During these giddy boom times, I’ve heard more than one remodeler announce with anticipation “I’m about to sell my company. I’m so excited.” I’ve heard such glee a dozen times before over the past three years. But then months or even years later, those once-excited remodelers admitted to me their dream had gone up in smoke. Poet T.S. Eliot expressed the problem perfectly: “Between the idea and the reality … falls the shadow.”
Each story was different, but only in small ways. Every company had been in business for the decades necessary to create a sustainable operation. Owners had established effective systems that allowed for efficient work-flow from lead intake to job close out. There was a cohesive company culture that attracted good people and allowed them to provide excellent service to their clients. Each firm had developed a solid middle-management team capable of successfully managing day-to-day operations. In short, they had built a company from the ground up that the right buyer would want!
All that, and still no deal for these companies. But you can do better.
This is a column that, in telling what not to do, also points out what you should do if you hope to execute a successful transition. I’ll focus on five no-no’s.
1. Failing to Think About Why You Might Exit
Over 30 years of working exclusively with remodelers, I’ve noticed few seem to spend much time thinking about their inevitable exit. When asked, most say something like “I dunno, sell it, or hope my kid takes it over.” That is far from being a good game plan!
You might exit out of intention (“I just want to fish more”) or by accident (“I didn’t know I’d fall off a ladder, hit my head, and become a vegetable).” Just as you buy insurance to protect against unforeseen circumstances in your business, so you should develop contingency plans for both the best case (more fishing), and the worst case (bedridden). This is VERY difficult to do when you’re working 50+ hours a week and starting a family, and it is even more difficult as you age. Many people put off the question, saying “things could change” Indeed, they could–in fact they will. Don’t limit your options by waiting to consider your future until Social Security stares you in the face.
2. Waiting Until You’re in Your Mid-60s to Start Planning
Under even the best-case scenario, it takes five to seven years to go from idea to reality. It can take three years alone just to pull information from the owner’s head and set it into concise documents capable of being followed by someone who isn’t the owner. It takes years to build the core middle management team into something approaching 90% efficiency. And if you lose a key player on that team, you’re back to go while the appropriate new hire is on-boarded and integrated into the culture; figure on another couple years to go through all that.
Just like planning for retirement is easier the younger you begin, so too is developing a strategy early on to pull and polish the many components of a successful company. It takes decades.
3. Pinning Your Hopes on a Successor with Only One Skill Set
Picture the org chart of an effective middle management team of a successful high-end remodeling company. Typically there’s an owner/lead at the top, with a second rank of executive filling roles such as marketing, estimating, production, finance, and administration. Some of these departmental functions might well be filled by the same person or, in the case of marketing and design, performed by outside contractors.
A highly successful and enthusiastic production manager might not have the skills needed to sell the X million dollars of work to cover overhead. An equally successful and enthusiastic sales person might not have sufficient management and/or leadership skills to keep the team moving in the right direction. Even if such potential exists among current employees, the time it takes to train and develop additional skills can, again, run into decades. One doesn’t learn how to ski moguls watching videos; likewise, one doesn’t learn to become an owner/leader/manager in a few years.
This was painfully clear when I was asked by a very successful and wealthy businessman in the Midwest to help set up accounting and job cost systems for the company he had just purchased. The company had 30 years of success in multiple areas of remodeling. The buyer had brought in very high-level—and very expensive—professionals from around the country to upgrade the brand and marketing program, develop sales systems and a sales force, and hire and train admin personnel. Money seemed to be no object, and the owner was involved, intelligent and focused. But three years later, he shut the company down entirely. He couldn’t learn fast enough how to run a mid-sized remodeling company no matter how much money he threw at it because none of the people he hired had hands-on experience at such a firm.
4. Selling at the Top of the Market
What? Isn’t that what you’re supposed to do? For you, absolutely, but that’s not how a buyer thinks. They want to buy at the bottom of the market. In order to actually conclude a good sale between an excellent seller and the perfect buyer, both parties have to be comfortable with the price: the buyer will accept less than hoped for and the seller will pay more than anticipated. When both are equally unhappy with the price–BUT can agree—that’s the right price.
We are now close to the top of an excellent run, nearly the longest economic expansion in American history. For many remodelers, volume has increased significantly over even three or four years ago, and with good management net profits have increased as well. Money has been made!
But remodelers who hope to sell should regard those record numbers as a reason to temper their expectations. After all, people buy businesses based on current revenue and earnings as well as potential earnings growth. If your company is operating at 100% capacity now, where is the potential upside?
Many but not all of the remodelers who I mentioned earlier failed to convert their idea of selling into a reality because they based the sale price on the last few years’ earnings. But anyone who has worked in remodeling for decades knows remodeling is a highly volatile industry, and spending on upper-end discretionary improvements is particularly subject to rises and falls. That high-end work is the niche where many of these disappointed remodelers operate.
In my recent experience, owners have been so emotionally and psychically tied to a high valuation that buyers have not been able to rationalize the risk entailed. A more moderate approach would entail a longer time frame and elimination of the high and low to arrive at a compromise value – one which makes both the buyer and the seller just a wee bit unhappy.
Take your company’s average net profit since 2010, throw out the top two highs and the bottom two lows, and you get a more reasonable anticipated sale price. Remember the goal: find a price that allows the buyer to anticipate reasonable future profits to repay you, the SBA or the bank for purchase of the company.
Of course, if someone is unlucky, unsophisticated or stupid enough to pay you the highest asking price and subsequently defaults on those loans, goes bankrupt or butchers your company reputation, what’s the big deal? You have the money, right? I believe you really don’t want your reputation diminished in the community. Remodeling is based on personal relationships, and your current and past clients expect you to uphold the highest ethical standard you’re known for. Just give it a thought, please, while you negotiate.
5. Hitching Yourself to the Company for Too Long
If through rational valuation, clear self-knowledge, and excellent timing you find yourself and the buyer ready to sign the deal, step back and imagine your future, both short term and long term, when the company is no longer yours. This is where the importance of Rule #1 becomes apparent: if you know why you’re leaving as well as what you might do next, then clarify time expectations and outcomes and be gone!
A man I respect highly, my father, told me 12 months after he had sold his company “the caged bird doesn’t sing.” He chafed at the new ownership even though they were well vetted and very capable. He was anxious to get onto the next adventure. You will be too. Good luck!
