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.

D. Brown Management Profile Picture
Share

  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.      





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

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

Contractors Exist to Build Projects - The Business of Building
Contractors exist to build projects. Delivering projects to a customer is the foundation all contractors are built upon. The business of building is about continually delivering more projects that are progressively larger and more complex.
Ownership Transition and Capital Basic Model
When a contractor goes through an ownership transition, the business itself is the proverbial goose laying the golden egg. Remember the basic math formula for ownership transitions and use this simple calculator as a starting point.
Building a Systems Development Team - Best Fit
Could an internal Systems Development team create a competitive advantage for a contractor?