Why is Building Value Important?
Every contractor will eventually leave their business. The challenge is for you to ensure that your inevitable exit is a successful one, one that will deliver to you future financial freedom and be consistent with your personal and business goals.
Building value in your business is an integral part of a successful exit. A more valuable business provides you, the owner, with more flexibility and more exit options. A more valuable business is one with less risk and solid predictable cash flows.
Business value should be a contractor business owner’s primarily long term goal, not business income. If your business focuses solely on increasing income, you may be missing out on building transferable market value through intrinsic value and other measures of scale and positioning. Even in times of volatility, such as the current COVID-19 crisis, construction business owners should not abandon all focus on the long term, and align your company to your long-term business and growth strategy.
Exit Options for Contractors
A properly designed exit plan will help the owner implement strategies that will help them achieve their financial and business goals. Review these common exit strategies as you build value in your company, to ensure that your value aligns with your overall future business goals, even after you depart from the company.
Internal Transfers
Because of the inherent characteristics of a construction company, this is often the more likely exit planning option. This typically includes sales to key employees, which could include family members.
External Transfers
These are sales to either strategic buyers or investment firms. These are less common in the construction industry as construction companies are generally hard to sell due to their inherent risks.
Gifting
These are non-monetary transfers to family members who work in the business.
ESOPS
A retirement plan that you establish to be the buyer of your company where employees become the owners of the company. This can be a very tax efficient tool for exiting where income taxes can be either eliminated or dramatically reduced.
It is important to note that in all of the aforementioned options it is critical that the construction company have a solid foundation and strong predictable cash flows (strong business value), as this will increase your chances of success.
Strategies for Increasing Your Construction Company’s Value
You increase the value of your company by increasing the “multiple” used to value your company, which starts with intrinsic value. Intrinsic value is the value of a business based on its cash flows, past and future. Those cash flows are then converted to a value based on a “discount rate” or “multiple” that is determined in large part on the reasonableness of financial projections and both the quality and risk of the company.
Intrinsic value is a better measure of company value than the comparable company transaction or the public company multiples methods, since these methods have serious flaws that are not present in the “Intrinsic Value Method.”
By conducting an assessment (“Value Opportunity Profile”) of eight major areas of your company operations, each one being equally important to the overall sustainability and value of your company, you increase your value. These eight areas are:
- Planning
- Leadership
- Sales
- Marketing
- People
- Operations
- Finance
- Legal
The assessment will highlight your strengths and weaknesses in each of these areas and provide you with a roadmap to how improvements can lead to a better quality and less risky company with a higher intrinsic value, with improved business efficiencies and reduced risks. With the assessment, you can achieve a roadmap to develop a higher-operational and scalable organization, and will be better positioned to grow future revenues and cash flow, further enhancing your business value, thereby increasing your available exit options.
A process and tool called VOP (“Value Opportunity Profile”), is designed to provide you with an estimate of your current intrinsic value, as well as the roadmap for how to maximize that value through a structured improvement process. The process is formulated to address risk, quality and value at three levels, so your company can develop a staged plan to maximized value over time. In addition to performing the assessment, we also deliver a detailed report outlining the areas in need of improvement, the incremental value by making the improvements and conducting workshops to help you design and implement these improvements. If you are interested in learning more about the VOP process please reach out to your trusted Cherry Bekaert professional.
