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Which Way Out? Selling Your Business

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Hardly a week goes by that Debbie Risher isn’t approached about selling her business. Risher, who has been president of Belair Engineering and Service Co., Inc., in Bowie, MD, for nearly 25 years doesn’t have a succession plan in place, but she’s working on it.

“We talk about different scenarios, but we don’t know how it will all work out,” says Risher, whose daughter has worked at Belair, but isn’t interested in owning it. Reflecting on her own experience, when she purchased the company from her father, Risher notes, “It would be best to have a consultant come in to give legal and financial advice about the whole process.”

Fred Silberstein is one of those consultants, and he recommends taking one step long before you pick a retirement date. “If you don’t already, start adhering to Generally Accepted Accounting Principles (GAAP),” advises Silberstein, a Certified Public Accountant and president of SF&P Advisors in Boca Raton, FL. “Having a balance sheet that has proper accruals, such as an allowance for doubtful accounts, deferred revenue for service contracts, and a warranty reserve provides for a consistency in valuations. This will allow your business to be compared to others.”

Being GAAP-compliant will also simplify and speed up the sales process when you decide it’s time to start another chapter in your life. Otherwise, adjustments to years of financial information will need to be made during the due diligence phase.

As you get closer to exiting your company, here are additional recommendations:

Have a post-ownership plan. No matter what your motivation for considering a sale: health problems, family issues, or pure fatigue, think about daily life afterward. “People who have worked their whole lives will have trouble in retirement just sitting around if they are still physically and mentally able,” observes Stan Johnson, who sold his company in 2011 after 40 years as an HVAC contractor. “You need a plan to be productive, and playing golf every day is not a plan!” Johnson, for example, is now employed by the Texas Department of Licensing and Regulation.

Call in the experts. Assemble a team of professionals including a tax specialist, a lawyer, and a consultant experienced in mergers and acquisitions. “Anybody who wants to sell a company would be making a serious mistake by thinking they could handle a sale by themselves and get it right, no matter what size the company,” Johnson believes. “You’ll be asked many questions and have to provide thousands of pages of documents. Having that expertise on hand is essential.” Additionally, experts working on your behalf can mediate disagreements that may arise during negotiations.

As Silberstein notes, “In many cases, the buyer and seller end up working together after the deal closes, so it’s good have a bridge, someone who understands your position and can help smooth out any issues.” Although the process is simpler when the buyers are family members or employees, “a transaction is still a transaction,” Silberstein emphasizes. “You still should have legal advisors to document everything properly and accountants to make sure the numbers are correct.”

Identify your priorities. Would you prefer to maintain some stock in the company, continue to work there in some capacity, or not sign a non-compete clause? While it’s natural to focus on price during the sales process, other factors often come into play. All parties should discuss their expectations before the execution of a non-binding letter of intent, which summarizes the transaction’s terms. For example, to ensure a smooth transition, Risher’s father stayed on part time for the first 18 months after selling her the company.
In Johnson’s case, he was less concerned about the sale price and more about the legacy of Stan’s Heating and Air Conditioning, the Austin, TX, company his father started in 1954. “If the company was going to be sold and I was staying in the area, I wanted the business to go to someone who would do a good job with it and honor the legacy. I didn’t want to sell to someone I didn’t respect,” Johnson explains. He considered numerous options, including approaching a group of five senior employees about buying the business. In the end, Johnson sold to another local contractor he’d known for a long time.

Figure out what it’s worth. With the industry currently in an active buying cycle, you probably have a ballpark idea of what your business might sell for. But every deal is different, so guard against inflated price expectations. “What you think something is worth is totally different from what someone else thinks. That’s why I would recommend doing a valuation even if selling to a family member,” says Risher. In fact, without an objective valuation to rely on, her father probably undersold the company when she purchased it from him, Risher adds.

According to Silberstein, a realistic valuation looks at historical financial statements and working capital as well as EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) times a multiple. That multiple is typically influenced by factors, such as the market, historical, and projected growth trends, and management’s “bench strength.”

Don’t be discouraged if your company is small. “Although I’ve seen people just close down a business, it’s not advisable because they are probably throwing money out the door,” Silberstein says. “If you’ve kept good books and records, and have a solid database of customers, that information is valuable to someone in the market.” For example, a net asset deal might be negotiated if the business is losing money, or the valuation might be based on a price per customer.

Exercise patience. Financial due diligence, which is similar to an audit, operational due diligence, and crafting the asset purchase agreement will take months and at times seem never-ending. Silberstein recommends getting serious about a sale about one year before you’d like to close the deal.

Because of the extra work involved, Risher suggests timing a company’s handoff to coincide with a slower business season, such as spring or fall.

And if the deal doesn’t go through? Hang in there, advises Johnson. “Don’t think the first deal is the one you have to make. If the first one doesn’t work out, go right back to looking for another potential purchaser,” he says.

Be ready to let go. Having introduced some new ways of doing things after stepping into her father’s shoes, Risher observes, “It’s tough to see someone making changes to what was your company, but you have to let the new owner run the business. Give advice only when you’re asked.”

“If you’ve sold the company, move on,” emphasizes Johnson, who saw the new owner of Stan’s Heating and Air Conditioning fire several employees and change the business’s location. “Yes, there are days when I have regrets about selling the company, and that lasts about two minutes,” he adds. “I couldn’t have asked for a better buyer. The place is humming, and they’re doing great.”

Posted In: Management, Money

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