Buying an Electrical Business: Why You’re Probably Not Buying What You Think

For many electrical contractors, the path to expansion feels like a fork in the road. You can spend years grinding away, slowly adding vans and apprentices, or you can take the fast lane: buy an established business. It’s an alluring prospect. You get the client list, the existing contracts, the gear, and the reputation all in one hit.

But for those who don’t look under the bonnet, buying an established business can quickly turn into a headache. You might find yourself paying top dollar for a business that evaporates the moment the previous owner hands over the keys.

Key takeaways for electrical contractors

• Financial performance is only one part of assessing an electrical business.
• Determine whether customer relationships belong to the business or the current owner.
• Assess whether the team can operate independently.
• Review contracts, supplier agreements and business systems before agreeing on a price.
• A business with strong systems and processes is generally more valuable than one dependent on its owner.

Buying an electrical business: Why the financials aren’t enough

According to Morgan Wilson, Founder and Director of Creditte, too many sparkies get blinded by the ledger and forget to look at the reality of how the business actually functions.

“Most people buying an existing electrical business focus on the numbers in front of them,” Morgan says. “Revenue, profit, asking price. That’s the easy part.”

The reality is that in the trade industry, the financials are only one chapter of the book. If you focus solely on the last three years of profit-and-loss statements, you’re missing the bigger picture.

Why is the owner often an electrical business’s biggest asset?

When you buy a software company or a manufacturing plant, the assets are largely inanimate. You’re buying code, machinery and inventory. When you buy an electrical business, you’re often buying a personality.

“In a trade-based business, a lot of the value sits with the owner personally,” Morgan explains. “Their licence. Their relationships with builders and project managers. Their reputation on-site. None of that automatically transfers when you sign.”

This is where the ‘spreadsheet trap’ claims its victims. If the builder, the lead project manager, or the commercial site lead is calling the company because they know and trust the outgoing owner, you haven’t bought an asset – you’ve bought a warm lead.

If that relationship is based on a 10-year friendship rather than a formal contract, your competitive advantage might walk out the door on the day of settlement.

What is the walk-out test?

Before you commit to a purchase price, you need to conduct a bit of due diligence that goes beyond an accountant’s audit. You need to determine what is tied to the business entity and what is tied to the individual.

“Before you agree on a price, work out what stays and what walks out the door with the seller,” says Morgan.

This is the walk-out test. Imagine the seller retires to the coast the day after you take over. What is left? Morgan suggests looking at these four areas specifically:

• Contracts: Are there recurring, legally binding agreements in place? Or is the work based on ‘handshake’ deals that rely entirely on the seller’s rapport with the client?
• The team: Can the staff run the jobs, quote, and manage site safety without the owner standing over them? If the business relies on the owner to be the manager-on-tools every single day, you haven’t bought a business – you’ve bought a full-time job.
• Supplier accounts: Are your preferential trade pricing and payment terms tied to the business ABN, or are they mate’s rates gifted to the seller because they’ve known the rep for two decades? Those rates could disappear faster than you can order a new cable run.
• Systems: Does the business run on a defined system, or does it run because the owner has a photographic memory for every job in the pipeline?

Don’t pay for a shell

The danger of failing to do this homework is simple: you end up overpaying for a ghost. You want to be paying for systems, processes, a trained crew, and intellectual property. If the business relies entirely on the seller’s hands-on presence, you are essentially buying a shell with a brand name on it.

“That is the part of the business you are really buying,” Morgan says. “If you skip this step, you can end up paying full price for a business that’s worth a fraction of that the day the seller leaves.”

The bottom line

Buying an electrical business is a massive milestone in any contractor’s career. It’s an exciting time, but it’s not the time to be casual. You need to be a cold, hard realist.

Step back from the spreadsheets and ask the tough questions. If the business stands up to the walk-out test – meaning it has the contracts, the team, and the systems to keep running without the original owner – then you’ve got yourself a solid foundation to scale. If it doesn’t, you’re better off walking away, keeping your cash, and building your own reputation from the ground up.

Frequently asked questions about buying an electrical business