Seven Drivers of Valuation

A significant number of contractors will be going through an ownership transition during the next decade.

D. Brown Management Profile Picture
D. Brown Management
April 26, 2018 2 minute read
Share

These transitions impact many people; especially the owners and the management teams.  

Succession: Key Drivers of Valuation. Book: Mergers Acquisitions From A to Z by Andrew J. Sherman. 1. Strong revenue growth. 2. Significant Market Share or Niche Position (Strategically Focused) 3. High Barriers to Entry by Competitors. 4. Strong Management Team (Post Succession). 5. Strong and stable cash flow. 6. No Significant Concentrations of Customers, Products/Services, Suppliers, or Geographic Markets (Strategically Diversified). 7. Low Risk of Technological Obsolescence or Substitution

Valuation is a very critical factor during these transitions because it has to be a number that fairly represents the value of the business for the outgoing owners while providing a solid return for the buyers.  

Andrew J. Sherman just published the Fourth Edition of Mergers & Acquisitions which should be read by anyone who is or could potentially be on either side of a transaction.  He laid out 7 Valuation Drivers:

  1. Strong Revenue Growth 
  2. Significant Market Share or Niche Position
  3. Barriers to Entry by Competitors
  4. Strong Management Team
  5. Strong Stable Cash Flow
  6. No Significant Concentrations in Customers, Products, Suppliers or Geographic Markets
  7. Low Risk of Technological Obsolescence or Product Substitution

For a contractor #3 and #7 don’t typically apply. 

#4 - Building a strong management team is the leverage point that makes the other factors sustainable in the long-run and therefore truly valuable.  

Focus on building your most valuable asset; a strong management team. 

Project Delivery - Integrated Project Delivery
Integrated Project Delivery (IPD) can be the best method for a project if the culture and competencies of all parties, including the Project Owner, are all aligned.
Related Article
Process Improvement and Cycle Times
When contractors grow inefficient processes usually get substantially more inefficient dramatically changing the Return on Investment (ROI) model. Saving a few minutes over 1,000 cycles per month means $60K+ potential savings over a couple years.
Related Article
Percent Planned Complete (PPC) - Calculation Example
Yoda would be the perfect coach for managing schedules on projects: “Do or do not. There is no try.” - Yoda This is the heart of Percent Planned Complete (PPC) and the weekly cycle of continuous production improvement.
Related Article