- What To Consider Before Selling Your Small Business
- Building Service Contractors Must First Get Their House In Order
Are You Emotionally Ready To Sell Your Business?
When it comes to valuation, many BSCs don’t know where their companies fall in terms of saleability. With consolidations on the rise, it should come as no surprise that buyers want the biggest bang for their buck — but that doesn’t mean they are looking at the biggest numbers. Many buyers seek out smaller regional companies with a loyal customer base. It’s all about profit reliability and buying a company that will help them get the maximum ROI.
Still, it may pay to wait until a janitorial services company hits the $1 million dollar mark before selling. That’s the number, before EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), that generates the most interest from buyers.
In his article “What’s So Special About the Million Dollar Mark?” Graddon says: “Getting to a million in profits means you’re not only getting a higher multiple but also applying your multiple to a higher number. A company with a million dollars in EBITDA would likely command at least five times that figure, or $5 million. So the company with $1 million in EBITDA is five times bigger than the $200,000 company, but almost 10 times more valuable.”
Graddon says buyers often account for frictional costs — such as banking and legal fees — which are the same whether a business is valued at $200,000 or $2 million.
When a seller is making more than $1 million in profits, they are also attractive to bigger buyers, who can afford to take the risk of an acquisition. Graddon points to the 5/20 rule, where successful deals typically appear between an acquiring company that is five to 20 times larger than the target company.
For smaller acquisition companies, he compares it to placing a bet and hoping the purchase results in a good hand.
“[Acquiring companies] need to look for a company with enough girth to move the needle,” says Graddon.
Meeting with an M&A advisor and following through with business enhancement strategies can help BSCs determine their current valuation.
Be Emotionally Ready
Numbers aside, BSCs also need to consider if they are emotionally ready to put their janitorial business on the market, says Peter Holton, a managing director at Caber Hill Advisors, Chicago. He says sometimes it’s a delicate issue that many BSCs would rather avoid discussing.
“Finance and profit and revenue are all really important, but it’s the non-financial legacy that gets things moving — financial just starts the conversation,” says Holton. “The business is their identity. And sometimes they’re not ready to hang up their cleats.”
The first thing Holton helps BSCs determine is why they are selling the business — and what their plans are for the “afterlife.” He adds that nearly 80 percent of businesses fail to sell because of owner’s unrealistic expectations.
Holton advises clients to first talk to their significant other, to meet with a wealth manager and then to get a valuation before considering a sale.
“Those three things, in that order, will make for a smoother transaction and a successful sale,” he says.
If a client is on the verge of retirement, for example, he or she needs to be sure that the sale of the business is going to fund his or her lifestyle.
“Otherwise, they could bleed out in three to five years and have to go work for somebody else,” says Holton.
Once Holton believes his client is ready for a sale, he gets to work on creating a customer information referendum, marketing plan and negotiating deal term structures. Then it’s a waiting game. It won’t happen overnight.
Graddon can relate. After taking the time to prepare his business for acquisition, he successfully sold his janitorial business after owning it for 36 years. Now, he’s helping his fellow BSCs do the same.
“Many BSCs who are selling, started with a mop and bucket,” says Graddon. “When they are actually building a company, they need to look at it as an asset. The thing that makes it more valuable to an owner, will also make it more valuable to a buyer.”
Stephanie Beecher is a freelance writer based in Milwaukee. She is a former Associate Editor of Contracting Profits.
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