Owners of remodeling companies commonly employ one of three exit strategies: close the company and live off well-invested profits; hire a general manager and work part time; or sell the company outright, either to employees or to an outside buyer.
Most remodelers hope to sell the company, and at first this seems to be a straightforward process. As with selling a house, you spruce things up a bit, find a willing buyer, pocket the proceeds, and live happily ever after. In reality, however, preparing a remodeling company for sale is much like training for a marathon; it requires three to five years of focused attention.
The first step is to find out what your company might be worth. Before you begin, however, ask your accountant to normalize your financial statements for the past five years by removing any income or expenses not related to standard operations. Normalized financial statements might exclude expenses such as depreciation or prepayments made to reduce taxes and non-remodeling–based income such as rent paid to you by your company. Also adjust owner's salary to the amount required to hire an experienced general manager in your area ( see Benchmark, August 2006).
Using normalized figures, calculate net profit for each of the past five years, then calculate a weighted five-year average that favors more recent years. For example, multiply 2005 net profit by 2; 2004 net profit by 1.75; 2003, by 1.5; and so on. ( Download a spreadsheet that automates these calculations here.)
Now divide the five-year average net profit by 0.225. (This is a standard figure used to evaluate service-based businesses.) The result is an estimated cash value for your company (see sample spreadsheet at bottom).
We're not quite finished. Certain characteristics of your business, called “marketability discounts,” may reduce its value to a prospective buyer. The sample spreadsheet lists common marketability discounts, such as dependence on a key employee and lack of systems. According to experts, a 45% to 50% discount is typical. Obviously, correcting even one or two of these characteristics prior to sale can significantly increase the sale price. —Judith Miller is a Bay Area construction business consultant and trainer specializing in accounting, finance, and computerization.
Some marketability discounts can turn off a buyer completely. To achieve maximum value for your company you must have:
- Great (not just good) financial records
- Great (not just good) process maps for three primary areas of the company: marketing/sales/estimating; production; and finance/administration
- Better-than-average wage and benefit packages for all employees
- Good long-term banking relationships