Questions for yourself

Selling your company can be both an exciting time and a stressful time. Sellers sometimes go through a wide range of emotions during the acquisition process. It can also be a time of doubt and self-questioning. I think it is important in deciding whether to sell your company, that owners go through the process of examining their own actions, motives, thoughts and/or feelings.

As the seller does this soul-searching, it should lead to a decision and not to the seller getting to the point of becoming virtually frozen. Doing this soul-searching should occur early as the owner begins to think about selling. He or she may ask themselves questions like:

• Am I selling at the right time?

• After I pay off debt, transactional fees and taxes, will I have enough money to keep me in the lifestyle to which I have become accustomed?

• Who should I sell to?

• How do I know I am getting the right price?

• What is the best exit strategy for me and my family?

• Will the buyer take good care of my employees and customers post sale?

• How do I go about packaging my company in a nice presentation that will separate the serious buyers from the tire-kickers when I take it to the market?

• How do I take it to the market?

• How do I reach out to the right and best buyer for my company? Finding the right buyer, whose criteria and strategy are a good match for a company being sold, will lead to a larger purchase price for the seller.

• How do I guard against not negotiating ALL the key deal points fairly and effectively?

• How do I make my company the most attractive to sellers?

• How much is my company worth/what is the valuation expectation I should have?

One of the most important questions to ask is, “What is my company worth?” Your company valuation or the purchase price of your company should be determined by the market, especially in the kind of seller’s market that is currently out there.

Depending on the characteristics of your company and how it matches up with the criteria of the buyer, a buyer will make an offer based on a multiple of the adjusted EBITDA. EBITDA is earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA is that plus all expenses added back to EBITDA related to the owner and his compensation that would not have been a cost after the transaction is completed.

It also includes adding back business expenses not necessarily related to running the business such as replacing the air-conditioning system. There are usually many things/costs to add back to the EBITDA to arrive at the adjusted EBITDA. If the multiple of the adjusted EBITDA that the buyer is willing to pay is 10X the adjusted EBITDA, then for every dollar of adjusted EBITDA, the seller gets $10. So, it is important to identify all owner and business addbacks. Valuations of a particular company being sold are not based on rumors, anecdote or what other companies have received in multiples of EBITDA/purchase price. Multiples are based on the adjusted EBITDA and things listed below that are attractive to buyers. Some buyers will offer more than others based on the characteristics of the company being sold.

Since we are talking about valuations, let’s briefly list some of the other things buyers look at in determining their offer and the terms of that offer and the structure of the purchase price:

• The amount of recurring revenue

• The type of revenue

• Commercial versus residential revenue

• The percentage of the business that is in the top ten largest customers

• Size of the company

• Footprint of the company

• History of growth and profit

• Customer retention

• Employee retention

• Ability of middle management

• Condition of vehicles and equipment

• History of insurance claims in general liability, auto insurance and workman’s compensation

• Systems and procedures used by the company being sold

• Pricing of services

• Geographical location (different from the service footprint)

• Are the buying and selling companies a good cultural fit?

• The seller’s facility (the buyer may want to rent it after closing)

I was contacted a few years ago by a potential seller in the Mid-Atlantic part of the country to have a confidential conversation on the potential sale of his business. It had only a few of the characteristics that are attractive to buyers. I suggested he do certain things (many of them related to the issues listed above). I advised against selling until he had great improvement in the most critical areas. Before then, he would not have received much at all in the way of attractive offers; after deciding to build it differently, his company has serious worth to the tune of several millions of dollars just five years later.

The sale of your company should be a smooth, calm, well-managed process that leaves the seller very happy with the end result. There are many good buyers out there who pay very well with good terms. They are found among the “strategics” (well-established privately and publicly held companies whose growth strategy includes an aggressive acquisition strategy), private equity groups (groups that have stock in a private investment company but does not offer stock to the general public) and individual investors.

I would caution sellers who think that in all matters related to selling their company that what they know about selling a business in their own mind would suffice throughout the acquisition process.

Dealmakers educates readers on all aspects of mergers and acquisitions in the green industry. Greg Clendenin is CEO of Clendenin Consulting Group. He can be reached at gc@clendenincg.com.