In today’s tough economic climate buying and selling of businesses has become quite the familiar practice. This certainly is true in the collision repair market, where pressures from outside forces have made it tough to operate year-in and year-out. As a result, you might be pondering the sale of your business, either to a larger entity or to another shop operator who is looking to build on what you’ve created. The worst thing you could do is wait too long to sell and miss that golden opportunity to set yourself up for those Golden Years. On the flip side, perhaps your business needs a bit of tweaking before putting your shop on the block. Otherwise you might fail to garner the maximum dollars for your years of hard work. Bob Billow, managing director at Billow Butler & Company, an investment bank dedicated to advising middle market business owners on the sale of their companies, says whether you are selling for corporate, business or personal reasons, you want to be sure you get maximum value for your years of hard work and effort.
Staying the course
Putting your business up for sale must first begin with a series of conversations with an investment banking firm to ensure you’re sailing in the right direction, suggests Billow.
The relationship you build with your banker will be crucial to the sale’s success. It will be their responsibility to manage and process the transaction from beginning to end. This includes the preparation of all marketing material, research and development of buyer categories and candidates, and the creation of a vibrant, comprehensive, competitive marketing campaign.
Your investment banking firm will also help you determine what kind of value your company has; what your goals for the sale should be; if you should sell all of your business or just a part of it; if you can remain on board as part of the executive management team; whether it makes more sense to find a financial buyer or a strategic one; and many other factors that need to be discussed.
The answers to these questions are critical in determining how to move forward, according to Dan Smith, president of Capstone Financial. “Sometimes we are onsite as much as a year helping a company prepare to sell,” he says in an effort to emphasize the importance of being thorough.
“Because all of our clients are private, we’re relying on the company and its information and what they give us to get to the point where we can come up with a valuation before we come to market,” says Smith in one of Capstone’s recent financial newsletters. “So, that’s the big thing, just making sure that we have everything from the seller that could possibly be a problem and emphasizing that right up front, so that when the buyer gets in they know not only the good stuff that the seller wants to tell you, but also the bad stuff, so we can get to a quick decision.”
Oftentimes, the management team is unaware that some of the decisions they’ve made in the past will have a positive or negative effect on the sale of their business—a banker will be able to help you determine what those impacts are. They must be able to get a sense of the micro and macro factors that can affect your business and its valuation (for better or worse), believes Billow.
Billow calls this process a SWOT analysis—the client’s strengths, weaknesses, opportunities and threats are identified. “Beyond valuation methodologies, a SWOT is helpful in getting what the value drivers are and, just as importantly, allows the banker in collaboration with your attorney to uncover certain issues that may be unsettling if they weren’t to be uncovered until the sales process was already underway.”
For instance, having too much revenue from one customer, too much risk from a sole supplier or too much dependence on technology controlled by outsiders can all affect the list price and a buyer’s interest.
But beyond an analysis of these weaknesses and/or threats, a professional banker will “interview the client for the purpose of cataloging what the value drivers of the business are,” reports Billow, adding that it isn’t just determined by the balance sheet or income statement but also the “intangible assets that comprise your business”—like distribution logistics, customer relationships and internally developed software. “Human capital, the seller’s workforce, too, is a strong intangible asset. This assemblage of management talent to remain intact can be of critical importance to a deal,” adds Billow.
Smith says that it is during this in-depth analysis process with the seller that they dig in to really understand the company and gain a thorough comprehension of its value. Once this process is complete, Capstone Financial, like others, develops what they refer to as an information memorandum, a 30- to 50-page document providing a “company description, history, product information, the sales and marketing strategy, financials, competitor information, company strengths and weaknesses, facilities information, intellectual property information, employee and management information along with an organizational chart, industry data, company growth opportunities, sales and distribution channels, customer information and anything else a prospective buyer might be interested in knowing.” This document is then sent to qualified buyers approved by the seller.
Sworn to secrecy?
You may choose to keep the fact that you are selling your business strictly confidential and that’s OK. There are pros and cons to this option.
According to Billow, some owners feel as if they would be showcasing disloyalty to their employees if they didn’t disclose the sale, while others recognize the “prospect of change can be disconcerting to employees, and, after all, there is the prospect that a deal will not be completed. These owners may figure that it isn’t necessary to get their managers and staff in a lather and impact their productivity until absolutely necessary.”
Don’t forget, too, that letting employees know the business is up for sale might bring out potential buyers under your own roof, perhaps a shop manager or technician who aspires to own his own business.
Billow and his associates tend to favor confidentiality until an official “Letter Of Intent” is signed—unless, of course, a small group of managers needs to be brought “into the circle” in the earlier stages.
Capstone’s Jon Taylor, senior associate, is less concerned with secrecy. Sellers often seem overly concerned about confidentiality because they think it could be detrimental to employee morale, “but they may just be oversensitive because businesses are bought and sold all the time,” says Taylor. “They might also be worried about losing customers, but you rarely see that happen. It doesn’t have the detriment that most sellers think it does.”
Anchoring the right price
There is no easy way to determine the worth of one’s company, hence the reason for bringing in a firm to help you derive a value. Smith suggests that sellers be realistic about what to expect in terms of a sales price. “You have a lot of people who have a small company doing a million in sales who want $50 million for their business,” but unrealistic views will only lead to disappointment.
As a business owner, you’ll need to gather the basic financial information needed to sell your business: profit and loss statements and balance sheets from the last three to five years of operation. Unfortunately, Smith says many companies don’t even know the profitability of their business or what their gross margins are, which can make it difficult to ascertain a sale price. “You’ll need to work with an accounting or investment banking firm to secure this information,” he suggests.
Additionally, various ownership perks, excessive travel and entertainment budgets, real estate issues and estate planning will need to be discussed before finalizing a price, suggests Billow. “We’ve seen airplanes, boats, jet skis and Florida condominiums that have lessened the portrayal of a business’ true profitability and these items need to be addressed.”
Ultimately, the value achieved is not simply accomplished on the basis of “a number-crunching exercise,” though several factors will help determine your ultimate asking price, including:
- Your revenue levels;
- Amount and sustainability of gross margins;
- The number and type of distribution channels;
- Your company’s overall growth potential;
- The strength of the management team;
- Brand equity;
- How you hold up to your competition.
According to our research, a broker or banking firm is going to look at these criteria and evaluate your business. However, a broker will typically use market-based valuation, a quick and common method for the sale of small businesses. They find out the selling prices of similar businesses in the area and industry and use that as their guide.
But Billow says, “the kinds of businesses that we typically work with are not going to be valued strictly on the basis of the balance sheet.” It’s possible your business will be valued on the basis of prospects, future profitability and cash flow. “When we conduct an evaluation, we use several methodologies to triangulate and confirm our perspective on value.”
Asset-based valuation considers the book and liquidation value of your business, but this is often inappropriate except in regard to a distressed business, says Billow. Earnings-based valuation takes past and projected financial data into account, including cash flow, capital expenditures and working capital needs. There are times when earnings-based valuation is combined with asset-based valuation, “as in the case where there may be an underperforming business that owns some ‘prized’ assets that could be the crown jewel envy of competitors,” explains Billow.
Determining the right price also has a lot to do with the type of buyer you’re looking for and how the business is going to be financed. A financial buyer is going to look at the company differently than a strategic buyer, who might be able to fold it into their operations, while reducing costs and creating synergies. Billow suggests that strategic buyers will, in the context of a competitive effort, often be compelled to pay premium pricing for a synergistic business.
Alternatively, “financial buyers look at the earnings and numbers and expect a certain return over a certain period of time. They run a financial model and price it based on the return they need to get on the capital they invested,” explains Smith.
Billow says it helps when the seller is flexible in their structure and term options. Partial sales are becoming more common today than just a few years ago. In terms of payment, cash is always king, says Taylor, but other options include serving as the bank for the buyer or taking stock compensation.
Capstone warns, however, to be careful when stock is the only payment. “Big consolidators sometimes go in and buy all these family-owned businesses and give them stock, and then the consolidator’s stock tanks, and they are left with nothing,” Taylor adds. Your investment banker will work with you to help determine the best payment options.
“We identify the transactional procedures and required/preferred structures like stock or asset sales, with stock or LLC membership sales being the greater preference because of their tax advantages to a seller in avoiding a potential double tax,” says Billow.
Getting the buyer on board
Once a potential buyer has issued an agreed-upon “Letter Of Intent”—a document that outlines the expectations of both parties—the buyer will then engage in due diligence, a comprehensive review by the buyer of the financial, legal and operational elements of a business, according to Billow.
Capstone’s Smith adds that a buyer is going to review everything, from any past legal issues to matters with warranties or inventory, and from sales numbers to financial and tax statements.
“It’s an endeavor to make certain the expectations of the buyer are confirmed, and there are no issues presented on a close inspection and examination of the business that one would not expect other than in the ordinary course of business,” explains Billow. The worst thing that can happen is a “surprise” during the due diligence process, which could lead to a delay, a detriment in the pricing or an abandonment of the deal altogether, he says.
“Surprises tend to be nasty developments, like the loss of a major account, a downward spike in earnings, cancellation of a contract, the loss of important documents or the discovery of environmental issues.”
As long as the process is handled correctly, though, no surprises should arise, and the remainder of the deal should go fairly smoothly for the seller.
But it is not just up to the seller to be open and honest; the buyer should also showcase certain behavior with regard to the sale. Billow points out some pitfalls for which sellers should be on the lookout:
- An inexperienced buyer could be hazardous since they lack the knowledge needed to close the deal.
- A high degree of leverage caused by insufficient equity may threaten the financial terms.
- Inappropriate terms regarding the deal’s structure.
- Too many levels of authorization.
- Unusual requests for data or unique expressions of concern.
- An overly relaxed approach to the deal, giving the impression they aren’t that interested.
- When the buyer resists any flexibility or adopts an odd approach.
- An unwillingness to commit to an investment time.
So, work with your investment banker, follow these guides and watch out for sharks. There are plenty of ways to capitalize on your years of hard work and dedication to collision repair, as long as you take it step by step and make sure you don’t get to eager to get out the door. Overall, selling your business should be a smooth process, with you sailing toward your new adventures in no time.
