Owners usually think about price as a multiple of earnings. A buyer's finance team does start there. But before a number goes into a letter of intent, the buyer's operating people have walked the floor, read the maintenance records and sat with the managers, and they bring back a list of what it will cost to own and run the company after closing. That list comes off the price, sometimes openly and sometimes inside the multiple. Knowing what is on it gives you time to shorten it.
1. Someone has to do the owner's job
If you quote the big jobs, run the schedule and handle the key customers, a buyer has to pay someone to do that once you leave. Few owners pay themselves what the role would cost on the open market. The buyer will put a market salary for a general manager, and sometimes a sales lead as well, into its view of earnings.
What to do: know what your role would cost to fill, and start moving parts of it to people already on the payroll. Earnings that already carry the cost of real management are earnings a buyer does not have to adjust.
2. Maintenance you put off becomes the buyer's bill
Equipment that has been nursed along for years still runs, and the earnings look better for every repair you deferred. A buyer's operating people see it the other way: every machine near the end of its life and every roof, compressor or truck that has been patched instead of replaced is money they will spend in the first years of ownership. Their estimate is rarely generous.
What to do: keep a maintenance record, and make an honest list of what will need replacing and roughly when. A buyer who sees the list prices a known cost. A buyer who finds it themselves prices a surprise.
3. Room to grow without new capital is worth paying for
Two companies with the same earnings can look very different from the floor. One is running near capacity, and any growth means a new building, a new line or another shift that is hard to staff. The other has space, equipment and people to take on more work without a large spend. A buyer can see which is which in a single visit, and it will pay more for growth that does not need its money first.
What to do: know your real capacity by line or by crew, and be able to show how much more work the operation could take on as it stands today.
4. The margins have to hold up job by job
A healthy overall margin can hide work that loses money. Operating buyers want to know which products, customers or kinds of job actually earn, and whether quoting is disciplined or depends on one person's feel. Work that does not pay tells a buyer that pricing may not survive a change of owner.
What to do: look at margin by customer and by product or job type before a buyer does, reprice or walk away from the work that does not pay, and write down how quotes are built.
5. Cash tied up just to keep running
Inventory that does not turn and slow-paying customers tie up money the business needs simply to operate. A buyer will look at how much cash the company really needs on an ordinary day and will not want to pay for inventory it cannot use.
What to do: clear out obsolete stock, tighten collections, and be able to explain why the inventory you carry is the right amount.
The takeaway
The price a buyer offers is its estimate of what the company will earn for it after it has paid to own and run it: a manager to replace you, the maintenance that was put off, the capital needed to grow, the work that does not pay, and the cash tied up in stock. Every item on that list is something an owner can measure, and most of it can be fixed or at least documented in the year or two before a sale. The shorter the list, the less the buyer has to take off.
