If you’re like most custom installation business owners, you started out with a passion for the industry and learned the rest along the way. The thought of defining a succession plan or exit strategy probably never occurred early on (maybe it still hasn’t). Rest assured you’ll need to get off the bus at some point, and it’s well worth beginning the planning process several years out from any big changes.
My good friend Steve Zacharias at Transact Capital shared some guidance a few years ago that I stare at every day. It’s a simple three-part plan laying out ways to increase value in any business. It may seem like a lot, but you’re going to have to deal with your choices sooner or later. Why not begin the journey now?
Also by Henry Clifford: 10 Ways to Revitalize Your Business
Part 1: Depth and Breadth of Management Team
Is the Owner the Center of the Universe? Most CI businesses operate like Santa and his elves. No Santa, no toys for the elves to make. Any business buyer will sniff out a Santa-based company and lowball an offer. What’s the solution? Empower your employees by delegating as much as you can. Begin with five things this week. After that, pick another five, and so on. Before you know it, you’ll be stepping back into the mode of true leader and enabler vs. being a single point of failure.
Leadership Skills and Knowledge Below Owner. Companies don’t grow unless its people grow. Do you program customer systems or serve as the primary salesperson? Are there people on your team who could step up and grow professionally by taking on more? You’d be surprised what your team is capable of when you let go. By developing your doers into managers and your managers into leaders, you free up time to think strategically and increase the value of your company dramatically. Most owners don’t stick around or fit in well after selling their companies, so consider what your organization would look like without you. Consider taking on less and less each time you come back from vacation. It won’t take long for your team to fill in the gaps and grow stronger.
Leadership Team in Place, Executive Employment Agreements, and Incentive Plans. Do you have a strong controller, sales manager, and operations (installation) manager? Are your key employees under signed agreements that dictate the terms of the relationship, severance pay, and conditions of employment? Do you have a self-funding incentive plan for each key employee based on hitting certain milestones? If you don’t, you’re not alone, but a buyer will want peace of mind that your key people won’t quit when you sell the company. Establishing these agreements now when you have no intention of selling will decouple the emotion of the acquisition and make it easier to gain buy-in from your top performers.
Also by Henry Clifford: Creating Your Lead Generation Flywheel
Part 2: Well Developed, Documented Business Systems
How is your company organized? Do you follow a system like VITAL’s Top Line Management or another business framework? Aligning around a standard chart of accounts, organizational chart, and workflow makes it easier to compare your own performance against other integrators and, you guessed it, have your business valued by a third party. The CI world has a ton of resources available around business frameworks. Organizations like CEDIA have a wealth of knowledge around benchmarking and ways to standardize your business operations. It doesn’t have to be complicated, but your business cannot scale without a solid, well-documented workflow.
Records, Docs, Files, and Processes Organized. This might seem simple enough, but it’s vitally important to document everything in your organization from written job descriptions to daily job responsibilities for each role. Here’s an easy way to find out if you’re ready: What would happen if one of your key people was hit by a bus? Could someone else come in the next day and do their job? Why or why not? We went through a process called Operation “Hit By A Bus” a few years ago aimed at making sure we all had our positions well documented. A buyer will be looking for this documentation to figure out how easy it might be to replace and retrain key personnel should they need to.
Financials, Tax Returns, Board Minutes Accurate, and Filed Timely. Walt Disney was fond of saying “Everyone needs deadlines.” Closing out financials by the 15th of each month is a good goal and keeps everyone aligned around the importance of reviewing profit and loss (P&L) and balance sheets on a regular basis. If you have an advisory board or other filings due, make sure they are complied with penalty-free or recapped in writing promptly. A buyer will see timely filings as a good sign that other parts of your business are ship shape. It’s an easy way to boost the valuation, but requires constant gentle nudging from the owner to hold everyone accountable.
IT Systems Documented and Can Support Growth. It’s 2020 and IT is easier than ever. It seems like small- and medium-sized businesses (SMBs) use Google G-Suite while larger organizations favor Microsoft Teams. In either case, their frameworks are all cloud-based with the days of needing dedicated server hardware or special applications long gone. If you’re facing a software or hardware decision for your business, think long and hard about its scalability. Are you buying a software platform with a small installed user base? What happens if your software vendor goes under? Try and get as much of your workflow onto a single platform as you can. The CI channel has great solutions like D-Tools, iPoint, ProjX360, Simply Reliable, and others to get you going. A buyer doesn’t want to see a homegrown software solution that can’t be easily supported.
Customer, Supplier, and Employee Agreements Documented. Are you doing work with your customers based on word of mouth? Do you enforce a solid purchase order policy with vendors? A lack of process in this area works well through a $1-2 million in revenue but starts to reveal serious cracks after the owner can’t manage it all. There are a ton of templates online that can help you nail down your customer contracts and vendor agreements. Implement them now — well before your prospective buyer asks where they are.
Operating Systems and Procedures Sufficient to Sustain Growth. Are you operating your 25-person company the same as when it was just you and a few installers? Beware the “no-man’s lands” that are prevalent when growing revenues and headcount. These are points where it can feel like the light at the end of the tunnel could just as easily be a freight train coming at you. When you can’t touch everything yourself anymore, it’s vital that your managers understand how to effectively motivate their direct reports. That’s only possible by following processes that set you up for future growth. Off-site strategic planning once a year, weekly leadership team meetings, and daily huddles with your people are all great ways to maintain continuity as your business grows. Friction and conflict will surface whether or not you check-in with your people, so better to find out about issues while they’re small and before they turn into big problems.
Also by Henry Clifford: AVaaS: Selling Solutions as a Service
Part 3: Diversified Customer Base Delivering Recurring Revenues
Customer Concentration Issues? Do you have one builder who makes up a huge percentage of revenue? What would happen if your largest customer fired you? It hurts to ponder these questions now, but beats the pain of dealing with the damage after it’s too late. Consider adding more large customers or growing other lines of business, like commercial installations or lighting control. Adding recurring revenue streams from security or 24/7 remote support is another way of ensuring your operating expenses and cash flow stay steady with or without your large customers. Consider running a profitability analysis of your large customers and committing to fire any customer where you’re not getting 40 points of gross profit or 80 percent on labor utilization. Business buyers are not kind with their valuations when they see you engaged in lousy deals. It makes them wonder what other bad decisions you’ve made.
Customer Retention and Why? If you have recurring revenue, what’s your churn (how many customers you lose each year)? Obviously the lower the better. A low churn rate indicates high levels of engagement with your services and a good sign the business is run well. How about Google reviews? Do you have a high star rating with more reviews than anyone else in the market? Consider services like One Firefly’s Review Champ to spike your review count and set yourself apart from competitors.
Is the Market Large and Growing; Economic Cycles? Marketing Plan? Our industry is a growth industry, but we’re always, in the words of a rep buddy of mine, “climbing to a higher rock” and constantly needing to reinvent ourselves. Are you looking at selling lighting fixtures now? What other new business lines are you contemplating now that will help you win the next 3-5 years? Rest assured there are revenue streams that will need replacing over the next 1-2 years with new verticals and services. If you’re struggling to find inspiration, consider joining a buying group like ProSource, HTSA, or Azione Unlimited to create a sense of community and benefit from a steady stream of fresh ideas.
Long-Term Contractual Agreements? These can be tough in our industry, but there’s strong value in any multi-year agreements you can execute, especially with security monitoring. A good rule of thumb values each monitored security account at $1000. A quick back of the envelope calculation shows 1000 accounts are worth $1,000,000. That’s a serious amount of money, but you can only cash in if they’re “papered up” properly. Consider offering discounts on your initial installation in exchange for multi-year contracts. My company, Livewire, offers 25 percent off initial installation for a three-year contract and 50 percent off for a five-year commitment. Other ideas include selling AV as a Service (AVaaS) through your commercial customers. This model allows the client to level out their spend over a long period of time (typically at least five years) with a bumper-to-bumper warranty.
Maybe you have some of these completed, maybe you don’t, but at least you know how the end looks and what it takes to get there. Don’t wait until it’s time to sell before whipping your outfit into shape. Start now and watch your business thrive in the bargain.
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