Baltimore Business Broker to Speak at American Subcontractor Association Conference in New Orleans

Gregory Caruso, Esquire, CPA, CVA a principal at Harvest Business Advisors will be speaking at the National Subcontractor Association Meeting, Sub-Excel, Saturday March 8th 2014 in New Orleans.  Greg will cover the topic Family Transition and Family Business Succession in Subcontracting Businesses.   The presentation will focus on how to avoid pitfalls that destroy family businesses and sometimes the families themselves.  Greg has been involved in 100’s of business transitions as a principal, attorney, broker, and valuation professional.  Before becoming an advisor on succession matters for sub-contractors, suppliers, and engineers he grew up in a family contracting company and later co-owned another family construction company.

Want to know more about building value and selling your construction company – Click here to download a 20+ page e-book. 

Gregory Caruso, JD, CPA, CVA
Harvest Business Advisors
Business Brokers, Business Valuations, Business Succession for
Sub-Contractors, Construction Contractors, Suppliers, and Engineering Firms

Business Valuation for Business Sale Price Estimates – More Detail on Calculating a Valuation Multiplier

Small business valuation for selling your business, or business merger and acquisition purposes is tricky and depends on many factors.  In this article I summarize how a valuation multiplier for a small business could be calculated.  The calculated value should also be checked against the business sales comps available from one or more databases such as Pratt’s Stats,  and BizComps, www.bizcomps.comYou can also look in The Business Reference Guide by Tom West, available at  .  Also, get a check from a reputable experienced business broker or valuation professional in all cases before entering into contracts or even negotiations.

Want to know more?  Please click here for the downloadable e-book. “7 Things You Must Know Before You Order a Business Valuation” 

This methodology is most effective for businesses with a value between $150,000 and $1,500,000.  Below $150,000 in value in my experience it is hard to reasonably calculate value although in many cases it does exist.  If the value is low enough you must also look at what the liquidation value of the assets may bring.  Sometimes this is the highest value.  Once a company grows larger than $1,500,000 there are other methods that may be more accurate which should be used to estimate value. We will post another article or articles on valuing larger businesses in the near future.

This methodology works for estimating the business value or business sales value of most types of companies including subcontractors, electrical companies, HVAC, plumbing, engineering firms, service firms such as CPA’s and consultants, manufacturers, government contractors, retailers, restaurants, etc. 

Generally, the multiplier is calculated by looking at risk and how the business will continue to generate cash flow for the new owner and the perceived desirability and growth prospects of the firm.  This is similar to the concept behind bonds or bank accounts.  Junk bonds pay more interest than government insured savings accounts in order to attract your investment dollar.  Of course, you will never lose principal on the government insured savings account.  Small businesses are very risky and carry a large discount usually in the 20% to 50% range.  The safer the business the higher the multiplier.  The higher the multiplier the higher the value and price when it comes time to sell.

Typical factors in the calculation:

  • Ease of entry into business
  • Location of business
  • Competition in Market Area
  • Historical profit trend
  • Industry trend
  • Size of business
  • Management systems in place
  • No one customer providing more than 10% or 20% of sales revenues
  • No major suppliers that would be hard to replace
  • Availability of financing
  • Condition of Books and Records

 One way to do the analysis is to rate each factor above from 1 to 4, with four being the most favorable, then divide by the number of applicable factors.   In all likelihood your business multiple will be between 2 and 3.  The average is between 2.3 and 2.7 depending on who is collecting the data.  Businesses that tend to be owner intensive such as auto shops and small independent restaurants tend to sell around 2 or less.  Highly efficient larger service firms with contracts may sell for 3 to 3.5.  Again, only proven rapid growth companies or unusually hot businesses (think BMW auto dealerships) reach above 4. 

 Example of Calculating a Multiplier:

 Sam’s Auto Repair factors     

Ease of entry into business                                                              1 easy to enter

Location of business                                                                          3 Sam’s is in an urban area where auto related land usage is discouraged

Competition in Market Area                                                          3  Same as above – few competitors, hard to get a nearby location

Historical profit trend                                                                      3 Sam is profitable

Industry trend                                                                                     2 Too many new cars

Size of business                                                                                   2  Sam’s is still small

Management systems in place                                                   2  Has great receptionist / scheduler

No one customer exceeding 10% or 20%                             4  Few large commercial acc.

No major suppliers that would be hard to replace          4  Many parts stores and suppliers

Availability of financing                                                              2  Hard to finance Auto related

Condition of books and records                                                3  Easy to follow, accurate books and records and tax returns


That totals 11 factors with a sum of 29 creating a multiplier of 2.6 which is high for an auto repair but the assumptions make this look like a pretty good small business.  Give him poor financial books, low profitability, and a neighborhood with car repair on every corner and you quickly have a 2  multiplier.                         

Now you just multiply your discretionary cash flow by your multiplier and you get an estimate of value.  ($150,000 discretionary cash flow times 2.6 equals $390,000 estimated value).  If done accurately (experience helps!) this can produce a very good indication of value.  It is also useful for internal purposes just as a check to see how you are doing as good businesses are valuable businesses.

DISCLAIMER:  Please note that this is a useful formula for preliminary planning or tracking your progress but is not a substitute for a proper valuation when selling your business.  NEVER go to market or enter into important negotiations or legal proceedings based on a rule of thumb formula such as this.  Get proper valuation assistance.  Call us.

Gregory R. Caruso, JD, CPA, CVA
Harvest Business Advisors


How Types of Customer Contracts effect Business Value

The types of contracts you have with your customers and the terms in those contracts will affect your business value.  This is particularly true of construction contractors, engineers, and subcontractors who often have long term projects.  The highest value goes to a long term, non-cancelable, highly profitable contract (this elusive contract is almost mythical I might add).  Clearly they exist but they can be fairly rare.  Below is the list of contract types.  The higher on the list, in general the more value created.

  • ·         Long term fixed price contracts (with profits)
  • ·         Long term T & M contracts
  • ·         Short term fixed price or T & M contracts with repeat customers
  • ·         New customers on negotiated jobs
  • ·         Repeat customers on competitively bid jobs
  • ·         New customers on competitively bid jobs

Time to Sell Your Construction Business? Please click here to download the e-book, “A Contractor’s Guide to Succession Planning”.

In general “repeat contract service work” has the highest value.  The lowest value is one time bid work for new clients.   

Who you work for impacts value too.  A contractor doing negotiated work for defense contractors and medical companies is going to be perceived as more stable than one building speculative office buildings.

What does your mix look like?  How can you improve your mix to get Your highest possible business value?

Gregory R. Caruso, JD, CPA, CVA
Harvest Business Advisors


Family Business Succession, Exit Planning for Contractors, Engineers, and Others

It is tragic when a business or anything else splits a family into pieces.  Yet I see this all the time in family business succession matters. 

 This is particularly acute in the construction industry including specialty trades such as mechanical, HVAC, electrical and plumbing contractors because of the prevalence of family business.  Exit planning between generations is difficult at best.  Too often when the successor is chosen or when the stock is given or sold, the family fractures.  This is not success.  You can maintain peaceful Thanksgivings (maybe not all of them but most) and a successful business transition. 

Time to Sell Your Construction Business? Please click here to download the e-book, “A Contractor’s Guide to Succession Planning”.

Clear communication which includes listening to everyone is essential.  Continuing to communicate (listening – not just telling) after splits in family / business opinion is crucial.  It takes time (a long time, usually many years) and patience to accept that things may be different from what each family member hoped.  It takes determination to build a business and it takes determination to keep communicating when you do not like giving or hearing the message.  Communication in family businesses often requires creating a back channel with an outside person that really wants to see the whole thing work well for everyone.  This provides a vent and an opportunity for someone with no emotional claim to provide another view. 

A few more quick thoughts on transferring a family business: 

Fairness is a big consideration.  I don’t know what fair is but I often know if a situation is unworkable or just “way” unfair.   Giving a business to 5 children evenly when 2 work in the business and the rest do not is a disaster waiting to happen.  This is unfair to all.  Often, life insurance is used to “even” out the opportunity being given to the children “getting” the business and the other children.  Again, fair at the date this family/business decision is made and fair at the date of death 20 years later may or may not work out the way one hopes, but, it is much better than a guarantee failure. 

Another matter is the children who are to lead the business must be trained and groomed for the post.  Not all will be able to do it. 

I equate running a business to riding a bike.  You can ride in a child seat on the back for years.  It feels like you are riding the bike.  You have been looking over the shoulders of the rider and see everything she did.  But it is not the same.  Only getting on the saddle and grabbing the handlebars and peddling teaches you to ride a bike.

It is tragedy when the wrong child takes over and in a few years crashes a 35 year old family business.  No one wants to burden their child with that.  Telling a child that does not have the capacity is hard.  Killing the golden goose is even harder.  It just does not seem that way at the time you need to have the “you’re not the one” conversation.

How can the family test the child?  Can they let him run a division?  Perhaps start up a new company to tackle a growth area?  Nothing prepares or tests an owner other than being an owner.  Find a way to stress test the child if at all possible.

Another reason you are going to want to start the transfer early is generally the child is going to earn the money to pay for the business from the business.  If the parent has done really well there will be gifting for estate purposes but in most cases the value of the business is going to fund the parent’s retirement plan.  I would not advise any business owner to walk away from control and knowledge of what is really happening until the debt or payments to them are substantially made.  This means you need to start the transition well before mom and dad intend to spend 11 months of the year in Florida. 

In family business succession planning starting early and carrying through with clear communication including listening and consensus building is one key to creating an exceptional exit. 

Gregory R. Caruso, JD, CPA, CVA
Harvest Business Advisors


Small Business – Business Valuation Formula and Example

Business valuation for M&A or other purposes such as divorce, partner disputes, IRS and estate planning purposes are complex formal processes.  What is provided here is a basic rule of thumb business valuation approach useful for preliminary planning for companies with revenues between $50,000 and $5,000,000 and/or owner profit plus owner salary of $75,000 to $500,000 range. 

Do not use the provided business valuation formula for formal final uses such as going to market in a sale situation or legal proceedings etc. without review and approval of a valuation professional.  Many businesses such as contractors, engineering firms, sub-contractors, specialty contractors such as electrical contractors, plumbing contractors, HVAC contractors, landscape contractors, suppliers, retailers, business services, manufacturers and the like can use this business valuation formula.

Want to know more?  Please click here for the downloadable e-book. “7 Things You Must Know Before You Order a Business Valuation” 

A small, owner-operated businesses with an active working owner who performs day-to-day tasks such as sales, production, direct management etc., can be valued using the following formula: 

Owner’s salary plus profits plus expenses benefiting the owner (such as underemployed family member on the payroll; exotic travel to conventions; auto; heath insurance; pension to owner etc.)  plus one-time charges (perhaps a large legal bill in one year only) plus interest plus depreciation and amortization equals the Seller’s discretionary earnings or SDE. 

If you are an absentee owner in a business that is usually owner run,  then you can add your manager’s salary back to the cash flow.  If you have cost advantages your Buyer will not have, subtract these.  Those often involve rent where you own the building the business occupies.  Most Sellers adjust the rent to market cost at the time of the sale so that should be factored into the formula.                         

Some people call this “normalizing” the cash flow.  The idea is to show a Buyer what her normal discretionary earnings will be.  They are called discretionary earnings because the owner decides what to reinvest and how to pay herself.  You can pull many of these figures directly from the company income tax return.  The total is then multiplied by a value called a multiplier.  In most cases the multiplier is 1.5 to 6 with between 2.3 to 2.7 being about average for small businesses. 

 Example of Calculating Value:

Consider this example of Bob Smith who owns Smith Electric.  Bob has a steady base of service work with some new construction mixed in.  Bob has four service crews and still often performs remodeling jobs himself.  Bob makes about $100,000 in salary.  His wife makes $35,000 working one day a week as the bookkeeper.  Bob drives a company truck all the time.  He has health insurance through the company.  He spent $12,000 last year on interest and had $35,000 in depreciation.  Bob runs the business from an office warehouse which he owns.  The business does not pay rent to Bob for Smith Electric’s 2500 square feet of space.   

The valuation math would work like this:

 Salary $100,000 plus excess salary to wife estimated at $20,000.  Plus personal use of truck estimated at $5,000 plus health insurance at $11,000 plus interest at $12,000 plus depreciation at $35,000 minus $24,000 estimated rent.  This totals $159,000.  Assuming Bob has a high percentage of service work which tends to be predictable then his multiplier might be around three.  That would put the value of his business at about $477,000.  If Bob mainly performed new construction work obtained from competitive bids, his multiplier would be around two because of the risk involved in obtaining future work. 

Please note that this is a useful formula for preliminary planning or tracking your progress but is not a substitute for a proper valuation when selling your business.  NEVER go to market or enter into important negotiations or legal proceedings based on a rule of thumb formula such as this.  Get proper valuation assistance.  (Call us).

Gregory R. Caruso, JD, CPA, CVA
Harvest Business Advisors


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