In the last year, Beacon has seen a rise in company buying and selling activity. This cycle is beginning to resemble the high-price multiple run witnessed in 2005-07. The activity is fueled by the return of the profit. Larger companies and other private capital are seeing closely held businesses as an alternative means of achieving greater returns on their investments. Banks are also beginning to loosen their underwriting criteria, unleashing low-interest loans.
These trends usually come in waves lasting six to eight years. History dictates that a possible crest to
the wave will occur in the next two or three years. One could speculate that baby boomers are on the verge of the next best window for selling their businesses before another recession. Missing this window could put many early baby boomers in a difficult position 10 years from now.
Most contracting companies sell via management buyout or gifting to family. Why? It’s difficult for buyers to predict the consistent reoccurring revenues/profit because of the cyclical economic nature of the construction industry. There are regional, national and international strategic buyers for solid roofing companies of all sizes. However, if you’re considering a sale to an outside buyer, you need to go into this with your eyes open.
A study by the U.S. Chamber of Commerce revealed that fewer than 20 percent of companies that go to market actually sell, and closer to 10 percent with contracting companies. You can increase your odds of success by getting your company “sale-ready” with the help of an adviser. Early preparation and assistance from a mergers and acquisitions adviser would include:
- A market study to review your company’s financial strength, efficiencies, competition benchmarks and potential buyers based on your size, location, niches and synergies.
- A due-diligence review to eliminate all the distractions and issues that could kill a deal.
- A market strategy to position the company in the best possible light to a buyer.
The 10 keys below are sound business practices in preparing your company for a sale and can add value to your company whether selling to a competitor, investors, employees or management. These keys focus on an external sale, with a few references to the internal sale.
Get your company appraised by an accredited business appraiser. This will allow you to determine and understand what creates or detracts value in your business. Remember each path (sale, private equity, ESOP, management buyout) has a different value and ramifications that can erode your proceeds by up to 50 percent. An accredited appraiser can show you the company’s value, and how the various classes of assets or stock will be taxed.
Bottom line, if the valuation does not represent the seller’s expectations, then the buyer will have the opportunity to adjust his post-exit lifestyle or stay in the business and implement changes that will build value.
2. Jump Start
Start the sales preparation process by meeting with your adviser a year before you are ready to sell, giving you the opportunity to properly align all the moving parts in the sale process. Much like selling your house, you will need time to “dress up” the business so it looks attractive to potential buyers. That includes cleaning up the financials. This will be critical in successfully completing the due diligence process with minimal adjustments by the buyer.
3. Don’t Go it Alone
Don’t deal with potential outside buyers by yourself. For many, transitioning a business is an emotional process. A lot of time and frustration can be controlled by an exit planner or an adviser.
Replace yourself with a team that can operate the company without you. This will require systems that measure results in consistent quality and efficiency that affect the bottom line. Whether you are selling to an outside buyer or internally to employees, you will need a strong management team to make your company more valuable. Remember what the buyer wants in your business is not the equipment, the facility or the products. He wants the cash flow, and your people will be instrumental in helping transfer that cash flow to the buyer with reduced risk.
Consider locking in key managers before going to market with something like a deferred compensation plan that creates golden handcuffs to secure the managers after the sale.
5. Change the C-Corp to an S-Corp
Consider making the election to change your C-Corp to an S-Corp. There are distinct disadvantages to transitioning your business while being a C-Corp: one of them being the double taxation inherent in the C-Corp structure; and the other being the built-in gain tax that stays with a corporation for 10 years. The built-in gain tax essentially eliminates the capital gain tax treatment for an S-Corp that was previously a C-Corp. Early planning will help you avoid this pitfall.
6. Recast Your Earnings
Private owners need to clean up their books and recast their financials to reflect normalized earnings by adding back discretionary expenses. This can include salaries/bonuses paid to family members, business vehicles, memberships, travel and entertainment.
These are items that would not necessarily be incurred by a buyer and will lead to a “normalized” earnings potential for the business. If at all possible, these expenses should be eliminated from the financials altogether because these adjustments are usually a point of contention with the buyer as they are often difficult to prove.
7. Sell the Opportunity
Your financial strength and future cash flow are central in the valuation and pricing of your company. However, you must be able to tell a story in your marketing position that is clear, measurable and defines your competitive advantage. This is an aspect of the sale that can increase your “multiple” for a higher price.
8. Clean Up Any Distractions
When you sell a house, you take care of things before the sale that you may have learned to live with but that would distract the buyer. The key is to clean up any “maintenance” distractions and disclose everything that could cause any surprises that could kill the deal.
The buyer’s due diligence process will examine a lot more than just your financials. They will look into every corner of the business, including key contracts, supplier agreements, legal agreements, insurance policies, company health and pension plans, human resource policies, corporate records/minutes, etc.
The key is to perform the pre-due diligence before going to market. The adviser’s role is to present the business from the buyer’s eyes to make everything transparent.
9. Be Prepared to Negotiate Terms
Every deal is different, but many items are negotiable and will determine the price.
The devil is in the details. While you may think you are getting a good deal, the details of the transaction will play a critical role into how much you will actually receive.
10. Pedal to the Metal
The buyer does not want to see shrinking margins or a loss in sales during his due diligence review. The owner needs to continue driving the business and let the professionals drive the sales process and manage the buyer. It’s best to keep the owner at arm’s length from buyers until the critical negotiations period later in the process.