By Andrew P. McCoy and Fred Sargent
Published On March 15, 2024
It’s March, and by now your accountant should have wrapped up your company’s financial statements for last year.
Here’s a trick that beats computing and comparing classic financial ratios in your company’s 2023 statements to characterize its year-end results. Just ask—and answer—one question: On the last day of 2023, how much more was this company worth than it was on the first day of 2023?
That’s a simple question, but not an easy one. The real valuation of your company is hardly ever the net worth on its balance sheet, which merely shows its book value.
Many other elements go into determining company valuation. For a service and maintenance business, the most important factor of all is customer base.
The customer base
Our definition of your customer base is twofold. First, it is composed of companies or people you think are your customers. Second is the people or companies that also think they are your customers.
Both parts matter.
These two parts matter for sure when somebody wants to acquire your company, especially if it includes a healthy service and maintenance business. They will be poring over any evidence they can find to accurately calculate your company’s customer base corporate valuation.
We anticipate that the majority of our readers who are electrical contractors have no thoughts of selling their firm and (with the momentary exception of a few really bad days) probably never will. But every electrical contracting business has a corporate valuation, regardless of whether or not it’s a candidate for acquisition. For every one of those firms, their customer base is the leading factor in assessing their corporate valuation.
Reliably determining the true value of your customer base amounts to more than merely identifying repeat customers and the recurring profitability of the service and maintenance business associated with them.
It gets into at least four probing questions.
- How does this company acquire new service and maintenance customers? Actively or accidentally?
- What does this company do to retain service and maintenance customers?
- How often do customers call for additional needs? This is not a subscription business, but it can anticipate recurring revenues with some degree of confidence.
- When they call for service and maintenance, what is typically the average value of the work order? Contractors will say there is no typical amount. (But there is.)
Entering emerging markets
Here’s where emerging markets enter the picture and can prove their importance toward building your company’s customer base and its corporate valuation. They are a natural source of new business to grow and diversify your customer base and replenish the losses from inevitable attrition.
Emerging markets are not about what’s going to happen next. They are about what’s happening now. And that’s only half the story.
While contractors might adopt a wait-and-see attitude toward emerging markets, they should be extremely wary (read, “paranoid”) of the emerging competitors arriving with them. With every new business opportunity comes new sources of competition.
Electric vehicle charging infrastructure presents an emerging market for electrical service and maintenance contractors as the concern of EV owners has now shifted from wondering en route where the next charging station is located, to praying that it is operable.
Meantime, many companies have surfaced that do not follow the business model of a typical electrical contractor, but rather have made installation and maintenance of EV charging stations their sole occupation. Their success will depend on the ability to match the expectations and meet the needs of their customers, versus displaying the full array of attributes and capabilities of a traditional electrical contractor.
For electrical contractors to develop and enlarge their customer bases, they must devote an appropriate level of effort to harvesting opportunity from emerging markets.
Like hockey legend Wayne Gretzky, who said he skates to where the puck is going to be, not to where it has been, electrical service and maintenance contractors must shoot for opportunities in emerging markets to take on new varieties of work and, better yet, win new candidates for their customer base. If they do, the year-end valuation of their company will reflect what they have achieved. It is, after all, the most basic measure of their business acumen.