Monday 14 September 2020

Your Restoration Business Is Too Small!

Posted by at 6:57 AM

Your Restoration Business Is Too Small!

This statement is about your future and it should begin directing your steps today!

The matter is vitally important to you, and I hope you read this carefully!

To the 25,000 Restoration Company Owners, I ask you, “What size must your business be to retire?"

50% of Restoration Companies earn approximately $500,000 in annual revenue. THAT IS NOT ENOUGH!

It is never too early to determine how much is enough, and set that as your goal and begin working toward building a business that is enough.

So how much is enough to retire on? Most owners would expect no less than $1 million from the sale of their business to take them into retirement.

So what does it take to get $1 million from the sale of your business?

You need a business that does $3 MILLION in annual sales, and it needs to earn a 20% NET PROFIT that produces $600,000 of net profit at the bottom line. Net Profit or EBITDA (Earnings Before Interest, Taxes, Depreciation, Amortization) is your operating profit. In other words, the amount of money left over after all bills are paid, but before depreciation and taxes, etc.

Net profit is important because its average over three years multiplied by 3 equals the most common formula for a restoration company to determine its fair market value.

So here’s the formula - $3,000,000 X .20 = $600,000 (assuming this is the average net profit for the past 3 years).

$600,000 X 3 = $1,800,000 fair market value. Its not top-line revenue that determines market value, but the bottom line earnings.

Since you will have current accounts payable and perhaps some debt to pay, and a discount to the price (no one pays full price to buy your business) less subtract 25% from the fair market value.

1,800,000 x. 25 = $450,000.

$1,800,000 - $450,000 = $1,350,000 (proceeds to you from the sale)

We're not quite done because you have taxes to pay. Some taxes will be calculated as capital gains, and another portion will be taxed as ordinary income. Let's assume the combined tax rate is 30%.

$1,350,000 X .30 = $405,000

$1,350,000 -= $405,000 = $945,000. We don’t even quite get to our $1 million goal.

You can see getting to a $1 million retirement goal requires no less than a $3 million business that produces a 20% net profit is barely be enough to reach that goal.

Lessons learned:

  • The typical $500,000 restoration company needs to get at it right now because you have a long way to go to reach the goal of a sellable $3 million business.
  • Most owners will never reach the goal because they are content with having created a job for themselves rather than a business to sell. They will reach their "crap out" date and just close or fade away, or go do something else without a sale at all.
  • A 20% net profit enables you to take annual distributions. Imagine taking $50,000 or more annually as a distribution on top of your salary. Wouldn't that be sweet? You should be doing this regularly!

How do you get from where you are to where you need to be?

  • Realize you are not going to get to $3 million revenue as a mitigation only company. At an average size mitigation job of $3,000, that would require your company to complete 1,000 mitigation jobs a year. That isn't ever going to happen!
  • The only way to reach $3 million in revenue is as a full-service company. You need to get at this NOW, and not wait for some distant hope and dream. You need to do it NOW!
  • Growing from $500,000 to $3,000,000 will require a lot of changes along the way. Most owners are good technicians but not so good owners and managers. You will need some help, so get it NOW!

Decision

You can create a job for yourself and one day just "crap out" with nothing left of the business you built, or you can commit yourself to grow your company into a business someone will want to buy. Only the latter will give you enough!

You need to get to it NOW!