How to Sell an Electrical Contracting Business
The electrical contracting industry has remained strong, despite supply chain problems and other economic impacts during the COVID-19 pandemic. The Bureau of Labor Statistics (BLS) expects job growth in the electrical industry to come in around 7% between 2020 and 2030, a healthy projection.
Since the market is doing well, you might be considering the question of when and how to sell your electrical contracting business for a decent price.
Doing so is a matter of increasing the value of your contracting service, learning what serious buyers are looking for, and covering all the bases financially and legally as you prepare to sell.
It’s often best not to navigate the process alone. An experienced broker can also help you raise the value of your business and sell it for the highest price possible.
What Makes An Electrical Contracting Business Valuable?
Many variables figure into the fair market value of an electrical contracting shop. Consider how your business ranks in each of these categories as you draw up your exit plans.
Niche Or Specialty
Electrical contractors operate within a wide variety of niches. First, there are considerations such as underground wiring or in-building wiring, both of which require different skills of staff. Then there’s the divide between residential and commercial.
Residential remodeling is a growing and lucrative niche for electricians. Contractors can specialize even further in installing lighting, security, entertainment, or heating systems in homes.
Commercial industries are wide-ranging, from alternative energy to aeronautics to manufacturing. These industries often call for specialty electricians. A contractor who operates in those fields can quickly secure lots of market share.
Depending on local and overall trends, a contractor’s niche will likely influence the value of the business as a whole.
How many workers does your company employ? How much revenue do you bring in? Those two big questions can roughly determine the size of your business.
Larger electrical contractors in good financial and operational health sell at a higher valuation than smaller shops. Smaller businesses are often more dependent on the owner, which presents more risk to buyers.
Good Field Service Metrics
How well is your business operating day-to-day? Optimizing field service metrics such as service response times, repair times, and travel costs will both reduce risks and costs, boosting your bottom line.
It’s also important to pay attention to the number and types of contracts you have. For example, a focus on converting more expiring warranties into regular maintenance agreements can mean more stable income for your business.
Staff Makeup And Qualifications
For electrical businesses, it’s crucial to have fully-trained and licensed staff that can provide dependable, safe service.
It also helps to have a low employee turnover rate, and staff that generally show commitment and solid performance, Buyers will be attracted to these signs of stability in a contracting firm.
If you do have hard assets such as computers, electrical equipment, office equipment, and the like, these will factor into the overall value of your shop.
Intangible assets also play a role. These include vendor relationships, memberships in industry associations, customer lists, and local brand presence.
Valuation Metrics For Electrical Contractors
Brokers employ several methods to value contracting businesses. Your broker will appraise your company and select those methods that will yield a fair market value.
Larger electrical contracting companies may be valued on the basis of EBITDA (earnings before interest, taxes, depreciation, and amortization). As the name implies, the EBITDA calculation adds back expenses to total earnings.
A multiple is applied to EBITDA to arrive at a value for the business. Electrical contractors are often valued at between 3 and 4 times EBITDA.
The seller’s discretionary earnings (SDE) is another method that can be applied to small electrical contracting operations. SDE is based on the following formula:
(Pre-tax, pre-interest earnings) + (vehicles, travel, other transactions listed as business expenses)
SDE adds back business expenses with personal benefit to the owner, such as charitable donations and a yearly salary. Smaller electrical contracting shops may be valued somewhere between 2 and 3 times SDE.
As you work with a broker on valuations, there are some key items to be aware of and take action on in advance of selling your business.
What To Do Before Selling Your Electrical Contracting Business
Anywhere from a year to several years out, you should be cleaning up the books and organizing all documentation relevant to the operation of your contracting business. Being prepared will position you to fetch the highest possible price in the eventual sale.
Look for any vulnerabilities, whether those exist in your sales process, legal standing, employee performance, vendor relationships, or some other component of your business. It’s best to get to work right away on resolving those to raise your company’s value.
As part of this, document your standard operating procedures (SOPs) to verify your business runs smoothly on a day-to-day basis.
Ensure Good Legal And Financial Standing
Gather your profit and loss (P&L) statements, balance sheets, cash flow records, taxes, and all other financial forms that pertain to your business. They should ideally be clean and free of concerning items, such as frequent dips into negative cash flow or outsized reliance on loans.
An accountant with experience in the electrical industry is a good bet to help you clean up your books as efficiently as possible. You’ll also want to work with a lawyer to ensure your permits and licenses are up-to-date, you’re fully compliant with local regulations, and there are no outstanding liabilities or entanglements with vendors or suppliers.
Strengthen Your Sales And Customer Relationships
Building goodwill with customers will only help in reducing risk and increasing the financial security of your business. In addition, honing in on excellent customer service and communications will help you improve sales, giving you the upper hand when it’s time to sell the company.
Be sure to contact and survey existing clients about their ongoing needs, network and join forces with general contractors, and thoughtfully build your electrical contracting brand through personalized marketing and outreach.
Remove Yourself From The Business
The less that your company’s day-to-day operations require your presence and labor, the better you’ll look when approaching buyers and investors.
Distancing yourself from operations may be difficult if you’re used to a hands-on role in project management or fulfillment. However, if you can delegate key tasks to experienced staff, you’ll prove that your contracting business can be run with minimal hassle.
Understand Who The Potential Buyers Are
One type of potential buyers is a larger competitor seeking regional expansion, or some other kind of strategic advantage your services might add to them.
Trade associations like the National Electrical Contractors Association (NECA and Independent Electrical Contractors (IEC) are good to belong to if you want to network with other contractors who might be interested in buying your business.
Other buyers may include private equity firms that focus on acquisitions in the electrical industry. This kind of buyer may work with you beyond the point of sale to raise your shop’s value and maintain efficient management processes.
In any case, it may be best to work with a business broker who has industry experience. They know how to sell an electrical contracting business for a decent sum. They’ll also be best able to help you navigate the field and introduce you to serious, qualified buyers when the time is right.
Why Work With Raincatcher?
A broker can do a lot for an electrical contractor prior to the sale of the business. To ensure a streamlined, profitable sale of your contracting shop, you’ll want to work with a brokerage firm like Raincatcher.
Our brokers come with deep connections within the electrical contracting industry, and will be able to market your business to the most qualified buyers — whether those are larger competitors, private equity firms, or individual investors.
After years of developing your electrical contracting brand, you deserve the highest level of service when it comes to selling your business and maximizing its value.