By Boyce Thompson. What's your company worth, and how can you make it worth more? Those are two questions for which every builder needs answers. All too often, builders are in the business of creating a good job for themselves and the people who work for them.
That's not enough if you want to perpetuate your company. Unless you develop an exit strategy early on and work toward building value in your company, it probably won't hold much equity when you want or need to sell it.
At the same time, it's impossible to pin an exact value on your company--unless you've already sold it. What you ultimately get will depend on what the market will bear at the time. But many other facets of your business that affect its value are under your direct control. That's where to concentrate.
To help you develop or refine your valuation plan, we've put together a conference, The American Housing Conference. It will take place in Chicago on October 17 and 18. We'll have speakers who have sold their companies, bought companies, and assisted in the process. We'll also give attendees a sneak peak at new market research we've done with builders and new-home buyers that identifies potential market opportunities.
When lining up the speakers for this conference, I asked them about the valuation process, and the same word kept coming up: focus. To maximize the value of your company, you need to focus your activity on a core discipline.
What are you best at? Is it building entry-level homes by the dozens in master plan communities on the suburban fringe? Then why would you have people and land allocated to high-end infill housing, unless you thought that they were absolutely necessary to provide a counter-cyclical buffer? A firm interested in buying probably won't put much value on the "other" portion of your company.
A strong land position may be what buyers are after. That has certainly been the case with many of the big acquisitions done in recent years, the classic example being John Westrum Development in Philadelphia. Westrum tied up 3,000 lots for active adult housing then sold them to Pulte. Maybe it's management expertise in a particular process that makes your company strong. Several recent acquisitions have been motivated by a desire on the behalf of big companies to gain expertise in infill development, active adult housing, or even-flow production. Your company could bring greater efficiency and profitability to another firm.
That depends, of course, on whether you've developed strong managers, who can run the business after the owners depart. Do you have people who could run your company if you left?
Developing a culture that emphasizes growth is a big part of that. Buyers will pay more for a company with a strong record of earnings growth, and they'll want to grow the company they acquire to pay off any debt they took on to make the purchase.
What's it worth?
There is no single way to value a company. Some buyers pay a multiple of earnings, others pay a multiple of book value, and still others pay a combination of those two. But anyone buying your company would want to know about the risks in your product pipeline. They'd want to see your community pro-formas. And, of course, they'd want to know what enterprise actually owns which of your properties--is it the parent company, limited partnerships, or some other entity?
With so much going on in your business day after day--keeping customers happy, finding land on which to build, developing new sources of capital--it's easy to lose sight of the bigger issue. But every action taken by a company needs to be weighed against the ultimate goal: building value.
Editor in Chief