Recent reports from They Got Acquired highlighted the acquisition of 14 companies that operated with a contractor-only model. These companies ranged from having one founder with a part-time freelancer to one founder managing a team of 100 contractors. These business owners had a 15-year head start in pioneering the trend of remote teams, which has become increasingly popular in today’s business landscape.
From a buyer’s perspective, there are both pros and cons to consider when evaluating a business that relies on a freelance team. Some of the cons include higher turnover, challenges with focus and continuity, longer onboarding processes, and potential difficulties in knowledge retention and building company culture. However, there are also significant pros, such as cost savings, flexibility in scaling up or down, and reduced responsibility compared to managing full-time employees.
Business valuation is primarily driven by profitability and EBITDA, regardless of whether a business operates with a freelance or contractor team. A lean contractor model that leads to high profitability can increase the valuation of a business, making it more attractive to potential buyers. However, risks associated with key contractors leaving can impact valuation, potentially leading to negotiations on the sale price or earning-out periods.
To make a contractor model more appealing to buyers, several strategies can be implemented, such as ensuring contracts are in order, following labor laws, implementing incentives to retain contractors, showcasing cost benefits, strengthening client relationships, sourcing new talent reliably, and widening the contractor pool to reduce risk. By presenting a strong story to potential acquirers, businesses can highlight how a contractor model can improve unit economics and drive rapid value creation.
Experienced business owner Nathan Hirsch, who has successfully built multiple remote businesses with no US employees, emphasizes the benefits of hiring remote teams in the post-COVID era. With the right approach to hiring virtual assistants and freelancers, business owners can leverage the advantages of a contractor model and gain a competitive edge in the market. Hirsch provides valuable insights into the common mistakes made when hiring contractors and remote virtual assistants, guiding small business owners towards success in building remote businesses.
In conclusion, while operating with (remote) teams of freelancers and contractors may present challenges, such as turnover and business continuity risks, they offer numerous benefits in terms of cost savings, flexibility, and scalability. Mitigating risks through well-drafted contracts, compliance with labor laws, incentivizing contractors, and highlighting cost benefits can make a business more attractive to potential buyers. Ultimately, the value of a business is driven by profit and EBITDA, and a contractor model that leads to profitability can enhance the attractiveness of the business in the eyes of potential acquirers.
