Thursday, 31 January 2008 17:00

Steps to Take Now If You Plan to Leave Your Business in Three Years or 30

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Dan Bailey was facing a situation that many in the collision repair industry have: how to handle the future of the family’s business.
 

In 1998, Bailey and his older brother were operating three shops in the Midwest. Bailey’s brother, the majority shareholder in the company, was less actively involved in the business and his children were grown. Selling the business could provide him the retirement he’d worked to achieve.


But Bailey still had two kids in college. He certainly wasn’t opposed to selling the business – but knew his working days were not yet over.

 

DRP Agreements: The Fine Print

 

Check the fine print on the direct repair agreements you’ve signed, and you’ll likely find they become null and void if your business is sold. So how can you ensure a buyer that flow of work will continue?


“There’s definitely risk,” said Dan Bailey, chief operating officer, CARSTAR, who during his career has been involved in both the sale and purchase of collision repair businesses. “The insurance companies are all about stability. They don’t want a big change.”


Bailey said some buyers and sellers have dealt with this risk by keeping the former owner on in some capacity during a transition period, until insurers are comfortable that the company will continue to conduct business as it has. The seller can also agree to sit down with the insurer and buyer over lunch, for example, a sort of “passing of the relationship.”

 

“That’s one of the things that we’ve found that has worked pretty well.” Bailey said. “But in today’s (direct repair) contracts, there’s not a way that I know of to eliminate the risk; all you can do is just reduce it.”

While not every shop owner will face Bailey’s exact set of circumstances, the transfer of the business, whether for retirement or to pursue other opportunities,  is inevitable for all owners. Bailey and others who have gone through the process say that how smoothly – and profitably – that transfer occurs is largely driven by preparation.

 

“You really have to start thinking at least three years ahead of time to get full value out of your business,” Bailey said. “And a lot of what determines how much your business will be worth is established even far earlier than that.”


So whether retirement or the sale of your business is in your short-term sights or longer-term plans, here’s a checklist of activities you can begin right now to make a graceful – and financially rewarding – exit from your business.

Scout out potential buyers


Jerry and Liz Burns started their exit strategy planning in 1994 almost immediately after opening their collision repair business, Automotive Impressions, Inc., in Rio Rancho, New Mexico. The Burns have worked to prepare their four sons for wherever their careers may take them – including, they hope, one day running a second-generation collision repair business. They’ve encouraged their sons to get college degrees, for example, and have had them work not only in the shop office but also in production.

 

Such grooming of a potential successor is just as important for the shop owner who foresees eventually selling to an employee. Bailey and his brother, on the other hand, chose a different buyer for their business: a large chain of shops.

 

“We’d been a CARSTAR franchise, and CARSTAR was one of two companies that approached us about selling,” Bailey said.

 

Bailey said they chose CARSTAR because it offered more potential for him to continue his career close to home. Today, after holding several positions within CARSTAR, including overseeing the company’s purchase of 11 more shops, Bailey is the company’s chief operating officer.

 

Although CARSTAR and shop consolidators are not gobbling up shops at the rate they were just five years ago, there are plenty of other potential buyers shop owners shouldn’t overlook.


“Maintaining good relationships even with competitors can pay off when you’re ready to sell,” said one former shop owner who sold his business to another shop owner who was looking to join the growing ranks of shop owners with multiple locations. “I probably would never have known he was interested in buying – and he wouldn’t have known I was interested in selling – if we hadn’t stayed on good terms through several industry groups.”

Understand value of your business


Part of exit strategy planning involves figuring out what your company is worth. That requires understanding “EBITDA,” or “earnings before interest, taxes, depreciation and amortization.”


Joe Sanders, who sold his two-shop business in Texas to Caliber Collision Centers in the mid-1990s and subsequently was involved in the acquisition of about 30 shops, said the selling price of a business is generally calculated as the company’s EBITDA multiplied by some factor based on such criteria as the stability and growth potential of the company.


“During the height of acquisitions and consolidation in this industry between 1996 and 2001, shops were selling for a multiple as high as even 9, but mostly between 4.5 and 7 times EBITDA,” CARSTAR’s Bailey said. “From what I have seen in the last couple of years, that multiple today is usually between 2.5 and 5.5.”


For a formal valuation of your business, expect to pay at least $3,000 for a professional appraisal. To find a business appraiser in your area, contact the American Society of Appraisers (www.appraisers.org, 800-272-8258), or the National Association of Certified Valuation Analysts (www.nacva.com), 800-677-2009).

Improve value of the business


Although EBIDTA is the core basis for determining a businesses’ value, it’s important to realize you can have a big impact – even years ahead of any sale – on other factors influencing your company’s value. For example, a highly-visible location, a renewable lease, a stable team of employees, and an efficient shop layout under one roof – rather than occupying multiple buildings – will likely make your business more appealing to buyers.


Annual sales volume is also important, but so too is where those sales come from. It can be a bit of a red flag if any one source of work – one insurer, one dealer, one fleet – accounts for over 20 percent of the shop’s work,” Sanders said.

Get your books and building in order


Most businesses are operated to minimize reported earnings. To a buyer, this may make it seem like the business is overpriced. Bailey and Sanders say there is little as important to making a sale successful for both buyer and seller than having 3 to 5 years of very clear, accurate and complete financial records. Cash sales that aren’t recorded, for example, or personal expenses identified as business expenses will only hurt the seller, they say.


“If you have a real good performing shop and they use a multiplier of five in determining the value, that $12,000 in cash sales you pocketed last year just cost you $60,000 off the selling price of your business,” Bailey said.

Most buyers have an idea of the types of equipment they’ll want to have to operate the shops they acquire. So while the primary reason to buy and maintain good equipment is to help you generate revenue, it can also help improve the value of your business. Selling or disposing of unnecessary equipment or other assets can also simplify the valuation and sale. Even maintaining such things as landscaping, parking lot striping and sealing, and interior ceilings and lights can improve the value and saleability of the business.


“And make sure the shop’s office technology is updated,” Bailey recommends. “Not having up-to-date computer hardware and phone systems, a shop management system, and high-speed data lines can make a difference of one-half to a full point in the multiplier.”

How to structure a sale


Someone wishing to buy your business is likely to offer one (or a combination) of three things: cash, payments or stock. Which of the three you should accept is largely driven by a range of factors: your tax and cash situation, how quickly you need to sell, or whether you’re selling to a relative or outside party.


Obviously, a cash sale offers the least risk, and provides the means to cover your tax obligations, which may be up front in any sale. Most buyers, however, will have difficulty lining up enough cash or financing to cover the entire cost; carrying a contract for some of the balance offers you potential interest income in exchange for taking on some risk.


A buyer may also offer you “stock” in the larger company they are creating with the purchase of your business. This isn’t an option Bailey recommends; if the buyer’s company fails, you’re left with worthless stock.


“I would not sell a business for less than 50 percent up front in cash, and I wouldn’t take any stock,” Bailey said. “You’ve worked all your life to build that business to where it is, so you need to get paid for it. If you get 50 percent up front, a 10-year lease at market rates, and a clause that if they don’t fulfill the contract, the business and assets come back to you, the worst that can happen is you’d have to go back to work or resell the business again. But in the meantime, you have a chunk of cash up front, the interest on any payments they’ve made, plus your lease payments.”


Develop a team of advisors


There’s obviously no shortage of legal and tax issues associated with selling a business, so it pays to have an experienced attorney and CPA or tax advisor to assist you. The longer you’ve had relationships with these advisors, they better they will understand your business and personal goals. But also keep in mind that your current CPA or attorney may not have experience with business transactions, so it can pay to ask them to bring in outside help.


Also ask any business brokers you are considering about their experience with sales of businesses such as yours. And remember that while a broker may be able to help you determine an appropriate selling price, not all have had formal appraisal training or certification, and their valuation may be influenced based on their interest in selling the business.

Plan for the unexpected


Lastly, it’s important in your exit strategy planning to prepare for some unexpected or worst-case scenarios. Make sure you have adequate life or disability insurance, for example, to help you or your heirs in case you are forced to exit your business unexpectedly. Create a will and make your wishes and plans known – in writing – to help avoid family or legal squabbles from destroying the business you’ve worked so hard to build. And don’t rely solely on your business as your retirement nest-egg. Develop a plan – and savings – that offers you some options as to when – and for how much – you sell and exit your business.

John Yoswick is a freelance writer based in Portland, Oregon, who has been writing about the automotive industry since 1988. He can be contacted by email at jyoswick@SpiritOne.com.

 

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