Defining and Achieving Full Value Subcontractor

The motivation to learn how to achieve a Full Value Subcontractor began when my dream of running my family’s construction business was dying. The family business was a commercial concrete form erection business and a form rental business. The erection business was started by my grandfather, father, and my father’s first cousin. They made a decent living for fourteen years until they got their lucky break. Dallas’ boom of the 1980’s. Dallas’ skyline was lined with tower cranes building buildings that would forever be part of a new modern skyline.

For 10 years the companies printed money. The erection company built a historic 50 story concrete tower with 1.2M square of concrete, terminals and parking garages at DFW airport, multiple buildings and parking structures for a new American Airlines Campus, and a string of other structure around DFW.

The rental company became the largest metal form rental company in the US with 5 acres of metal forms of various shapes and sizes. The party was capped with the construction of Dallas’ new Federal Reserve Building.

The problem with over reaching your dreams is you don’t build a structure capable of consistently sustaining the growth, nor is the mental energy and focus to maintain momentum nurtured.

I was taught that you work hard and learn the business from the ground up. The ground up only covers learning the trade.

From the time I was 9 years old, I followed my father around anywhere he would allow me to follow. I would rather go to my father’s office and wonder around the yard looking at all the various pieces of equipment and tools, than a trip to Six Flags. When I was 14, I began doing shop drawing for buildings all of the country. When I was 16, I was old enough to work in the form manufacturing and refurbishing facility. When I was 18, I graduated on Sunday afternoon. At 6:00 AM Monday morning, I was walking 3.5 inch 4X6s 17 feet in the air 400 hundred miles from home. My Amarillo by morning was not the same as George Strait’s song. There were many more milestones and positions. I tell you this because I want you to know I have lived and breathed every minute aspect in the life of a trade contractor. It literally is in my DNA.

The problem with learning a business from the ground up, you don’t learn about the foundation that is below the ground. As in every building, the foundation is what supports the building. The higher the building the stronger the foundation has to be built. The peers have to be supported by bedrock.

The foundation of a trade contractor lies in the business of the trade. Not the trade itself.

As my dream was dying, I was introduced to concepts that are fundamental to achieving a Full Value Exit. The concepts are how businesses valuation are determined. They are

• Market Approach is that the market’s current valuation of the comparable companies and/or transactions provides an indication of value for the subject company being valued.

• Income Approach is based on the premise that the Fair Market Value of assets is the present value of the future earnings (cash flows) that are available for distribution to both equity and debit investors of the business.

• Cost Approach establishes value based on the cost of reproducing or replacing the property, less depreciation from physical deterioration and functional obsolescence, if present and measurable.

These concepts were applied to the family businesses that were being sold because the details of the agreed to success plans were never memorialized.

It studying the concepts I noticed they were just mathematical formulas at their core. Math formulas can be dissected, studied, and learned. I didn’t then, nor do I now, care about learning all the skills necessary to apply the various approaches to a business. What I learned was the numbers that mattered. They all boiled down to consistent growth in net profits. They just provided different lenses to view and validate the growth in net profits.

The next lesson was what was necessary to prepare the data to be processed via the various approaches. This was and continues to be the challenge of determining the value of a privately held businesses. As I see it, this where huge amounts of money can be made, but is usually lost. This is part of the exercise that creates the most frustration and aggravation with most privately held SMBs, but specifically trade contractors. I have always found the frustration and aggravation interesting. Trade contractors spend their lives following plans and specs on the job site. But they refuse to follow the plans and specs required to achieve Full Economic Value in a business they poured their blood, sweat, and tears into building.

Before the value of a business can be determined the data has to collected. Ideally, data collection would be as simple as running an report from the accounting system. This is rarely the case.

The person that was hired to valuate my family’s business became a friend and later a mentor. He told me half his fee was spent cleaning up the data so he could begin creating the models for each approach. Then his minimum fee was $25,000. Today, his fee is on the plus side of $50,000. (Note | This is a $12,500 to $25,000 financial leak.)

Other data lessons:

• Financial data produced by an accounting system has the highest credibility.

• Financial data needed spreadsheet or other adjustments are discounted due to reduced credibility. (Note | This is a unquantified financial leak. It could reduce the selling multiple from .5 to 5.)

One of my good friends sold his commercial P&C agency a few years back. He was one of the few of my friends that sold the business he and his partners built and achieved a Full Value Exit. How they did it so simple. They set the price and gave the company that had approached them full access to their accounting system. Because the agency’s books consistently documented the economic activities of the agency, the agency was purchases at the highest multiple the acquiring bank had ever paid for the an agency. The premium was seven figures. (Note | Full Value Exits do not create financial leaks. They receive a premium purchase price.)

The other agencies purchased by the bank began adopting and implementing the system of my friend’s agency. A financial holding company with a billion in assets purchased at Full Value and adopted a platform built by four insurance agents that built an agency because they got laid off due to a carrier’s reorganization.

They were great at their trade, but knew nothing of the business of their trade. They learned over the years. They made very comfortable livings over the years because they were good at their trade and were learning the business of their trade. They are very comfortable in their retirement years because they learned the business of their trade. Every trade contractor or SMB owner can learn the business of their trade.

Many trade contractors are not happy with the value placed on their business. They think the business is worth more. It may be if the accounting system fully captured the value, and the business is not dependent on the owner’s relationship and knowledge. If an owner is not happy with value placed on their business when they are ready to sell, they have two choices.

• Accept the price.

• Work longer to implement the changes necessary to achieve the desired price.

The best choice is to begin implementing the steps necessary from the day the business is founded, so the owner can enjoy Full Economic Value while working and enjoy a smooth transition into a Full Value Exit. Win-Win.

The requirements for achieving Full Economic Value while working are the same requirements for achieving a Full Value Exit. They are:

• Set of books that consistently document the economic value created by the business for a least three years. If a random event or series of events occurred in one of the three years, additional years may be required. This is why the minimum or best case requirement is three years. Do you want to plan your retirement on best case timelines?

• Achieving the scale required to attract, finance, and maintain quality managers that will continue to support new ownership without an economic disruption or additional financial risk. The following is a critical concept that owners of trade contractors consistently struggle to understand. If the company cannot run without you, it has no value other than the liquidation value. You cannot sell yourself. Don’t expect to receive a Full Value Exit if the value of your business leaves with you!!! Learning the business of your trade, means learning to delegate. Learn to manage via systems and SOPs.

• Make sure you have created transferrable value prior to advertising you business is for sale.

• Be authentic and transparent with your stakeholders. People understand you cannot work forever. They need to know the company can be transferred without their economic stake in the company being negatively disrupted. This can plan can be systematically implement with planning and execution. It is critical that the owner controls their emotions and executes the plan they articulate. Everyone has a story about an owner saying one thing about succession planning and doing another. If you actions to do stay on point with the plan as articulated, they the value proposition of the company will be damaged. Stakeholders will begin to doubt a smooth exit. A Full Value Exit is not achievable without stakeholder buy-in. Warning | This a business activity without mulligans. Once doubt has been created, the Genie does not go back in the bottle.

Learning how to achieve Full Economic Value while working, and a Full Value Exit at retirement takes time to learn. Takes time to internalize. Takes time to implement and document. The old Chinese Proverb is applicable to becoming a Full Value Trade Contractor.

The best time to begin creating a Full Value Trade Contractor is the day the business if founded. The next best time is ten years before planned retirement.