It’s one of the most difficult decisions facing the owner of any electrical contracting firm: Knowing how or when to sell your business. It’s a decision many electrical contractors must confront these days, particularly Baby Boomers nearing retirement.
The decision becomes even more complex and at times emotional if the owner does not have a succession plan in place. It can be a tough transition. According to the Family Firm Institute, 70% of family-owned business do not survive into the second generation, and 90% never make it to the third generation.
Over the past 25 years, Joseph Bazzano, COO, Beacon Exit Planning (www.beaconexitplanning.com) and co-author of the book, Contractor’s 60 Minute Exit Plan, has helped contractors and other small business owners sell their businesses and advised them on succession planning and business valuation.
In his NECA LIVE seminar on October 8, “How to Increase the Value of Your Electrical Business,” Bazzano offered attendees tips on developing a realistic value for their businesses. Bazzano says it’s important for business owners to be realistic about what the business is worth, and to realize that a buyer will base their offer and business valuation on how much future cash flow the company will produce for them.
He says that while many potential purchasers will develop an offer based on a market multiple (typically a profit-to-sales ratio for a specific industry), business owners can improve on that multiple and the eventual selling price if they identify and improve key “value drivers” for their business. These drivers include but are not limited to the following:
- Annual growth profit.
- Sales growth potential, which is influenced by things such as the company’s niche or service specialty and the economic health of that company’s local geographic market.
- How dependent an electrical contractor is on a specific customer, supplier, or employee, and what would happen to that company if it lost that customer.
- Customer satisfaction and the recurring revenue that comes from customers that produce a steady flow of revenue.
One of the hardest challenges for owners of a small contracting business is that they are often one of the most critical assets of the business, and the company will not be worth as much without them. Bazzano advised owners considering a sale is to develop an exit strategy that will include building up a team of employees who can maintain the value of the contracting firm after a sale, if the owner is no longer involved with the company. “Work on your business not in your business,” he advises owners.
