For Fisher, here’s what gives an established remodeling company its sales value:
- Operating systems. J. Fisher Construction uses a written set of standard operating procedures that determine everything, including how a first call from a client is answered, how a job is bid, how statistics are collected, how markup is determined, etc. Those systems generally take years of trial and error to create and refine.
- Referrals and reputation. If 70% to 80% of a remodeling company’s business is from referrals and repeat business, Fisher figures, that is worth something. He notes that a vast majority of newly created remodeling businesses will fail within the first few years, and that a business with an established reputation and client base will be more likely to prevail.
- Subcontractor base and employees. A reputable remodeling company such as J. Fisher Construction has established relationships with a small army of qualified and loyal subcontractors, a position that can take years to achieve. Plus, trained and skilled employees are valuable, and some remodeling companies are bought by other companies just to harvest those employees. At the end of the transition period for J. Fisher Construction’s sale, employees included an office manager, a senior designer, an assistant designer, two project managers, and a superintendent.
- Alliances. A successful remodeling company will likely have forged alliances throughout the years that bring business and honor to the company. J. Fisher Construction, for instance, is an authorized Pella installer, and is a distributor for a high-end line of cabinetry that is featured in the company’s showroom, as well as in an appliance store in downtown Fairfield. In return, J. Fisher Construction features that store’s appliances in its showroom.
- Recurring revenue sources. Fisher has sought to create revenue for the company independent of the ebb and flow of remodeling jobs. For instance, his company has been contracted to provide maintenance to a local printing company. He also rents out part of his showroom building (a former restaurant filled with architectural character) to other small businesses.
- Established insurance. Getting liability and other types of insurance for a new remodeling company is next to impossible, Fisher notes. But when his company transferred to the hands of Valentino, “my insurance company took him on seamlessly, and at the same rate.”
THE ENTERPRISING EMPLOYEE
All of these elements were in place at J. Fisher Construction when Valentino showed up in 1997. Fisher did have a problem, though: His long-time superintendent had just had a stroke, and Fisher had just landed a large job that would need a superintendent’s oversight for six months. After looking at Valentino’s portfolio, he offered him the job. Valentino figured he’d take the job for six months to get a leg up, and then proceed with starting his own company.
But after six months, Valentino stayed on. He paid close attention to the professional way that Fisher ran his business. Valentino’s previous forays into general contracting were not focused on the numbers. Coming up as he did from the boots-in-the-dirt construction side of the business, Valentino was handy with the tools in his bag but not with the business tools his boss relied on. One day Fisher asked him: “Pete, what was the gross profit on your last job?” Valentino replied: “I had a wallet full of money. I couldn’t tell you more than that.”
But Valentino had a desire to learn, along with ambition and tenacity. Fisher calls him “a bird dog.” Working for wages for someone else, though, was not what Valentino wanted for his future. “That’s just not me,” he says. So when the day came that the younger man asked his boss if he would ever consider selling his business, Fisher suggested they sit down and talk it over.
THE PLAN Once the pair decided in concept to the sale, three main issues had to be addressed: 1. How much is the business worth? 2. How should the sale proceed? 3. What needed to be done within the company before Valentino took over?
To figure out the value of the business, Fisher talked with bankers, accountants, and consultants; read books and articles on the topic; and attended seminars. Valentino also consulted his accountant and other experts. Finally, it was determined that the value of a remodeling company should be determined using this equation: a year’s gross profit (averaged over the past five years) multiplied by up to 3, depending on various factors such as age of business, referral rates, etc.
For Fisher, gross profit, rather than net profit, is a more accurate indication of how the business is doing. “You can play with net profit,” he says, “but not your gross.” Gross profit at J. Fisher Construction is running about 44%, and the company shoots for Fisher’s “10 and 10” plan: 10% of volume for profit, 10% for owner compensation.
In the case of J. Fisher Construction, the five-year average of a year’s gross profit equated to $300,000; the company was doing almost $1 million a year, and the gross profit was running about 38%.
Before the pair settled on a sales price, Fisher received an offer for $650,000 from another interested person in the area. When he heard about the offer, Valentino recalls, he said: “Take it. I can’t match that.” But Fisher wanted Valentino to take over the business and asked him what he could pay. Valentino offered $300,000, which would equate to a multiplier of 1, and Fisher accepted it.
“I wanted Pete to have the lowest multiplier,” he says. Valentino thought $300,000 was a fair figure. “How long would it take me to build it up to that level?” he thought. “And would I even be able to do it?” In exchange for the lower multiplier, he assumed all warranty liability on past jobs.
Because Valentino did not have cash for a down payment, they agreed on a plan that would place a certain amount of the profits into a stock account on a monthly basis, with the goal of raising $50,000 over five years for the down payment. (In fact, the account balance stood at nearly $56,000 at the completion of the plan.) The building that houses the company would remain in Fisher’s hands, but Valentino will have first chance to buy it should it be sold.
Still, one point needed working out: Would the sales price be based on the gross profits at the beginning of the five-year period (which benefits Valentino), or at the end (which benefits Fisher if the business grows)? That was a “ticklish” issue, Fisher admits. Valentino knew that if the price were based on the gross profits in 2005, it would behoove him to just coast along, exerting minimal effort, until the business was his. Ultimately, they agreed to base the sales price on the gross profits of 2000, when the deal was put into writing, with the stipulation that Valentino would not ask for a raise in salary during that period. This benefited both of them, as Fisher’s 10% owner’s compensation rose as the company’s volume rose during that time: to $2.6 million in 2004.
Finally, during the five-year transition period, the company was made ready, as was Valentino’s skill set, for the future. Fisher had done a lot of the design work on his company’s remodeling projects (he is a certified kitchen designer with a strong interest in lighting), but it was clear that Valentino did not share that interest. Therefore, the company hired a full-time designer five years ago.
For his part, Valentino joined a peer review group. Fisher went along to the first meeting, and Valentino went solo from then on. Even so, he found himself prefacing statements to the group with “Jim said …” (Another member eventually advised him to stop saying that.)
Valentino also began an intensive sales training program. Gradually, he started doing sales within the company, beginning with change orders (at the proper profit margin, Fisher insisted), at a 10% commission.
Two years ago, Fisher and Valentino told the company employees about the coming change of ownership. The week the sale was to become final, Valentino moved from the superintendent’s desk in the back to the more prominent owner’s desk up front. On the last day that Fisher was owner of J. Fisher Construction, he had a long lunch with the company’s designer and then dinner that evening with Valentino. While Fisher had asked Valentino if he wanted to rename the company Fisher Valentino Construction, Valentino declined. After all, he hopes to sell the business himself after 15 years, as part of his retirement program, so the name will go to the next owner. He did, however, streamline the name to Fisher Construction, losing the “J,” at the suggestion of a peer.
As the day approached for the change in ownership, Valentino worked to line up financing for the balance of $244,378 after Fisher got his down payment. But when Fisher realized he would get needed tax advantages if he carried the loan, he worked that out with Valentino.
The day after completing the sale, Fisher resumed work on a book he hopes to publish on the art of selling a remodeling business. The working title of that book is When You’re Done, Cash Out, Don’t Walk Out. Fisher has a passion to show other contractors how to cash out. “How many remodelers sell their businesses?” Fisher asks. “I bet you the percentages are really slim and there is no reason for that. None.”
Kathy Price-Robinson is a freelancer who writes about remodeling. She can be reached at www.kathyprice.com.
To purchase a copy of the book “Cash Out, Don’t Walk Out, A Contrator’s Guide to the Successful Sale of a Construction Business,” by Jim Fisher, visit http://jfisherpublishing.com/