Often, small business owners such as those run by irrigation contractors get to the end of their run with the industry and think they have a big book of business to sell. It turns out all they really have to offer is a customer list as opposed to a company.
Many factors come into play when selling a business, notes Andrew Yeghnazar, managing partner, Orbis Management, Pasadena, California.
“You and I can do everything right, yet situations and circumstances outside your control can end up having a significant impact on the final transaction,” he says. “These can be both negative and positive.”
Industry experts say factors currently influencing the mergers and acquisitions landscape include higher interest rates, inflation and supply chain challenges.
Check your assets
As a starting point for developing a plan for acquisition, understandable “normalized” financial data is required, such as a balance sheet and an income statement at a minimum as well as a chart showing the business’s seasonality, says Garry Bartecki, managing member of GB Financial Services, Plano, Texas.
“Normalized data is adjusted for amounts the current owner takes out in salary and benefits over and above an amount that is normal for the industry,” Bartecki says, adding that covers elements such as vehicles, vacations and benefit programs.
It could also include one-time events that are not normal and impact profit either positively or negatively, such as a location move to open a new branch. “Financial data should express an estimate of the cash flow the buyer can make going into the deal,” Bartecki says. “Fixed costs should be scheduled — like leases, rent and note payments.”
Before releasing any revenue data, ensure the person presenting themselves as a buyer is able to do the deal and is not merely looking around to see what others are doing, he adds. The trick is to provide financial data without disclosing your customer list, employee list and other data so that someone looking to buy isn’t able to get meaningful data to solicit customers and employees.
Sincere buyers have a bank and attorney ready to prepare and review paperwork and provide funding, Bartecki says.
“You have to be careful with buyers in your area of business,” he adds. “Out of town buyers will normally be ready to do something. Have an accountant prepare your financial data because they know what numbers they want to see without disclosing details. They will also want to see tax returns, but this is after you have something going with them. Make sure you are current regarding state and local taxes.”
Use a set of industry metrics as a template to prepare statements to which industry results can be compared, Bartecki says.
In assessing sale viability, a business owner or president should determine whether they want to stay on, says Joe Higgins, a Harvard Business School executive in residence.
“How critical are they to maintaining current and winning new business? Is there a successor in the wings?” he adds.
In terms of what business owners need to do with their team, Higgins points out “a sale process can be very disruptive to daily business. There is a time and place to inform only certain senior members of the team, whom a buyer will probably want to meet as part of their diligence.
“If a sale is imminent with a scheduled close date and depending on the owner or president’s plans, that is the time to announce more broadly across the company.”
Consider the work
Before heading into negotiations with a potential buyer, it’s important to start with a real look at the current employees. Considering your team is critical among the steps needed to be taken to have something real to take to the negotiating table, says Yeghnazar.
“The team that got you here may not be the team that will get you to the exit point,” he says. “You may need new or specialized outside help.”
Most new owners want a “going concern” (an accounting term meaning the company has the necessary resources to continue operating indefinitely until it provides evidence to the contrary) and want all employees to stay in order to achieve business goals, says Higgins.
There needs to be a balance of experience and zeal with the team, Yeghnazar says.
“Many companies get rid of experience because it is typically more expensive, but that’s often unwise. At the same time, growth comes from people who are hungry and have drive,” he adds.
As with employees, the goal in terms of clients and accounts is to lessen the disruption and ensure continuity of great service “and perhaps new benefits like investments that the new owner will bring to the business,” says Higgins.
Use a set of industry metrics as a template to prepare statements to which industry results can be compared.
A major issue with small businesses like contractor companies is that many lack discipline in their route to market by providing a wide array of services to an extended audience, says Yeghnazar. Having more offered services and reaching out to a wide set of markets might not always be a good thing.
“Every sale is typically looked at as a good sale, and if a customer has money, they get access to the product,” he says. With a disciplined approach, your chosen channels to market give you more focus from the company’s perspective, as well as better vision and clarity to who the ultimate customer is.
“It is not always easy to introduce process and structure to a channel network years after having worked with them, but if you want to add value to your enterprise, it is essential,” says Yeghnazar. “When you are selling a business, you are also selling the ease to maintain and manage the network — if it is complex and hard to even understand, that detracts value right off the bat.”
That also trickles down to clearly outlined pricing and discount structure, says Yeghnazar.
“I would say in a small- to mid-sized business at least eight out of 10 times the pricing and discount structure is complex and convoluted,” he adds. “This is not good and typically means the organization is also leaving money on the table. This can be a hard exercise which will need to incorporate some tough conversations and pushback from clients and accounts, but it is essential to building clarity and value post-exit transaction.”
Plan now for later
Business owners decide to sell a business for different reasons, says Yeghnazar.
“Sometimes they are well planned out and prepared for, but not always,” he says. “In fact, life happens to business owners just like everyone else. Just because you own a business does not make you immune to outside influences.”
That being the case, having a plan for three, five or any number of years is important because it shows discipline and structure, he adds.
“By being prepared, an owner at least is able to pivot and respond in an informed and intentional way,” says Yeghnazar.
He says as part of his merger and acquisition advisory role, there comes a time when the “good and right thing to do is to encourage a business owner to sell now. And at other times, the good and right thing to do is to encourage them to put on the brakes and get their house in order first before going to the market. It is never wrong to do the right thing in the long run.”
A three- to five-year plan is an “aggressive but authentic view of the potential growth of the business financials,” says Higgins. “Are there new customers? New services? New geographies? All of these provide new growth.”
Such plans demonstrate how a business owner manages costs via pricing increases such as inflation, purchasing power, efficiencies and team turnover metrics, he adds.
“Obviously, the less turnover, the better,” says Higgins.
The plan also provides a visual for a potential buyer to know the competitive context of area of business, including such factors as the number of competitors, how big they are and an evaluation of strengths and weaknesses, Higgins notes.
Any company that is in business is doing and has done at least some things right, Yeghnazar points out.
“People and companies do many things well and great,” he adds. “The key is being able to identify what your organization does great and find ways to replicate and maximize them as part of life’s daily process.
“An organization is only as strong as its weakest process. A solid process makes a company stronger, so we should be maximizing those all day every day. Good behavior and processes need to be encouraged and incentivized. That is how companies grow and multiply — doing good more and better. That is how you go further faster.”
Yeghnazar calls a small business of one to 10 employees “the jewel in the American crown.”
“People are investing in themselves in making ends meet and providing jobs for five to 10 people all over the country,” he says. “It is not easy, but it builds backbone and character. It is the small business that seeks to serve the customer and community more than any other.
“That is especially true of business in spaces like irrigation and specialty lawn care. It is here that deep relationships get formed and daily challenges get addressed in practical ways and must be addressed in real time.”
When the time comes to sell a business in this sector, the nurturing of client relationships is critical to ensure there is little if any drift in customers that is caused, Yeghnazar says.
“It is not easy and that is why it needs to be planned for effectively,” he adds. “When selling a business, it can either be a land mine or gold mine. How well you plan and prepare for this is what determines the outcome.”
Know the terms
According to guidelines from the U.S. Small Business Administration, preparing a plan for selling a business includes a business valuation to set a monetary value before marketing to prospective buyers.
The SBA advises business owners to accurately value all property and real estate tied to the small business, including intangible assets such as brand presence, intellectual property, customer information and future revenue projections. Common valuation approaches include the income approach, which examines projected revenue and accounts for potential risks. The market approach compares a business to similar businesses that have recently sold. An assets approach subtracts total business liabilities from the total value of all assets.
A sales agreement allows for the purchase of assets or stock of a corporation. An attorney should review it to ensure it is accurate and comprehensive.
List all inventory in the sale along with names of the seller, buyer and business. Determine how the business will be run prior to close and the level of access the buyer will have to the information. Note all adjustments, broker fees and any other aspects relevant to the agreement terms.
Assets and liabilities should be included, as not doing so could create problems after the sale has been finalized.