By Jeff Harkness
Right now your phone is probably ringing off the hook with every “business broker” and “deal guy” saying they have a deal for you. Sound familiar? Are you really ready? The industry has been buzzing as word spread about a pending mega deal between two industry household names. While we will continue to monitor the “opportunity or fallout” regarding this and other deals, the fact is, activity is picking up and so are business valuations. What information can you trust? How do you evaluate a “sale” pitch for your company? Ask for help and as the economy continues to improve think about a 12-24 month window for planning an exit. Here are several key factors to consider:
- Revenue– Business mix still matters. More than 60% of your revenue should come from maintenance and turf-care contracts. This includes enhancement sales for contract customers. Sales need to be trending up and you should have retention better than 85%. It’s important to be able to present department financial statements showing revenue and expenses. Depth in your sales team (i.e. salesman in addition to an owner) and a strong CRM system are big pluses.
- Earnings– An Adjusted EBITDA (Earnings before interest, taxes, depreciation and Amortization plus Add-backs) of 15% or better really puts you in the driver seat. This is an easily definable equation with the right guidance. It’s important to understand what “add-backs” are legitimate and defendable. You must “recast” your operating profit for each fiscal year including the most recent trailing 12 months. Your 2014 and 2015 projections must be defendable. This means don’t tell me you are going from an adjusted EBITDA 12% to 18% in one year!
- Strong Balance Sheet: Low debt and strong working capital will enhance the amount of total purchase price you net. Capital, in excess of a working capital requirement, (5-8% of revenue), could be added to your purchase price. This is a highly negotiable item and often times where sellers leave money on the table.
Don’t underestimate the negative impact of an old fleet and worn out equipment. Buyers will eliminate some or all of a depreciation expense (add back) if they need to make large purchases to update your fleet and equipment. You should be spending a minimum of 2-3% of revenue on fixed assets to maintain a good fleet etc.
- Secondary Markets: Small to Medium sized markets are getting interesting and could be attractive to the right buyer. Less competition from the “Big boys” on labor resources, pricing and quality of service, makes operating a branch or satellite in a smaller market more appealing. Don’t discount your opportunity to get something done just because you are not in Texas, Florida or California.
- Cost of Procrastinating: We have seen this cycle before. Those of you who believe your window is 3-5 years out need to consider and calculate what you actually gain in dollars by operating longer. Items which cost you purchase price dollars in a deal with bad timing include: tax increases, erosion of valuation multiples, fuel costs increases, insurance issues, singular buyer, and limited availability of labor to support growth.
- 6. Continued Role of Owner: Plan on signing an employment agreement for 1-3 years. It’s important mentally that you are ready to work for the buyer. Smooth customer and employee transitions are a must and you will be the expected facilitator to do so. This is mentally exhausting and you will have differences of opinions and philosophies. Don’t underestimate the difficulty of this task. Your deal structure will be a key here for piece of mind.
Conclusion– Exiting your business is emotional and difficult. Put together a plan that quantifies your options and takes emotion out of the equation. Now is the time to get started with a simple business valuation and net cash projection. Deal structure is super important, meaning, when and how you will get your money and with what strings. Timing is everything as they say, but be cautious of jumping in if you don’t understand the game or know your company’s value equation.