They say in business that timing is everything. Unfortunately, they don’t offer any MBA courses on being in the right place at the right time. Good timing is honed through experience, of knowing to strike when the iron is hot. Or maybe you just go for it and get lucky.
When it comes to selling your business, the right time may mean the time at which you get the maximum value. But it also may mean it’s the time when you have the right buyer who is ready to close the right deal that will be free of headaches and complications. Above all, there is such a thing as being too late, and you never want to end up there.
“Every owner of a body shop will, I believe, exit his business in one of six ways, and only one of six ways,” says Stuart Sorokin, managing member of Business & Legal Advisors, a consulting firm that specializes in the auto body industry. “He will sell it to family, he will sell it to management, he will sell it to a third party, he becomes an absentee owner, it gets liquidated, or he dies. But if you don't choose one of the first four, the last two will happen.”
Thinking about your succession plan is important as you reach the latter stages of your career as a business owner, but once you’ve made the decision to sell your business, there are vital steps to prepare both you and the business for life after a sale.
Evaluate Your Goals
If your goal is simply to unload your business at any cost, then this process would be easy; for the right price, someone would be glad to take it off your hands. But most business owners have a number in mind that they need to walk away with, whether that number represents their retirement fund, their investment into another business, or for whatever the next stage in life holds. Seeking advice on your sale often comes at a cost, but Sorokin recommends working with a financial planner to determine what that number is for you.
“There’s no sense in going through a sale if you’re not going to get enough money that you can retire and do what you want,” Sorokin says. “So, at that point, you need to look at where your number should be and then decide, ‘OK, if I’m not there, how am I going to get there?’”
In the event of a shortfall between the number you need and the estimated value of the business, based on gross sales, number of locations, and rent factor, it may not be the right time to sell, allowing time for further business growth. That evaluation is something of a “pre-step” before even getting to the market and before getting a full appraisal of the business.
“So that, to me, is the first point, in a sense, because you’re not going to accept an offer that’s not going to get you where you want,” says Sorokin.
Understand Where Your Value is
Once the decision is made to pursue a sale, there are a few things you’ll want to ensure are in place, according to Sorokin. One of the first is to make sure that any key employees will be remaining with the business. The acquiring party will want that assurance and also know they won’t have any potential competitors in the making.
“The acquirers would potentially have a problem and could say, ‘Hey, if you don’t have these guys bound by some kind of noncompete or nonsolicitation, that’s a problem, because I don’t want your guys opening up a shop around the corner from me,” says Sorokin.
Failure to deliver key employees is one of the top reasons that deals fall apart, says Sorokin, and another is failure in due diligence. It’s important to build a due diligence library, encompassing all the numbers that an acquirer is going to want to look at. “Sixty percent of the deals that go to a letter of intent don’t close, and a high percentage of them (are due to) failures in due diligence,” Sorokin says.
One maybe under-the-radar thing to consider is separating your real estate and your business operations into separate entities. Especially in acquisitions by consolidators, the buyer may prefer to lease real estate, not buy it. Real estate carries with it certain headaches such as environmental concerns; the investment is in the body shop, not the land it’s on.
“I just did a deal where I sold a body shop for $8 million, but the underlying real estate they rented, they had a 20-year lease at current rent of about $300,000 a year,” Sorokin explains. “So the purchase price was being dwarfed by the total lease value. And people will focus so much on the asset purchase agreement even though, potentially, the lease is the more valuable piece.”
Consider Some Guidance
Whether or not to use a broker in your deal is a big decision. While brokers bring a lot of expertise and help smooth out the process, that assistance comes at a hefty cost — five to 10 percent of the sale proceeds, according to Sorokin. Where brokers can come in really handy is if a shop’s diligence and documentation are not organized — as their payment depends on the sale, that is one area they can ensure is top notch.
“Some people pay a broker because the broker is going to help their people do all the paperwork that’s going to be needed for the buyer,” Sorokin says. “In other cases, I’ve seen brokers do virtually nothing and the attorneys end up doing all that work.”
Brokers can also assist in taking an asset to market, though there are any number of ways a seller can get matched with a buyer. Besides the common situation of selling to family, some sellers get contacted initially by consolidators, and never even have to market themselves. Or, Sorokin offers an example of a paint contractor who works with a consolidator in the area as the kind of connection that could facilitate a business relationship.
“That paint guy may be more than willing to hook you up with the franchisor because he wants to keep selling paint, right? And if you switch, he loses that work,” says Sorokin.
When a sale reaches the stage of signing a letter of intent (LOI), Sorokin strongly recommends having attorneys involved to review an LOI before the seller signs it. Sorokin also advises that if working with a broker, the broker may push a seller to sign an LOI quickly to avoid getting lawyers involved and hold up the sale.
“Until the seller signs the letter of intent, he’s like Cinderella at the ball; everyone wants to dance with them,” says Sorokin. “The minute he signs the LOI, he’s now like Cinderella the next morning in the fireplace, cleaning out the ashes, because the buyer is going to try to do everything possible to renegotiate the price.”
Be Sure of Next Steps
As in any sale, there is always the possibility of seller’s remorse or regrets about doing things differently. This is where the preparation process is key. Sorokin asks if you as the seller are truly willing or not to walk away from your business.
“Most sellers, their business is their baby,” says Sorokin. “They don’t do real well necessarily, when they’re working in what was their business and someone’s making decisions that they don’t agree with.”
Above all, through proper preparation, consideration, gathering of documents, and consultation with experts, a sale can proceed with, at minimum, few surprises. Not all deals come together for whatever reason, but doing as much work as possible up front will help make a smoother process.
“I see deals that fall apart because buyers and sellers think they have a deal and they don’t, I’ve seen some deals where buyers and sellers have gotten together and it’s not the panacea they thought it was, and that ends up in some, sometimes, very bad situations,” Sorokin says. “And sometimes, I’ve seen some deals where parties are right in alignment, and everything goes really smoothly.”
