Two of the greatest value adders that are in your transition toolbox are a strong leadership team and a recurring revenue model. When a buyer is looking at a company for a potential purchase, it’s not just about the annual EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) number that they care about. In many cases, a seller loses track of what’s truly important to the potential suitor.
Make no mistake, a strong P&L is important and net income still is a driving factor. However, buyers are looking for sustainability and growth potential. A few years of profit does not always tell the whole story. Most individuals in the market for a good contracting business to buy are interested in the management and leadership of the organization…without the owner. In a lot cases, the owner is looking to move on. Oftentimes they are only willing to work in the business for a short time to smooth the transition. If that owner is the day-to-day decision maker and responsible for the majority of the sales or operations, your business value will not be anywhere close to what it could be. The development of strong leadership can have a tremendous impact the final value of any company.
The second key influencer in building value is the existence of an internal revenue maker. We call that “recurring revenue”. In our industry, that comes in the form of repeat business such as maintenance agreements or repeat customers. These are ongoing sales that do not require effort and the investment of hours and dollars to recapture the sale. The higher that number as a percentage of overall sales, the better.
We talk a lot to our clients about the difference between income and value. While income is always important to consider, building long term value by focusing on leadership and recurring revenue will help you when it’s time for you to retire.