How do you build a heavy-duty parts or service business that someone would someday want to buy?
I’m going to answer that question by telling you a true story about how I built my contracting business differently than a competitor and why it led to me being able to sell it when my competitor struggled to sell his buinsess.
Building a Different Kind of Business
When I was running my contracting business, I was in my 30’s. My wife and I had figured out that we needed to create systems so that we didn’t have to do everything ourselves. With those systems, we could teach others to do what we were doing in our business every day.
We had come to appreciate that producing a predictable result and creating systems that allowed us to operate the business independently of us was a critical factor in achieving scale.
At this point, we thought we had it all figured out. This feeling of accomplishment was reinforced when I got a call from a competitor. Phillip Moore (not his real name) was a 55-year-old competitor who had been in business for over 30-years.
The purpose of Phillip Moore’s call was to ask me one question:
“Jamie, your business is remarkable, you have only been in business for a few years and you are growing so quickly, would you be interested in buying my business?”
I agreed to meet with him and what happened next reminded me of how much I still had to learn.
Phillip explained that the years of hard work had taken its toll on his body and he was close to needing to retire. Everything sounded good so we got to the business of buying his business.
When we did due diligence, we discovered something surprising. Despite his business having decent revenue and reasonable profit, his valuation was much too high. At the end of the day, his business was only worth about $5000.
How is that possible?
How could a 30-year-old business with solid annual revenue and gross profit margins of 40% be only worth $5000?
My valuation of $5000 was based on the following factors:
- Phillip Moore was the business, he had no employees, only his sons who despite working with him had no desire to take over the family business much less work for me as employees. As soon as Phillip left I would have to hire additional people and train them.
- He wasn’t even including his truck in the equipment assets because the business didn’t own the truck, Phillip did. Which meant if I did buy his business, in addition to needing to hire employees and training them I would have the expense of purchasing a work vehicle. The used tools Phillip was including were worth $5000.
- The customer list he had was worthless because those customers bought services from Phillip, not his business. As soon as they found out Phillip was gone they would put their business out to bid because nothing was under contract. Since we were on their bid list already all I had to do was wait and I would get a free opportunity to win that business. Which is exactly what happened and my business did win some of those bids on work Phillip had previously done.
30-years in business and all Phillip Moore owned that he could sell was $5000 in used tools. I didn’t want to insult him, so I never made an offer and I suggested that his best course of action was to find someone that was looking for a job, to step in when Phillip stepped out. That is what he did and although I don’t know what Phillip got for his business I am confident it wasn’t close to his asking price.
This had a profound effect on me.
There was no way I was going to run my business for 30-years, destroy my body in the process, and have nothing to show for it in the end. I was not going to become Phillip Moore. Just for the record, 4-years later I listened to my own advice and sold my contracting business for a great profit. 🙂
Being a contractor and running a contracting business is very similar to being a heavy-duty technician and running a heavy-duty repair shop.
The work is physically demanding, it takes a lot of training and skill, finding employees is tough, and even if you are young and healthy now you eventually will age and you will need to think about an exit strategy. Remember what is truly important is that you build your business so that it can be sold, because one day you may just need to.
The Tactical Work of Building a Business That Can Be Sold
In the first part of this article, we talked about the end result, selling your business. Now we will discuss what you must do tactically to build a business that someone else wants to buy.
If you would like to listen to how one family built a fleet and sold it for a great profit, check out episode 8 of The Heavy-Duty Parts Report.
Producing Predictable Results
How do you create predictable results from a business?
The answer is found in the systems that you create for your business.
The business must produce predictable results for the following stakeholders in your business:
- Business Owner
The customers must know exactly what your business will do for them and come to trust your business to deliver the same result each time they spend money with your business.
The employees must know exactly what they are expected to do and what benefits they will enjoy when they do the job corectly.
The suppliers must come to view your business as a valued customer, someone that they can count on.
The lenders and investors must see a predictable return on their investment.
You as the business owner need the business to operate profitably and under control, so you can count on the business to provide you with what you need and want from it.
How do you do that?
To establish predictability in your business you must first create the systems, then test those systems, and finally, measure the results your business systems produce.
This will provide you with a baseline.
Regardless of who runs the system, the business will produce this baseline, an average result that can be measured and reported. From there you can make incremental improvements to the systems and gradually increase both the predictableness and the quality of the results.
Can you create systems in your business that are simple to follow, repeatable, easy to measure, and will appeal to a large enough group of customers?
If your answer is YES you can move on to the next section of this article.
If your answer is NO, I would recommend looking first at the products and services you offer and looking carefully at the customers you intend on selling to. All too often, people try to sell too many things to a broad customer base.
The best illustration I have heard that really drives home the point is instead of trying to go a mile wide and an inch deep, try going an inch wide and a mile deep.
Clarity and focus is key and less is often more.
Operating Independent of You, the Owner
If your business needs you to function, you will never be able to make it scale and no one will ever want to buy your business because as soon as you leave, your business doesn’t exist.
Your business is not in existence to provide you with a job. Your business is an entity all on its own and it has its own set of needs and obligations. Remember the stakeholders of a great business are your customers, employees, suppliers, lenders, investors and absolutely last, you the owner.
Your business must offer your customers something that they need, or want, and are willing to pay for and you must develop a set of systems that deliver that need or want predictably and profitably.
Your employees need a business that delivers predictable and profitable results otherwise it won’t last and they will need to find another job.
Your suppliers need customers that buy regularly, pay on time, and help them grow their business.
Your lenders and investors need a business that makes money and will give them a return on their investment otherwise they need to find another investment.
If you are building a business that is based on you and you alone it is doubtful if not completely impossible to give all those people what they need. In fact, if you try to give all those people what they need you will be torn to pieces emotionally, financially, and even physically!
That is why 96% of businesses fail in the first 10 years. Thousands of entrepreneurs try to give all those people what they need and want by emptying themselves and they end up failing.
It’s a recipe for disaster and yet it is a recipe that so many insist on trying to follow.
When I built the contracting business that I sold in 2016, we built a systems-centric business that eventually worked so well we were able to move 1000 kms (600 miles) away and it continued to operate exactly as we had built it to operate.
Small business owners often struggle financially. The business that is centered on the owner will hit a growth limit.
You may hire a few employees and your business will grow but not enough to allow you to step out of the business and become a leader that is working “on the” business full-time.
The organic growth that is initially experienced stops. It then seems like no matter how much growth you have experienced there is never enough money.
In my business, we found initially that the best we could accomplish was for me to work part-time in the business and part-time on the business. We were constantly having to invest more money into the business to keep the growth pattern going. This resulted in an accumulation of personal debt because my wife and I were the business.
What is the solution?
Once we understood that to build a great business we needed to start over and build our business to produce predictable results and operate without us then we could break the cycle. We began to understand that in our contracting business one truck with two employees could produce $100,000 dollars a year in sales and generate $30,000.00 a year in gross profit. Not enough to even run our business never mind pay us a wage that we could support our family on.
Once we applied scale to the equation the solution became clear. Increase the number of trucks and employees and we would hit a critical financial benchmark. The business would pay for itself and then would pay for our livelihood.
But how do you do that?
The secret to scaling is all the way back at the beginning; building the first version of your business, a version that works perfectly, and replicating that repeatedly. The scalability of the business is a fundamental component of whether it becomes a great business.
Now can you see why a business that delivers a predictable result is so important?
Can you see why the business must operate without you the owner?
How without those two components in place, you will never scale and without scalability, you will never create a great business?
The secret to scaling is not being big, it’s starting small, and “one brick at a time” building something that once complete can grow.
A great business is a business that can produce predictable results, operate independently of its owner, scale, and be sold for a great profit. To build this kind of business requires a completely different approach than most entrepreneurs take. By applying systems and creating predictable results you build the foundation for scale, once that foundation is complete the business can grow and that growth will lead to a business that someone wants to buy.
Want to Sell Your Business?
Jamie Irvine works with forward-thinking heavy-duty companies as a consultant. Jamie has sold one of his own businesses and is actively consulting with heavy-duty companies that are looking to acquire or sell a business. If you would like to work with Jamie on an acquisition or sale of a company schedule an appointment today.