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Conversations: Level Up Your Contracting Business with Maarten Koorn

Over the last couple of years, the pandemic has hit construction and trades businesses hard. With lockdowns, shutdowns, rising costs, and materials & labour shortages, it has been hard for even the most established companies to keep their heads above water.

Although many companies are still focused on survival, I wanted to explore how construction and trades businesses can start making small changes and improvements now so that they are 1) more profitable 2) better positioned to sell down the road.

To do this, I sat down with Vancouver-based entrepreneur, Maarten Koorn, to talk about his perspective on how to build a profitable business and how to prepare financially for sale.

Maarten is a serial entrepreneur who previously co-owned a general contracting business. The company he joined in 2006 eventually evolved into multiple companies doing everything from office and retail renovations to cinema construction and lighting installation. He sold his share of the business to his partner at the end of 2021 and used his sabbatical time to come chat with me about what it takes to build a successful construction company.

Whether you want to leave your business to your children, sell it altogether, or just step out of the day-to-day operations, there are simple and impactful strategies you can implement now to prepare.

Read through the highlights from our conversation below or skip to the end for our key takeaways.

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Me: As a General Contractor who hires subcontractors, do you think being organized and professional gives subcontractors a competitive edge?

Maarten: Well, it gives them a professionalism level that we like. If we have a small job, and we need a drywaller, you almost look for smaller, less organized people, because they will be cheaper.

But if you have a bigger project, you want somebody who comes with a proper invoice (not hand-written), they provide us with their insurance and WCB, processes to follow up on payment… well, you can just tell they are organized.

I worked with somebody once, and he came into the office wanting his payment. I said sure, but where’s your invoice? He said, Oh, I never sent it to you.

Me: I’d like to say I’m surprised, but I’ve seen some disastrous books in my time! What do you think tradespeople and contractors need to do to prepare their books, financials, and business structures for sale? Even if they don’t want to sell, what are the benefits of preparing early? I focus a lot on profit and job costing…I’ve seen businesses where their revenue could be $500k, but their expenses are so high, they really only have a $50k business. 

Maarten: Well, as you said, we can probably pull out more profit if you actually understand your expenses better, and if you manage them better. And then you can start looking at what are the projects that I’m actually making good money on?  And what are the projects where, to your example earlier, you do a project like that and you are so busy with it for 6 months and you make nothing on it. Well, then it’s opportunity cost because you could have done a job that’s 5 times more valuable and actually made 10x the profit.

The next thing is you need to make sure that your financials are organized so you can squeeze everything out that you can. My next thing will be to buy and sell businesses and I’ve been looking a lot at businesses that come up for sale. Half the time, their financials are shit! These people are really, really good at what they do, but they don’t understand their books.

You have to start looking at your expenses differently if you are going to sell. If I’m going to sell my business in a couple of years, I don’t want to drop $10k on a conference that I don’t really need because if you will sell the business for, say, a multiple 5x of your profits, your conference just cost you 5x $10,000 or $50,000 in lost value But if I’m not selling for 20 years, I’ll be trying to put as much on my business as possible.

A company that wants to sell, maybe not today, but in 5 or 10 years, making sure that those financials are developed correctly so that if a potential buyer comes in, they look at it and don’t have any questions.

Me: In my part of the industry, you can really tell how things are run by what their books look like.

Maarten: We saw with a lot of our subcontractors how poorly they were run financially. We thought about setting up a service to subcontractors on the accounting side. Is that something that you do?”

Me: Yes, I help with job costing, making sure they are actually getting paid properly for the services they are providing, that they are 100% compliant with CRA, making sure they have money for taxes at the end of the year, and they are able to grow…we look at what is going well, what isn’t, maybe they need help increasing sales, costing jobs… we go through and brainstorm what they need to do.

Maarten: Oh, so you aren’t just looking after their books, you are a consultant as well who can help them understand and interpret the numbers and with that you try to analyze what is the problem? It’s not always clear from the numbers and how they view what projects they make money on and sometimes that’s not true at all. And you don’t find that out until you actually analyze it.

Me: Exactly. Another thing to really watch for in your books is the number of shareholder contributions.

Maarten: Right cause if you’re profitable, then you shouldn’t have to do that. You pay for profit in a business. Most businesses out there, even if the owner wants to sell, don’t sell, because there are way more sellers than buyers. It’s not a very big market.

Me: Are there things businesses can do in terms of structure to make them easier to sell?

Maarten: One of the things companies in general can do to sell your business that is largely tax free is to put it in a family trust. We all have a capital gains exemption that you can use one time in your life. Through a family trust, you can actually use the exemption from other people because most people will never use it. You have to do this at least 2 years before you sell the business or CRA is like, yeah, nice try. There are legal ways to do this properly. But, it may not be worth it if the business is too small.

Also, audited financial statements can’t be manipulated and are most valuable when buying a business because you know what you see is real.

Me: Yes, absolutely. Another thing I recommend is to look at your A/P. If there is stuff sitting in there from years ago, it doesn’t look good. Why are you so behind in your bills?

Maarten: We had that when we moved from Timberline to QuickBooks. We had some A/P accounts that I know we paid, because I met with them personally, but they were still showing up. We had to clean that up because you do have to reconcile it for accounting, but it has consequences for your profitability. You have to figure all that kind of stuff out.

Sometimes, even without an issue like that, it happens that there is something on the books that might raise questions. You have to say, OK Jenn, this is a red flag, we need to sort this out now. When books are clean, it makes sense, it’s logical, revenues and profits are growing in the right direction. Ideally, net profit is growing more quickly than revenue, now you’re like OK, this seems like a good business.

Key Takeaways

I really enjoyed my conversation with Maarten and his perspective on the challenges faced by construction and trades businesses. Here are the key takeaways:

Professional + Organized = More Money

Being professional and organized allows you to charge higher rates and compete for better paying jobs. Investing in systems, processes, team, and proper bookkeeping makes you look like the professional you are.

People Purchase Profit

Prospective buyers are looking for clean books that show a trend of rising profits. Yet, there are so many construction and trades companies who are not profitable. The main issues holding them back from being profitable are:

• Not costing jobs properly
• Expenses are out of control and too high
• Opportunity costs associated with not understanding their numbers, and
• Choosing the wrong, less profitable jobs

Tips for Preparing Your Financials for Sale

Prospective buyers look for trends over time in your financials so it’s important to start preparing early. Here are a few things to keep in mind:

1. Change how you look at expenses: if you are years away from selling, claim as much as you can (legally). If you are closer to selling, start removing as many expenses as possible to improve profitability.

 2. Stop shareholder contributions: if your business is profitable, you shouldn’t need to do this. For that very reason, shareholder contributions on the books can be a red flag to potential buyers.

 3. Clean up your accounts payable: a lot of unpaid bills on your books can be a red flag. Why can’t you pay? Have a professional go through your books to clean up anything (accounts payable or other) that raises questions and may scare away potential buyers.

 4. Explore legal ways to reduce taxes when you sell: consult a tax specialist early if you are preparing to sell your business. For example: a family trust can be used to take advantage of the capital gains exemption from multiple people, but you need to start this process at least 2 years before you sell.