It’s an interesting time to think about leaving your company or changing your business model.
The pandemic has delayed retirement for some, so they’re overdue. Others just feel burned out by the insane workload experienced over the last three years.
On the other side of the coin, others want to take advantage of heightened demand and expand their companies more.
No matter what kind of partner you’re interested in — investor, acquirer, or franchiser — the industry offers more options than ever. There are more regional and national companies looking to partner with existing operations, whether it be the consolidators growing large-scale companies by acquiring, or the franchises that have been in the industry for years or even decades. Even smaller companies are purchasing neighboring firms in greater numbers to expand the reach in their markets.
It’s true that investors initially were drawn to the industry by the historic growth it showed during the pandemic. While those numbers are tapering off, investors remain interested, some observers say.
“Because of the essential services branding that we all had over the last couple years, that has given investors a sense of comfort that, no matter what gets thrown at us — pandemic, economic correction, etc. — we’re fairly resilient,” says Troy Hazard, a business consultant and chairman of the board for Dallas-based pool/spa retail/service franchiser Poolwerx.
But whether looking to work with a purchaser, investor or franchiser, you’ll need to prepare the business. Follow these guidelines to ease the transition and position the move as positively as possible with all parties involved.
START FROM THE BEGINNING
Before presenting your company to potential buyers or partners, establish your own goals.
“I ask my clients for their definition of success when they look back on their career,” says consultant Scott Hunsaker, founding partner of Ardent Group and former president of aquatics design firm Counsilman-Hunsaker. He sold his family firm to employees and specializes in that route.
With that goal in mind, you can more easily map your strategy. As the seller, your goal may be to get the highest price possible.
“Start at the finish line,” Hazard says. “If the finish line is to sell the business for the best enterprise value that you can possibly get, then start with that and focus on demonstrating what that value has looked like in the last three years, and what that value is likely to look like in the next three to five years.”
But that isn’t always the end goal, Hunsaker says. “Many of the people that I know in the industry were the founding owners,” he says. “For many of them, their business is their family, it’s their baby. The people they work with and their clients are near and dear to them.
“Three components are usually important to a founding owner — what happens to the employees, the customers, and the legacy of the business. So I find that, once a lot of founding entrepreneurs start thinking about it, money sometimes isn’t the most important thing.”
DOWN TO BRASS TACKS
In any discussion about selling your business, converting to a franchise or taking on an investment partner, your company’s books will be the first thing to come up. This topic immediately springs up for two reasons — it’s the most important indicator of how viable the company is; and it’s also the area where small business owners seem to be the weakest.
Interested parties want to see how your company performed in the recent past, and how it is expected to do in the near future. When looking at smaller operations, such as most pool/spa builders, retailers and service firms, some potential partners may be happy with one year back and one year projected. Others will want three going back and looking forward.
And the data must be clean. When business owners use company earnings to fund portions of their personal life — no judgment, these experts say — it can muddy the books. Some prospects will not have the patience to wade through the books and figure out how the data would change without those personal expenditures.
“You can’t have it both ways,” Hazard says. “You’re either running a business to make it profitable ... because your multiple is going to be based on that profit. Or you run it ... a tad messy, and that’s the stuff that we move on from quite quickly.”
At the very least, a potential purchaser or partner will want to know specifically which costs are more personal and wouldn’t be carried forward in the future.
“When we’re buying a business, we’re trying to determine or estimate the costs of the business today, the profits of the business today, what are the costs of the business tomorrow, and what are the future profits to the business tomorrow,” says Bruce Mungiguerra, CEO of Riverbend Sandler Pools, a consolidator of pool construction and service firms in Texas.
“So if your life is run through the business, then you just need to be able to separate that. Taking your family on vacation and charging it to the business would not be a future expense in the business.”
If you have a long-term plan to sell or take on a partner, it would be cleaner to stop making those purchases through the company altogether, they say. If nothing else, it shows potential buyers and investors that you run a cleaner ship.
If your company has multiple divisions, provide separate figures for them. This especially applies when trying to partner with a company that specializes in one segment of the business. A firm that consolidates or franchises service operations, for instance, may not want to know about your company’s construction side.
“When it’s all on one ledger, it’s really challenging to understand [whether] the builder business is propping up the retail or service business, or vice versa,” Hazard says. “Without that clarity, that’s the sort of deal that 90% of these guys would walk away from.”
When providing data, you can’t only focus on the past, but will need to provide some projections and budgets for the upcoming year or two. If you’re suggesting that you can grow the company at a certain rate, provide detailed plans explaining how you expect to do that, and data justifying your projections.
Otherwise, Hazard says, “It’s a blue-sky number that you’ve just made up to make it look attractive, but I’m probably not going to believe you.”
Be able to articulate your goals. If you’re looking for an investor to help grow the company, you’ll need to know how much you need, what you’ll do with the investment, and how much growth you expect from the change.
“They might say, ‘If I had $300,000 of capital, I could go buy six more trucks, and we could add 300 more weekly routes to our business,’” Mungiguerra says. “It’s sometimes just as simple as that.”
KNOW YOUR KEY EMPLOYEES
To position your company for its next phase, you may have to do some preparatory work with employees, especially key staffers.
Some business owners don’t want to tell employees when they’re thinking of making a major change to the business, fearing they might scare the staff, or word might get out.
But if you plan on retiring from the business, you should have a plan for how the work will continue to get done without you, and who will carry the institutional knowledge. In other words, potential purchasers and partners will want to know which key employees will stick around and how they will make up for the void left by your departure.
Consider having a conversation at least with your key staffers, these experts suggest. Explain to them why you want to make the change, and ask what this means to them. Would they expect to remain or look elsewhere?
“Is there a person in the business who can run it, or do we need to find somebody who’s going to run that business?” Mungiguerra asks. “We certainly don’t want to acquire a business if we don’t have any idea who we think is going to stay or go.”
Look at ways to increase the value proposition for both the new partner and key staffers. If your plans include promoting employees to play a more important role in the next phase, provide them training so they increase their value to the operation. To make the deal more enticing to the staffer, consider offering them a package to stay.
Presentation matters. Make sure your books are clean literally as well as figuratively.
Furthermore, Hazard suggests, practice your presentation.
“You can’t just throw the books in front of somebody and say, ‘Hey, I want to sell my business. What’s it worth?’” Hazard says. “You actually have to sell it. You have to physically put that sales process in place, which means you have to prepare your presentation to suit that particular buyer so that you meet their needs, answer their questions and you’re succinct.”
He refers back to when he was helping Poolwerx seek out a private-equity partner. “I would playbook every meeting ... so I’d know exactly what I was going to say, where I want to take the conversation and what information I’d like to get out of them that will help me prepare the next presentation and answer some of their questions before they ask them.”
GET THE RIGHT INPUT
If this all falls out of your wheelhouse, don’t feel bad — that’s the case for a lot of small-business owners. Consult with an accountant, attorney or other specialists. You could even take it a step further.
“I would encourage getting a team of people who can help you make a knowledgeable business decision,” Hunsaker says. “That might include an accountant, a lawyer and a business-evaluation firm.”
This not only helps potential purchasers or partners, but you as well.
“You have all the information to make a timely and accurate decision on how to move forward for your organization, but more importantly for your goals and objectives of the organization after you leave,” Hunsaker says.