How to Sell Your Business for Top Dollar
© 2007 Door & Access Systems
Publish Date: Winter 2007
Author: Bruce McConnell
How to Sell Your Business for Top Dollar
Sustainability Is the Key
By Bruce McConnell
If you’ve been contemplating how to best prepare to sell your business, the word “sustainable” should be in your every thought.
To maximize the transaction’s value to you, you must be able to (1) identify the key elements of your success and (2) demonstrate that these elements will be sustainable under the new ownership. These key elements are typically your business’s finances, resources, personnel, and processes.
You need to be able to tell your story so that the new owners can see themselves stepping in with little difficulty. The effort needed to verify sustainability will vary depending on whether the potential buyer is an employee, a family member, or an outsider. Having your ducks in a row will help them secure the financing to buy your business.
The goal is to maximize the value of the business. That value is directly related to the earnings an owner can derive from the business.
Why Garage Door Companies Are Unique
Garage door businesses are different from most businesses.
· Most door companies don’t require many assets to generate profitability, but rely on turning inventory numerous times per year.
· The company’s value is related to customer relationships and the ability of management to consistently be paid a fair price for goods and services.
· Door businesses often have few managers and depend on the owner for sales.
Valuation for door businesses is based on cash flow, defined as “adjusted EBITDA” (Earnings Before Interest, Taxes, Depreciation, and Amortization). EBITDA is adjusted for certain items that are within management’s discretion. Once adjusted EBITDA is established, garage door dealerships generally command a valuation of three to six times the adjusted EBITDA.
Goal: Maximize EBITDA
Thus, the goal of a seller of a garage door company is to maximize adjusted EBITDA and to do it in a way that the adjustments and the EBITDA are consistent, sustainable, and able to withstand investigation by an outsider.
In some cases, this will change the way that the business has been managed in the past. Most private businesses are managed with the goal of minimizing taxes. This is accomplished by increasing the costs and expenses of the business to have it bear what otherwise would be personal expenses of the owners.
Examples include management bonuses, expenses of automobiles, travel, clubs and organizations, household repairs, home offices, etc. This essentially minimizes EBITDA.
However, when preparing your business for sale, you can legitimately add all of these costs back into the reported EBITDA of the business to determine value. They are within management’s discretion and would not be borne by a buyer. By adding them back to determine adjusted EBITDA, you can determine your business’s real productivity as an economic engine.
I should note that some buyers and financing sources balk at that methodology, saying that these “add-backs” have not always been taxed as income to the recipient. To address that concern, if your business is likely to be valued below $1 million (and, therefore, may be subject to the requirements of a buyer backed by an SBA lender), you should consider planning ahead by two to three years. During that “get-ready” period, you should consider re-characterizing these discretionary payments as compensation, or don’t pay them out at all.
The overall tax burden for this get-ready period will increase, but it will erase any questions about their acceptability as add-backs once the sale process begins. The good news is that the owner will be compensated by three to six times the value of the adjustments once they are accepted.
Have a Plan Already in Place
Make sure you have a current financial plan that incorporates the key elements needed to support sustainability and value. When a prospective buyer reviews your business, the plan provides additional assurance that you have been operating with a purpose and direction. Building confidence in this manner greatly helps buyers envision how they will assimilate themselves into a well-structured and well-run sustainable environment.
Bruce McConnell, a financial consultant (815-288-3556, firstname.lastname@example.org), has been helping door and access systems dealers since 1992.