Seven Drivers of Valuation

A significant number of contractors will be going through an ownership transition during the next decade.

D. Brown Management Profile Picture
D. Brown Management
April 26, 2018 2 minute read
Share

These transitions impact many people, especially the owners and the management teams.  

Succession: Key Drivers of Valuation. Book: Mergers Acquisitions From A to Z by Andrew J. Sherman. 1. Strong revenue growth. 2. Significant Market Share or Niche Position (Strategically Focused) 3. High Barriers to Entry by Competitors. 4. Strong Management Team (Post Succession). 5. Strong and stable cash flow. 6. No Significant Concentrations of Customers, Products/Services, Suppliers, or Geographic Markets (Strategically Diversified). 7. Low Risk of Technological Obsolescence or Substitution

Valuation is a very critical factor during these transitions because it has to be a number that fairly represents the value of the business for the outgoing owners while providing a solid return for the buyers.  

Andrew J. Sherman just published the Fourth Edition of Mergers & Acquisitions which should be read by anyone who is or could potentially be on either side of a transaction. He laid out 7 Valuation Drivers:

  1. Strong Revenue Growth 
  2. Significant Market Share or Niche Position
  3. Barriers to Entry by Competitors
  4. Strong Management Team
  5. Strong Stable Cash Flow
  6. No Significant Concentrations in Customers, Products, Suppliers or Geographic Markets
  7. Low Risk of Technological Obsolescence or Product Substitution

For a contractor, numbers 3 and 7 don’t typically apply. 

Number 4 - Building a strong management team is the leverage point that makes the other factors sustainable in the long-run and, therefore, truly valuable.  

Focus on building your most valuable asset; a strong management team. 

Jack Welch - Short and Long Term
We exist to help contractors build stronger businesses for the next generation. That is not only our mission at D. Brown Management but should also be the mission of EVERY leader within a construction business.
Related Article
Reasons to Run
Successfully leading in the long-term requires going beyond managing to outcomes. You must dive deeply into the underlying activities, habits, behaviors, and ultimately, to the motivations that lead to those outcomes.
Related Article
Degree of Discretionary Time with Growth in Role Levels and Business Size
The degree of discretionary time that someone has in doing their job grows with their role level - for example from crafts person to VP of Operations. For similar roles, that time decreases with company growth as the job roles become more tightly defined.
Related Article