PCA Articles

Do you have an “exit” strategy?

Stephen Covey’s first two habits in The 7 Habits of Highly Effective People — Be Proactive and Begin with the End in Mind — are especially important for owners of painting businesses.  Why do I say that? At Aleph, we invest in and partner with painting company owners. As a result, we talk to a lot of owners about their goals for their business and where they are headed.  One overarching theme that I’ve noticed is that most of the owners in this industry did not think that they would be here when they started their professional careers.

Accidental entrepreneurship is very common in the painting industry. So for many owners, to “Be Proactive” and “Begin with the End in Mind”, as the first two of Covey’s habits go, tends to be something that needs to be grown into rather than something that comes naturally.  And this dynamic is on display most clearly in how much owners in this industry tend to think about their “exit” strategy.

Why This Matters Right Now

Building your business with the potential for an exit is one of the smartest long-term strategies you can adopt. Here’s why it matters:  First, we live in a world where things we don’t expect happen all the time (does anyone remember a little thing called COVID-19?).  We can’t predict the future and owners are never 100% in control of when they may have need or desire to “exit” their business.  Having your business ready for such an event can provide a lot of peace of mind not just for you but also for those that depend on you.

Second, the companies that are best positioned for their owner to be able to exit are also the companies that are most successful by all conventional metrics. Having any kind of successful exit requires a successful business in the first place. Having clarity on what success looks like down the road can focus energy and effort to the highest impact activities to drive success today.

So where should you start?

Here are 3 areas to focus on that not only give you “exit” options down the road, but can drive success in your business today:

1) The Team:

Perhaps the most important aspect of your company is not “WHAT” the metrics are, but “WHO” it is that delivers the metrics.  Of course, a business needs to have sound metrics in order to be successful.  However, the nuance of who it is that delivers the metrics points to one of the most important elements of value: Stability.

The extent to which your team, rather than you alone, delivers the company’s metrics greatly affects the value and opportunities available to you as the owner.  Who is doing the sales? Who is doing the project management? Who is doing the marketing? Who is managing the financials? If your name is the answer to all of these questions, you may want to consider this as an area of focus over the next 6-12 months.

2) Scalable Gross Profit:

At Aleph, we are fond of saying that “Sales are for show, Production is for dough.”  At the end of the day, it is not what you make that matters, but what you keep.  You can, in fact, “grow” yourself right out of business if you sell unprofitable work, or can’t manage your production process to produce predictable profits at scale.

Having a trackable and historically strong gross profit points to a number of things. One is that your sales function knows how to sell profitable work and there is a market that is willing to pay for what your brand is selling. Second, a strong gross profit is indicative of a strong production function.  You know how to manage labor and material costs. This doesn’t happen without good systems and processes.

At Aleph, we target a gross profit of 40%.  One caveat is that we use the following to define gross profit: Revenue minus the cost of Labor, Materials, AND Project Management.  The reason we do this can be covered in another article. This typically trends out to have labor around 40%, materials around 15%, and project management around 5%.

3) ‘Adjusted’ Net Income:

This is the mother metric in the grand scheme of things, and for good reason.  This metric is what ultimately determines the viability of your company as well as the quality of life for you and your family.

But what do I mean by ‘Adjusted’? In most cases, there will be a way that your business is represented on your books that may or may not be helpful in giving you a picture of the health of your net income. If you are doing the majority of the sales, or the production, or even doing some of the labor – you need to make sure you factor that in as you look at your net income.  You need to factor in market rate costs associated with the work you are doing IN the business on a week to week basis even if your profit and loss statement doesn’t.

Consider asking yourself this question: “If I were to go hire someone from the market to do the work I do in my business (sales, project management, painting, admin, etc.), what would I need to pay them?”  You need to look at an ‘Adjusted’ Net Income that includes these costs.

Don’t Wait

These are three key areas we at Aleph are always watching when doing analysis on our companies.  By keeping an up-to-date and honest grasp of these areas, you can start taking meaningful actions today that set your business up for future success.

Even if you’re not planning to exit soon, setting up your business to allow for that option ensures stability and success—no matter what the future holds.

Haakon Hansen – Director of Development

Want to hear more from Aleph? Check out our podcast, Aleph Ventures TV, on YouTube and Spotify.