should get somewhere around three to four times your revenue and if it’s slower growth, closer to two multiples. But the multiplier also depends on various other factors which we will discuss about in much detail in our future blogs. To summarize, to know what the business is worth, you have to know what the industry is it, what are the major aspects that you have to include in your business valuation and what is your industry position, the goodwill, percentage of regular sales and many more.
Most businesses end up closing. Only 20 to 30% of businesses that are even on the market end up selling. Most businesses never even go to the market. So even though 80 to 90% of business owners have their financial wealth, all their cash, locked up in their companies, they’ll never actually sell it, which is the sad part of the truth.
Now, other important aspects that has to be considered are how to build a business that sells, this is relevant to anybody, even if you don’t have a business today. Next is the deep dive into the selling process, what you do when you actually get ready to sell the business. And the very last step of all is the most important one that almost everybody skips, you cannot ignore this because this is where all the cash is. So make sure you hang out for the rest of this blog understanding each and every points that we are going to discuss. As the leading mergers and acquisitions firm, we at N3 Business Advisors and considering our these many years of experience we have noticed there’s one thing that businesses always undervalue, their brand or let us mention it as the goodwill value. This is one of the important perks of buying a business instead of starting and building a business from the very beginning that is, from scratch. You’re buying the assets, trust, marketability that comes with an already existing business which is actually the best thing a new owner can get and this is where you can add more value for your business. All these might be quite confusing and a tiresome job for you as a business owner as you won’t be having a clear-cut idea about this. This is where you need to get a proper assistance from an experienced and well-educated mergers and acquisitions advisors and we can definitely say that we at N3 are not considering our sellers and buyers as our clients. We are your all time TRUSTED PARTNERS.
As per the studies and market considerations its proven that brand consistent activities will increase revenue by 33%. Can you just believe that?
You should check it out here. 33% more revenue will drastically increase how much you can make from your business when you sell it. Of course, it’s the need of the hour to educate yourself, understand and spent on various businesses, testing, and figuring out how to nail your brand. As a business owner to be successful in no time, you should indulge yourself to understand about content audit and metrics to track about your brand performance. This will further teach you how to create a brand strategy. As a mergers and acquisitions firm we believe that it’s our responsibility to create a proper awareness hence we create a huge amount of content. It is also very shocking to see a report that said 78% of a brand’s assets go to waste. Please note, don’t waste any of that time or money. Remember those are the result of your sweat and blood.
Ingredient two, tracking and documentation:
Every single thing, or activities that you are planning and executing has to be documented. This is awful in the beginning of your business, but it is so important. One method one of our old seller clients have informed us is to use the 80-20 rule here. What 20% of the processes you have are the most important? Analyze, write it down. When I am asking you to write it down, I mean you have to note down each and every point, you will see the magic of this afterwards and will be able to help the new owner as well. Getting a proper understanding will help the new seller to understand about your business and work for it accordingly. What we ask our business owners is that if you’re not sure whether you want to sell your business or not, do it anyway, because worse comes to worse, forever, but you hand off the operations to somebody else at the right time, that can create wonders maybe. The next thing you should be keeping an eye on is about your financial statements. Keep it running immediately and smoothly. Every single business needs to have their financial statements updated properly. If you don’t have these, you don’t have a business, you have a hobby that just gives you a source of income. One of our clients who visited us in 2015 told us that the major thing that they usually keep in their mind is to run their business successfully and smooth is to get their financial statements cleaned up and to look at it weekly. See, you don’t have to consider this as that complex process, but keep this in mind what gets measured gets managed. And if you pay attention to your cash, it turns out that it hangs out with you. Analyse whether you hit your goals one way or the other. Next thing you have to do is to have a current dashboard with everything drilled down by business unit. This is what you have to go through from a leadership perspective every single week. So, by this you could double check on these and there would be more underneath them, but make sure that you keep it clean because if you are going to sell your business to a new person, that seller is going to review the overall assets, liabilities and other aspects of the business, and they need to be able to understand it without talking to you each time. Make the statements crystal clear, add the notes as needed and make it very easy to understand in common layman terms. So, understand and match these things at least one a week to get a better clarity about the business that you are handling. Check these points, how are you doing on a weekly basis? Are you going to hit your monthly goals or are you lacking anything and being behind? And you can definitely see that there you have a bunch of goals that are green or light green, meaning you are going to hit them or you are going to crush them. And then you have a couple of them highlights in yellow which means they are at risk. And anything that’s yellow, that means that needs to be worked upon. Anything that’s green that’s good, you need not worry about it because you got it covered. Well done!
Ingredient three, diversifying or de-risking:
This is all about de-risking, which is really what the word diversifying means. What we understood in our these many years of experience is that there are actually 2 rules. The first is diversified client base. One of our clients in our previous meetings said that they believed in this mantra of Diversified client base. Which means they usually make sure that no single client makes up more than 15% of their total revenue. Which further helps them to be on a not so risky field, because having a high percentage of revenue from a single customer can lead to a risk as when they reach out to a different supplier apart from us, our revenue will come down all of a sudden, which have a negative impact on the business in total. The percentage also have a rule called the diversified product rule, or the 60% rule. For example, if you are dealing with building supplies or construction supplies, make sure that no one product makes up more than 60% of your revenue. We definitely understand that this isn’t always possible, but, think about this for some reason you have only one product, and that product doesn’t seem to be a big success. This is not a good thing that can happen, right? Always remember you need to even out those revenue streams. The second type of risk isn’t necessarily just your clients. It’s diversifying risks of two different areas, the credit and debit side of our supplies. This is the major area where your cash gets blocked. Make sure that your cash balance is not blocked unless and until it’s in the safe margin as it will definitely create a huge risk. For example, the average small business only carries 30 days of cash. And if your business is having 90 days term to get your payment from your customer then it would create a big mess in your operations, because they kept our cash for 90 days. And just like that, a huge big human kills your business. Hence be very clever and literally cunning while setting the credit terms. So, it’s necessary to always re-check with yourself and others including the concerned high end team of your business regarding these types of very simple yet highly cautious risks.
Ingredient number four, reoccurring revenue:
Now this part’s really interesting because we essentially want to come up with a process to continue to get paid after we’ve sold the clients once. The general rule is basically this. There are six types of reoccurring revenue and your business should have at least three of them in our opinion. The first type is long-term contracts. Then the second type of reoccurring revenue is called an auto renewal subscription or an evergreen revenue. The same as above a long-term contract, or annual, and it renews without you having to go and re-renew it. And we have the third type, which is sunk money subscriptions, or it’s called replenishment. Let’s say you buy a new air filtration system for your house. You also get air filters for that every three months, right? So that’s auto subscriptions. Then there is a great replenishment system. Then you have a pay as you go subscription. Subscription sort of for a set period of time. You kind of buy it as you need it. Then you’ve got loyalty programs. And then finally, you have simple consumables. These are one-off products, but bought repeatedly through customer loyalty. Think coffee shop regulars and Starbucks, who has billions and billions of dollars in people coming back to their store. Here’s the benefit to this. So when you have a reoccurring revenue model, you will have scalable income, you have freedom of time, because you don’t have to keep chasing customers, you have increased value when you go to sale, you have increased lifetime value, which also increases your ability to sell your business for more. You have more stable cashflow because you have subscriptions continuing to come on board as opposed to net new customers, which often go like this, and you have predictability. Usually when people buy a business, the more predictable, repeatable, and expected you can make your business, the more money they’re going to pay for it.
All right, Ingredient number five repeatable sales process:
This is key because if you are the only salesperson, you don’t have a business, you have a job. And if you only have one salesperson, you don’t have a sales team. You have a liability if they leave. And if you have two salespeople, you don’t have a sales team, you have a group that needs to be managed. Ideally, you need a sales leader and a sales team. Your buyer wants to know that the sales will continue without you. And this is one of the most important aspects of a sale. Sales drive predictable revenue streams. If you want to sell, build a reoccurring sales model and you’ll sell for more. Now what gets measured gets managed in sales. You need to be able to tell a buyer really quickly what your success rate is, how many people you close, what your outreach is, how many people you reach out to, the total number of businesses, clients, that could be potential clients, so that you can determine what your total market size. is. The more data you can show them on what your average is for your purchaser, how often you can get in touch with them, and how often you close that, the more likely they can forward project their ability to sell more and thus pay you more money for your business. The other thing a lot of people forget about is sales enablement, which basically are the resources that your salespeople use to convince people that what your selling is worth it. And most sales teams hire great salespeople. That’s what they focus on. Here’s the thing, it’s a lot easier to find a bunch of horses than it is for a unicorn. Meaning, you can have good salespeople and not have to have great salespeople if you have good enablement. That’s like things to handle objections, resources, testimonials, reviews, all of those can turn horses into unicorns. And that’s really important if you go to sell because it’s really hard to hire unicorns and no buyer wants to have to find them. For example, one of our clients back in 2020 believed that the real important thing you need to have is at least two or three diversified ways to sell the products. It could be content marketing, SEO, PPC ads, cold calling, door-knocking, affiliate, influencer, The list goes on, but you need to have multiple channels and a process for each one that they follow. That way, your process is one that they purchase. It can turn into thinking one of the ways that we sell is a way to drive people to your construction-based product or service and they then do an action that we want. So, it is really important to have some sort of flywheel for your process. You can also use social media ads and be interactive to the people in your same industry and domain. This will definitely increase your customer base. The major attractive feature of ads is that they’re repeatable, quantifiable, and measurable. So, you don’t have to have a bunch of top-tier unicorns selling things if the ads drive people for a set amount of cost every single time to buy something that costs more than the cost of the ads. It’s a really scalable process. But yes, in order to make the marketing process customized you need to have a trained bunch of sales people. Next step, productized service. Whether you’re a seasoned entrepreneur or just dipping your toes into the business realm, understanding the power and potential of productized services can transform the way you approach your business.
Imagine this: You have a skill, an expertise, or a service that you’re passionate about. Instead of offering it as a traditional service with varying scopes and prices, what if you could package it as a standardized, ready-to-buy product? That’s the magic of productized services.
Pro tip: Be very much alive in social media platforms like, LinkedIn, Instagram, Facebook and Tik Tok. These platforms will definitely help you reach out to a wide variety of lead base which will further help you to achieve a greater height in terms of getting new customers and hence new businesses.
Now, Ingredient six, who should be your buyer?
There is a need for us to turn the thinking to this important aspect as well. It should be really obvious who’s a good fit for you. Do they want to buy the product or services? Is he capable of it? Do they fit your application criteria? If that person is not a good fit, let them know it because don’t allow everybody to come in that too if the credit terms are involved in your business transactions. Think- what if the customer didn’t turn out post buying the product or availing the service from you, that cash will get held up-right? So be very clear in terms of setting up the standards, do not encourage the tire kickers. So, everything is set, which will actually give you a better experience.
Next ingredient, number seven, turning a cash drain business into a cash flow business:
This is the sugar, the most exciting part we can say. Do you know the major reason why businesses fail? The main reasons why small businesses fail is they run out of cash. This is a huge problem that a lot of businesses could fix if they knew what we are going to tell you about next and most businesses do not. Here’s the difference between a good business and a bad business. A cash drain business provides a service, then gets paid. They make money just a couple times a year, maybe, as opposed to every single day, week, month. They maybe have one big client and if they leave, the business is in trouble. A cash flow business gets paid up front, then provides the service, makes monthly reoccurring revenue continuously, has lots of clients, and if this is your business, you get to decide when you charge for your product or service. So, the major feedback we wish to give all our readers considering our more than a decade of experience in construction domain is that, it’s always better to charge upfront or in milestones to create a positive cash flow cycle. Think about it this way, if somebody comes to buy your business and they have to float the business for a certain period of time, otherwise they have to infuse money into the business so the business can keep running, they’re going to pay you less money for it. So, think about this, what does this actually mean? Buyers will pay more for cash flow. If you have a good business that allows people to make more money, you should charge for it.
Ingredient number eight, key man risk:
So, a business that’s relying on its owner is not really a sellable business. So right now, for instance, don’t name your business your name. You want brand loyalty, not personal loyalty. What you need to do next is you need to build a management layer and good set of hardworking and loyal workforce. You have to have a team of energetic people. Always remember to set up the business and the company in such a way that you have the accurate talent in your team. The best people so that if the owner falls off, the rest of the faces could continue to run the company and continue to grow. Now the question becomes, how do you keep these people post-sale? And there’s really three ways. You can give them equity in the company, equity vests over time, a little bit each year. You can also think about giving them profit shares, they get a percentage of the profits after you go through with the sale for a continual amount of time. You put a pool aside for that. Or there’s a bonus pool.
So now we’re getting into the part where if you don’t have a business yet, this next part will apply when you get one. Everything up until now applies to anybody if you want to build a business. Now we’re really getting into the depth of how do you sell a business for millions and millions of dollars.
Ingredient nine, potential buyers:
Remember the sales matrix that we discussed about in the beginning? It looked like that. All right, put this thing back up on stage. Your goals for your business the buyers that you need to pursue. And there’s kind of usually two different types of buyers. There are financial and strategic buyers. It’s always better to create a list of the strategic buyers because they pay more. Financial buyers just want to cash flow off your business. So they’re going to pay a lower valuation. Strategic buyers look at your business and say, wow, we could actually pay more than it’s worth today because our business combined with this business makes it more valuable. Those are the buyers whom you have to connect with. Basically, you have to increase the sales price because you have a bunch of people all bidding on your business. A financial buyer is like they don’t wish to think about the future earnings of a business in the current costs. So, when you are wishing to sell your business, put together a list of all the companies that could potentially buy your company. Then target this list compare who are big enough to pay you an outsized multiple. This seems to be a very tiring job for any construction business owners, hence here comes the need of having a proper coaching and assistance from well-established M&A advisors. They are the right people who will help you out in saving your time by searching for the best potential buyer for your age-old business since you are transferring your legacy to the new hands which needs to be safe afterwards.
Ingredient number ten, M&A Advisors:
Finding the right advisor is really important.
Now the next question is – how do you find the right advisor to sell your business? Well, you need to interview a bunch of them. And consider the most important points to make it easier in choosing the best option, which are experience and well educated. Choose an advisor that has done deals in your niche before. It will always be better if they are well versed in handling construction domain in particular. The advisors are really important in your business sale as they will help you in completing the deal in ease and in less time with utmost perfection and success. Make sure that they are having only one goal, to help you and to sell your business at the highest value and get the most money out of it and transfer your successful business to the next right hands. This is where N3 business advisors comes into the picture. Don’t forget, seeking support from a seasoned mergers and acquisitions team ensures invaluable guidance and an outstanding partnership. Emphasize transparent accounting, accurate valuation, and thorough documentation to present an enticing offer to potential buyers. While the process may seem intricate, careful accounting scrutiny brings a successful sale closer.
At N3 Business Advisors, we transcend the role of mere advisors—we become your dedicated partners. For us, sellers and prospective buyers are not just clients; we’re your collaborative allies. Our mission? To accompany you through the entire journey of selling or purchasing your construction business, navigating both peaks and valleys. We specialize in unleashing the full potential of the construction industry, turning your business aspirations into reality. Whether you’re considering a sale, acquisition, or seeking an accurate valuation of your construction enterprise, our committed team stands by your side, guiding every stride you take.
Ingredient eleven, business plan:
This is where you create your one- and three-year business plan. It doesn’t have to be unconventional. This is sort of an example of what a one-year vision might look like. Write down who is your customer, what are their problems, what solutions do you offer that are uniquely you, why now makes sense for this business to be even more successful, and why you and your team are going to be the only seller that they should reach out, what makes you special? What you are really doing is you’re selling the dream for the buyer. And inside of this business plan, you want to outline everything we’ve talked about in the steps up to this day. The more processes and the more de-risking you can do, the more you can sell your business and then you can look forward and you can have like three-year financial projections. Now analyse this, if the business had these resources, this fresh blood, your brilliant mind, look at what this business could do apart from what you are doing now.
Ingredient twelve, the seller story:
So institutional investors and strategic buyers see lots of deals a year. After the successful screening of these potential buyers by the M&A team now its your responsibility to have a direct conversation with the selected buyers. How do you make your business story stand out? You have to talk about why you’ve been successful, why it’s going to continue to grow and be even more successful under them, or at least continue at the same rate. Where is future growth going to come from? Give them a plan that makes them confident in your business, because that will make them decide about your business, whether to buy or not to proceed. Now the next important aspect that we wish to inform you is the importance of being genuine. When you talk to buyers about buying your business, you need to be honest. You should explain to them that the company is ready for more, that you’re really proud of where you’ve come from, but you might need to take a little liquidity off the table, you want to see the company grow under a bigger team, you will continue to run the business regardless, but you think this might be a good time for exiting. Being honest and genuine doesn’t mean to say that you are fed up about the business, oh my God, I hate this thing, I got to get out of here, Or I can’t wait to sell. This is not the right thing to do. Not the right answer. Now you don’t want to lie, but you probably, if you’re considering selling, have a little understanding, that, your job is to not scare them off and to show that you’ve put in the work where you could continue to stay on in this business. As a leading advisor team, let me tell you one thing, you need to sell the history, the business and everything. Do not feel bad you have spent years in your business building it by now, make sure that you are not having a cold feet rather than that be confident and show the other person what you’ve done so far and what are the potential growth aspects that you have planted till date.
Ingredient thirteen, setting up your team for the sale:
You should tell your team but make sure that you are not informing them too soon. You don’t want to keep them out of the deal too long but they need to believe that they’ll be better off without you when you tell them. You have to sell the dream externally to the buyers and internally to the team because we believe that they’re going to be scared and worried. That’s very natural because we’ve got current state and unknown future state which is very uncertain. So, make sure that your team has a plan and you as the business owner you should also need a plan for how you’re going to tell your team to make sure that they’re excited about it.
Ingredient fourteen, due diligence:
Due diligence typically takes 60 days at a minimum. Due diligence is the backbone of any business transaction. It’s the comprehensive investigation and evaluation process undertaken by potential buyers or investors to assess the viability, assets, and risks associated with a company before finalizing a deal. This meticulous examination isn’t confined to financial records; it spans across various aspects of a business. Financial due diligence scrutinizes historical financial statements, cash flows, assets, liabilities, and potential risks, offering a clear snapshot of the company’s financial health. Operational due diligence digs into the operational aspects, evaluating efficiency, scalability, and infrastructure. Legal due diligence reviews contracts, litigations, intellectual property rights, and compliance issues to uncover any legal risks. Cultural due diligence focuses on the company’s ethos, values, and workplace culture, ensuring alignment with the buyer’s philosophies. Environmental and social due diligence appraises the company’s impact on the environment and society, vital in today’s conscientious marketplace.
And so, if you’re going to sell your business, make it to have a process that’s really efficient, have a clear-cut communication with your M&A advisor, so that the buyer can interact with them and you don’t have to take your time to get the potential buyer. Here’s a nice little timeline for typically how this works. Preparing to sell for one to two months, marketing the business two to three months, closing the deal. three to six months, transition period, one to three months, sometimes longer. The bigger the business, the longer the transition period it might take to get transaction completed.
All right, so the last thing ingredient fifteen, time:
The most important ingredient. It takes around an hour to bake a cake at 350 degrees. And you can even bake it for 20 minutes at 600 degrees, but what do you think? Will that work? No, it will not taste good. Cooking is an art and it needs to be slow cooked. Same with this process. As a business owner you need give time to get the transaction completed successfully. Give it around 6 to 8 months of tenure. Building a business that will sell for millions isn’t going to be a cakewalk, you need to be diligent and calculative.
When it comes to buying or selling a construction business, it’s crucial to navigate the complexities with careful calculation and unwavering diligence. Our specialized team boasts expertise in handling these intricate processes, understanding the pivotal factors that significantly impact successful deals. From valuation to negotiations and strategic positioning in the market, we excel in streamlining the entire journey to safeguard your interests.
However, this conversation isn’t one-sided; we value your input! Which topic would you like our next blog to explore? Your feedback matters:
- Unveiling the Value in Selling a General Contracting Business
- 10 Strategies to Build (and Reap) Your Company’s Value
- 5 Vital Steps in the Sale of Your Company
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Any information provided here is for information purpose only. It should not be considered as legal, accounting or tax advice. Prior to making any decisions, it’s the responsibility of the reader to consult their accountant and lawyer. N3 Business Advisors and its representatives declaims any responsibilities for actions taken by the reader without appropriate professional consultation.