If you had to put a value to your company how would you do it?
The assets and current jobs are easy, how would you value the Name, Good Will, & Client list.
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For construction companies it's pretty much just the value of liquidated equipment and up to 6 months revenue, maybe 12 months if you've really got a good thing going.
I'm a one man band. the tools are worth 10 cents on a dollar at the pawn shop. people call me because they want ME. without me it aint worth shhhhhh......
Very well expressed!
Have a good day
Cliffy
In the commercial franchise world, it's 5 times annual billing / earnings.
I've heard as little as 2.4 times annual earnings for specialty businesses. Tenure in business, the value of the name, the value of local "good will" all enter into the equation. Also inventory, materials, office equipment, and, of course, trucks, trailers, tools.
Greg
Every year one of the business magazines, Entrepreneur I think, has a compilation of business types, total businesses sold, sale price vs. revenues (EBITDA), etc. That's where I got my 6-12mo figure from for construction. Do you have real world experience in this? I've never actually been around to see a small-time construction company sale. By your figures the little company I work for would sell for 10 million. Not happening.
No, I answered a little quick, Mike. My cousin worked for a long time with Bank of America, in a division that catered to the food industry, mostly franchises, KFC, Taco Bell, etc. I was shooting from the hip,
not thinking about the trades, specifically.Not pertinent numbers for one-off work. Some businesses work with residuals - insurance people, for instance, make money every time someone renews, no matter how long they've been a customer.Greg
It's really interesting to see how big a difference there is in different industries. Some as much as 20 years revenue. Many in the multiple year category. Granted the payments aren't all just cash out of pocket, but still it's interesting to see how much more residual value one business type has over another.
Valuating a company isn't an exact science, there are so many variables.
There are certainly guidelines for specific lines of business and I am sure if you ask an accountant who deals with clients of those business he should be able to give you a general guide for that particular line of business you are interested in.
5 times annual billing is kind of high for a lot of business unless you can justify it with future growth potential. Don't forget billing is not the same as earning.
I would be interested in a rough idea of the earning multiple somebody would be willing to pay for an ongoing small construction business like some of you are running.
Depends on whether you're buying or selling.
"Put your creed in your deed." Emerson
"When asked if you can do something, tell'em "Why certainly I can", then get busy and find a way to do it." T. Roosevelt
A lot of variables to consider...assets, loans, etc. But all in all, with any sort of predictability of gross sales, and depending upon who's buying, most will start @ 1 X sales. It's like a car: you have a base amount and the negotiation begins there. Good luck!!
I would be more inclined to bring on someone who might want to do a buyout arrangement. Lots of small business with potentially unpredictable revenues bring on a buyer to acclimate them to clients, land, etc.
"The nearest thing to eternal life we will ever see on this earth is a governmental program" -Ronald Reagan
I have heard the starting point is 2.5 times net earnings. (that is after paying your own salary/wages etc.)
Had a contractor friend who had an appraiser put a value on his business for a divorce proceeding and it wasn't tied to the gross sales amount. He did around $400K in gross sales, had a few loans on equipment and his grand total value was about $30K.
Bowz
15K to buy his wife out, not bad.
Not quite that simple. That was only the value of the "business".
They owned the building together through a seperate LLC, and she was going to get a good peice of his salary. He just wasn't turning much of a net profit, so there wasn't a lot of value to the "business".
The idea being if someone from the outside bought it, they would need to hire someone to run the operation. After that expence was paid, they would want a return on their investment. With not much net profit, there is little return on investment, so there is little value there.
Bowz
It would all depend on your "system". If there is none, you have nothing to value other than your hard assets. If you've actually built a "real" business, then it would operate without you and the systems that are in place would create an income stream. That income stream would be valued just like any income stream.
Bob's next test date: 12/10/07
there are people who do just that professionally.
not sure who ... but know that service is out there.
last company I was an employee went thru it when the 3 owners decided to split up.
afterwards ... one of the former owners told me I could probably buy the whole deal from the one remaining owner for their debt.
was around $40K at the time.
wasn't in a position to seriously consider it ... but still think that would have been one heck of a good deal.
so ... motivation to sell has to come into it.
in that case ... all 3 owners wanted out. Just didn't want to play the game no more.
I never did find out what the "list price" was. That sale went backwards though, because 2 of the 3 owners bought their way out. One for cold hard cash and he walked away ... another paid less, but stayed as an employee / designer for a coupla years.
Jeff
Buck Construction
Artistry In Carpentry
Pittsburgh Pa
i think most companies will only fetch what their hard asssets are worth
the best way to sell a small company is to bring the potential buyer on board... train him / her in the operation
let them see how they can seamlessly take over the reigns so the public will not realize anything has changed
incorporate... start transfering the stock in a timed buyout
i think that is the best way to get the vaue out
the trouble is finding a buyer who recognizes what all of these systems are , what the client list means, what established customers mean
it really does have tremendous value... the devil is in the details of transfering that value whole
Mike,
That is the ideal way to maximise your return. Otherwise you force someone to go to a bank and convince them to lend money on something where you are the key element to making things work..
Since you will be leaving the bank sees it's buying nothing but air and equipment some of which they have no way of putting a value on or have any reasonable expectation of recoving should things go wrong..
Any company is worth what someone will pay at a given moment in time.
I've heard from folks at the development bank it is projected profit in future 3 years.
Name...Good Will... are not really something with much financial value. Client list is difficult to quantify, that is a cross your fingers kind of thing.
With anything... it has to be sold to the right prospect to maximize profit.
Profit and potential profit rule the day. I would suggest that in present economic circumstances construction related companies are at a low in the value cycle.
That said, I've seen a guy sell the same Idea to 30 people for upwards of 25k each-and apparently the idea was heavily flawed.
L
GardenStructure.com~Build for the Art of it! Decks Blog
Case 1: I did construction for about 7 years, we averaged 3-4 homes a year. Myself and three guys did virtually all of the work, but I subbed out foundations, chimneys, drywall and roofing. One guy was an electrician and another a plumber. They each made around $85k per year. My goal was 17% profits, I'd pay out everything over 13% to them in profit sharing. The profit sharing could be another $35k to each of them per year.
A few years ago I sold the business to the other three guys. Value was for the equipment plus $62K per guy. I made a little bit on the equipment plus the $186k from the three guys. I thought they overpaid by about $185k. Honest.
They felt that because I turned down so much work that after they took over they could do the work we were doing plus more, and they'd all make a killing.
So what happened? They tried to expand quickly but couldn't find good help to support that expansion. They couldn't represent themselves well in the market, they couldn't sell, they started building cheaply, quality declined. They tried doing a couple of spec homes. Yadda yadda yadda.
They disbanded last year, two going one way and the third out on his own. Now they sub for other builders in the area.
What they never realized was that I was the business. The face of the company. The name. My name and my reputation was the value of the company, that is what generated future projects. I never advertised, but the phone was ringing by word of mouth. We did custom homes so we were above the fray of the spec home madness. With custom homes, financially you pretty much know where you stand the day the contract is signed. Plus we were building in good times. Granted, these guys slid off the edge before the sub-prime fallout had an effect on the market last year...they just were not good businessmen in terms of knowing the scope of their abilities.
What the company held, it's assets, the tools, the machinery, was not worth much. But that was the true value of the company. So when their business foundered, they got less than value in a distress sale.
Case 2: I sold a consulting company last year. I had two partners, one I brought in because he knew how to take my idea and turn it into something. Another guy I gave an equity share to because he was up on the global legislative side of things, he was the shaker and mover kind fo guy. A whacko, but he had the connections.
Still I kept 55% of the company. My original goal was to just sell a software package. Then we got into training and consulting. Things blossomed. We went from straight one-time sales for the software package to annual licensing fees. I ended up accruing a massive informational database.
I sold last year to a large software company for big bucks, more than I ever imagined.
My company had no real estate, we all worked out of our houses on our own computers. Besides the two partners, I only had three true employees, two who wrote code and one who did a lot of administrative and training support. Everyone else was working on commission as independent subs.
The software, the ones and zeroes? It was worth something. But it was the transition to annual licensing fees that upped the value of the business, as that produced future income. The killer was the database. That turned into a bonanza and really upped the value of the company. Not in genrating revenues today, but in the possibility of what that database might be able to generate in the future. It was the database that sold the company.
So what did I sell? Annual licensing residuals and several terrabites of data.
In this transaction, I was worth virtually nothing. The database and the potential of that database was worth everything.
So...what's a company worth? Like the other guys wrote, "it depends."
Congrat to you Mongo! The licensing fees falls into that "income stream" line that I was talking about. Bob's next test date: 12/10/07
this thread cud use a bump...
da....bump !Mike Smith Rhode Island : Design / Build / Repair / Restore
It's a slow thread because most of us aren't really thinking about building a business that would have a resale value. Bob's next test date: 12/10/07
CAGIV
My father used to do this professionally. He said first generation construction business was only worth fixed assests. Untill you reached a threshold number (I forget what it is but we're speaking about really big where systems were in place and the owner could be gone without the business folding.
To get a fair value bring a list of your assests into a bank you are doing business with and ask them what they would lend you on that.
Because chances are the buyer will have to do just that..
I don't know the specifics but I talked to a guy who was a roofing contractor and he had "bought out" a roofing company such as "AAA Roofing" which had been in business since about 1976.
He then was able to advertise that his business had been around for 30 plus years and I assumed that alone added a lot of value and credibility to his company.
This is a really good thread. The premise that the value is really only that of the hard assets makes sense to me.How does the equation change when the situation is not buying a business,but rather buying into a (small and young (<10 years) but so far successful) business as a partner, where the person or people who have built the business's reputation are still fully involved and likely will be for a long time?
We have asked a few of our employees if they wanted to buy into the partnership. Two of them decided to accept the offer.
We valued the company by its straight book value. We loaned them the amount needed to equal their share of the company and used a portion of their draw to pay off the loan. In both cases the loan was paid in less than two years.
In neither case was there a significant financial gain for the existing partners but that was not the reason for the action. We were looking to keep a valuable person and give them more responsibility. In the long run this has improved our profits and our quality and has spread the administrative burdens of the business between capable and motivated people.
We have used a similar procedure to buy out a partner with a small additional payment for ongoing projects that were at least partially due to his efforts. The buyout was not a burden to the ongoing operations of the company nor a huge windfall to the departing partner but all were happy with the result.
We valued the company by its straight book value.
how did U arrive at that number?
Jeff Buck Construction
Artistry In Carpentry
Pittsburgh Pa
Assets minus liabilities.
In our case, cash plus accounts receivable plus equipment (trucks since every other tool is expensed at purchase) minus accounts payable (We have no debt.)
In addition the departing partner took his share of the expensed tools.
The book value number is determined by you or your accountant every year at tax time. Hey, that's now.
pretty clear.
Thanks.
Jeff Buck Construction
Artistry In Carpentry
Pittsburgh Pa
mrfixitusa,you would THINK that advertising "in business since 1976" adds value-----but not much in reality.
IF- you buy a commercial roofing business with a fleet of trucks, shop, equipment----and established commercial accounts servicing their flat roofs--MAYBE there is some value there---but it is primarily in the equipment.If it is a residential roofing business-------well the value in buying is--not much.Have a friend--- I actually sub some work out to him.--He bought out his first employer when the employer retired----basically he bought the trucks etc.----guy had been in business FOREVER---and yet, despite living here for 45 years and being in the same trade for 20 years-- i had never heard of him---so where is the value ?My situation is exactly like Blue described--- I have zero interest in deluding myself into thinking my business will ever be salable-----or that it will be passed on to a 2nd generationto me-----it's purpose is the income it generates now-----which is re-invested into other financial assets on my personal balance sheet. THOSE things can be passed on. I am much more interested in building my personal net worth-than in distracting myself in the pursuit of a statistical long shot( selling the business)Best wishes, all--Stephen
stephen
suppose you have an ambitious young person working for you
you know human nature... they are going to be on their own sooner or later
and you know that there are lot's of thinkgs you can pass on that will let them hit the ground running instead of falling into the abyss that most of us do
then i think a transitional sale works great for both...
and if you structure it right you have a small income stream for say... ten years after you stop going to work on a daily basis
by the end of the term .. they know everything you know and they're free to use it or ignore itMike Smith Rhode Island : Design / Build / Repair / Restore
A transitional sale can work, and it should work. That was the intent when I got out of building a few years ago.Two of the guys were fairly smart and recognized the proverbial goose that was laying the golden egg, the little niche market that we held.The third guy felt he could pump a little HGH/steroids into the goose and get that golden egg real big, real fast. He had the bigger mouth, talked louder, and pushed harder than the other two pushed back, and he won the expansion battle.But they all lost the war.I do think an in-house transitional sale has a better chance of being successful than a cold sale, in a transition the business model should essentially remain unchanged, it's just the soldiers doing the work that have changed. There shouldn't be a change in the philosophy or execution of the game plan or business plan. At least not immediately.It's always good to re-evaluate what you have and tweak it to your strengths, or tweak yourself to match the company's strengths. Whichever provides the greater upside.But it's not good to buy a successful McDonald's franchise and then change the menu overnight to serving nothing but soft boiled eggs.That may be the dumbest analogy I've ever made.<g>Mongo
mike---you are talking theoretically.as a practical matter---it's never gonna happenstatistically--- how many people like you and I--achieve such a thing--next to noneyet many people delude themselves into thinking they are "building a real business"---and that it is a saleable assetin actuality--very ,very rare.On the other hand- what I propose--is absolutely achievable by just about each and every one of us----and i don't need to spend one second looking for a sucker to "buy my business"BTW--- in my early 20's--and in another industry I was groomed to buy out an existing business along with the forman.
instead I started my own mickey mouse little deal here--in roofingthe forman now works for a suburban government recreation departmentand the business we were being groomed to buy out--it's been closed for 10 years or so.stephen
do your bosses know yer gonna sell their company?
great scam if U can pull it off!
Jeff
Buck Construction
Artistry In Carpentry
Pittsburgh Pa
FWIW, there are a number of different ways to evaluate the value of an on-going concern, with a number of factors to be considered in each.
None is THE way.
Remember Mary Dyer, a Christian Martyr (Thank you, Puritans)
http://en.wikipedia.org/wiki/Mary_Dyer
May your whole life become a response to the truth that you've always been loved, you are loved and you always will be loved" Rob Bell, Nooma, "Bullhorn"
I disagree that there are multiple ways to value a business.All businesses are valued as the NPV of the future stream of earnings, no matter whether they are large publicly traded corporations, small cap firms, or ESOPs (like I work for).The catch is trying to figure out what that future stream of earnings is. That and the discount rate used for the NPV calculation.
Have it appraised by a construction familiar business appraiser.
"Doubt is not a pleasant condition, but certainty is absurd."
~ Voltaire