Recently, They Got Acquired published a report detailing 14 companies that were sold with a contractor-only model. These companies ranged from having one founder working with one part-time freelancer to having one founder managing a team of 100 contractors. These business owners were described as pioneers in the remote team trend, utilizing contractors instead of employees to allow for flexibility and cost savings in their operations.
Buyers evaluating a business with a freelance team will consider both the pros and cons of this model. Some cons include higher turnover, challenges in maintaining focus, longer onboarding times, risks to business continuity, difficulty in retaining knowledge, and limited opportunities to develop company culture. On the other hand, the pros include cost savings, flexibility in scaling up or down, pay-what-you-need arrangements, savings on office space, and reduced personal responsibility for contractors compared to full-time employees.
M&A Advisor Steve Kilberg recommends creating detailed SOPs for tasks performed by contractors to facilitate smoother transitions. The article also highlights insights from exited business owner Nathan Hirsch, who experienced success selling a business that was remote and had no US employees. Hirsch emphasized that buyers now see the benefits of remote businesses, as they are cheaper and offer more flexibility, ultimately adding value to the business.
Business valuation is primarily driven by profit and EBITDA, rather than the type of team structure in place. However, a contractor model that leads to high profitability can increase the valuation of a business. It is important to mitigate potential risks associated with a freelance team, such as dependencies on key contractors or risks to business continuity, by implementing strong contracts, following labor laws, creating incentives for contractor retention, and showcasing the cost benefits of the contractor approach.
To make a business with a contractor model more appealing to potential buyers, owners are advised to button up contracts, ensure compliance with labor laws, incentivize contractor retention, demonstrate cost savings, highlight strong client relationships, establish reliable talent sources, and broaden the contractor pool to reduce risk. Graham Stephen, CEO of bizval, emphasizes the importance of telling the right story to potential acquirers and how a contractor model can improve unit economics, driving rapid value creation.
In conclusion, while there are challenges associated with managing teams of freelancers and contractors, such as turnover and continuity risks, there are also significant benefits in terms of cost savings, flexibility, and scalability. By implementing best practices in contract management, compliance, retention incentives, and cost benefit demonstration, businesses can enhance their attractiveness to potential buyers and increase their value through a contractor model that drives high profitability.
