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Contracting businesses: growth and exit strategies for contractors

Contractors running a one-person business they wish to grow will eventually reach an earnings ceiling. That’s because a one-person company can only earn up to the contractor’s maximum daily rate times the number of days that can be worked in a year.

So, if you are seeking to grow and ultimately exit your contracting business, you need to create a strategy that will enable you to build a business of value that does not depend on you personally.

And just because you are a cracking designer or a brilliant developer does not mean you are destined to be the world’s best entrepreneur. Recognise your strengths, and your limitations, and if you are missing a vital business skill, hire someone who has it.

First step: understanding your processes, and how you fit in

You want your growth business to become a profit-making machine. Its well-oiled cogs will be the processes you define and people you hire to complete those processes. Remember that if the processes require highly skilled and expensive people, it will impact on your profits.

Start out by drawing a flowchart of how your business will function once you have built it. In the beginning, each box in the chart will have your name in it. Your challenge is to design and document processes for each function that allows it to be automated. Some may require full or part-time staff, or can be outsourced. Others potentially offer little value, and might not be required at all.

Imagine you are building a franchise model that can be replicated again and again; aim to design processes that don’t require expensive, difficult to source specialist staff. This will enable you to focus on creating something of value to a potential buyer.

Get yourself fired

Working long hours, seven days a week, in the early days of a growth business with no seed capital to hire staff is normal. Working long hours, seven days a week when a business is established is not normal.

If you have created a business that cannot function without you, you have built a monster that controls you and, crucially, cannot be sold because you are the business.

Aim to get yourself fired. As a contractor, some of your assignments might have required you to prepare the ground for the permanent hire taking over from you. Work on those processes so that you are not essential for any of them to be completed.

Creating value

Although not all exit strategies involve a sale, many do. After the sale, the new owner would usually expect you to work within the business for a period of time to ensure a smooth transition. This is quite normal, and the harder you worked on creating processes that function independently of you, then the smoother the transition.

And by building a business that does not depend on you, you can potentially make more money because it will have greater value to potential buyers. That’s because the buyers won’t have to worry about having to replace you with somebody else.

If you have adopted the franchise model from the outset, with clearly defined and documented business processes that do not require specialist skills, your business will be highly marketable, because the potential buyer will see it has even more potential for growth.

If you don’t have business skills, hire someone who does

Not everyone is a born entrepreneur with the wide range of hard and soft business skills required to build a profitable firm. You’ve enjoyed success as a contractor because you are highly skilled and experienced in a technical capacity, be that bridge building, advertisement writing or financial forecasting.

But the best entrepreneurs recognise their weaknesses and build a team around them with the skills, experience and capabilities they lack. You will need to develop basic finance, marketing, legal, HR and operational skills, but you will also need to recognise when to ask for help.

Chances are you’ve already contracted in a team like this at some point in your contracting career. So you’ll understand that, certainly in the early days, that team can include consultants, freelancers, contractors and professional advisers as well as employees.

Many contractors successfully diversify their one-person contracting business into a software company, design house, engineering practice or consultancy. Those who have done so to the greatest effect created and implemented a growth and exit strategy from the outset.

Published: 09 October 2012

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