Episode 39: Creating An Exit Strategy With Russ, Sky & Andy

In episode 39 of the Professional Builders Secrets podcast, we’re joined by Co-founders of the Association of Professional Builders Russ Stephens and Sky Stephens, along with APB’s Head Coach, Andy Skarda. Throughout this episode, the trio go over how professional builders can create their exit strategy.

During this episode, Russ, Sky and Andy discuss the different types of exit strategies builders can use, as well as who actually needs to consider creating an exit strategy plan and when they should start.

The trio explain what a successful exit plan looks like from a strategy perspective, and go over some of the key considerations you need to make when planning an exit strategy.

Throughout episode 39, Russ, Sky and Andy also go over the many common mistakes builders make when trying to sell their business or create an exit strategy, and outline what buyers are actually looking for in a building company.

Listen to the full episode learn the options you have in creating your perfect exit strategy.

 

Russ Stephens - Co-founder

Russ Stephens is a Co-founder of the Association of Professional Builders, a business coaching company dedicated to improving the residential construction industry for both builders and consumers. Russ is a data analysis expert who has introduced data-driven decision making to the residential construction industry. Russ is also a proud member of the Forbes Business Development Council.

Connect with Russ

 

Sky Stephens - Co-founder

Sky Stephens is a Co-founder of the Association of Professional Builders, a business coaching company dedicated to improving the residential construction industry for both builders and consumers. Sky is a proud member of The National Association of Women in Construction and she was also recognised as one of 2021’s Top 100 Women. 

Connect with Sky

 

Andy Skarda - Head Coach 

Andy Skarda has owned and led businesses in South Africa, the United States, South-East Asia, and for the last decade, Australia. With 30+ years of business experience, Andy heads up the coaching team at the Association of Professional Builders (APB), helping business owners in the building industry identify and implement the skills and systems they need to be successful, without needing to go back to school or more importantly, without going bust.

Connect with Andy

 

Timeline

2:02 Why builders need an exit strategy.

3:39 Who should consider liquidation.

5:26 Who needs to consider creating an exit strategy plan and when.

6:36 What a successful exit plan looks like from a strategy perspective.

8:44 The different types of exit strategies.

13:33 Some of the key considerations when planning an exit strategy.

14:42 The mistakes builders make when trying to sell their business or create an exit strategy.

19:56 The necessity of leadership and communication in an exit plan.

23:10 The critical elements when selling a building company.

26:03 How to find the magic number when selling a building company.

28:11 What buyers are looking for when purchasing a building company.

34:58 The impact of intellectual property (IP) when selling a building company.

36:44 How legacy and succession planning factor in to exit planning.

42:01 The next steps after the exit?

45:34 The common outcomes for builders that have sold their businesses.

47:33 Some key learnings from the perspective of APB coaches when working with builders on exit strategies.

49:24 Available resources for builders who are considering their exit strategy.

 

Links, Resources & More

APB Membership Demo

APB Website

APB on Instagram

APB on Facebook
APB on YouTube

Join the Professional Builders Secrets Facebook group for builders & connect with professional builders world-wide.

Sky Stephens:

Every single owner of a building company needs to think about their exit strategy and work to a plan because otherwise, the least appealing option, it chooses you.

Bosco Anthony:

I'm sure this is a question that every builder is going to want to ask.

Andy Skarda:

If I get to the point where I'm redundant in this business, why would I want to sell it? Builders don't think about selling their businesses early enough or at all. That's the biggest mistake.

Russ Stephens:

You've really got to demonstrate that it's a profitable model, because who's going to pay tens of thousands of dollars, otherwise? The irony is that the less work they actually do in the business, the more valuable the business is.

Bosco Anthony:

Hello and welcome to the Professional Builders Secrets podcast, a podcast by the Association of Professional Builders (APB) for building company owners, general managers, VPs and emerging leaders. Here, we discuss all things running a professional building company, from sales processes to financials, operations and marketing. I'm joined today by Co-founders Sky and Russ Stephens as well as Head Coach Andy Skarda for APB. Sky, great to have you here again.

Sky Stephens:

Thank you, Bosco. Lovely to be here.

Bosco Anthony:

Russ, always a pleasure to have you join us as well.

Russ Stephens:

Thanks Bosco. Good to see you again.

Bosco Anthony:

And Andy, thanks for taking the time to chat with us today.

Andy Skarda:

Always a pleasure, Bosco. Always.

Bosco Anthony:

Well, let's get into it. Why do builders need an exit strategy, moving forward?

Russ Stephens:

Well, I think the main reason in this industry, the simple answer is because it's not easy to shut down a building company. It's very easy to get started in this industry, but it's very hard to exit and that's due to the long sell cycle and the even longer delivery cycle. It can take a year or more to exit a building company. And that means you've really got to plan it in advance. Even if you just want to get out, if you've just had enough and you're not even thinking of selling, you can't just liquidate or stop trading because you've got all these contractual liabilities and they don't just go away.

Russ Stephens:

So, it's very tough for builders and a lot of the time they feel very trapped and chained to what they're doing. By the time they usually decide that they've had enough there, I think at that point they're still completely burnt out and yet they've got to face another 12 to 18 months just to shut the company down.

Russ Stephens:

That's why you need a plan in place, and you need to be thinking right now, what is your plan? Is it to sell? Is it to liquidate? Are you closing down the company? Is it to hand it down? Put in a general manager (GM)? Builders have got to look at it that way. Every investor who goes into an equity deal goes into that deal with a timeframe to exit. Business owners have got to think the same way, especially builders. They've got to have a timeframe and they've got to be working towards that goal.

Bosco Anthony:

It's interesting you mentioned liquidation, Russ. Who would consider that?

Russ Stephens:

Well, I guess if your company is not particularly profitable, you're not getting close to that 10% net profit benchmark, then it's going to be very difficult to put a GM into the company and pull back and even to franchise the business.

Russ Stephens:

Those options are off the table. It also means if you don't have family members who are going to come in through a succession plan, that's going to be off the table as well. Of course, if it isn't profitable, it makes it very difficult to even sell the business. I think if you find yourself in that position with a company that's not particularly profitable or not profitable at all, they're the companies that get shut down, put into liquidation.

Andy Skarda:

I think, Russ, just to tie back to something you said earlier, we tend to hear the word ‘liquidation’ only from the negative perspective. But what it realistically means is shutting down the business legally. It doesn't necessarily have to be negative. You could choose, as we know a couple of builders have done, to get out of the industry. Exactly what you said, although it's going to take you a year to work out your contractual obligations, et cetera, putting the business to bed properly is known as liquidating the company. It can be done positively or neutrally as well from a legal perspective. But absolutely, when we hear that word liquidation, we always give it that negative connotation.

Russ Stephens:

Yeah. That's a really good point. We just associate it with something bad, don't we?

Andy Skarda:

Yeah.

Russ Stephens:

It's just tying up the loose ends.

Andy Skarda:

Yep.

Bosco Anthony:

When and who should consider an exit strategy and an exit plan out there?

Sky Stephens:

Every single building company owner should be thinking about it. It's that age-old thing that you only start a business to sell it. You're not going into business thinking this is it for the rest of your life. You need to exit somehow or some way, because we're all going to die at some point. So you quite literally are not going to be here forever.

Sky Stephens:

Every single owner of a building company needs to think about their exit strategy and work to a plan because otherwise, the least appealing option, it chooses you. That's the voluntary liquidation that Andy and Russ were just talking about, and it doesn't have to be negative.

Sky Stephens:

But after all those years of work, in so many cases it’s been decades of work on this asset, to just shut it down, walk away, means that you’re not going to get anything out of it. It just seems like a waste to us, and this is why we want to talk about exit strategies for builders, so you get rewarded for all the work, time and energy you're putting into the building company.

Bosco Anthony:

Russ talked a little bit about the fact that some of these exit strategies could take over a year to implement. What does a successful exit plan look like from a structure perspective?

Andy Skarda:

It's not quite how long is a piece of string, but I think the foundational answer here has to be that it'll be different for every single builder and every single building business. But there are some fundamentals that are going to be exactly the same. The way we look at this is that it is another business process. It's a significant one and it's one that can have far reaching consequences, but it needs to be put together in sequence taking into account all of the parameters that will affect it, and once you've decided what the end goal is, you then want to work out a strategy to get you from where you are today to whatever that outcome is.

Andy Skarda:

I think that the element there that is important is that it's not going to happen by accident. It's got to be planned; it's got to be carefully planned. And when we talk about successful, just to link back to what Sky said earlier, at the APB, we obviously are all about builders building value.

Andy Skarda:

If you're going to spend a decade building something of value, then a successful exit is you maximising that value at the point that you sell that asset. That's what we'd like to see, a plan that builds the business sequentially, makes sure – as Russ has already alluded to – that it's systemised and it's profitable and all those good things. Then at that stage and at the right point in time, you make your successful exit. That's the other reason to plan it, because if it's forced on you, as Sky said earlier, the least favourite option chooses you if you don't do anything. 

Andy Skarda:

The beauty of planning it means that you get to control the timeframe. You get to decide when it's going to happen. If it's ready to go, even if circumstances change, the only thing you're doing is adjusting the timeline. That's the other reason why you want it to be properly planned so that you can then execute that plan.

Bosco Anthony:

Now, for our listeners out there, I'm sure they're curious, what are the different types of exit strategies? We talked a little bit about liquidation, we've talked a little bit about selling as well, but what are some of the different types of exit strategies that we should consider when looking at an exit play?

Russ Stephens:

I think there are four main types, really. There’s liquidation, the closing down of a company, there’s the selling of the company, there’s succession and then there’s investment. If we just look at liquidation, the company has no value, and no family members want to carry it on. That unfortunately and quite sadly as well is the most common in our industry. The reality is these companies don't have any value. And the younger generation sees how hard it is to run a building company. Really, who can blame these guys for not wanting to carry on the family business? It’s a shame, because as we're saying here, there's a lot of work that goes into these businesses.

Russ Stephens:

It's a lot of compound work over the years and it is sad that there's no value there at the end of this time. Selling really should be an expectation. For everyone going into business, for everyone in business, the expectation should be that this is a valuable asset that can be sold. But you've got to ask yourself, “What exactly am I selling?” Because really, it comes down to two things: systems and cash flow.

Russ Stephens:

If you're not systemising and generating a healthy net profit, then the reality is you have not created a business. Certainly not one with value. You've literally created a job and be honest, who wants your job? It's hard; you're working long hours.

Russ Stephens:

Then there's succession and this is tricky because I think you've got to be realistic about the value of your business and ensure there is a proper transition. Now, most building companies are not systemised and they're not profitable. Really, they're worth nothing. If you are going down the succession route, you need to be honest about that. You're not handing down something of great value to the next generation.

Russ Stephens:

In fact, they're the ones doing you a favour in taking the building company off your hands, because otherwise it will take you 18 months to shut it down. You've got to be realistic about that. You're not doing anyone any favours. But if you do go down the succession route, you've got to invest time coaching the next generation into ownership rather than literally dumping it on them when you decide the time is right and you want to get out, and that takes planning there. Two or three years, really coaching and investing the time to make sure that they can take the business to the next level.

Russ Stephens:

Then within the investment category, there's a couple of different options. A lot of people like the idea of franchising their building company. We hear this quite a lot. Builders come to us because they want to systemise, because then they want to franchise. It's quite a popular idea, but not easy to execute and you do need a lot of systems.

Russ Stephens:

You've got to have everything documented and you've really got to demonstrate that it's a profitable model because who's going to pay tens of thousands of dollars, otherwise? When you gauge how profitable your model is, you've really got to look at your role in that business. How much will it cost to replace yourself? If you're going to go the route of putting a GM in there, the GM isn't going to work as hard and as long as you are. So realistically, you might need two people coming in to replace you and take on the workload that you do.

Russ Stephens:

Is the company still profitable after that? If your margins aren't around 10% after you've put those two people in and your business is fully systemised, then you've probably got a bit of a problem on your hands, and I think you're going to find it very hard to take a step back and just let it run itself.

Sky Stephens:

I want to add to that bit on franchising though, because I think this is a step that's often missed. When you're considering an exit strategy, going down the route of setting up a franchise, you're exiting that one business, but you're creating a whole other business for yourself because you're suddenly the franchisor and you are on hand to help all of your franchisees.

Sky Stephens:

I think a lot, when that's the realisation, builders suddenly think, "Ah, but I wanted to be out totally." And then they reconsider those options. I don't think it's talked enough about. If you go down the route of franchising, you need to go all in on that completely new, different business, because you're no longer building homes, you're essentially supporting people who are building homes and building their businesses.

Russ Stephens:

Yeah. It's a really good point and they say there are three attributes you need in order to be a successful franchisor. You need to be able to sell franchises, sell franchises and sell franchises. That's all that matters, really.

Bosco Anthony:

Speaking of consideration, Sky, what are some of these key considerations when creating an exit strategy and planning?

Sky Stephens:

It's everything because it's just completely unique to everyone's own unique situation. How old are your kids? How old are you? Who’s in your whole family? Are you married? Are you single? How many more years of work have you got left? What are your personal goals? What do you want to do in the community?

Sky Stephens:

An exit strategy is actually really personal to the founders and who's working in the company. Everything is a consideration, every single thing about your life and your business needs to be factored into that decision so that you can come up with the exit that suits you best. It’s because, honestly, selling isn't going to suit everybody. Succession isn't going to suit everybody. It's completely unique.

Sky Stephens:

So there really isn't a one-size-fits-all exit plan and that's why there are options. Rather than just thinking, "No, I definitely want to sell," or “It's definitely succession,” at least explore all of the options, because you have to have the knowledge of ‘what if’ and ‘what could it be’, so that you know you're making the right choice and then can go all in on that one direction.

Bosco Anthony:

What are some of the mistakes that builders make when trying to sell a business or look for an exit strategy?

Andy Skarda:

That’s a difficult question to answer because unfortunately, as Russ has alluded to, it doesn't happen a lot in our industry and that's primarily due to the fact that most builders become business owners by mistake. They never intended to do that. They wanted to build stuff and they really went into it in a lot of cases with the mindset that Russ mentioned earlier as well of, "I want to get myself a secure job and do things my way."

Andy Skarda:

The problem with that is if you are not working towards selling a business – and let's take it wider – towards exiting a business on any basis, you don't plan to get there. It's a little bit like when I'm going on vacation. I get in my car, and I just drive. I get to the first corner, and I turn left, and I get to the second one, and I turn right. It's aimless. I have no idea where I'm going to end up. 

Andy Skarda:

Whereas if I decide I'm going to the Gold Coast on holiday, I can plug that into my GPS and I know exactly how to get there. Now, that's the problem. It’s that a builder who isn't in the mindset of, "I want to sell my business. I could sell my business," is not even going to start thinking about it. Really, it's part of why I love the fact that we are doing this podcast. What I'm really hoping for is although we won't necessarily give people the final answer on, “This is how to do it,” we might at least get them thinking.

Andy Skarda:

We might get them to change the things that they do from now onwards: the people they hire, the software systems they install, the profitability, the margins that they start to create within their business. If those change tomorrow, because they start thinking, "I need to start building value," then this podcast will have knocked us out of the park as far as I'm concerned. To summarise all of that, the mistake that builders make is that they don't think about selling their businesses early enough, or at all. That's the biggest mistake.

Russ Stephens:

They wait until they want to sell and then they realise they have to systemise, don't they?

Andy Skarda:

Yeah.

Russ Stephens:

We've worked really closely with a guy called Kevin Lovewell who's been on the podcast and runs a business brokerage. That's the main feedback from him. It's not just builders, I think. It's a lot of small businesses. They come to a business broker because they've had enough. They want to put their business on the market and the business is not in a position to be sold and they spend the next year or so systemising it.

Sky Stephens:

Again, with the end in mind, literally.

Russ Stephens:

Yeah.

Andy Skarda:

I think the other problem with a lot of builders, unfortunately, is they are the business. Literally, they are the centre of that universe, and the problem is if you are the business and you go to somebody and say, "Buy my business," and they realise you're going to leave, they don't really want to buy a business where it just left with a cheque in its hand. That's the other value in systemising, you get to the place where the business doesn't all hinge on you.

Sky Stephens:

This is more common than you think. Think of the number of building companies that have come through to APB, and they're thinking they're in a much better position. They're not on the tools, they're not on site all day, but they are doing all of the sales and really driving the building company forward.

Sky Stephens:

If you think the business doesn't depend on you, it really does because you can't step away from that building company for longer than maybe a day, maybe a couple of weeks, maybe a month at maximum. But if you can't step away for six months and have it run smoothly, then it does depend on you and that's still an issue.

Andy Skarda:

Yeah. I had a case in the last week with a client who planned a wonderful holiday, not quite bucket list, but up there. He hated the 10 days that he was away because he was bombarded incessantly with emails and telephone calls from the office. That's the way that this problem manifests.

Russ Stephens:

I think the irony is that people think about selling their businesses because they're getting burnt out and because they're working so many hours and there's so much demand on them in the business. As a result, they then go through that process of selling and I think the irony is that the less work they actually do in the business, the more valuable the business is.

Andy Skarda:

Exactly. That concept is wonderful to look at because what it starts to say is if you get to the point where you’re redundant in this business, why would you want to sell it?

Russ Stephens:

Exactly.

Sky Stephens:

Everyone needs to listen to the episode with Kevin Lovewell because I love what he said in that episode. He said, "The first question to ask is, 'Would you buy your building company?' Because if you wouldn't, why are you thinking you can sell?" You need to sort that out. I thought that was a great episode.

Bosco Anthony:

Let's talk about leadership. I guess I'm sort of on the fence to say, should leadership be proactive or reactive? How do you communicate with the people who you work with when going through an exit plan? Is it something that you hold close to your chest? What does that look like?

Russ Stephens:

Yeah. Good points, Bosco. Because I think good leadership is, first of all, looking ahead and anticipating the challenges. Whatever exit you plan, you've really got to think ahead and anticipate the roadblocks that are going to come up. Part of that once you've anticipated the challenges is then creating the plan.

 

Russ Stephens:

But step three is communicating the plan. It's so important, and obviously that communication is going to vary dependent on the strategy, but good leadership, that's got to be communicating the plan well. It's very similar I think to growing or even operating a company. It's exactly the same, isn't it? You're anticipating the challenges, you're creating the plan and you are communicating the plan.

 

Russ Stephens:

I think there's probably a couple of additional skills involved in being a good leader. If you are planning on selling the business, then negotiating skills would probably come under good leadership. For that, I think we'd all recommend the book Never Split the Difference [by Chris Voss]. You can pick up a lot of good tips in that. I wished I'd read that before I sold my last company.

 

Russ Stephens:

Then if you're going down the GM route, I think a good skillset for a leader to have is delegation because you're going to have to be able to step back and let others step into your shoes and take over. If you're going down the succession route, I think being humble would be a good quality for a leader because there's every chance that the next generation is going to take that business to the next level. Be humble and embrace that. With liquidation, it comes back to what Bosco said, communication, because that can be quite fraught. You can be walking a bit of a tight rope, especially with a building company to be balancing out, closing down the resources strategically as the company gets towards its final days.

Sky Stephens:

I think that’s a really good point.

Andy Skarda:

One of the things in terms of communication is making sure that the incoming buyer has continuity in the leadership of the company, for example. Again, this is why we talk about planning it, making sure that you’ve got a long enough runway that your key leaders, whoever you identify in the company, are going to keep that continuity going and you involve them in the process.

Andy Skarda:

A wonderful thing to do in terms of that is to build in a deferred compensation bonus that is payable only after the company has been sold, based on its results from the first year. That kind of thing. But to do that, you’ve got to be honest, you’ve got to actually get to the place where you know what you’re doing and then you share that openly and honestly with your team members.

Russ Stephens:

I did something very similar, actually. When I sold my company in the UK, we had a key account and the whole deal was very dependent on this key account ongoing. I had a key employee who was looking after that account and I did exactly that. I set this deal up for three years where he earnt based on the success.

Andy Skarda:

Yeah, yeah.

Bosco Anthony:

Let's get into what goes into the sales process for a business that's looking for an exit play. What are some of those critical elements to take to the market?

Sky Stephens:

In order to create a saleable asset, just piggybacking on what both Russ and Andy were saying just then, often when you do make the sale, it's not, "Goodbye, see you later." There's often going to be a deal in place that you will stick around for maybe a certain number of weeks or months to ensure a smooth transition for the new owners.

Sky Stephens:

But that's after the sale. How do you even get it saleable? You quite literally need to begin with the end in mind. It's important to think, would you buy your building company? Think of why people say, "You know what? I can't do this by myself. I'm going to go buy a franchise." What are they trying to buy? Well, a lot of the time they're trying to get systems.

Sky Stephens:

They're trying to get maybe some brand recognition and a bit of a name and maybe a little bit of a network with the other franchisees. Really, that's probably what they're getting. I don't think I'm missing anything, but feel free to jump in if you think I am. If that's why people are buying franchises, why would they buy a solo building company? Well, try to build that into your building company.

Sky Stephens:

You need to make sure it's saleable and scalable. You can only do that by having proper systems in place and massive assets as well. I'm talking about marketing assets. Think of all of your content. This is your whole building company's IP. It's not just a systems manual. It's so much more than that. What's your sales process? All of your scripts, the entire marketing to back it up.

Sky Stephens:

What are all your content videos? What are your social media accounts like? Are they posting automatically? Who's in control of that? Is that someone's KPI? Does that run without you? And then you can look at all of your other assets. Look at exactly how your website is and how it functions. Make sure you have all of those logins, and your servers are under your name, so you have total control.

Sky Stephens:

Then look at all of your photography assets and all of your video assets for all of the homes that you have built. Look at your design range, all of your lead magnets. I could go on and on and on. But it’s about making a really valuable looking building company. It takes work, naturally, because otherwise, why would someone buy it? It needs to look good. All of your online reviews, your whole reputation, everything counts.

Sky Stephens:

It’s not light work and it really shouldn’t be. Because if you’re going to sell it, you should have proven that you’ve been making decent money from the profit from the building company for several years so that it’s proven. That’s why you can then sell it for a multiple of that net profit. They’re buying literally something that is good to go. They can keep moving forward with it.

Bosco Anthony:

How does one acquire the magic number for sale? I’m sure this is a question that every builder is going to want to ask. But when it comes to actually planning this, is there a way of finding the magic number?

Andy Skarda:

The real magic number is what do you need out of the sale? This is why we talk about developing your exit strategy and your plan because those two things are different. The strategy is you deciding what form it’s going to take. The plan is the individual steps that get you to that eventual outcome.

Andy Skarda:

It’s going to vary on things like: are you walking away from any kind of income generating activity at all when you sell this business? Or, exactly as Sky said earlier, if what you’re saying is you’re selling your building business, but you’re going to open a franchising business, then that puts you into a completely different situation. It goes back to the uniqueness that Sky mentioned earlier as well.

Andy Skarda:

Your number is your number. It’s going to be driven. It goes back to the foundational element: your business should not be your life, your business should serve your life. It should be a tool, a resource that allows you to accomplish those things that are important to you as a human being, no matter what those are.

Andy Skarda:

It’s really taking the time to do a bit of self-reflection and introverted sort of thinking on, “Why am I here? What am I contributing to the spinning green ball? And what do I want my legacy generally to humankind to be?”

Andy Skarda:

When you get to that, and you’re at the point that you’ve worked out what that is, it’s then calculating the price tag that is associated with that outcome. Not that we are going to pretend to be financial planners on this podcast, but that’s where you’d need to sit down with a professional and say, “Okay, this is what I want to do. Can you help me work out how much money I need to be able to do that?” And that is then going to inform how much money you need to sell the business for in order to achieve that financial outcome.

Bosco Anthony:

Take me through a potential buyer’s perspective. What are they looking for when they’re looking to make that purchasing decision? What are some of those critical elements that a buyer looks at?

Russ Stephens:

Well, they’re going to be looking at a few different ways to value a business and businesses get valued in different ways, in different industries and of course, based on the size as well. For a small business, they’re pretty much looking at how much income it brings in for the owner.

Russ Stephens:

But a larger business, you’d be looking at a price to earnings ratio. And when you look at a price to earnings ratio that could be EBIT, which is ‘earnings before interest and tax’ or it could be EBITDA, which is ‘earnings before interest and tax depreciation and amortisation’. Now, I’m not sure how that is even relevant to valuing a company, but I’m not an accountant, as so many accountants like to remind me. So, I’ve got no idea what part that plays.

Russ Stephens:

But also there’s net asset value as well, which could be more appropriate for builders. It’s the net equity or the stock value of the building company that can be a more appropriate one. Some industries even do valuations on revenue, which could be appropriate if you are selling to someone who’s looking to wash their money, for instance. It could be very attractive. But of course, like Sky alluded to as well, there’s the intangible figure as well that brand value brings, the reputation in the marketplace, the systems, et cetera. Part art, part science I would say in the whole valuation. To answer your question about what the buyer would be looking at, well, they’re going to look for anything that produces the lower number.

Sky Stephens:

I think they’re trying to buy the value, like you say. I know this is a different industry, but if you look at some of the other sales that are happening of businesses that are getting sold, you think, “Well, were they too profitable to begin with?”

Sky Stephens:

Some of them weren’t, so you have to think, “What was that other company trying to get?” There’s clearly some value there. Often, if you really dig deep, it was because of the audience they had. We’re all trying to buy that attention and that client base and if you are building your building company to be so valuable and well-known in the area and you’re building your database, like this is another valuable asset you can have, people who are taking into account the net profit and your total earnings for the last 12 months. But then they’re looking at every other thing; you have your audience or your other assets and that’s where your multiple can come from and can get much higher.

Andy Skarda:

I think the other thing that’s critical that we mustn’t gloss over here is niche. There are a number of businesses that get sold because the buyer wants to get the seller out of the way; you dominated a portion of the market that they want. They know that to take you on, let’s call it in the open market, is going to take them longer and cost them more than what you will take as a price to go away. That almost hostile acquisition kind of scenario, where you’ve become a thorn in their flesh and they want to get rid of you, pumps that value up significantly.

Sky Stephens:

The opposite is also true. Think about when you are in a great position as a building company, you can swallow up much smaller building companies to buy their assets. If you want to buy their team members and you want to buy their corner of whatever market, the opposite can also be true. It’s a great scaling strategy.

Russ Stephens:

I’ll just put a couple of numbers out there for builders, because I’m sure there might be builders listening to this and just wondering, “Well, how much could my building company be worth?”

Russ Stephens:

If it’s a small business where you are a very integral and important part of it, you’re probably looking at between one and two times the owner’s income. You might struggle to get above one and a half in all honesty, and it might be closer to between one and one and a half. However, if you’ve got a systemised company, you’ve even got a GM in there, you are probably still only looking at a price earnings multiple of around about three or four. Building companies don’t really attract high multiples like you might see for other industries. I think it’s probably important to be just a little bit realistic about your expectations there.

Sky Stephens:

To clarify with realistic expectations, I’m surprised we haven’t raised this in this episode so far. We tend to raise it on every other episode. Clean accounts are a must. As soon as you go into a sales process, and I know we’re focusing very heavily on the sale of a building company and it’s just one of the possible exit strategies, but no buyer is going to come in unless those accounts are perfectly clean.

Sky Stephens:

We talk about this figure so often because it’s just so important. That means doing your work in progress accounting adjustment and your profit and loss, and your balance sheet needs to be clean. Obviously, you’ve got to be hitting the industry benchmarks for price profit margin, net profit margin and fixed expenses as a percentage of revenue.

Andy Skarda:

We haven’t mentioned the swear words around an exit strategy either, yet. Those are the two D words: due diligence, which must be done in every sale of a business, before somebody’s going to actually hand over a cheque, if you’re in the US, or do a transfer anywhere else in the rest of the world.

Sky Stephens:

You can put makeup on a pig and it’s still a pig.

Andy Skarda:

There you go. The topical one, I know it’s going to date this episode, but I think it’s worth it as a really good example. Mr. Musk was going to buy Twitter a couple of weeks ago. And then what did he do? He turned around and he said, “Well, hang on a minute. Maybe I’m not buying Twitter because I’m not sure that the assumptions on which we came, which you guys used to get to the price, are even achievable.”

Bosco Anthony:

He questioned the evaluation.

Andy Skarda:

Yeah, exactly. This is the point and Sky mentioned it earlier. She stopped way sooner than she could have in terms of the things that add value. If you take what Sky said about how you must first build the value, then add to that what Russ said about the multiplier, the bigger you can get the value to be, the bigger effect that multiplier is going to have when it’s actually applied to your business. The key focus initially is building that value.

Bosco Anthony:

It’s interesting that you also talked about market expansion as well as the reason for exit plays. We actually had a guest in previous seasons who talked about a trend where some of the big building companies were buying out some of the smaller building companies to expand territories as well.

Bosco Anthony:

It’s a very timely conversation because this is actually going on in the market right now. I’m going to take this conversation, which has been really stimulating, in a different direction and then we’re going to open a can of worms here. How does intellectual property complement an exit strategy? What are some of the significant impacts it has towards the sale?

Sky Stephens:

Well, with franchising, I think we have covered this, so we won’t take up too much more time, but you are starting a whole other business. If you’re selling, it’s just the new owners who get the benefit of what you have set up.

Sky Stephens:

Franchise law can get a bit messy; it’s very specific in the way you need to set it up. Maybe it’s not technically a franchise you do, maybe it’s licensing. Consider both for what I’m saying here: franchising, licensing, whichever one you choose. If you go down that route, you can actually benefit and bless so many more people because they get to use all of your systems, and this is how you can go national or statewide.

Sky Stephens:

Just grow that a little bit more quickly and it’s all under your same brand. If you want to see this go a little step further, that’s a wonderful opportunity. Obviously, you get rewarded for your effort. When you sell a franchise or a licence, you’re obviously getting the purchase immediately for that territory or area and then you’re getting those franchise fees, so it’s ongoing reward for the support and this is why the full-time job and the new business kick in when you become a franchisor.

Sky Stephens:

But obviously, in order to do that, you’ve got to make sure you’ve got really robust systems that actually work. You want to make sure you can set it up somewhere else first and prove that it can work and that anyone can buy it and run it.

Andy Skarda:

And then you’ve got to work out your exit strategy to get out of the franchise company.

Sky Stephens:

Exactly. You would be here again.

Bosco Anthony:

It’s a circle, basically.

Andy Skarda:

Absolutely.

Bosco Anthony:

How do legacy and succession planning come to life in this exit strategy? We talked loosely about it but let’s talk about what the steps would look like.

Andy Skarda:

Well, let me be pedantic here. I’m the ‘words create worlds’ boy, so I’ll start there. There is a difference between legacy and succession. When we talk about legacy, we’re talking about handing down to a family member. Usually, a child. It doesn’t have to be, it could be a nephew or a brother, sister. Whereas succession is really the transfer of power or the transfer of authority.

Andy Skarda:

You could have one without the other. You could quite easily have succession happening in a business that wasn’t being passed down to a family member. I think it’s important just to differentiate that. But really where this question is going is how do you get it to the next generation? I think there’s two fundamental questions you’ve got to ask yourself.

Andy Skarda:

First of all, is your family functional? The quickest way to really break a family apart is to add the weight of a business to something that’s already shaky. That’s number one. Number two, probably most importantly, are they competent? In other words, they don’t have to be today, but the fundamental question would have to be, “Are they interested in getting involved in the business and taking it over at some stage?”

Andy Skarda:

That takes me back to what we said earlier, that this needs to be a process that’s properly planned so that there’s enough time to set everything up. What would that mean? Well, that might mean that one of your children is going away to get a very specific academic qualification to bring into the business. It might mean that somebody else is coming into the business to do an apprenticeship so that by the time they are ready to take over the business, they’ve literally walked through the entire business from sites, they’ve built homes, they’ve sold homes, they’ve run the numbers et cetera.

Andy Skarda:

It’s an ongoing thing that what you really want to do is make sure that by the time that transfer happens, it is a blessing, not a burden. Russ said earlier, in some cases, your family’s doing you a favour by taking the mess off your hands. As a professional builder, you don’t want to do that to anybody, no matter what kind of sale it is. But in particular, you don’t want to do that to people who you care about.

Andy Skarda:

It’s maybe even more important in the legacy hand systems that are in place, people are competent, the business is a growing concern that is healthy. That’s what you want to hand over to your family.

Sky Stephens:

One hundred percent. I can remember so vividly, we did an event in person in Australia and clients flew in from different cities and states to come to this event. It was a two-day workshop. There was a group there, I suppose you could call it a family business because there were the parents who had started it, but their son was in the room because he was going to take over the building company. It was such an expectation. I vividly remember that their son was so entitled to have this building company.

Sky Stephens:

The parents, more specifically the dad of the family, said something that fully stuck with me afterward. He said, “It’s such a shame because I have had to deal with this building company for years while it’s been essentially in the ground, terrible, not making any profit and he is going to get all the benefits of the work I am putting in. He’s going to get all the profit.”

Sky Stephens:

The dad resented that so much. He was so bitter about that because he wasn’t making profit for so long. He wanted to retire and he was doing all this work just for that. And I felt for him, but it was a shame that he was so bitter, and it just stuck with me for so long.

Andy Skarda:

Now, there’s the functional question being answered.

Sky Stephens:

This was quite a few years ago now, but I think actually in hindsight, the grandfather set up the company. So the dad got passed on the building company that had no systems. It was from the generation before and he’d been working in it, and now he was going to systemise it, make it better and he’s getting to the point where he’s going to leave it to his son.

Andy Skarda:

Bosco, you and I’ve had a couple of discussions about different types of liquid refreshments. When you talk about legacy, the best examples of family businesses that have stood the test of time, strangely enough, are European alcohol manufacturers.

Andy Skarda:

If you look at the French winemakers and the Italian winemakers, you see that those businesses have been handed down for centuries. If you go back and you analyse why that is, it’s because they literally have done the same things in the same way generation after generation after generation. It’s that consistency thing.

Andy Skarda:

We don’t see that a lot in the building industry. Most building businesses don’t make it past the second generation. Occasionally, they’ll get to the third. But even in the example Sky’s given you now, there’s some bitterness in the middle. The guy who got the bad business and made it good is really feeling bitter about handing on this beautiful thing to his son.

Sky Stephens:

He got the burden and he’s going to pass on a blessing. He just feels a bit left out. 

Bosco Anthony:

I resonate with the French champagne legacy planning.

Andy Skarda:

Well, there you go.

Bosco Anthony:

If you look at French champagne, you see it’s stood the test of time. Which begs me to ask the next question, which is what comes after exit planning? Do you have builders who struggle with the scenario where they've exited, and they don't know what to do with themselves?

Russ Stephens:

I think the next step after exit planning is procrastination, without doubt. Really, it has to be execution. I think selling is probably the one thing that business owners, not necessarily just builders, but business owners in general, have the most trouble with because it's out of their hands. You need a buyer. You think it's going to be quite a quick process when you decide to sell and then you realise that it's not worth what you probably thought it was going to be worth. In my experience, when I've looked at valuations put on companies by owners and then the negotiations get underway, I've seen about a third, I think is a pretty good guide really of what it's really worth against the expectation.

Russ Stephens:

But the reality is like we said earlier, when you go to the broker, they're going to ask you for a ton of information, which is only going to expose all the gaps because you can't lay your hands on that information and that's obviously going to lead to delays. I think that's where the struggle comes in. At this point, after going down that route for a few months, this can be the point where the plan changes for a lot of builders. It moves from an exit strategy of selling into an exit strategy of liquidation. But in all honesty, any route that you choose, it's a long journey and that puts pressure on a builder for sure.

Andy Skarda:

Yeah. If I can just add to what Russ has said, you don't want to be doing that while you are trying to keep the business running day to day. The actual preparation that goes into the sale, setting the business up and all of those negotiations, the business must be running on autopilot with the team making it happen while you, as the owner, are focusing on selling it.

Sky Stephens:

That's the irony, isn't it. When we worked on our system of exit strategies, step number one, no matter what exit you choose, you technically need to choose the option to move to investor status. You need to be out of your building company altogether so you can very calmly think about the actual next step.

Sky Stephens:

What is your exit? Otherwise, you are trying to work in the building company. You're trying to grow it. You're trying to stay profitable. You have your role in the company and then you're trying to think of what next to do. No, get completely uninvolved. Often, what you'll find is when you get to that step, you think, “That's okay, I'd probably like to live off the net profit for the next few years." That's pushed way further down the track.

Russ Stephens:

Yeah. It's a really good point because going through that process of selling the company is a bit like being audited tenfold. If everyone in the company is already working at maximum capacity, you are not going to have the bandwidth to cope with that kind of audit. You really want to maybe even bring someone on in anticipation. If you are selling, it's probably not going to be public knowledge. So you can even use the guise of an audit, "The accountant's asking for this." But really do make sure you've got that capacity because otherwise it will suck you under.

Andy Skarda:

And it will take you longer than you expect. Absolutely. Double the time you think it's going to take you.

Sky Stephens:

Double.

Bosco Anthony:

It sounds like you're also going to go through a rollercoaster of all kinds of emotions as well. Excitement, fear, anticipation, exhaustion. What are some of those common outcomes for builders who sold their business? What do they do next?

Sky Stephens:

As soon as you do exit your building company in any which way, it's going to give you that ‘what now?’ feeling. Unless you actually have a plan, just like anyone who has sold any company, if you do not have a plan because your company was your whole life and then you sell it, and even if you’re really happy with what you sold it for, if there's no plan, there's just this emptiness and you feel a sense of loss.

Sky Stephens:

You just have to mourn who you once were, and this is why it's really important that your identity isn't caught up in your company. It's just part of what you do, not who you are. You have to go into any exit strategy separating your identity from the company's identity. Because again, it's what you do, not who you are. You can sell it and it's not a part of you leaving so you don't have this midlife crisis after making such a huge achievement.

Sky Stephens:

Unless you have a plan, you really can fall into what’s now the midlife crisis point in your life. It's like working all your life just to reach that retirement age. If you don't have a plan, what are you going to do? Just sit on a chair for the next 10 years, really just waiting to pass because you have no other purpose in your life? When you plan your exit strategy, you need to plan life after the exit.

Sky Stephens:

You must have something to look forward to so that you don't end up in a bad situation. This again is unique to everybody. Is it your family? Is it your community? Do you even want to create a new business? You can exit a building company at a very young age. Who says you have to work in it for a few decades first? You can exit really early and start all over again if you've got that energy. The world's your oyster.

Bosco Anthony:

What are some of the key learnings from the coaches at APB working with the builders with this particular process and these thought processes? Do you have builders who are speaking to your coaches on the front line around exit strategies? What are some of those perspectives?

Andy Skarda:

I think we need to go with full disclosure here. There aren't a lot. The reason for that is quite simply some of the things that we've mentioned earlier, that for most building businesses, this is not an option that they really consider very seriously. Because of that, they're not really set up to be sold for any kind of real number and therefore it doesn't happen very often. That is primarily what we would like to change.

Andy Skarda:

We've spoken about why APB exists. We want to improve this industry for the clients and builders. Part of that means if they are going to invest themselves, they're going to put their blood, sweat and tears into a business, let's make sure that we help them build value and we get something back for them at whatever point it makes sense. What really are the key learnings?

Andy Skarda:

Well, to be totally honest, they're not that different to what they would be on an ongoing basis except now we've answered the why question. You're not just systemising for the sake of systemising. You're not employing people for the sake of employing people. You're not trying to create profit just for the sake of having money. You're now starting to look at, “Why do I want that money? What am I going to do with that money?”

Andy Skarda:

How long am I going to be part of this? It's critically important, “What am I going to do? And I'm no longer part of this.” Those are the kinds of elements that go into it. We've touched a little bit on how long it takes. Truthfully, we would be very surprised if somebody made the decision today that they are going to sell, that they could be done maximising value in less than three to four years, as an absolute minimum.

Bosco Anthony:

I could speak to you guys about this for a very long time, but my final question for the day is: is there a checklist or a resource that some of the builders who are considering an exit strategy can access from APB?

Sky Stephens:

Yeah. Essentially what we've done at APB is put together an entire action plan discussing all of these exit strategy options and giving a much deeper overview of all of them; all four different options are included in that action plan. It is for members, it's part of our membership, but included in that is actually a detailed list or checklist of how to make your building company valuable and all those assets you can get in place.

Sky Stephens:

That's available for all of our members. I suppose if you're not a member of APB, what we can do is pop a link maybe in the show notes to a full demonstration so you can at least see behind the scenes and see how they look and what else is included with what we do as part of membership.

Andy Skarda:

Yeah. That's the subtle answer, Bosco. Join the APB.

Sky Stephens:

Plugging away.

Andy Skarda:

You know me. I'm very subtle always. Join the APB. That's what you need to do.

Bosco Anthony:

Well, as I think Sky alluded to, begin with the end in mind.

Andy Skarda:

There you go.

Bosco Anthony:

I think that's definitely left us with a lot of food for thought. Thank you once again, everyone, for joining us today. This was a lovely chat, a very detailed chat about future planning and I look forward to sharing more conversations with you in the near future.

Andy Skarda:

Thanks Bosco.

Russ Stephens:

Thanks so much, Bosco.

Andy Skarda:

Cheers.

Sky Stephens:

Awesome episode. Thanks.

Bosco Anthony:

Thank you for listening. Remember to subscribe to Professional Builders Secrets on your favourite podcast platform and leave a review. To learn more about how the systems at APB can help you grow your building company, visit associationofprofessionalbuilders.com. See you next time.