Articles Written by Charles Vander Kooi

What is your company worth?

By Charles Vander Kooi

Your company is probably not worth as much as you think it is – or as much as you want it to be worth. In fact, in most cases, construction companies are near the bottom of the list of good businesses to build and sell. Here are just some of the reasons why that is so.

1. Lack of a loyal client base. Most contractors work either on a 1-time basis with people and/or on a price-sensitive basis. For a client base to have significant value there needs to be significant work contracted into the future, 1 year or even 2 years down the road.

2. Too relationship based. Contracting companies are usually businesses that revolve around the personality of the owner. What repeat business you may enjoy exists primarily because of your relationship with a client. If I buy your company, that relationship may not continue because my personality may not mesh with the client’s. Also, many of your employees fit your personality and work well with you because of that relationship. If I buy your company, my personality may not work well with your employees, and I may lose a majority of them during the transition.

3. Easy entry business. Contracting is so easy to get in to from scratch that there is usually not a strong motivation to buy an existing company. For a few thousand dollars someone can get cards/brochures printed, put up a Facebook page/do-it-yourself website and start drumming up business.

4. High risk. Contracting is the 2nd riskiest business to be involved in. You don’t see the investors from Wall Street rushing in to buy interest in any construction company. Most contractors I have met are in it for the love of the business, not because they are enjoying tremendous returns on their investments.

5. No unique niche. Contracting is too much of a commodity in the marketplace. If you had invented a new widget and had a patent on it and created a market for widgets, your company would be worth a lot of money. But most contractors have no patents or widgets, but are doing fairly typical things that other contractors are doing.

Determining a company's value

So, with all this in mind, what is your company worth? There are 3 areas to be considered in placing a value on your company:

1. Assets. Assets come in several different forms including, yes, cash in the bank. However, I would not buy a company because it has cash in the bank. It would be better to take your cash and hire consultants to train your people in the performance of good systems to operate your company. That's because the most valuable asset to a buyer is self sufficiency, a company that is fully functional without you there. You want well-developed systems in place, and trained people to operate them.

2. Blue sky. "Blue sky" is the common descriptor used for the value of your company name and reputation. Many owners think blue sky is worth a lot when, in reality, it is not. Buyers can’t bank on loyalty and reputation staying with a company under new management. A company's name/reputation can even have negative value; sometimes there are skeletons in the closet and the name is actually a liability. Because of the potential risk, even the blue sky of a good company might not be as high as it could be.

Every reputable company that has been in business for at least 5 years has some blue sky value. The value will vary greatly depending on the type of business – design/build, hard bid, residential, commercial, maintenance or retail – and the type of area in which it is located – city, rural or small town. I’ve seen as little as a $10,000 paid for blue sky and as much as $100,000 paid for it when a major company was being purchased.

3. Existing contracts. For a construction company these are worth very little. Who knows whether the expected profit on someone else’s contract will be there at the end of the job or not? Who knows if profit will exist because of a good bid or because you took over the job and made it profitable? Still, construction contracts are worth what it costs to obtain them, even though you are buying someone else’s risks. Larger contracts should be purchased for around 1% to 2% of the contract; smaller jobs could run between 3% to 5%.

Maintenance contracts, because of their ongoing, year-to-year renewal potential are worth more money. I would typically value them at half the profit (after overhead) for 3 years. However, this is not paid out at the time of purchase. Make a list of contracts and payouts for each contract. As long as a client pays and remains a client, the payment is made. If at the end of 1 or 2 years, a client drops off the list and does not renew, the payout also drops off the list.

What's to become of you?

The other major concern is what will happen to you after the company is sold? If an outside investor or someone new to the industry buys it, they may want you to stick around for some period of time. If you sell to that kind of buyer, make up your mind to stay around for the sake of your employees, clients and buyers. If you don’t want to stick around, sell to another contractor who will not want you around after the business is sold.

A good source of buyers for your company may be your employees. They know the company, its systems and clients, and will want to see the company go on so they will be employed.

Call or write to us for information if you have any questions on evaluating your company’s worth, deciding who to market your company to or evaluating any offers you may receive.

Since 1980, Vander Kooi & Associates has been helping business owners add more to the bottom line of their company’s financial performance. We would be proud to help you with budgeting, estimating, high-performance management, marketing, sales, productivity and field training. Visit VanderKooi. com or call (303) 697-6467.