Tips for selling a business that runs on contractors (no employees)

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.

But what does that model mean for an acquisition? What do buyers think of this structure, and how does it affect a company’s valuation?

And what can sellers do to make a contractors-only business more appealing to buyers?

We set out to answer these questions as we publish our report on “14 Companies That Sold With a Contractors-Only Model.”

But first, a quick personal story, as I went through this myself when I sold a company for the first time.

How I sold a business that relied on contractors, not employees

I was at a critical decision point when I sold my content marketing agency in 2015.

My team included a handful of regular contractors plus a broader network of freelance writers. A couple of our regular contractors were approaching full-time hours, so I was asking myself: Do I want to hire them as employees? What kind of business do I want to run?

I never had to choose, because that year a buyer came knocking. One of our biggest clients was interested in an acquihire, whereby he brought my team and me in-house at his business to grow the content operations there.

A few months later, we signed the deal, with an interesting twist…

While all of my team had worked for me as contractors, we offered several of them full-time roles with the buyer through the transition, and several agreed. We continued to work with most of the others as contractors.

If you’re building a business with contractors or freelancers, and you want to set yourself up to sell in the future, here’s what you should know.

Why businesses with contractors instead of employees are appealing to buyers

Most of the M&A advisors and buyers we polled on this question agreed that yes, buyers are interested in acquiring online businesses that rely on contractors or freelancers rather than employees.

While a contractors-only model brings some risk, buyers appreciate these types of companies for many of the same reasons as founders, including the cost savings and flexibility.

“Most buyers just want an established business with a solid team; the mechanisms of the team are less important,” said Dom Wells, CEO of Onfolio Holdings. His company acquires and operates online businesses, including one we wrote about recently, Proofread Anywhere.

“The only issue is if there is a key person in a business who might leave post-acquisition, but them being an employee or a contractor is irrelevant as the risk is the same regardless.”

Pros and cons of a contractor team from a buyer’s perspective

The biggest benefit of working with a team of contractors rather than employees is cost savings. While it depends on the type of business and role, contractors tend to be less expensive than W-2 employees.

“Cost efficiency is achieved by operating without the overhead of benefits, taxes, and related costs,” explained Nicole Ana Voutsas, an M&A advisor at Foundy, a UK-based marketplace for selling and buying businesses. “There is flexibility in the ability to easily scale operations up or down without the complexities associated with the commitment of permanent staff.”

That was the case for Karl Hughes, who bought an agency, The Podcast Consultant, in April 2023 for a price in the high 6 figures. “We saw having mostly contractors as a positive value of the business,” Hughes said. “The owner had been able to keep good margins and consistent output of work with an all remote contract team, so we saw that as a good sign that we could probably do the same.”

He added: “If the team had been all full-time employees, we would have had to factor in the risk that some of these people might not be 100% utilized and we might be paying a fixed overhead even if demand went down after we took over.”

Every owner who works with contractors, however, knows the downsides of a contractor-heavy team. You may see higher turnover because contractors tend to be less invested, both emotionally and financially, in the business than employees, and it can take longer to get contractors up to speed if they’re not working full-time hours. That can be challenging for ensuring continuity and knowledge retention.

“It’s sort of like, do you want to buy a house or rent a house?” said JD Graffam, who owns several businesses including Audience Ops, which he purchased in 2021 at a high 6 figure price. At sale, the founder ran the business with about 25 contractors.

“Contractors are more like renting the house. You don’t have nearly as much responsibility for them personally as you would for full-time employees who rely on you for their sole income.”

“On the con side,” Graffam said, “there’s not as much of an opportunity to develop a company culture, which can give you the ‘one plus one equals three’ effect. You may find it a challenge that contractors aren’t going to focus on your business in the way that employees are likely to.”

Because of these challenges, sometimes a contractor-only model slows the business down. Yet for other companies, it’s an asset for speed because it enables agility and quick ramp-up.

How a contractor model might affect your company’s valuation

When it’s time to value your business, how might a contractor model affect the amount buyers are willing to pay?

Buyers won’t pay more or less simply because the business runs on contractor labor. But the results of that approach will likely affect the valuation.

For example, if the contractor model leads to high profitability, that will increase the valuation. “The lower operating costs will strengthen the profits and margins of the business, making it financially more attractive for a buyer,” said Jake Olivieri, an M&A associate at brokerage FE International. “When valuing a business on a multiple of its profit or EBITDA, the strong bottom-line financials will yield a greater valuation.”

Likewise, if the contractor model adds risk – for example, if it’s built around one or two key contractors who might leave – that could reduce the sale price overall. Or it could reduce the price paid at closing and shift some of the payment into an earn-out, which is riskier for the seller.

Generally speaking, it’s more common to see contractor models for businesses that sell for 6 or 7 figures. Companies that sell for 8 figures and beyond tend to build teams of employees, though there are certainly exceptions to that rule.

“You see more employee-models as businesses scale, because the acquirers of larger businesses may expect to see employees vs. subcontractors (or a combination of the two, which is sometimes the case),” said Chris Wozniak, a senior advisor with Quiet Light brokerage.

How to make your contractor-only team more appealing to buyers

As you think about how to position your business to sell in the future, you can do a few things to make it more appealing to buyers.

Your big aim should be to reduce risk for the buyer by putting safeguards in place. As a bonus, as you build those safeguards, you’ll also create a more stable business for yourself as an owner.

Here are a few steps you might take:

1. Button up your contracts

Have clear contracts in place with each contractor to define roles and responsibilities. That includes current and previous contractors.

You may also want language on who owns the rights to the deliverables created by the contractors (likely your business). The agreements also need to be assignable to the new owner.

2. Ensure your contractor arrangements follow labor laws

Check your jurisdiction’s requirements to ensure your contractors meet that definition, so no one could successfully argue that they should be classified as employees.

For example, in some jurisdictions, if someone works more than a certain number of hours, or has to work at a certain time, they are required to be classified as an employee rather than a contractor.

3. Put incentives in place so the team wants to stay

Have you created an environment where your contractors have incentives to continue working for the business? Maybe that’s through competitive pay, coveted flexibility, a supportive work environment, or frequent learning and networking opportunities.

While it can be difficult or impossible to ensure the buyer will maintain that same culture and incentives, do what’s within your control to keep that team in place. If you’re staying through the transition, you can reassure your team that you’ll do everything in your power to continue their positive work experience.

4. Show the cost benefits of your contractor approach

Provide potential buyers with transparent financial records highlighting the cost-effectiveness of your model, so it serves as an asset, not a liability.

Profitability and cash flow are key for most buyers, so if you can show how your contractor team contributes to that goal, it will be easier to get them onboard.

5. Highlight your company’s strong client relationships

Every buyer wants a strong base of clients or customers. But in this case, the strength of those relationships might also help you demonstrate that the contractor model works, and that you’ll be able to retain those clients even if you have some contractor turnover.

The goal, said Voutsas of Foundy, is to showcase “the portability of these relationships beyond individual contractors.”

6. Develop reliable sources for new talent

How do you find new contractors when you need them? Is that process accessible and repeatable for a new owner?

Be prepared to share with a potential buyer how and where you find your contractors, said Wozniak at Quiet Light. “If a company is in growth mode, it becomes increasingly important to have reliable sources for new talent.”

7. Reduce risk by widening your contractor pool

While keeping lean with a small team can be a strength, it can also introduce risk. Some buyers prefer to see a larger pool of skilled contractors, so the business can still operate if a few team members leave.

With this in mind, it might make sense to offset that risk by growing your contractor team. Of course, you’ll want to balance this approach with keeping costs low. The best approach really depends on what’s right for you and your business.

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