One of the main challenges business owners in the built environment industry face is getting a fair price for their practice when it’s time to move on. In fact, the sad truth is, when they retire, many engineers, accountants and other industry professionals simply close the doors, without receiving any compensation at all.
But if you plan for your future, you can ensure you will receive full and fair value for your business when the time comes.
Spread your growth and your risk
A lot of business owners base their price expectations on how they’re performing in a boom market, such as the current one. However, according to Roger Collins-Woolcock, Director of Collins & Woolcock, the most valuable businesses can make money in any market. They often do this by operating across different geographies and working across diverse, even counter-cyclical, disciplines.
Danny Chung, National Head of the Built Environment with Macquarie Business Banking believes that spreading your risk also means not relying on one staff member, or one client, to bring in most of your work.
“To mitigate risk, you should also aim to have a diverse fee base of clients and referral sources,” Chung says. “As a consultant, you also want to minimise having significant credit risk with one key counterparty.”
If you’re readying your business for sale and want to maximise value, the minimum period you need is five years
For this reason, Chung says the first step in maximising value should be to sit down and analyse your client base, including finding out who your clients are and how and why they came to you.
Collins-Woolcock agrees: “When I ask many business owners where their work comes from, they can’t tell me,” he says. “That should sound alarm bells.”
Think at least five years ahead
Successfully growing any kind of business requires planning. But in the built environment, planning is even more important than in most industries. According to Collins-Woolcock, many built environment consultants get stuck doing the work and let business growth take care of itself. That means the business grows organically. It also means the consultant owner usually ends up “owning a job” rather than a business and when it’s time to move on they have nothing – or at least very little – to sell.
Collins-Woolcock argues that the only way around this is to actively plan for the future. And the first step in that is to imagine what you want to be doing in five or 10 years from now. “If you’re readying your business for sale and want to maximise value, the minimum period you need is five years,” he says. “Otherwise, you’re doing yourself a disservice.”
Rather than focusing all your energy on an external acquirer you should spend time looking internally too
Given the built environment is so closely tied to the construction cycle, Chung adds that another aspect of long-term planning is analysing where you expect the economy to be. Once you have done this, he says you can orient your business development efforts towards where you think opportunities may arise and plan for an eventual downturn in the parts of your practice you expect to wane.
When it comes to selling a business many, if not most, business owners think of a scenario where an external company eventually acquires them. That happens sometimes, according to Chung, especially if you have a specialty that a larger player wants to add to their arsenal. However, even then, it often comes with the proviso that you, as the owner, will stay on for a period of time to “earn out” any payment you receive by onboarding clients and continuing to service them.
If you’re trying to make your business attractive to an external firm, Chung says that you need to honestly assess why they would purchase you. What specific skills do you have that they can’t simply acquire in the marketplace by attracting staff with the same skillset?
Chung adds that rather than focusing all your energy on an external acquirer you should spend time looking internally too. After all, for small to medium-sized built environment consultancies it is far more likely that the person or people most interested in paying for your business will be your existing staff.
It takes 10 years to build a good business and just one year to kill it
Chung also says that it’s important to identify the buyer as early as possible, so that you can work gradually towards them taking over the reins. That way you will have the best chance of a seamless transition, including the time to properly prepare clients for the change in owner.
Get your structure right
When most people think of structuring their business, they think of the legal structure. However Collins-Woolcock, says that getting your business structure right isn’t simply a matter of working out whether you will opt to be a partnership or a company. Instead, it’s about analysing the day-to-day running of the business to make sure people are engaged and satisfied, and that the people who you’ve identified to take over the business see doing so as part of their natural career progression.
That includes involving them in the direction of the business, making them responsible for bringing in work, and also helping them begin to share in directly in its successes. To do this, he recommends that – instead of focussing all rewards only on the person who brings in new work – any incentives should be shared among all senior people responsible for doing high quality work – from the rainmaker to the technician.
“It’s like building a successful sports team,” he says. “You can’t pay all the money to the guy who kicks six goals a game and neglect your defenders Everyone has a contribution to make and should be compensated directly for how they perform.”
Get your infrastructure right too
Preparing for the day you depart, doesn’t mean simply priming your staff or looking for your successor. It also means making sure the business intangibles, such as its processes, intellectual property and confidential information don’t just reside in your head but are written down, systematised and form part of the property you will pass on.
After all, according to Chung, this is where the real worth in your business lies – in the ability of someone to step in and run your practice without needing any involvement at all from you.
And if you fail to enact these steps?
For consultants in the built environment industry who fail to get it right, there is little chance they will be able to realise the value in their business.
That’s because if all the work only comes through you and your reputation, if you are still responsible for doing much of the work, if you depend only on one relationship or source of work, or if you have no repeatable work, you have nothing to sell. It really is that simple, says Collins-Woolcock.
“It takes 10 years to build a good business and just one year to kill it,” he says.
It may sound like a dire prediction, but if a business owner fails to create something that other people want to buy, that is exactly what will happen.
Your checklist for making your business valuable
To ascertain whether your built environment business has any value, Chung advises that you should ask yourself these five questions.
- How many sources of work do you have?
- How many markets do you play in?
- How many specialties do you have?
- Who holds the relationships with your clients?
- Who will take over your business when you move on?
(Reproduced from Macquarie)