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
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, numbers 3 and 7 don’t typically apply. 

Number 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. 




Contractor Profiles in Recession Management
3X your profitability during a recession. Look at how you performed during the last recession then evaluate your current readiness and plan your next steps.
Teams and Readiness for Growth and/or Succession
Whether you are focused on growing profitably or preparing for an ownership transition, the strength of your team and organizational structure is a major factor.
Resource - 2 Second Lean
Dozens of practical and fun ways to save a few more seconds each day. 3 minutes per day of additional productive time on tools (ToT) equals about a 1% labor savings - or $10K for every $1M in job cost labor. Helps develop a continuous improvement culture.