The Ripple Effect of SMB Stagnation and How to Avoid It - Part 2

I am the Founder and Managing Director of Prestiza Equity Group, a network of over 100 operators and investors across diverse industries. We partner with companies of all sizes, helping them grow and/or exit at maximum value in a tax-optimized manner.?

In Part 1 of this article, I highlighted the alarming trend of stagnation among the SMB sector. Here, I present case studies highlighting how Prestiza has helped small and medium-sized businesses (SMBs) scale rapidly through creative deal structures and growth strategies.

Case Study #1 - Transforming a $10MM Commercial General Contractor

The business owner had built this company over 30 years with nearly 50 employees.? However, he was fast approaching retirement age and his youngest son who had just started working in the company was too young to take over the business. In addition, he was not able to find a buyer at a fair valuation for his business due to some inherent risk factors in business.

Challenges

1. Revenue Concentration: The company relied heavily on a few major clients for the majority of its revenue. This dependency created vulnerability, as losing any of these clients would drastically impact the business.
2. Lack of Systems and Processes: The company operated with informal and inconsistent processes, leading to inefficiencies, errors, and difficulty scaling operations.
3. Limited Market Reach: Focused primarily on existing clients, the company struggled to diversify its customer base and penetrate new markets.
4. Overly Reliant on the Owner:? The owner wore too many hats and many of the client relationships would be jeopardized if the owner left the business.

Creative Deal Structure/Tax Free Payment:? Unlike traditional private equity firms, Prestiza was able to structure a creative management buy-in deal structure that allowed the owner to get some additional senior management bandwidth along with technology expertise that was previously missing in the company. By allowing the owner to retain equity in the business, we ensured that the existing client relationships are not jeopardized and the owner and his family benefit from the upside as we grow the business.? We were also able to structure a tax free payment to the owner through a loan against the real estate for office and warehouse space that was previously not being sold with the business.? The upfront cash payment along with annual dividend payments and retained equity value resulted in the owner getting a much higher projected value for the business as opposed to what he was being offered for an outright sale of the business.

Strategy Implementation:

1 - Revenue Diversification

• The business owner had not invested in marketing at all.? He had a one page website and relied on repeat business from his existing client base or through client referrals.? We immediately launched a targeted marketing campaign to attract a more diverse range of clients, highlighting the company’s expertise and successful project history. In particular, we targeted property managers, architectural and design firms, civil engineering firms and real estate investor groups to add residential property development as well as maintenance services business rather than just relying on commercial development projects.
• In parallel with the marketing campaign, we quickly identified? other construction services companies in the area that we could either partner with and/or acquire in order to fulfill the increased demand? from the new residential and maintenance services business.? In addition, these companies would allow us to expand our service offerings to include green building practices and advanced construction technologies, appealing to a broader client base and tapping into emerging market trends.

2 - Technology Transformation

• Applying GenAI to cut costs and potentially fuel future growth in Construction Tech Sector:? During the due diligence phase, we conducted a data audit and discovered a treasure trove of repair estimation data.? Most of it was in paper form but over the last 6-7 years, they had hired two repair estimators who had digitized that data.? However, the process was still very manual and error prone.? We are currently using that data to train repair estimation models so that we can automate the repair estimation process entirely within the company and provide a career growth path to those two employees on the project management side of the business.? Our long-term vision is to transform this internal tool into a licensable product for other construction companies. This could unlock a significant new revenue stream, positioning the company as a leader in the construction technology space.
• Implementation of Project Management Software: Introduced project management software to streamline operations, enhance communication, and track project progress more efficiently.

Results

1 - Revenue Growth and Diversification:

• Achieved a 30% increase in annual revenue within the first year of implementation, with new clients in the residential sector accounting for 50% of the growth.
• Reduced dependency on the top five clients, lowering their combined revenue contribution from 70% to 40%.

2 - Operational Efficiency:

• Standardized processes led to a 25% reduction in project completion times and a 15% decrease in project costs due to fewer errors and rework.
• Improved project tracking and communication enhanced client satisfaction metrics.

Case Study # 2 - Unblocking the sales bottleneck for a $8.5MM Custom Software Development and IT Services Company

This custom software development and IT services company was founded by two software engineers in 2004. Over 20 years, they grew the company to $8.5 million in annual revenue across two continents, offering a range of services from custom software development to IT consulting and support. Despite their success, the founders were tired after running the business for that long and faced significant challenges when attempting to sell the company at their desired valuation.

Challenge

1. The sales bottleneck - As you may be aware, custom software development and IT Services is largely an undifferentiated and saturated market and getting new customers for most firms in this space is a challenge.? Even though the firm had steadily grown to $8.5MM in revenue, it took them nearly 20 years to get there.? Thus, even though they had 40+ customers in the Fortune 500 sector, a low customer churn rate, decent margins and a team of 140 very talented employees across 2 continents, the potential buyers were not willing to pay the premium valuation the sellers needed to move on to the next phase of their respective lives.

Creative Deal Structure?

Again, unlike traditional private equity firms that try to outright buy businesses, we convinced the seller to hold off on selling the business and engage us on a consulting revenue share basis to help them solve their growth challenge and increase the overall value of the company.? This significantly reduced their risk because outside of covering our minimal costs, they would only pay us a percentage of the incremental revenue that we added to their existing topline revenue.? On the other hand, if we were successful in our plan, they could see 3-4x returns on their investment in this consulting engagement.??

Strategy Implementation

1. Channel Partnerships - In order to accelerate sales in the shortest amount of time without incurring the cost of hiring a massive sales team, we decided to build out their channel partner network of rapidly growing proprietary software vendors in the low-code/no-code, RPA sector.? All of these companies are selling software that is in high demand and requires engineering services to be implemented and maintained.? Thus, we can simply leverage the success of their sales efforts in selling the software and bringing us in as a services partner to implement and maintain it for their client.
2. Employee Training - In order to service the anticipated demand from these channel partners, we quickly trained the 140+ engineers on these new technologies.? This significantly raised the employee morale throughout the company as engineers are always hungry to get their hands on new tools.

Results

1 - Sales Growth

• Within 6 months, we signed deals with 3 new channel partners and the sales pipeline doubled during that time.? Based on the average deal size of the new leads, the company is on track to double their top line revenue in 1 year even if they closed half of those opportunities.??

• In addition to the added services revenue, these partnerships have also created an additional revenue stream of referral fees from the software vendors for cross-selling their software to the existing 40+ client list of Fortune 500 companies.

2 - Increase business valuation

• By virtue of creating a differentiation through channel partnerships, they are likely to hold off selling the company for another 2-3 years and exit at a valuation that will be exponentially higher than what they were willing to take on the original anticipated sale.

These case studies demonstrate Prestiza's ability to unlock significant growth and value for SMBs through innovative approaches, positioning them for successful exits at higher valuations. Our extensive network of 100+ seasoned operators across diverse industry sectors coupled with a focus on creative deal structures, strategic partnerships, and technology-driven solutions sets us apart from traditional private equity firms.

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