Valuing The Virtual: How Remote Teams Impact Valuations
Recently, They Got Acquired published a report of 14 companies sold with a contractor-only model. These companies had teams ranging from one founder with one part-time freelancer, to one founder with 100 contractors.
With a 15-year head start, these business owners and freedompreneurs pioneered the remote team trend long before it became mainstream.
"Many business owners, especially those of us who run lean, online businesses, rely on teams of contractors rather than employees because it allows for the flexibility and cost savings we want or need," Alexis Grant writes in the accompanying article.
So let's dive into how buyers view the pros and cons of a freelance team, how it can affect your business valuation, and how to make your contractor model more appealing to buyers.
How Business Buyers View a Freelance Team
From a buyer’s perspective, there are pros and cons they will consider when evaluating your business and the team for an acquisition:
The cons of a contractor team:
Higher turnover: freelancers tend to be less invested, both emotionally and financially.
Focus: it can be challenging that contractors aren’t going to focus in the way that employees are likely to.
Longer onboarding: bringing contractors up to speed can take longer if they’re not working full-time.
Continuity: with higher turnover, business continuity can be at risk, which has downside effects for customer-facing roles.
Knowledge retention: when a freelancer leaves, it might be more challenging to transfer the built-up knowledge in-house.
Company Culture: there’s not much opportunity to develop a company culture with freelancers.
M&A Advisor Steve Kilberg recommends to:
“Make sure you create a detailed SOP (standard operating procedures) for every task that a contractor performs. The more detailed the better and have them create it. That way someone else can step in.”
The pros of a contractor team:
Cost savings: Freelancers tend to be less expensive than employees.
Flexibility: It is easier to scale up or down without the complexities of having permanent staff on the payroll.
Pay-what-you-need: full-time employees are great if their skills are needed full-time. If not, you pay a fixed amount for working hours you don’t need.
Office space: If your team of freelancers and contractors works remotely, you do not have to provide desks and pay for the square footage in your office spaces.
Less responsibility: the personal responsibility you feel for a contractor is less than for a full-time employee (who relies on you for their sole income).
“Buyers used to be scared of acquiring a business that was remote and had no US employees. Now buyers want this, because it is cheaper and has more flexibility. When we sold FreeeUp.com, we had hit 8 figures with no office and no US employees. The buyers looked at this as a big plus.” Nathan Hirsch, exited business owner and founder of OutsourceSchool.com.
How a Freelance Team Can Affect Your Business Valuation
Let’s start with the good news: buyers won’t pay more or less simply because the business runs on a freelance or contractor team.
What drives valuation most is profit and EBITDA.
If your contractor model leads to high profitability, that will increase the valuation. So, if you are saving costs because your team is leaner, your profits and margins will be better, making the business more attractive to potential buyers.
On the flip side, your freelance team can add risks too. If it’s built around one or two key contractors who might leave, that dependency could be a reason to negotiate the sale price down or build in an earn-out period.
How To Make Your Contractor Model More Appealing To Buyers
If you think about selling your business in a couple of years and it mainly runs on (remote) contractors and freelancers, you can do a few things to make it more appealing to buyers.
Here’s what Alexis advises in her article:
Button up your contracts
Ensure your contractor arrangements follow labor laws
Put incentives in place so the team wants to stay
Show the cost benefits of your contractor approach
Highlight your company’s strong client relationships
Develop reliable sources for new talent
Reduce risk by widening your contractor pool
Graham Stephen, co-founder and CEO of business valuation specialist firm BizVal, highlights that the appeal of a business model is all about telling the right story to potential acquirers.
"Unit economics is a core driver of business value, and a contractor model can significantly improve unit economics, creating a flywheel effect that drives rapid value creation."
How an Exited Owner Looks at Contractor Teams
Nathan is an expert at building remote businesses with no US employees. He has launched trioseo.com, ecombalance.com and accountsbalance.com to name just a few.
“Before COVID, I felt like the only person running a remote business and it seemed less legit. Post-COVID, business owners are realizing all the benefits of hiring remote. If you are good at hiring virtual assistants and freelancers you have a big advantage.”
Building with a remote team?
Learn to prep and sell your business for maximum value:
Conclusion
While (remote) teams of freelancers and contractors can present certain challenges, such as higher turnover and potential risk to business continuity, they also offer numerous benefits including cost savings, flexibility, and the ability to quickly scale.
However, to mitigate potential risks, it's crucial to have well-drafted contracts, detailed SOPs, ensure compliance with labor laws, put incentives in place to retain contractors, and highlight the cost benefits of the contractor approach.
In short, the value of a business is largely driven by profit and EBITDA, and a contractor model that leads to high profitability can make a business more attractive to potential buyers.
