Contractors should operate their businesses as if they are contemplating selling, even if they aren’t considering it any time soon. This means constantly focusing on key performance metrics to ultimately increase the company’s value and attractiveness to a potential buyer.

While this is not a study on valuation methodology, asking specific questions and using key measures to track progress can increase a company’s long-term value.

To ultimately prime their companies for the next step, this article will identify some useful key measures and focus on how companies can reduce risk, improve profitability, and maximize growth opportunities in the following areas: diversification, revenue stream predictability, standard work and labor development, annuity agreements, intellectual property, growth capacity and infrastructure, and profitability.

Diversification

Since a business valuation is predicated on the company’s future performance, diversification reduces risk for the buyer. Consider:

• How diversified are the services you are performing (e.g., the type of work, type of customer, or location of the work)?
• Do you track revenues and the number of customers by type of work, industry segment, and geography?

Many contractors have increased their focus on service work to complement their project work. For example, if a large segment of your business is with health care organizations, then consider exploring manufacturing, government, or education.

Geography is often more difficult to diversify, since location of labor is a prerequisite; but even seeking business within 100 miles can make a difference. If you do track revenues by these types, check how your portfolio is balanced. Focus on achieving some balance of work instead of a perfect level of diversification.

The key considerations are knowing how to approach an active market and recognizing that such a market does not have staying power. Establish a plan for how to downsize, and set aside those profits for reinvestment or development when those market opportunities fade.

Key measures:

• Revenue and number of customers by work type or classification
• Revenue and number of customers by industry segment
• Revenue and number of customers by geography or regional market

Category: Reduce Risk

Revenue Stream Predictability

Contractors typically don’t clearly outline sales and marketing processes or measure the performance of their short- and long-term pipelines. They may know what they are bidding on and use a spreadsheet that tracks open and in-process bids. But what about long-term sales metrics?

• What relationships with GCs, developers, architects, bankers, lawyers, property owners, and property managers are important for long-term viability?
• Who do you need to stay connected with, how often do you need to meet with them, and what tracking measures are in place so you have a pulse on the health of your business referral network?

Let’s start with marketing. Too often, marketing is allocated to advertising, sponsorships, entertainment, and trade shows without any regard for who your ideal prospects are, what they need, and why your company is uniquely qualified to help them.

Once this is determined, focus your marketing efforts on where these customers exist and what you need to communicate to them. Your company’s marketing measures should focus on contacts made with ideal prospects, their understanding of what your company does, and ultimately, the leads that your company is best suited to deliver.

Also, consider the sales process, including bidding:

• How do you track potential projects?
• How can you influence these potential projects to increase your chance to win?
• What processes are in place to nurture these longer-term opportunities, and do you have visibility related to the actions taken by your staff?
• What type of bids do you win?
• What analysis is performed on projects won and lost so you know what to look for in a project?