A Trade or A Business?

by Scott Balfour

Exit planning can convert one to the other.

When putting your business on the market, this is one of the first questions that needs to be answered. And no, it’s not as easy as you might first think.

First of all, it is not a question of a white collar vs. blue collar business. It is not a question as to the size of revenues or profit. It is not a question as to the industry, profession, number of employees, or even the number of customers/clients. It is about how the company is run.

The reason it’s important is because it is key to the value and the transferability of the business. I’d say, second to the cash flow, it is the biggest factor.

Let’s take two companies. Let’s call one Fred’s Plumbing and the other Ace Plumbing:

Fred’s Plumbing has three service trucks in addition to himself, two licensed plumbers along with some on-call help as needed, and his wife does all the bookkeeping. Fred has been in business for 15 years. Fred’s customers are loyal. They know Fred personally and know that you can call him 24/7 and that he, or one of his men, will respond to any service call quickly. Much of Fred’s business is past customers and referrals. Fred’s employees start every day arriving at Fred’s house to receive their daily schedule, equipment, and supplies and are encouraged to call Fred by cell with any questions they have during the day. They know Fred’s attitude about customer service and know he considers no question unimportant and is always available for assistance. The Schedule C tax return for Fred’s Plumbing shows $750,000 per year in gross sales and net income at $150,000.

Ace Plumbing also has three service trucks in addition to the owner, and two licensed plumbers along with some on-call help as needed. The bookkeeping and all administrative support are outsourced. Ace has been in business for 15 years. Ace customers all rank Ace extremely high on Angie’s list for delivering prompt and professional service. In addition to many loyal repeat customers, Ace markets to landlords and property managers. Ace’s plumbers take the well-stocked trucks home at night. Ace’s employees also know they can call the owner w/ necessary questions of a technical nature. However, they are encouraged to call the outsourced administrative support when they arrive and finish a job along with any scheduling or supply needs they may have. Ace Plumbing Corp.’s tax return shows $750,000 per year in gross sales, and net income of $100,000, with a $50,000 salary to the owner.

On the surface, these companies seem similar. They are in the same business, have the same number of employees, trucks, revenues, and cash flow (income plus owner’s compensation), high customer satisfaction, and both have been in business for 15 years. Yet, I’d classify Fred’s Plumbing as a trade, and Ace Plumbing as a business. Ace plumbing has a higher market value, and here’s why.

In Fred’s business, it’s all about Fred. Fred is the hub of the business. Nothing is delegated. Nothing happens without Fred’s involvement. You take Fred out of the picture, and there is little left. Fred is central to the success of the business. If you take the keystone out of an arch, it will come tumbling down. If you take Fred out of his business, the business comes tumbling down. Poor Fred. He’s spent a lifetime working his butt off but has built little equity in his business beyond the inventory and equipment. Not only that but in his day-to-day life, there is never free time. Even when he’s on vacation, he feels the need to check-in at the office or take calls to solve crises.

With Ace Plumbing, there are systems in place. Every operation of the business is not dependent on the owner. The service calls from customers are received and dispatched by an outsourced service. This company also provides bookkeeping services. They are kept informed by the plumbers as they log in and log out at a site, along with the supplies that are used for that job from the well-stocked and inventory-controlled trucks. Billing is automated, and nothing can slip through the cracks. The owner has time to work on billable hours, because calls from customers, employees, and vendors are not taking up his valuable time. The customer list is loyal because it was built on customers looking for quality results, not just on relationships and niche marketing. Their marketing is automated and can be replicated with a transfer of ownership. This owner can go on vacation knowing that he has a well-operating business back home. This owner has built up great goodwill value and equity in his business.

If you have a trade and want to convert it to a business in preparation for a sale (or not), that is what we call “Exit Planning’” and it is one of the many Advisory Services offered at Magnusson Balfour. It is never too early to think about your exit plan. Give us a call. We can assist.