x2019;t have to sell it, you probably shouldn’t right now.
Selling your business will take time. You need to plan for the event to maximize your return on your time and financial investment. In the ideal situation, plan for the sale three years before you anticipate selling.
You’ll also need some help. Selling a business involves many issues, one of the major ones being taxes. Therefore, you’ll need to involve your accountant. You’ll also need a good business appraiser (or two), as well as an attorney who specializes in transaction law.
The amount of professional assistance you need depends on the size of your business. If you’re running a shop that’s doing $2.5 million in annual sales and you own the property, you’ll need more assistance than the $500,000-per-year shop owner who’s at the end of his or her lease term and just wants out so he or she can return to the carefree lifestyle of pounding metal for someone else.
A Six-Step Process
Selling the business is done in several steps:
1. Prepare
2. Determine pricing
3. Find a buyer
4. Negotiate the deal
5. Perform due diligence
6. Deposit the check
Remember, the deal is not a deal until you get the check! Like most things in life, preparation is the key to maximizing your return from the prospective sale. Factors affecting selling price include:
• Profitability
• Cash flow
• Sales
• Operations
• Marketing
Since you know those factors will have a significant impact on the price you receive for your business, it makes sense to maximize them.
Having a good written business plan is a fundamental component to a successful sale. Do you have one? Is it current, and do you review it on a regular basis? If the answer to those questions is “yes,” you’re in a much better position to sell than if the answer is to point to your head and announce, “I’ve got it all right here!”
What if you don’t have a business plan? Don’t feel alone as most collision shops don’t. Begin the process of writing a good one now. It’ll take three months, but the investment will pay back through improved business activity now and again when you sell the business.
| Selling Your Business: A New Lease on Life…Maybe
Many body shops operate from leased premises. If you own one of those shops, there are steps you can take to make the sale of your business easier and more profitable. Plan your exit strategy early, before signing the lease. Negotiating with your landlord may be easier than you think. Landlords need you just as much as you need them. After all, most have mortgage payments to make, just as you have rental obligations to fulfill. There are many terms landlords will negotiate that can help your business. Our focus here is on the assignment clause. Typically, the assignment clause prohibits anyone other than the tenant from occupying the leased premises. Generally, to assign a commercial lease to a buyer, you’ll need the landlord’s consent. Some leases state that such consent may be granted or withheld in the sole discretion of the landlord. This allows the landlord to turn down your request for an assignment for any reason or for no reason whatsoever. Tenants are better off when the landlord cannot unreasonably withhold, delay or condition consent. Under these terms, the landlord can require that the buyer provide evidence of its ability to fulfill the financial obligations. The landlord can also require that the buyer, known as the “assignee,” demonstrate that it has the experience required to successfully operate the business. Watch out for a profit sharing provision, which allows the landlord to take all or part of the proceeds from the sale of the business. Although there are a number of variations, such provisions generally allow the landlord to take all or part of the funds paid to the selling tenant that are over and above the rent. Another provision to watch out for is the “take-back option.” The take-back option allows the landlord to recapture the leased premises when the tenant requests an assignment. The landlord’s exercise of a take-back option ends your tenancy as well as your sale. Finally, during lease negotiations, cap fees that the landlord can charge for the assignment, including legal and administrative fees. Randall L. Airst, Esq., LL.M. is a managing director with Airst Stann and Sustainable Realty Solutions (www.airst.com). As an attorney, business broker and investor, Airst has successfully worked on thousands of commercial leases and is a pioneer in green leasing. He can be reached at [email protected] or (215) 552-8800 ext. 756. |
Financial Statements
Financial statements have a huge impact on your business’s selling price. Therefore, it makes sense to meet with your accountant to make sure all is in order. Are your financials complete? Does your balance sheet reflect inventory, receivables and work-in-process (WIP)? If not, it should. Fix it now, but keep an eye on the tax impact.
Net positive cash flow is a huge factor in business appraisal, which is why you should maximize this number for three years prior to your planned sale. Accountants will “strip” your profit and loss (P&L) statement and remove everything from depreciation and amortization expenses to special owner compensation that may be hidden in the P&L. Those who are in the business of buying and selling businesses refer to this as EBIDTA, or Earnings Before Interest, Depreciation, Taxes and Amortization. For us, just think of net positive cash flow and work with your accountant to find ways to make that number bigger.
If you’re in a hurry to sell the business, meet with your accountant and build “stripped” financial statements going back two or three years. These statements have no value from a tax standpoint, but they can support a sale.
Do you occasionally do a job for “cash” that simply doesn’t hit the books? Do you sell an employee a tool and allow him to pay you back in cash that never hits the books? Stop it! That reduces your equity in your business by a factor of two to six. In other words, doing a “cash job” for $1,000 may save you $300 in taxes but cost you between $2,000 and $6,000 in equity!
I worked with two collision businesses over the past year that suffered significant losses in value because they had poor financial statements and pocketed cash.
What if you don’t have time to properly prep your financials? Visit your accountant right now and create a P&L statement and balance sheet that represent your business in the most positive but honest light.
You may need to find an accountant familiar with transactions and versed in building financials to support a sale. Your current accountant or banker can help find that person.
Marketing and Appearance
Marketing activities of your business play a significant role in the amount of money you receive for it. Do you have a written marketing plan that shows current sources of business and how you plan to increase sales? Is your marketing current? Are you taking advantage of the opportunities provided by the Internet and social networking Web sites? Are you making an effort to become “green” and utilize that in your marketing?
If the answer to those questions is “yes,” you have a distinct advantage in the mind of a potential buyer over those who answered, “Hey, I run an ad in the Yellow Pages and have a couple of DRPs.”
General appearance is also important. Clean the place up, change the office carpet, put in new seats and seal the parking lot. Add some plants. Make it look like a business someone would want to own.
How does the shop operate? Is your business people-driven or systems-driven? Buyers want a business that runs itself.
Preparing the business for sale is important and it takes some time. That’s why I’ve suggested a three-year timeframe to get those financial statements in order, refine the business plan and make the business attractive to a buyer. If you go through those steps, the business may even improve to the point that you no longer wish to sell!
If you don’t have that much time, get with your accountant to make the financials as good as possible and spend time making the business as attractive as possible.
Finding a Buyer
You’ve decided to sell the business, you’re prepared the business for sale and now it’s time to look for a buyer. You could just hang a “for sale” sign in the window and hope someone stops in with a pile of money. But in the real world, it doesn’t work that way.
About 10 years ago, there was a great deal of activity buying and selling collision centers. Consolidation was common, and it wasn’t difficult to find a buyer for a good collision shop. Today, things have changed. While consolidators are still potential buyers, they’re more conservative with respect to the shops they’re interested in, and the prices offered are lower.
There are several ways to find buyers for your business. Many choose to retain the services of a business broker, which you can find online or in the phone book. There are plenty of them. Figure on a 10 percent commission. They’ll actively and confidentially list your business to the local as well as national market.
A good broker will assist you with formatting your financials and making the business ready for sale. If you’re thinking of going with a broker, speak with several and ask for recommendations. Compare your independent appraisals to the figure the broker develops for you. A good broker can tell you what “multipliers” are being used in your market.
You can also opt to bypass the broker and list the business online yourself, which is not much different than selling your own home. You’ll be amazed at the number of business listing services that are on the Internet. Trade publications are another good way to get the word out.
Still another option is to contact consolidators in or adjacent to your market and let them know you’re thinking of selling. The most recent activity in collision center acquisition has been from multiple shop operators (MSOs) interested in expanding and able to buy shops to fill their market needs. When talking with consolidators or MSOs, keep in mind that they’re looking for locations that complement their existing networks of shops.
You probably won’t sell to the shop across the street for a good price. Its only interest is to eliminate its competitor. But the shop owner in the next town might be a great potential buyer since your location adds to his market coverage.
| How Much Is My Shop Worth Now?
So, what’s your business worth? How much money should you receive for your business? It’s time to take an honest look at its value. Approximately 70 percent of small businesses placed on the market fail to sell because the owners don’t price them realistically. There are many methods for appraising the value of a business, the two most common being asset valuation and cash flow valuation. Of the two, asset valuation is the easiest. Simply look at your balance sheet and find the total asset number – that’s the selling price. You pay off the liabilities, and whatever is left over after taxes is yours. That’s why it’s critically important to have good financials that reflect all assets like work-in-process and inventory. Cash flow valuation uses the net positive cash flow of the business to arrive at a value. EBIDTA (Earnings Before Interest, Depreciation, Taxes and Amortization) is multiplied by a number (the multiplier) to arrive at a value. If your business has an annual net positive cash flow (EBIDTA) of $100,000 and the multiplier is 3.5, your business is worth $350,000. You get $350,000, and after paying off liabilities and taxes, the rest is yours. In the late 1990s, most collision shops sold via cash flow valuation with multipliers of 3 to 6.5. Today, the asset sale is more common and multipliers, when cash flow valuations are used, are generally 2 to 5. EBIDTA is negotiable, as is the multiplier. EBIDTA is a frequently used phrase, but an examination of GAAP (accountants’ rule book) doesn’t show a standard formula to figure it out. The multiplier represents the number of years the buyer will allow the EBIDTA generated by the business to pay him back for his investment. A strong business with good management systems and a good and current business plan with solid growth and profitability will justify a larger multiplier than a poorly run business. In our example above, let’s say we review and adjust our financials and negotiate an annual EBIDTA of $120,000 and a multiplier of 4. The value of the business is now $480,000. That represents an increase in equity of $130,000 for the same business. To answer the question of the value of your collision shop, hire two independent business appraisers. It will cost you some money, but you’ll get an honest range of prices. If you’re not in a hurry to sell, the appraisals will provide information on what needs to be improved in the business to maximize the value when you do decide to make a deal. Evaluate the business separate from the real estate if you own the property. Make sure the rent figure the business pays you for the building is competitive in your market. Separate the lease price from the business price. Frequently, the buyer will purchase the business and lease the property from the seller. Keep the transactions separate. |
Negotiating the Sale
What’s your goal in selling your business? Do you want to pass the company on to your children? Do you want to retire? Do you just want to get out with your shirt on and credit rating intact? Your goal will dictate how to proceed with negotiating the deal.
If you own a small shop and just want to get out intact, one-on-one negotiation with the prospective buyer is fine. You know what you need, and they have a checkbook. It’s like selling a car.
If the business sale is more substantial, you’ll need some help. Create a team consisting of your broker (if you’re using one), an accountant familiar with tax law and transactions, and a transaction attorney. Negotiations involving anything over $400,000 should be handled by the transaction attorney. Transaction attorneys are interested in getting the best deal for their clients. Trying to negotiate transactions with litigation attorneys can be difficult because they just don’t speak the correct language.
Since you’ve built the business with your sweat, blood and money, you’re too closely connected to it. Successful negotiations require emotional detachment. It’s like trying to sell your favorite, loyal old dog. You just can’t do it.
Don’t try to save money on transaction attorneys – hire the best available because they’ll pay for themselves for years to come. They’ll search out hidden “clawback” clauses in offers, which can be used later to reduce the amount of money you eventually receive.
When negotiating price, don’t forget the terms of payment. Smaller sales (under $300,000) will probably be cash, asset-based sales. Larger sales (cash flow-based sales) generally have some sort of seller-based financing. Make sure the transaction attorney builds a bulletproof security agreement so you can step in and recover the business should the buyer not be able to make payments. In many cases, the terms of payment are as important as the dollar amount.
Four years ago, I was involved in selling a business where the buyer, a competitor, insisted on an asset sale. Unfortunately, the number on my balance sheet didn’t meet my needs with respect to sales price. The situation was resolved by my disclosing what I needed and the buyer wanting the business bad enough to pay more than the total asset number on my balance sheet. The difference was assigned an asset named “goodwill.” Some call that “blue sky,” but it’s a valid asset for any business and can be negotiated into an asset sale.
One common buyer’s tactic is to negotiate a reduced lease rate as part of the business sale. As noted before, keep the lease and purchase negotiations separate. Commercial real estate is appraised based on cash flow. A favorable lease rate may help make the business sale easier, but may also reduce the value of the real estate by a significant amount. Everything in the business transaction process is negotiable.
Due Diligence
Lucky you! You’ve found a buyer for your business. Once you negotiate the deal, you and the buyer enter into “due diligence.” Somewhat like the escrow period when buying a house, due diligence allows the buyer to make sure the business is what was represented, and you get a chance to make sure the buyer can live up to the terms of the deal.
Expect a detailed audit of your financials and some serious questions from the buyer or its agents. Will DRPs stay post-sale? Who really owns the mixing machine? What pieces of equipment are leased and not really owned by the business? Are you morally or legally committed to any supplier? Are there any undisclosed debts or liens against the company? Is the company in compliance with local zoning and environmental regulations?
But you get to ask a few questions in return: “How are you paying for this?” and “What are your plans for my employees?” This is an emotional process, so it’s best to maintain some distance from it. Let your team handle it.
Frequently, adjustments are made to the sales price or terms during due diligence. Perhaps the frame rack is shown as a company-owned asset, but in reality it’s leased and owned by a leasing company. Maybe you show the mixing machine and paint mixing computer and scale as owned by your business when in reality it’s owned by your jobber or paint supplier.
These discoveries are normal. Minimize them by thoroughly preparing for the sale. Be flexible and look for many possible options for the settlement of the inevitable disputes that arise during due
diligence.
Cha-ching!
You made it! You prepared for the sale, decided on a price, found a buyer, negotiated a deal, survived due diligence and now you have the check in your hands! Congratulations!
Now what? Plan for that issue before deciding to sell. Some personal advice: Don’t come back. Many buyers want the seller involved in the business for some time after the sale. But walking back through the door you’ve owned for years as an employee is one tough walk.
If there’s financing involved, stay in touch with the business until you’re paid in full. You may be back in business sooner than you think!
If you’ve sold your business simply to get out from under it, take the check and pay off the suppliers and other debt to keep your credit score intact. You never know, you may be “back in the saddle again” when times improve. Take a deep breath, relax and get on with your life.
There’s a lot of additional information on selling your business online. Check out the Small Business Association Web site or run a search for “business sale.” You’ll be amazed by what’s out there.
Hank Nunn is a 33-year veteran of the collision repair industry, having served as a shop owner, technician, jobber store owner and consultant. He’s the president of H W Nunn & Associates, a collision industry consulting and training company in Happy Valley, Ore. He’s a frequent speaker at NACE and other industry meetings and serves as sales and marketing manager for DuPont Performance Services’ Shop Management Training seminar series. He can be reached at [email protected].
