Greg Wilkes (00:01):
The construction industry can be a tough business to crack, from cash flow problems, struggling to find skilled labour and not making enough money for your efforts, leaves many business owners feeling frustrated and burnt out. But when you get the business strategy right, it’s an industry that can be highly satisfying and financially rewarding. I’m here to give you the resources to be able to create a construction business that gives you more time, more freedom, and more money. This is to develop your Construction Business podcast, and I’m your host, Greg Wilkes.
Today we are discussing the subject of, is it possible to sell your construction business? Could you actually sell it? Now, that’s a big question because I guess that raises a few other questions. One of those would be why would you want to sell your construction business? What would be the reason for it? For some, they might want to sell the construction business because they don’t enjoy what they’re doing. They want to get out of being in construction altogether. For others, it might be that they’re approaching retirement and they’ve built a really successful company, but they need a retirement pot. They might be wanting to sell it for that reason. Others may want to get into something else, explore new opportunities and think, “Well, I’d like to to sell my construction business.” The first thing is asking yourself what do you really want to achieve out of your business. How big do you want to grow it? Is the end game to sell it? Is it to create a business that is well established and well run with other managers looking after things so that potentially you don’t have to sell it, you can just draw a wage as a shareholder or as a director? There’s lots of different ways of doing it if you don’t actually want to be in the business anymore. There are different ways of structuring it. What we’re going to do, first of all in this podcast, we’re going to think about how you can sell a business and what needs to be done in order for you to even think about selling a business. Then potentially we’re going to look at how much your business could actually be worth and if that’s going to be enough for you, maybe you are doing it because of retirement. We’re going to look at how you can work out your figure of what you need on to retire on. We call this your ‘FIRE Figure’ FIRE, which is ‘Financially Independent Retire Early ‘ figure. We’ll look at that too and see if you can create that with the business you have at the moment or if you can’t, what you need to do in order to create that.
The first thing we want to look at, is the different stages that a business goes through in construction. Now, if you were drawing a triangle on a bit of paper….I would draw a triangle out and split the stages into four. Draw four horizontal lines across your triangle. Now, in the bottom segment of your triangle, I call this stage of business being on the tools. This is probably the first stage that an entrepreneur may go through where he starts his construction business. But normally when you first start out, you are on the tools. You might be a trade person, carpenter, bricklayer, and you are working for a return to get your money. You may start getting the odd subcontractor to work for you as well, but generally speaking, you are on the tools two/ three/ five days a week, for example. Now, there’s some problems with this. I think we all know, you are never really going to be able to sell a business where you are on the tools because it’s so own operated. What often happens is someone on the tools will really struggle to scale their business. I’ve spoken about this before, but when you’re on the tools, it’s very difficult to get a business past (it varies) somewhere between 250K and maybe 450K a year. It’s very hard to scale beyond that when you are constantly working on the tools, you just haven’t got the brain capacity and the time to be able to step away and grow the business successfully, because you’re working in the business rather than on the business. If you’re drawing your triangle, the bottom segment, you write on the tools and then maybe next to that, you want to write, you are going to create a business that’s turning over between 250K/450k in revenue per year. All that’s going to do really, is pay you an annual wage. That’ll be a wage depending on how fast you work and how well you price up, that might be a really good wage. Ultimately it’s completely reliant on you. If you’re going to break your leg or have an accident etc, or off sick, then that business stops. So there’s no real inherent value in that to be able to sell it. I think we all know that.
Now, the next stage up from being on the tools is what I call Mastermind. This is where, companies that I’m currently working with at the moment, we’re trying to get them somewhere between 1 million and 4 million pounds a year in business. We have people in all different stages of that journey. In Mastermind, what we are really looking to do is for the business owner to completely come off the tools. They’re no longer working in the business in that way anymore, and they are the director and the manager of their company. They’re looking to have some admin staff that work with them, potentially a project manager that works alongside them too. Somewhere on their journey they’re going to get between one and four million turnover and they’re going to put all the systems and procedures in place, so that they’ve got a nice well-established business running for them. Now this is a great lifestyle business, because what we are really aiming to do here, is give the business owner more time, freedom and money when they get to anywhere between one and 4 million. It’s really a sweet spot to have a great lifestyle business. You could comfortably work three/ four days a week and know that you’ve got a great team around you that are following all your systems and processes. There’s enough money in the business to have an efficient team working around you, and you can earn some great income out of this. Businesses that we are working with at the moment, some of them are doing 20% net on that. You imagine if you’re a million pounds a year and you’re doing 20% net, you’ll be taking home 200,000 pound a year. If you were doing 4 million pounds, if you were doing 20% net, you’d be taking 800,000 pounds a year. We’re talking about a really well paid lifestyle businesses that ends up in Mastermind. That’s a great business, but again, that is also a very difficult business to sell. It’s really hard to sell a business where, again, it’s so owner operated, even though you’re not actually on the tools. If the owner disappeared it would be hard to replace the owner because the owner in this business has still got a very active role. They might be out doing the sales or have the relationships with the architects and they’re generally looking after everything and all the figures and things like that. So although it’s a great lifestyle business, it’s still very owner-operated. This business is difficult to sell too. Not impossible, but very, very difficult. Now I’ve got some experience of trying to sell a business that was at this level. I think when (this is years back) we were probably doing around one and a half million turnover and it was profitable, and we were approached by a company that were brokers and they promised to sell us a business and they did evaluation on it and it was pretty good. I thought “Yes, do you know what, I think I would be interested in selling this actually, and could just start another one up or do something else, get into property development” (or whatever it else we wanted to do). You’ve got to be really careful because there are a lot of brokers out there that prey on business owners like this. What happened was, you had to give them a brokerage fee in order to advertise your business. I think this worked out roundabout somewhere between four and six thousand pounds, which is quite a lot of the time. They prepared a bit of a pack, a sales pack that got all your figures together, and then they started advertising the business. Sure enough, we didn’t hear anything at all. We didn’t get one phone call or just the slightest interest whatsoever. It was really frustrating. What I came to realise later was that these brokerages, this is actually how they make their money. If they do get a sale, they get a commission from it. It’s well known that many brokers are doing it just to get you to pay this brokerage fee of between four and six thousand and that is built into their commission. They’re happy if you don’t sell the business. Well, obviously they want you to sell the business because that means even more money for them, but they’ve got their money anyway through the brokerage fee, and they do this to multiple companies. They’re making multiples of four to six thousand pounds every time they sign someone up. We were a little bit naive there, I was a lot younger and made a mistake and it didn’t work. So that was a lesson learned. The more businesses I’ve worked with, the more I’ve realised that (as we said) when you are somewhere between one and four million, if you are very own operated in construction, then it’s a difficult business to sell. Bear that in mind.
The next stage up on the triangle (we’ve got the two bottom segments filled) is what I call boardroom. This is where you are creating a business. This might be somewhere between four and ten million pounds (or much more than that) where you are creating a proper business where you are the CEO, you’re sitting at the top and underneath you, you might have a Operations Manager, Finance Manager, HR Manager maybe. What you’ve got is departments that now sit underneath you and you’ll sitting as a CEO and you are receiving reports, you are not actively visiting the sites, not meeting clients so much, but you are very much high level in this regard. You might have 20 odd people in the office and a load of people out on site, delivering that four to 10 million pounds worth of revenue a year for you. We call this boardroom. Now, this is where potentially you could sell your business in this segment. You’ve created something where you are not really (although you are sitting there as CEO, and that’s really valuable) a CEO can be replaced. You could come and have a another CEO that comes in and could do the same job as you. They could come in and quite easily do that. This is where we’ve created a business with assets and it is worth something. Now we might think, “Well, what is that business worth? How would I work out what a business like that would be worth?” There’s an interesting figure that we use when selling businesses, and they’re often valued by what’s called EBITDA. That is E-B-I-T-D-A, and that signifies ‘Earnings-Before-Interest-Tax-Depreciation-and- Amortization’. That’s what it stands for. Basically we’re talking about the bottom line figure (before you take the tax off of it) but the bottom line figure that your business makes after your accountant messes about and does bits and bobs with it. EBITDA is normally is a multiple of your annual earnings. Now how we work this figure out is, if you think about what your annual earnings are as a business….Let’s imagine your annual earnings / your taking revenue of 400,000 pounds net profit a year as a business. Now EBITDA is a multiple of that, and this is how we work out the value of your business. In construction, it is very difficult and it does depend on what the size of your business is and how good your systems are in operations, etc. But you can normally get a multiple, of somewhere as an average, between four and eight times your annual earnings. Let’s imagine you are on 400,000 pounds a year net profit, and we multiply that, let’s do an average of six. We multiply that by six, that then tells us that your business is worth 2.4 million pounds. That’s interesting, isn’t it? 2.4 million pounds is what your business can potentially be worth. If you sold your business for 2.4 million pounds, would that be enough for you to retire on? Would that be enough for you? You might look at that and think, “Yes! That’s loads.” Or actually, you might look at that figure and think, “No, how am I going to retire on that? I <laugh> spend a lot of money out every year, that isn’t enough for me.” This is where your FIRE Figure comes in, this FIRE Figure I mentioned earlier (Financially Independent Retire Early figure) They’ve done a lot of studies on this FIRE Figure and what they worked out is, that if you took your annual living expense and you divided it by 0.03, that is usually a good indicator of how much you need to live on without eating into your savings. You could basically live off that, if you invested that money in standard index funds / stocks and shares (nothing too risky) you could potentially live off that money. Let’s imagine we had our 2.4 million that we just said. Is that going to be enough? Let’s say you’ve got annual living expenses of a hundred thousand pounds a year, and we’re going divide this by that FIRE Figure, which is 0.03. We spend a hundred thousand pound a year on our annual living expenses, we divide that point by 0.03. What that tells us is, that we need a FIRE Figure of 3.33 million pounds a year, in order to retire early. So if we had 3.33 million in cash and we invested that and we lived off the interest, you could comfortably be able to spend your annual living expense, your a hundred thousand pounds and you wouldn’t eat into your pot, that would last you until you died! That’s the figure you need. That’s interesting, isn’t it? You might look at that and think, “Wow, actually, if I sold my business for 2.4 million, I’m nearly a million pounds short of <laugh> my FIRE Figure, so that isn’t enough.” That’s something to churn around and do the figures on with that. If we wanted to go little bit further than that, if you actually wanted to work out how much you need to earn as a business in order to reach your FIRE Figure; let’s say our FIRE Figure (3.33 million) If we then divided that by six, which was our EBITDA figure that we wanted, it actually tells us that we need to make 555,555 pounds in net profit every year in order to be able to sell our business for the six times multiple and get our FIRE Figure. That’s interesting, isn’t it? We’d need to make 555,555 pounds a year net profit, in order to sell our business for that 3.3 million pounds. There’s a bit of a goal to go for there. To be honest, if you were making over half a million pound in net profit every year, you might think, “Why would I want to sell it? I don’t want to sell a my business at all, I could comfortably live off that.” But you could go a step further. Maybe you want to engineer it even more and think to yourself, “Well, how do I get to 555,000 pounds a year in annual profit?” Again, that’s quite easy to work out. Most businesses run around (if it’s a good business and quite healthy) probably run at around 12% net profit. If we took your 555,000 pounds and we divided it by 0.12 (12%) it shows us that you would need annual turnover of 4.6 million. If you had a business that was doing 4.6 million in turnover, you had a net profit of 555,000 a year, you could potentially sell that business for 3.3 million, or decide just to keep the business and keep it at boardroom.
A lot to think about there. You need a calculator and a pen and paper to do it for yourself. I’ve got workbooks on this, if you’d like a workbook showing you how to work all this out, then feel free to pop me a message over on social or on email. But really, this is to get your brain thinking about it. What is your aim? What’s your big goal with your business? Do you want to sell it? The reality is, if you look at your triangle, if you are down at the bottom on the tools, it’s not going to happen is it. You’re not going to be able to sell a business while you’re down there. If you’re in Mastermind, that’s great. You might be creating a really good lifestyle business for yourself and earning some good money. Or maybe you are looking to get into boardroom and then you are going to have to put the right systems and processes in place so that the business can run without you, and you sit there at the top as a CEO, building yourself up for an exi in years to come. But at least you can work out your figures, your FIRE Figure, and then you know exactly how much you need to make in profit and how much revenue you need to make every year in order to make that happen.
If you’d like to work with me to fast track your construction business growth, then reach out on www.developcoaching.co.uk.