You work your entire life to build up your company. Then, when it’s time to sell and move on to something else, you discover no one wants your business. This is part II of a column on how you can avoid that trap.
7. Focus on Service Agreements
Buyers like subscription models. They like recurring revenue. Service agreements are recurring revenue. They lower the risk of an acquisition, thereby increasing the value. A strong service agreement base is also the best way to defend against the Internet companies trying to turn contractors into labor only commodity suppliers.
8. Strengthen Your Balance Sheet
Work off your debt. Using debt to leverage your capital to earn a higher return on investment is smart as long as the debt service is manageable. However, debt detracts from the value of the business. The buyer will want it paid off, want you to personally assume it, or will discount the purchase. Since many buyers will try to leverage an acquisition, you will be in a much stronger position if company debt is minimized when you are ready to take your company to market.
Unless you want a lifestyle business, which is typically unsalable, you need to show continual growth. For buyers, the best predictor of future performance is past performance. While it will not enter into any discussions, buyers will inevitably base their purchase price on anticipated future cash flows, discounted to present value. A company with growth rates that exceed inflation or the buyer’s discount rate is worth more.
In addition, the larger the company becomes, the more attractive it becomes. It takes overhead to build a team, document processes, establish a brand, etc. Your company needs to be big enough to carry that overhead. As a result, larger companies sell for higher multiples of earnings.
10. Set Reasonable Expectations
Few contractors approach the sale of their companies with realistic expectations of the market value. Reality becomes a big slap in the face. Standalone contracting companies under $10 million in gross revenue tend to sell in the range of 0.5X to 4X EBITDA. It’s possible to get more, but the stars have to align just right. Ultimately, the price is whatever a willing buyer and a willing seller agree to.
Do you plan to remain in your business post transaction? Some buyers will want you to stay around. Some will say they do, but replace you six months down the road. You should know what you want to do, and accept that it may not work out.
Do not be surprised when a buyer who wanted your business because it had a strong local brand, decides to change the brand after a couple of years, destroying all of the brand equity you created. Remember, the new owners can do whatever they want. It’s their company now, not yours. Keep repeating that when they make decisions you disagree with.
11. Get Help
Most business owners sell a business once or twice in their lifetimes. The buyer across the table may purchase four businesses in a year, or more. You are at a severe disadvantage in the biggest negotiation of your life. It’s tantamount to a consumer trying to DIY a change out. Get help. Hire a mergers and acquisition (M&A) advisor or, if you are large enough, an investment bank to manage the sale of your company. Brandon Jacob at Contractors Financial Opportunity is an M&A advisor specializing in the service trades.
Do you know what a reasonable hold back is? Are you prepared for an earn out? Do you know how to approach private equity firms who might be interested in your business? Can you create an auction for your company? Are you familiar with “Indications of Interest,” “Letters of Intent,” and “Term Sheets?” Are you ready for due diligence? Will you carry a note? What kind of guarantees should you request? Will you keep equity in the business, post transaction, as a minority owner?
If you cannot answer the questions above, you need help. The help will not come cheap. Most M&A advisors and I-banks charge a monthly retainer and a “success fee” or commission on the sale. Their role is to help you market your business, negotiate, and advise you along the way. As a rule, they will increase the sale price far more than what they charge, making it money well spent.
Without help, you are likely to find yourself across the table from someone who not only has more experience and knowledge, but who has a stronger negotiating position. Your choice is to accept the buyer’s offer or walk away.
By contrast, if your business is well marketed, your M&A advisor or I-banker might be able to pit one buyer against another to increase the price. This gives you the best chance to top industry averages and exceed a 4X multiple. Plus, if one buyer gets squirrely during due diligence, there’s a backup.
12. Screw Your Head on Straight
Selling a business is emotionally tumultuous. It is like putting a child up for adoption. Can you handle seeing someone else raise your baby?
Not only is selling a business emotionally charged, it does not occur swiftly. Expect it to take the better part of a year, and maybe longer. You have to handle the stress of the sale over a long period of time, while keeping your business running smoothly.
Do not be the business owner who balks at the eleventh hour because he could not let go. Make sure you are ready. Make sure you know what you want to do after the sale. Even if you stay on, post transaction, your role will inevitably change.
For the ultimate help in crafting a profitable exit strategy, consider the Service Nation Alliance. Call 877.262.3341 to learn about the locations for upcoming Success Days, which are complementary day long business building seminars for contractors. For more information, email [email protected].