How remote teams impact business valuation

They Got Acquired recently released a report on 14 companies that sold under the contractor-only model. These companies had teams ranging from one founder and his one part-time freelancer to one founder and his 100 contractors.

With these business owners who started 15 years early. free entrepreneur We pioneered the remote team trend long before it became mainstream. “Many business owners, especially those who run lean online businesses, rely on teams of contractors rather than employees because it gives us the flexibility we want or need. “This is because it allows for cost savings,” writes Alexis Grant in an accompanying article.

So, how do buyers view the pros and cons of freelance teams, what impact can that have on business valuations, and what makes the contracting model more attractive to buyers? Let's take a closer look at how.

How business buyers view freelance teams

From a buyer's perspective, there are pros and cons to consider when evaluating your business and team for acquisition.

Contractor team disadvantages:

• High turnover rate: Freelancers tend to be less emotionally and financially invested.
• Focus: It can be difficult for contractors to have the same focus as employees.
• Onboarding takes time: If your contractors aren't working full-time, it can take time to get to know them.
• Continuity: High turnover can jeopardize business continuity and negatively impact customer-facing roles.
• Knowledge retention: Once a freelancer leaves the company, it can become more difficult to transfer accumulated knowledge within the company.
• Company Culture: There aren't many opportunities to develop a company culture with freelancers.

M&A advisor Steve Kilberg recommends, “Make sure your contractors have detailed SOPs (standard operating procedures) for every task they perform.” The more detailed you are, the better, so I'll ask you to create one. Then someone else can intervene. ”

Contractor Team Advantages:

• Lower costs: Freelancers tend to have lower costs than employees.
• Flexibility: Easily scale up or down without the complexity of having full-time staff on payroll.
• Pay as you need it: If your skills are needed full-time, a full-time employee is the best choice. If not, you'll end up paying a flat rate for hours you don't need.
• Office space: If you have a team of freelancers or contractors working remotely, you don't need to provide a desk or pay for square footage of office space.
• Less responsibility: You feel less personal responsibility towards a contractor than you do as a full-time employee (who relies on you for their only income).

“Buyers used to be afraid to acquire companies that were located in remote areas and had no U.S. employees. Now, buyers want this because it's cheaper and has more flexibility. FreeeUp. When we sold com, we had zero offices, zero U.S. employees, and eight-figure sales. The buyer saw this as a big plus.'' Nathan Hirsch, former business owner and OutsourceSchool Founder of .com.

Impact of freelance teams on business valuation

Let's start with the good news. Just because a business is run by a team of freelancers or contractors doesn't mean buyers will pay more or less money.

The things that most influence valuation are profit and EBITDA.

If the contractor model yields higher profitability, the valuation will also increase. Therefore, any cost savings you can make by slimming down your team will improve your profits and margins, making your business more attractive to potential buyers.

On the flip side, freelance teams can also come with added risks. If you are building around one or two key contractors who may exit, that dependency could be a reason to negotiate lower sales prices or build during profit periods. there is.

How to make the contractor model more attractive to buyers

If you're thinking of selling your business in the next few years, and it's primarily run by (remote) contractors or freelancers, you might want to consider a few things to make it more attractive to buyers. You can do that.

Here's what Alexis advises in the article:

1. close the contract button
2. Ensure contractor arrangements comply with labor laws
3. Provide incentives for teams to want to stay
4. Demonstrate the cost benefits of a contractor approach
5. Highlight your company's strong relationships with customers
6. Develop reliable talent for new talent
7. Expand your contractor pool to reduce risk

Graham Stephen, co-founder and CEO of business valuation specialist bizval, emphasizes that the appeal of a business model comes down to telling the right story to potential buyers. This article explores unit economics as a core driver of business value and how the contractor model can significantly improve unit economics and create a flywheel effect that drives rapid value creation. I explained in detail.

How defunct business owners view their contractor teams

Nathan is an expert in building remote businesses with no American employees. He launched trioseo.com, ecombalance.com, and accountsbalance.com, just to name a few.

“Before COVID-19, I felt like I was the only one running my business remotely and it didn’t feel legit. Since COVID-19, business owners People are starting to realize all the benefits of remote hiring, and if you're good at hiring virtual assistants and freelancers, you have a huge advantage.”

He has created a valuable guide to the mistakes small business owners make when hiring contractors and remote virtual assistants.

conclusion

(Remote) teams of freelancers and contractors may face certain challenges, such as higher turnover and potential risks to business continuity, but they also offer benefits such as cost savings, flexibility, and the ability to scale quickly. , also offers many benefits.

However, potential risks can be mitigated by having well-drafted contracts, detailed SOPs, ensuring compliance with labor laws, implementing incentives to retain contractors, and It is important to emphasize the cost benefits of the approach.

That is, a company's value is primarily determined by its profits and EBITDA, and a contractor model that yields high profitability can make a company more attractive to potential buyers.