5 Things You Must Do Before Selling Your General Contracting Business
It’s the perfect time to begin exploring exit options for your construction business.
The general contracting sub-sector within the United States casts a tremendous net over a variety of trades within the construction industry. General contractors focus on everything from interior design to disaster renovations and everything in between. There are nearly 160,000 general contracting firms in America and together, they account for over $425 billion in revenue.
While the industry is trending upwards right now, M&A activity is also on the rise in the construction sector. The buyer pool is massive for general contracting firms due to the high profit margins (nearly 25%!) and opportunity for expansion. Timing is critical when it comes to planning an M&A transaction and if you think you may be ready to take that step, the timing could not be better. Several factors are considered when strategizing an exit, but the very first step is getting a professional business valuation. While only a true business broker can tell you what your general contracting firm is worth, these are some of the commonly used formulas for determining value.
- 20%-25% of annual sales + inventory
- 1-2x SDE + inventory
- 2-3x EBITDA
After reviewing these formulas, you may have discovered that the total worth of your business is not where you’d like it to be. That’s ok! We help dozens of business owners increase the value of their business prior to sale. If you think you are still a couple years away from selling, I recommend taking some steps to build the value within your firm now, so that when you do decide to sell, you can secure the best price possible for your general contracting business.
Marketing is important to the success of any business, but in our digital age, internet marketing is crucial. Nearly 85% of consumers use the internet to find local service providers and if you don’t have a presence on the web, you are not even on your prospect’s radar. The first step is developing a website and claiming all social media pages, including pages on sites such as Angie’s List and Yelp. Due to certain general contracting firms, some consumers have a hard time trusting businesses in this arena. By claiming pages on review sites and directing satisfied clients to the pages to leave reviews will build trust in your community and set your business apart as a trusted firm. A strong marketing campaign also includes email communications, Google AdWords campaigns, direct mail and social media updates.
As you can see in the formulas above, your inventory value is a huge part of determining the worth of your business. To ensure a top sales price, you’ll want to make sure your equipment is at its maximum value prior to the valuation. While this is expensive, you’ll get that money back when the deal closes. We recommend spending a little more now (or over time) to ensure your equipment is always on schedule for routine maintenance, repairs are being done, and equipment is being swapped out when the time comes. The best way to preserve your equipment is to spread the cost of maintenance over the lifespan of the unit, rather than cramming in a ton of repairs when you’re preparing to sell. Equipment value is so important in this industry, and not only will it increase the sales price of your business, but an impressive inventory will attract more buyers.
One of the most overlooked value boosters in any business is having a strong management team in place. The reasoning behind this is that when the owner of a business is heavily involved in all faucets of the company including client relationships, sales, or operations, it can be extremely difficult for a new owner to seamlessly transition into the business. Buyers often view this situation as high-risk due to the potential outcomes of the owner leaving the company. For example: if the owner manages most of the large accounts, it could be risky for a new buyer to take over since the customers mainly work with the owner. If you see this problem within your own general contracting business, don’t worry – we see this a lot and it can be fixed. The solution to this issue is building your management team. Once you have identified your management team, begin transitioning your responsibilities to them so that when the new owner comes on board, there will be virtually no responsibilities to transfer.
The beauty of owning a general contracting firm is that it’s easy to build a base of repeat clients. You may have helped a client rebuild a deck and they were so satisfied with your work that they remember you when they need new lighting installed. Doing good work will generate future work for your business and build a “word of mouth” marketing campaign. Unfortunately, most people have had a negative experience with a general contractor and before choosing someone they have never worked with, they may ask friends or neighbors for a recommendation. Once you have established a few repeat clients, you can market your various service offerings to them and offer specials to generate new jobs.
It’s a well-known fact that our society places a higher value on environmentally friendly products and services, but here’s something you may not know. Millennials are the next generation of home-buyers and this demographic is currently the largest group in the United States, and part of their culture is taking care of the planet. That being said, it would serve your business well to offer eco-friendly options to your clients. Sometimes greener options cost more money but the younger generations are willing to pay it for the sake of the planet. Offering green supplies also gives you a great new marketing point and will help build your reputation as an ethical business.
As the owner of a general contracting firm, you understand the importance of staying up to date with what’s going on in your industry. The construction industry in the United States is massive and constantly adapting to new technology, demand and trends within a domestic and global market. The industry is also heavily reliant on several other sectors, many of which dictate the financial state of the industry and the small businesses within in. Because of these facts, construction business owners are always looking to the future and when the unforeseeable strikes, it’s essential that you have a plan in place for your business.