A potential client I was recently networking with was beginning to prepare for the emotional and highly tedious process of putting his excavation company up for sale. 30 years ago, he had started the company with only one piece of equipment and word of mouth marketing.
After 10 years, he had made connections with three national home builders and grew his company to five pieces of equipment and six employees. His revenue had grown ten-fold and his profit margins were soaring.
The following 20 years saw the continuation of this growth as did his overall company, growing to 20 pieces of equipment, now three lines of production and a total staff of 30 employees. His revenue continued to grow, but at a much lower rate than the first 10 years as his overhead increased and his equipment needed increasingly more frequent repairs. Additionally, the country had moved in and out of a building recession which created a much higher level of turnover and low productivity of his workforce. To add to the lowering profit margins was an extended period of time for accounts receivable, going from an average of 30 days completion to payment to over 60 days, requiring a higher usage of the company’s credit line to pay the accounts payables.
At the beginning of 2023, the client used a 3x annual revenue number to begin advertising his business, with a market price of approximately $30 MM. The client was overly excited, thinking that he would soon sell the business close to his asking price and would be retiring in high style in a warmer climate.
The offers began to come in, but were substantially lower than the client had expected, so much that he was offended by most of the offers. One buyer’s agent called the owner to understand if there was information that was not being communicated that needed to be disclosed to understand the high price. After a lengthy discussion, the owner began to realize why the offers were so much lower than he anticipated. He called his broker, asking for more specific information from the buying brokers and their client’s feedback.
The information was consistent from most of the buying brokers, and soon after, the client realized he had not done his due diligence in valuing the company. “Your business has outgrown your growth curve and you have not invested in new equipment or technology”. After the owner got over the initial shock, he began looking for solutions to the problem to get his valuation back up in the company.
When we first talked, I asked him a few questions about the company and a quick historical view of how the industry had changed. His answers were not surprising, as he had spent all of his time focused on “working in the business, not working on the business”. After agreeing to help the owner with getting his valuation back up to an acceptable level, we agreed to focus on four areas:
The client had been a “word of mouth” business, and had never done any marketing outside of that medium. While most of his clients had remained loyal to his company, some of his clients had moved to other vendors due to contract requirements, pricing, or other relationships. More importantly, his client base was beginning to “age out” of the business, many of his connections and colleagues that were his main source of referrals were beginning to retire.
Solutions – We built an outbound strategy including using social media tools to distribute content marketing through a social drip program. Additionally, we got the owner on an advisory committee for homebuilders where he could begin creating new relationships.
The legacy clients of the company had always been quick to pay their bills as they understood the importance of paying for what you received. As the clients’ companies grew, most of them had hired bookkeeping services or an in-house AP employee who would pay the bills when convenient.
Solutions – Since the client had always worked with others he trusted, he did not feel that there was a need to include a late payment penalty. The owner communicated individually with each business owner about invoking a late payment fee, which each of the owners understood and respected. Since invoking this late payment, AR has decreased back to around 35 days, substantially lower than where it had been running.
The client had a large storage facility with supplies for the business, much of it supplies that were “used rarely”. The cost of the storage, along with the amount of money tied up in “dormant inventory” was costing well over $100k per year. Additionally, some of this product had been in storage for so long it was no longer used in normal operations or was “expired”.
Solutions – An audit was completed to determine how often each of the inventory items were used over the past year. Using this data, we agreed that we would only inventory items that would be used within a 6 – 12 month period. After going through an evaluation of what would potentially be needed over the next 6 months and selling / donating the remaining inventory, the overall cost of inventory was decreased by 50%.
One of the major areas that had been identified by the investors for the lower price of the company was a high employee turnover in “skilled workers”. While the owner felt he was within the industry standard for employee turnover, he was calculating that number with ALL employees, not separating the labor workers from skilled workers. These skilled workers are higher paid, but much harder to train and a more lengthy time to hire. The investors saw this as a major issue as this results in downtime on jobs and more error.
Solutions – Immediately, we got together and had lunch with the 10 skilled workers at the company. Our objective was to see what some of the incentives and disincentives were for this group. Surprisingly, the two largest areas of concern were solved with very little investment. First, the skilled workers wanted an organized retirement plan. We created such a plan and added a 100% match to 3% vested over 5 years. Second, the skilled workers wanted more time off, whether paid or unpaid. We were able to add an additional 5 days unpaid time off to their 15 days they were already getting for no additional cost. Over the past 8 months, the company has seen a 60% decrease in attrition due to these changes.
