News: Consolidator Report
“How do you evaluate and sell your business?”
– John Smith, president
The Auto Body Shop, Inc.
Great Bend, Kan.
Question answered by: Hank Nunn
Interesting question, John. Selling a business, in concept, is no
different than selling a house or a car.
First, you have to decide how much the house or car is worth. Then, you market it.
With a car, you may take out an ad in the paper or just park it at a corner parking lot with a sign in the window. For the house, you may do it yourself or hire a realtor to market it. Once you have someone interested, you negotiate a selling price, close the deal, money changes hands and that’s it.
As noted above, selling a business is conceptually the same as selling a car or a house. In reality, however, selling your collision repair business is a bit more complicated.
Much of the information I’m about to share with you has been learned through my continued attendance at the School of Hard Knocks. I’ve experienced the sale of my own body shop, been involved in acquisitions of body shops, and built and then sold a paint jobber store.
Disclaimer: Please understand that this should not be taken as legal advice. I’m not an attorney or a CPA. This is simply a summary of some issues regarding the sale of a body shop.
What’s It Worth?
There are two basic methods for determining the value of a business: cash flow valuation and asset valuation.
• Cash flow valuation: A business’s true worth is in its cash flow. It really doesn’t matter if the business repairs collision-damaged vehicles, makes sandwiches or offers software installation consultation services. A business is supposed to generate cash flow.
The cash flow valuation is based on the buyer asking the question, “How long should I allow the positive cash flow of the business to repay my investment?” Conceptually, this is simple. “How many years do I allow the net profit from this business to pay me back?
In reality, you get to deal with two terms, EBIDTA and Multiplier.
EBIDTA is Earnings Before Interest, Depreciation, Taxes and Amortization and is generally stated as an annual figure. You may have to sit with your accountant to figure out what that number is. The simple, do-it-yourself method would be to look at your Profit and Loss (or earnings or income and expense statement), add back in stuff that you as the owner of the business decide you deserve (the boat, plane, horse trailer and Corvette) and take out depreciation, taxes, interest and amortization. That process is called “stripping” the P&L.
Once you’ve determined your EBIDTA, you need to determine your “multiplier.” Conceptually, that’s the number of years the buyer will allow his investment (sale price of your business) to pay back through the positive business cash flow. As a rule of thumb, multipliers run from two to six. The stronger the business, the higher the multiplier.
A strong shop with multiple lines of work and good standard operating procedures (SOPs) (so the owner’s constant presence isn’t required) in a good, expanding market will warrant a much higher multiplier than an average shop in an average market with average (or poor) profitability.
For example: Bill’s Body Shop has annual EBIDTA of $150,000. The shop is in a growing market in a good building, with good street frontage and a favorable lease. The shop has no SOPs, and Bill handles everything. After discussions with his accountant, Bill decides that a fair multiplier is three. Therefore, Bill’s Body Shop is worth $450,000. (EBIDTA of $150,000 multiplied by three.)
• Asset valuation: The second common method of business valuation is called an asset sale. This one is quick and easy. Just look at the total asset side of your balance sheet. That’s what you get paid. You get to pay off all liabilities, and whatever is left over, you keep. In reality, though, it’s not quite that simple. Nothing ever is.
Now that you have a price in mind, it’s time to market the business. This is a bit more complex than hanging a “for sale” sign on the front door. You can run ads in trade magazines, call on consolidators or competitors, or even sell the business to employees or family members.
There are also business brokerage companies that will list and sell your business for you. Figure a commission of about 10 percent. The nice thing about the business broker is that you maintain some control over who sees your business and how it’s presented. Just like anything else, there are good brokers and bad brokers. Search for the good ones. They’re the ones with a history of sales and good references. Check the references.
Some realtors also will market and sell businesses.
Which way is best? The answer depends on why you’re selling. Are you fed up with the whole darned body shop business and just want out? Is the business about to go into bankruptcy? Is it a good, profitable business, and you think the time is right to grab the big brass ring and play golf and fish for the next 30 years?
If you’re in a hurry, you’ll need to make the sale very visible – and price is a big factor. Run big ads in the Sunday “business” section of the local paper.
But if the business is well-run and profitable and you have more time to sell, more conservative methods might be the way to go to make prospective buyers aware of your desire to sell the business. Meet confidentially with consolidators or owners of multiple-location shops who may be interested in a presence in your market. Let your jobbers, paint reps and other suppliers know that you’re interested in selling the business.
And don’t overlook employees as potential buyers. If you’re really thinking ahead, consider creating an ESOP – Employee Stock Option Plan. You can sell to employees over a period of time. You’ll need good accounting and legal help to form and manage it, though.
Many of us transition the business to our children as a method to sell the company. If that’s where you’re going, involve a transaction attorney early and plan years ahead of the sale. You want the kids to still love you later when you’re old and need some help pushing the chair to the light and emptying the drool cup.
How visible you want your business marketing is up to you. Do your employees know it’s for sale, and how will they react? Do you have insurance relationships that may be jeopardized by the knowledge of a possible sale? You need to consider everything.
Doing the Deal
So you figured a price, marketed your shop and now someone is interested in buying it. Now’s the time to get some serious help. Lawyer up! I like lawyers as much as I like having the flu, but there is a time for a good lawyer and this is it!
Unless you’re selling a small shop for little money, the choice of attorney is critical to the successful sale of your business. Don’t go cheap! Get the best available transaction attorney.
There are lots of lawyers out there. Many warrant all the lawyer jokes we tell. (What’s the difference between a catfish and a lawyer? One is a bottom-feeding scum sucker and the other is a fish.)
Good transaction attorneys aren’t like that. They view their job as protecting the client while at the same time getting the deal done. Money invested in a good transaction lawyer will save real money later when problems with the deal arise. Litigation attorneys handling transactions can muddy the waters and cost you lots of time and money and may not provide a good or safe deal for you.
Have your lawyer draw up the transaction documents. One of the basic rules of negotiation is, “He who writes the deal, wins.” Pay the money and get it done correctly. Make sure you have strong contracts with good security.
Once the deal is written up, contracts signed and money paid, you’re done.
Maybe. Take a vacation, buy that summer home and forget all about the shop.
On second thought, maybe not …
Many factors make selling a
business complicated. The following are suggestions that may make the transaction process easier and safer.
• Plan ahead. Earlier we looked at
Bill’s Body Shop and used his EBITDA and a multiplier to find that his business is worth $450,000. Let’s say Bill decided that he wants more than $450,000. So he plans to sell the business three years from now.
During that time, he implements SOPs and refines his production systems with an eye toward improving profitability. He meets with his accountant and focuses on improving profitability and increasing sales. He quits buying personal items through the business and actually deposits cash deductible payments.
Ever think about that? “Skimming” $100 in cash to hide the income from the taxman may save $30 in taxes but cost $300 to $500 in business equity! Plus, you can be audited and pay big fines. Ever buy a $400 spray gun for a painter, run it through the business and have the painter pay you back in cash over the next two months? That gun and money in your pocket cost you about $1,600 in business equity.
Over three years, Bill has improved sales and profitability and has created operating systems that make the business less dependent on his presence for its success. If we go back to the cash flow valuation formula, he has increased EBIDTA and now warrants a higher multiplier.
If he improved annual EBIDTA to $180,000 and can now negotiate a multiplier of 4.5, his business is worth $810,000. That’s a 90 percent increase in business equity!
• Set up a transaction team. Business transactions are complicated. Work with a good CPA familiar with transactions and a good transaction attorney. Make sure everyone talks with everyone! Decisions regarding allocation of sale funds can have an impact of thousands, perhaps tens of thousands, of dollars in taxes. Do not ignore the taxes!
• Be realistic. Deals fall apart. While an early retirement may seem like a good idea, there’s always a chance that you’ll wind up with the business back again if the buyer cannot make payments. Be prepared to step back in and run it all over again until you’ve received that last dollar.
• It’s all negotiable. Everything – EBIDTA, multiplier and even assets in an asset sale – are all negotiable. I once reviewed a sales proposal for a client. The proposal had the phrase “EBIDTA” per GAAP. That means EBIDTA as calculated according to Generally Accepted Accounting Principles. I spent three hours with a highly qualified CPA with years of transaction experience researching GAAP for EBIDTA. We never found a GAAP procedure for EBIDTA. It’s negotiable.
In the Bill’s Body Shop example, negotiating a 0.5 increase in multiplier yields $75,000 in equity.
• The security agreement is as important as the note. We all hope that the buyer of our business will be successful with it and that they’ll pay us all the money due. Unfortunately, this isn’t always the case. Most business transactions involve a down payment and a note for the payment of the balance due the seller. Make sure you have a good security agreement. In the event that the buyer defaults on the note, you’re number-one and in a position to reclaim the business. One need look no further than M2’s collapse to see the importance of this issue.
• Leave. Many buyers require the seller to remain in the business for a period after the sale. This may be a very difficult time for you. You’re there but not the boss anymore. You built the business, but the new guys don’t see things your way. You may not like the way they do business or how they treat your former employees and vendors. It’s easier to get out as soon as possible, if you can. But be ready at all times to come back! Stay in touch with key employees and vendors.
• Remember, the real estate and the business are separate entities. If you own your building, remember that the building and the business are separate assets. The lease negotiated with the buyer of the business has a direct impact on the value of the real estate. If you choose to sell the building with the business, make sure you use competitive, fair market value lease rates for the building evaluation. If you plan to keep the real estate (a really good idea), make sure you have a good lease with very good security terms.
Believe it or not, giving up a lower-than-market lease rate on the building just to make the business sale go through may cost you hundreds of thousands of dollars in building equity. Make sure the lease has annual cost-of-living adjustments.
• Beware of “claw back” clauses. Be aware of clauses in offers or contracts that allow the buyer to reduce the purchase price after you’ve committed to the deal. The initial offer may be for $1 million, but there may be “claw back” clauses that allow the reduction in price by hundreds of thousands of dollars based on future performance or other issues. This happens so frequently there’s actually a term for it. Lawyer up early!
• Make sure your financials are accurate. Meet with a good accountant to ensure your financials are good and properly formatted. They will be reviewed! That’s where EBIDTA will be calculated. Make sure all assets are posted to your balance sheet. Most of us miss inventory and “work in process.”
I recently reviewed a shop for a prospective buyer. The financials were formatted so poorly that we couldn’t even begin to create a valuation of the business. The seller had no basis for justifying his asking price. Sadly, he was represented by a “business broker” who should’ve been able to advise him about the importance of properly formatted financials.
Sold – to the Highest Bidder!
Selling a business is complicated. Make sure you have a good business valuation (there are business appraisers out there; your banker can probably refer you to one), and make sure you’re well represented by both a transaction attorney and accountant – even if you are selling to a family member.
Writer Hank Nunn has been involved in the collision repair industry for 30 years as an adjuster, shop owner, technician and consultant. Nunn is president of H W Nunn & Associates, a collision industry consulting firm. He’s also the lead facilitator as well as sales and marketing manager for DuPont Performance Coatings SMART Management Seminar Series. Nunn can be contacted at [email protected].