Valuation Math - Growth Pays

All other factors being equal, a contractor that can accelerate growth after the purchase will -- in most cases -- be able to pay for the business quicker.

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  Here are some things to consider:

Succession: Graph representing valuation and purchasing math for growth and timelines.
  • If the business was already on a strong growth trajectory, then that will be built into the valuation and likely won’t change the pay-off timeline.
  • If the business was valued during peak performance or just before an economic downturn, such as being valued in 2008, then it was likely overvalued and will take longer to pay off, creating a lower return for the buyer and potential payment risk for the seller.  
  • Business growth requires additional capital to manage, so unless the new management finds a way to make the business materially more capital efficient, then some of the after-tax profits each year will have to be retained for working capital with the remainder going toward paying off the business.  
  • Even if the capital comes in from the outside, such as in the case of a third party buyer or merger, the timelines still apply because that is how long their capital will be tied up before they even start to see a cash return. It is like having your money tied up in a 10-year CD at a bank and then after ten years, you can start to receive the interest payments (profits) each year while your original capital is still tied up.      

Continue building value in your business, yourself and your key team members with a good succession strategy....

Continue building value in your business, yourself and your key team members with a good succession strategy....

Words of Wisdom for Leading Growth
Develop a clear market strategy and set guiding principles that creates value for your customers and your business. Nurture and promote those on your team that take initiative to aggressively execute strategy while relentlessly following up on details.
Capital Use Policies
Capital is to contractors what blood is to our bodies. We can survive days without water and weeks without food but seconds after losing blood flow we lose consciousness. Capital enables the execution of effective talent and market strategies.
Using a Vision to Create Desire and Context for Tasks
There is a whole lot of work involved in building projects and building a construction company. It is easy to get mired down in endless to-do lists, processes, and problems. The thing that holds this all together and accelerates performance is the vision.