Building Business Equity

In my last column, I spoke about the difficulty that remodeling contractors have selling their remodeling company. Simply, we are subject to the whims of the economy, and are subject to market conditions that we have no control over.

When market conditions are bad and consumer confidence is low, homeowners hold back on larger remodeling projects. The phone stops ringing, and sales go down. We all experienced this in 2008 with the market downturn until 2012 when consumer confidence started to return to the housing market. For example, while contractors are reporting strong sales in 2013, no one is certain what may happen in 2014. Having a good year this year, does not mean you will have a good year in 2014.

This is the uncertainty that any potential business opportunity buyer will address in looking at your company for potential sale. This doesn’t disallow selling to family members or employers, but the sales price will reflect that economic uncertainty.

In talking with a business opportunity broker, he let us know that a company’s value is dictated by economic “value-drivers” that help maintain sales in any economic condition. Without these value-drivers, a remodeling company’s value is reduced due to all the uncertainty. He shared with us that a traditional remodeling company might sell for 2 times the annual net profit. For example, if a company has a net profit of $100,000, it might sell for $200,000 (if there is an interested buyer). Share that number with most remodeling company owners, and most will just keep working. They don’t want to give up their ownership position for 2 times the annual net profit.

The Answer – Diversify! Think of all the products and services that are part of maintaining and improving the traditional home. Can you begin to provide solutions to this long list of on-going services, and take on a new role with your homeowner clients? Successful companies create more than one profit-center so that when one profit-center is down, another area maintains sales and cash flow. There is the basis for a wonderful opportunity here!

In doctor’s terminology, can you become a primary care provider? I’ll review these additional profit centers next week.