What’s Your Company Worth From the Buyer’s Perspective?

If you’re thinking about selling your company in the next three to five years, you need to start preparing now to get the most value for your business. Today on the podcast, Eric Wilkinson joins us to talk about what you need to consider from a buyer’s perspective as you get your company in the best shape to be sold.

Topics we cover in this episode include:

  • When owners wait too long to prepare their business to sell
  • Owner involvement
  • Number of employees in teh business that a new owner may have to replace
  • The importance of good books and due diligence when selling your business
  • Considering the reputation of the company
  • Risk and the Employee Retention Credit
  • The value multiple
  • Consider getting a valuation done


Join the conversation on our LinkedIn page: https://www.linkedin.com/company/CarpenterCPAs

Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com
Eric Wilkinson | https://www.sandhillglass.com/


[00:00:00] Wade Carpenter: Welcome to the Contractor Success Forum. In this episode, we are doing part two of the series about what a construction company is worth. And today we are focusing on what the buyer wants to see. And we have a very special guest today to give us some firsthand perspective. So if that’s of interest, stick around, let’s get into it.

If you’re new here, I’m Wade Carpenter with Carpenter Company CPAs. And here with me is my Stephen Brown with McDaniel Whitley Bonding and Insurance. And our special guest that is back with us is Eric Wilkinson of Sand Hill Glass, who has a couple of business purchases under his belt.

And Stephen, what are we talking about today?

[00:00:42] Stephen Brown: Well, we were talking before the podcast started, of course, and it could have gone on all morning, because what Eric’s gone through, what he’s learned by not only buying and selling business, the stresses involved, the steps involved, the pros and cons. He’s been in both positions. 

And so today we’re talking about what would make your construction company worth something to a buyer. 

When owners wait too long to prepare their business to sell 

[00:01:10] Eric Wilkinson: Just a little background, 2021, I ended up buying 2 different glass companies. And prior to that, I evaluated dozens of other different companies and since then as well. And a common thing is you come across for sellers is they’re ready to retire. Some of them might’ve been ready to retire a few years before they came to the point that they’re trying to sell. And it’s sad. 

A lot of times you come across these sellers and they’re working 60, 70 hours a week. They’re the main part of that business. And they’re tired. They’re ready to go, but they hadn’t prepared their business to be sold. They’re trying to sell a job at that point.

And from a buyer standpoint, at least my view, is I’m looking to buy an asset. I’m looking to buy a business that’s going to generate income and a return for my investment. I’m not looking to buy somebody else’s 60 hour a week job. And that’s where it can be difficult for some of these folks, you feel for them, because they don’t really have another option at that point. They hadn’t taken those steps like you guys described in your other podcasts to get their business ready for someone to buy it. And that doesn’t take a month or two. That takes years of getting things in line and getting it ready so that it is attractive and that a buyer is going to see value in it. And, and the value that you as the owner and the seller are wanting to get out of it.

[00:02:40] Stephen Brown: Mm hmm. Well, we preach on the Contractor Success Forum always about profit. Running your business without you being there. So when we talk about how do you get your business ready to sell, it’s that whole mindset of it not being you, it being the company. Your employees, your systems. 

What would you say are the most important things that a buyer looks for in a company ready to be purchased? And to pay a premium price?

Owner involvement

[00:03:08] Eric Wilkinson: I do look at the owner involvement, like what are they doing in the business? So that when they leave, what am I going to have to replace? Is what they’re doing replaceable, even? The two businesses I bought, one of the indicators I saw that they at least had something in place, whether it was processes, systems, another layer of management, if you will. 

They both were already spending months of the year in Florida. I’m based in Michigan. They like, snowbirds, they go down during winter. It’s not always the ironclad answer, but there’s at least an indication. Something must be there that, this is a business. This isn’t just, if this one person departs, the whole business falls apart.

Number of employees in the business that a new owner may have to replace

[00:03:52] Eric Wilkinson: Likewise, a common thing that I’d see is that with these smaller businesses, that might be 8, 20 employees or so, you find that you have the owner, who’s nearing retirement. His wife is working in the business too. She’s doing the books, she’s doing receivables or something like that. A son, a cousin, a nephew, or somebody else tied to the family or multiple people tied in the family are leading a crew, they’re doing something else in the business. So as a buyer, that can be somewhat of a red flag too. It’s well, how many people are going to be here after I buy that business?

And for a small business, if you have, two, three people depart, especially ones that were like in key positions, that’s a lot of risk for a buyer. So more risk for a buyer, the lower the value that they’re going to offer to you. And so that’s one thing a buyer is looking at is what’s going to stay with that business?

And then if I’ve got to replace these people that are performing these functions, what’s that cost going to be for me as the new owner? Because that’s how I’m going to value the business, because, if we’re doing it off some multiple of seller discretionary earnings or EBITDA or something like that, that might be somewhat discounted from the owner’s standpoint.

As the buyer, I’m going to look at it’s like, I’m going to have to replace that. That’s going to be with some type of salary to either if I’m doing it, getting compensated for above and beyond, if you will, the return I’m trying to make on my investment, or I’ve got to hire someone. I’ve got to pay someone to do that role. 

So for sellers, when they’re 3 to 5 years out, do they got the right people in place? Do they got processes so that’s not all tied to them and their family when they sell?

The importance of good books and due diligence when selling your business

[00:05:43] Wade Carpenter: Let’s talk about the due diligence and going through some of that stuff. Because I know you went through a few things and, besides the owner himself, there are sometimes other people looking at things and they assume that well, you’re gonna just skim through their books. Why do they need to really have things buttoned up?

[00:06:01] Eric Wilkinson: As a seller, you want to try to make your business look risk free or less risky. That’s going to give you more value. The less information you provide, the greater the risk that can be perceived by the buyer. And they’re going to compensate that by having a lower value, anticipating having to spend more after the closing to compensate for these types of things.

 You can tell a difference. A lot of times sellers, they’ll use a broker to help them and some of the brokers are really good. They help that seller package things so that it’s clear and concise for potential buyers so that they’re attracted to it and want to take those sort of next steps.

Some brokers are like glorified realtors that they really don’t do much to help and that can hurt a seller that they have really sketchy sort of information, there’s not much detail that can help to answer the buyer’s questions. And then, what you want to do is, you want to try to get as many buyers interested in your business to, one, find someone that can close, but then close close to the value that you’re looking for. You can turn away a lot of folks up front if, that package that’s put together, the financial package and stuff like that is sketchy, is missing pieces.

And then even when you get to that stage, that buyer most likely is going to have someone else involved. A bank, someone else that’s helping with that equity, a contribution. They’re not going to go on anybody’s word. They’re going to look at the numbers and they’re going to prove it out. 

And so if there’s things that have been extraordinary or special, you want to keep those to a minimum. You don’t want to have those things that just cloud it, add more reason for a potential buyer or their team to ask questions.

[00:07:57] Wade Carpenter: you were going where I was going with this with the bank. They are looking at tax returns and if they’re not up to date I know you had some horror stories on that and I know you said something about people getting upset about asking questions.

[00:08:10] Eric Wilkinson: As a buyer, it’s a risky thing for you to take on this unknown entity, if you will. And all you have is maybe some QuickBooks, a couple of conversations with that seller, maybe some site visits. That’s not a lot. And so when you come across things that don’t seem to add up, maybe there’s a legitimate reason, maybe there’s other things. You’re going to dig into it.

In due diligence, you and the bank are looking for things that potentially kill the deal. And so for a seller, you have to understand, that’s the point that the buyer’s coming for. And what I had seen is they weren’t prepared for that process, that inquisition, if you will, of questions.

And they get frustrated. They might get angry, like, why is this taking so long? Why are they asking these questions? As a seller, you’ve lived it for years. You might know this is why this is this way and that way. But the buyer doesn’t know that. They don’t know all that context and detail. And that’s what they’re trying to understand. Is this a legit reason? Does this make sense? And not just trust you at your word, but also prove it by making sure things match up. Do your books match your bank account transactions, , your tax returns and things like that?

 If something had been hidden, that’s a red flag and that’s a reason sort of to stop. Because if you find one thing as a buyer, there’s probably more. And so it’s usually not worth their time to continue on. So it’s having clean books, having a sort of a clean story to tell about how your business has operated the last 2 to 3 years or more really helps to go through that process. But having the patience to understand they’re going to have questions. They’re going to drill into why did you do something.

[00:09:56] Stephen Brown: As a buyer, you’re looking at assets, you’re looking for customers, you’re looking for your sales, you’re looking for whether they make a profit on their projects, whether there’s profit fades on their projects, you’re looking at all these things.

Considering the reputation of the company

[00:10:11] Stephen Brown: As a buyer, how do you determine best the reputation of the company, the goodwill, et cetera? We know how the assets can be valued, and then they’re client based for bringing revenue for you, the buyer, in the–

[00:10:23] Eric Wilkinson: Some of the things I’ve looked at is generally, I’m going to come at it from some type of multiple of what I found was for like the smaller businesses, Sellers Discretionary Earnings, where you’re not just taking the profit of the business, you’re also looking at what did the owner take in compensation and things like that.

I’m looking at the business as is today. Not what it might have done 5 years ago, but has declined to where it is today. I’m not valuing it based off of that. I’m looking at the recent history. I’m also not valuing it based on what it could be if I do all the work and get it to a certain spot. It’s sort of as is.

When it comes to customers, I’m not asking, usually in the early stages, you’re not giving up like specific names of customers. But what a buyer can expect is what’s your concentration of customers? Your top 10 customers make up what percent of your sales?

What sort of changeover did you have in those top 10 customers? Is this year’s top 10 totally different than last year’s and the year before that? You know, that might show that the business doesn’t have consistency. If you’re heavily concentrated with 1 or 2 customers, well, that could be risky if that customer doesn’t survive the transition, if you will.

 It goes back to that risk equation, looking at consistency. What have the earnings been? Sales wise, it wasn’t uncommon to see businesses, they were running along a certain track, and then a year before, something popped up. Earnings, magically, were three times what they had been on similar types of sales, or your sales popped up just in that last year. 

I’m looking for something that is going to be able to consistently generate income from this business because that consistency as a buyer is what I’m going to need to get the return I’m looking for, to service the debt I might have, all those different things. So,

the consistency of of those results that that business has had and those relationships with their customers is something that a buyer is going to be interested in and value.

[00:12:35] Stephen Brown: Okay.

Risk and the Employee Retention Credit

[00:12:36] Wade Carpenter: Stephen and I were talking before, and I know you’ve got a deal that you’re working on. I’ve got one I’m working on here in Atlanta, but you were talking about the employee retention credit and going back to what Eric was saying about risk, Stephen, you want to relate any of that?

[00:12:51] Stephen Brown: Sure. A lot of construction companies had their profits boosted by the PPP and the Employee Retention Tax Credits, the ERC. And by now, most of the PPPs that doesn’t have to be paid back, but the Employee Retention Credits can be huge, and they can be audited, and that can be an exposure to you if you buy it.

[00:13:12] Wade Carpenter: And there’s a lot of fraud out there on the ERC stuff, and there’s unscrupulous people just filing them left and right. So.

[00:13:20] Stephen Brown: What I would suggest as a buyer is you get a copy of that ERC and get it to your CPA and your attorney and say, do you think this is going to hold? Because you’re responsible for the audit, paying it back. And in some situations, it’s a lot of money. It’s amazing when you think about the accountants putting that ERC together are literally getting a commission based on the amount they get for you.

And of course, I’m sure if you’re audited, that extra money you paid the accountant doesn’t have to be paid back. It’s something that Wade has always been wary of as an accountant and CPA. There are certain situations where it’s good, and then there’s some situations where it’s flat out scary.

[00:14:02] Eric Wilkinson: That’s a good example of some of these extraordinary or one time events. If you’re the seller, you’ve got to be prepared that there was one of these one time type of events, that buyer’s not going to see it in the future, that they just throw that out, or they heavily weight it to other years that didn’t have that sort of noise in there. As a seller, you just got to be prepared for that because they can’t trust that the government’s going to come along and shower a bunch of money on the business again.

[00:14:30] Wade Carpenter: It goes back to the risk too, I think. Stephen and I were also talking about this and we could probably do another show on this, but the difference between an asset sale and a stock sale. When you’re doing a stock sale, you’re probably going to be on the hook for some of those liabilities. 

[00:14:44] Eric Wilkinson: As you get further into due diligence with a lot of construction companies, you do want to start looking at those contracts that you might have for those projects that will be ongoing during and after that transition. Can that contract be assigned to the new buyer?

Because if you’re doing an asset sale, it’s a whole new entity, and there could be challenges with that in terms of, for the buyer, they don’t want to get stuck doing the work and then not get paid for it. But that’s something that they would be looking into those contracts to see if it can be assigned and then doing the work after the close to get that changed over as well.

[00:15:24] Stephen Brown: And you’ve got warranty issues that you’re responsible for. I know we don’t have a whole lot more time on this episode, but I hope we can do more with you, Eric, in the future. This question I had was, you’re selling your company and you’ve lived pretty heavily through your company.

[00:15:39] Eric Wilkinson: That was a common thing that I saw during due diligence. You see, like landscaping for their home. You’ve got everybody on the car insurance in the family, or phones and things like that. The best advice I’d give is that when you’re getting into that phase, that five year phase out from when you’re thinking to retire, start cleaning that stuff up. It leaves less questions for the buyer to ask, and it also presents your business as a well run standalone asset.

I won’t say everybody does it, but it’s very common, but it can be tricky to try to then tease out, well, is this really a business expense or was it now seller’s discretionary earnings, which they’re trying to earn a multiple on? Because I may look at it as like, well, if your wife’s working in the business, yeah, you can’t now claim that it was discretionary for her cell phone, or maybe a vehicle, because will someone in that same role after the close need a phone, vehicle, and some of those other expenses?

It’s just easier to, to sort of keep things as clean as possible in the years heading up to it, not the weeks heading up to it.

[00:16:54] Stephen Brown: But that’s a good point because you’re going to come in and manage it and make those overhead costs go down and that’ll take care of a lot of this stuff you think. But if it’s already cleaned up. And you’ve got something that’s already operating, it’s less headaches for you. You’re going to pay more.

[00:17:10] Eric Wilkinson: It comes down to like, how much time is it going to consume for me as the buyer? For my team to take on this company? If I’m a business and I’m looking to bring on another location or add them on, if I see that I can just bolt this new business on, that’s a much greater value to me because we’ll be able to move faster, we’ll be able to start generating those returns. There’s efficiencies that can be had to lower our overhead costs. 

But if on the other hand, I see just a big flaming mess that I’m almost like starting a new business and having to pay for the privilege to do it, I’m not going to pay that much for that. So how you run your business and how you present it is definitely going to influence how that buyer views it.

Is this going to be a easy acquisition or is it going to cost me a lot of time and money to take this on? And I’m going to ask for a discount for buying that business.

The Value Multiple

[00:18:06] Wade Carpenter: Talking about the value multiple that they’re asking for. And, a lot of times the seller doesn’t really think about what you’ve got to do to make this go. If you’ve got bank loans, we had a discussion the other day about when they strip out all the receivables and the cash and the working capital from the business, and you’ve got to be able to make this go, service debt.

[00:18:30] Eric Wilkinson: You see some monkeying around to inflate the earnings and the like. One, they want you to pay a multiple on the earnings, but then also buy the working capital elements separate. And well, without these pieces of the working capital,

the business isn’t going to earn what it’s earning, whether that’s inventory or other things like that. 

The other thing I would say is you would see that, they kept inventory at a certain level value on their books for years at say, 50, 000. And now when it comes time to sell, oh, it’s worth 200, 300,000.

Hold on. If it wasn’t worth that a year ago, I’m not going to pay that much for it. If anything, it’s probably junk that’s been hanging around in your shop for 20 years and I don’t want to buy it at all. You have to view that from the buyer that, they’re going to continue that business moving forward, and you can’t get too greedy in thinking that, well, I’m going to strip everything out of this business so that when it hands over, that business isn’t going to be able to continue to operate as it was without that buyer having to infuse even more capital into it beyond just that purchase price.

[00:19:44] Stephen Brown: I was just thinking Wade, hearing Eric talk, this is all just such good universal truth to whatever type of construction company you have. A subcontractor, general contractor, any kind of trade. 

[00:19:55] Eric Wilkinson: 

Consider getting a valuation done

[00:19:55] Eric Wilkinson: When we talk about valuation, usually that buyer, he’s going to have to use a bank. And that bank is, you’re going to hire a third party to do a valuation on that business. And what I saw with that report that came back, they would give you comps of other businesses that had sold for that particular type of company you have, whether you’re a concrete construction company or glass company like mine, you can see what those ranges were. It only costs about three or $4,000. If I was a seller, spend that money, get a reality check before a buyer does. 

To give you an example of how I use that as I was going to close on the first purchase, I had these comps and the second business, it had been for sale for more than a year and I had reached out before then, but what they were asking was way too high. 

I approached them with those comps, said, here’s what 20 something other glass companies have sold for. These are the ranges. It’s in that 2 to 3 times, not 12 times, which is where your number is. This is where I would need to be at, you want to move forward? Got a yes. That seller could have saved some time and frustration. Just spend a little bit of money to get that sort of outside reality check of, okay, here’s where other companies like yours are selling at. The range that that is.

You can influence where your business sits on that range with all those things that we’ve talked about. If you’re a well run business, you’ve got systems in place, you’ve got clean books, you’re going to be on that upper end of the, that spectrum. If not, you’re going to be on the other side.

[00:21:31] Stephen Brown: Okay.

[00:21:31] Eric Wilkinson: All those people that have spent decades in their business and they’re ready to retire, it’s heartbreaking to see some of those that just don’t have a plan in place to sell. Don’t wait until the last minute. Because either you won’t sell, it or you’re definitely not going to get the value that you’d been hoping or planning on getting.

Start three to five years out getting things straight. And then you and your family can hand off that business that you’ve invested all that time and energy in to another person, another company that’s going to continue it forward for years and decades to come. And there’s no better legacy I can think of for, like, all your work that you’ve done in that business to be able to see that it’s continuing on, as opposed to, withering away.

[00:22:18] Wade Carpenter: Okay.

[00:22:18] Stephen Brown: Thank you.

[00:22:19] Wade Carpenter: I really appreciate you being here, Eric. This has been great. I guess we need to go ahead and wrap up here. Thank you all for listening to the Contractor Success Forum. If you’re listening on a podcast somewhere, check out the show notes at ContractorSuccessForum.Com or on the Carpenter CPA’s YouTube channel for more information. Consider subscribing to the channel and follow us each week. We will look forward to seeing you on the next show. Thanks. 

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