For Sale By Owner
This article is the first in a two-part series on acquisitions. Part two will advise building service contractors when buying another company or division and will run in the September issue of Contracting Profits.
Starting and running a successful contracting firm takes skill and savvy. When the time comes to sell that company, or a division of it, building service contractors will need as much business acumen as ever. From finding a buyer to getting the paperwork in order, the selling process is long and arduous. To get the most out of the sale, BSCs must be sure they understand the process before it begins.
Deciding when to sell
The first, and often most difficult, step of selling a business is deciding if and when the time is right. There isn’t just one reason to sell a business. While retirement is a common impetus, BSCs also decide to sell because of divorce, relocation, disputes with a business partner, or to try their luck in another industry. When it comes to selling off a division, most BSCs are motivated by either financial or strategic goals.
“There are a thousand possible reasons and it is a conclusion that one must come to by themselves,” says Gary Penrod, owner of Gary Penrod & Associates Inc., a building service industry-specific merger and acquisition firm based in Hilton Head Island, S.C. “You can seek advice, but you have to feel good about it.”
Although the why of selling a business is subjective, the when is not. As the saying goes, get out while the getting’s good.
“It is always better to sell when you are on top of your game, when the company has a good track record, and all the ingredients are in place,” Penrod says. “Sell your company when it’s headed up as opposed to flat or headed down.”
It’s tempting to hold on to a business or division until sales begin to dip. Who would walk away from a moneymaking operation? Smart sellers would, according to the experts. If there is even the faintest desire to sell, take stock of the profitability and plot a course to strike when the iron is hot.
The additional profit of selling a successful business or division usually exceeds the extra dollars business owners would have earned while waiting out the downturn. More importantly, if they wait too long to sell, they may not find a buyer willing to inherit their sinking ship.
“We’re not in the market to buy fixer uppers,” says Chris Clifton, who sold his company, Paradise Building Services, to Marsden Holdings in 2005 and is now involved in acquisitions for Marsden in his new role as president and COO of Marsden Building Maintenance LLC. “We’d rather pay a fair price for one that’s successful than buy one that’s in trouble at a great price and then have to work on it.”
Another reason to sell before a business passes its prime is that many buyers consider it an added bonus if owners will stay on board during (and after) the transition. That’s because they bring special attributes to the table that are difficult to quickly reproduce — established client and employee relations and an intimate knowledge of the business’ workings.
“You can probably strike a deal to get better sale proceeds because there’s less risk involved for the buyer,” Clifton says. “It’s not just the earnings we’re buying. The acquisitions we’ve done the best on are those where we had the fewest changes and previous ownership stays on.”
Setting a price
Once a BSC has made the decision to sell, the first item on the agenda is to determine what his or her company or division is worth.
Not so long ago, this was a simple formulaic decision based on some multiple of profits. Things are murkier these days, experts say; establishing a price is an objective and subjective venture.
“It’s not like a used car where you can get the Blue Book value of it,” Penrod says. “It’s much more subtle and more personal.”
Most buyers multiply earnings before interest and taxes (EBIT) by some number (a typical range is 3 to 7) to come up with an offer price. There are other factors, however, that can raise or lower the bid.
The type and quality of contracts is a factor, as are market penetration and assets held. Where a business is located is also important; one city may be a buyer’s market and another a seller’s market. Or, if an out-of-town BSC wants to expand his reach into the seller’s particular city, the seller can demand more money than if he or she sold to a local BSC simply looking to reduce competition.
“At the end of the day, like the sale of a house or a car, it’s worth what a buyer will pay for it,” says Vince Elliott, president and CEO of industry consultant Elliott Affiliates in Hunt Valley, Md.
Pricing a business or division should also account for professional fees, such as accountants and lawyers, which must be paid to complete the transaction (this can easily equal 5 percent of the sale price).
What shouldn’t be a factor in pricing is emotion. Unfortunately, many BSCs are unable to be objective about their business and price it too high because of pride or ignorance. Therefore, it is prudent to hire an independent third party to help at this stage and throughout the selling process.
“It is recommended that the experienced financial advisor be used,” says Jim Peduto, president of Matrix Integrated Facility Management in Johnson City, N.Y. Peduto sold his family-owned distributorship in 1996 and has made many acquisitions for his new contracting cleaning firm. “If your accountant does not have extensive experience in valuing businesses, find one that does.”
To get the most money for a business or division, BSCs should spend some time prepping it for sale. In addition to making the facilities sparkle, the pre-sale process should include getting the facts and figures in order.
BSCs should assess their books and try to recast financial statements in a way that highlights profits and growth. Examine contracts, including any leases, to be sure all terms are clear and, hopefully, extend well beyond the projected handover date. Put policies and procedures in writing and create a manual for how to run the business or division.
“The objective is to position the business in the most favorable light to prospective buyers,” Peduto says.
Keep this process quiet until it is certain that a sale is imminent. At that point, inform employees of the intentions so they don’t hear about it through the grapevine. It’s important to not scare off employees, who are part of the business’ assets
Finding a buyer
With a business or division fully prepped for sale, the only thing left to do is find a buyer. Unless owners are passing the business down to a child or a buyer has already approached them, finding a qualified, compatible buyer can be difficult.
Business owners can go about it the old-fashioned way — placing ads in newspapers or trade publications or calling potential buyers directly — and hope for the best. While this approach works for some, it is definitely hit-or-miss. To speed up the process or to better ensure finding an appropriate buyer, many sellers turn to intermediaries for help.
“You can hang out a shingle, but who’s running your business while you look for buyers?” says Elliott. “That’s where the merger and acquisition person comes in. They will pick up the phone and canvas for you.”
An intermediary not only scouts for potential buyers, but they also act as an ally during the negotiations. As an outsider, they can objectively tell owners when to walk away from a tempting but unsatisfactory deal, or inform when it’s time to bite the bullet and accept less than expected.
Merger and acquisition brokers are not inexpensive. Depending on the deal, the fees are generally from 1 percent to 5 percent of the purchase price (the larger the transaction, the smaller the fee), some or all of which the seller can recoup in the sales profit.
“At the end of the day, [intermediaries] earn that fee with the guidance they give,” Elliot says. “Sellers who try to do it all themselves as well as run the company day-to-day are trying to save a few pennies and it costs them dollars.”
To find a reputable intermediary, ask a lawyer or accountant for recommendations or go to professional associations for referrals.
Closing the deal
Once owners reel in an interested buyer and come to mutually acceptable terms, it’s time to get everything in writing. Whether BSCs are selling to a large conglomerate or passing the business along to a child, it’s important to take this step seriously.
First, both parties sign a preliminary agreement, or letter of intent (LOI). Although not binding, once signed the LOI stops the seller from talking to anyone else about purchasing the business or division.
Only after an LOI is in place should the parties begin due diligence. This is the buyer’s opportunity to verify all of the information, financial or otherwise, that the seller has presented. Although this is done at the buyer’s expense, the seller must provide all the necessary documentation, which may include information on taxes, payroll, inventory, regulatory compliance, legal liabilities, capital assets, customer accounts and more.
“Most sellers aren’t well prepared to sell their business,” Elliott says. “A lot of times these deals get dragged out for an extended period of time because they don’t have the right information. Even for small companies, the amount of information you need is pretty much the same as a big business.”
Sellers can also perform due diligence on the buyer to make sure that the person or company buying your business or division is qualified and capable of successfully running it.
The final step in the arduous process is when both parties sign a binding sales contract. Even if owners do not hire an intermediary to help navigate the selling process, it is critical to have a lawyer, accountant and banker help with all of the documents involved.
“Putting together a very thorough and as-close-to-perfect-as-possible closing document was a challenge,” says Clifton of the 2005 sale of his business.
All told, the process of selling a business usually takes four months to a year or longer.
Becky Mollenkamp is a business writer based in Des Moines, Iowa. She is a frequent contributor to Contracting Profits.
Editor’s Note: Jim Peduto will be speaking at ISSA/INTERCLEAN® North America in Orlando, Fla. on Tuesday, October 23. His presentation titled “How To Construct a Manageable Budget” is sponsored by Contracting Profits.