Issue 5 of 9: Cash Generation

Construction Ownership Transition Issue 5 of 9: Does the Business Generate Enough Free Cash Flow to Make the Transition Equitable for All Parties?

D. Brown Management Profile Picture
Share
Succession: Ownership Transition Issues - Number 5 Cash Generation.
  • Building construction projects -- just by themselves -- is very cash intensive
  • For that reason, a contractor must have enough working capital along with financing provided by their operating Line-of-Credit (LOC). Depending on the type of contracting business (GC, Specialty, Civil) and work types, this might range between 5-15% of the revenue.  
  • Growth requires building additional working capital to run the business safely. Your financial partners will ensure that you work within those constraints.
  • Working capital is only built through earning profits and retaining them after taxes are paid.  

For a simple example: If a contractor requires 10% of their revenue in working capital and is projecting $50M in revenue the following year, they will will need $5M in working capital. 

If they earn a 5% pre-tax net profit and pay 40% in taxes, they will retain $1.5M in earnings.  

If they plan to grow by 15% the following year to $57M, they will need another $700K (10%) in working capital.  

That means they will have $800K in free cash flow to pay for the business or provide a return on capital invested by the new ownership group.


Issue 5 of 9: Cash Generation
Continue building value in your business, yourself and your key team members with a good succession strategy....

Issue 5 of 9: Cash Generation
Continue building value in your business, yourself and your key team members with a good succession strategy....

Sharpening Your Thinking Through Writing
Contractors can learn many lessons from the leadership principles of Hyman G. Rickover who is considered the “Father of the Nuclear Navy” including safety, engineering, talent, management, schedules and quality control.
Zero to One - Advice From Peter Thiel
Construction as craft and as a business has been around for thousands of years. Contractors build and maintain the infrastructure that enables society to grow. That history comes a lot of pride. It also brings a lot of difficult to change habits.
Doing Something is Worth a Lot
All things must be thought about before they can be built. For more complex ideas they must be talked about with a team to align everyone. Those are both critical prerequisites however without the act of actually doing something they are 100% waste.