If you own a commercial maintenance company in today’s market, breaking up (exiting) from your business should not only be easy to do, but it should also be profitable. It’s even better yet if you own a chemical application company. Lawn care, weed control, pest control, tree health care and similar companies often command premium prices upon the transition of ownership. It’s the repeat revenue and high margins that make these companies so desirable. In the last year or so, residential maintenance has become highly prized by private equity investors. All of these sectors are experiencing a land rush of sorts as private equity, with its billions of dollars to invest, seeks investment opportunities that provide healthy returns.
But what about commercial and residential design/build and bid-build enterprises with minimal repeat revenue? How do such companies transition ownership? What are the options? This is the very challenge that many of my clients are facing today as they consider how to retire. Here are some thoughts and a possible way to do so:
One possible solution
Let’s say that you own an installation company with annual revenues of $5 million of which $250,000 is maintenance. Your net profit margin is 15% ($750,000) and your EBITDA (earnings before interest, taxes, depreciation and amortization) is 18% ($900,000). The company value would probably be 1.0 to 3.0 x EBITDA or $750,000 to $2.7 million. You have an employee, investor, son or daughter who would like to eventually buy your business, but they have limited resources. Here are some options:
- The buyer(s) has the resources to buy a small portion of the business (i.e., 5% or 10%). They do so with the stipulation that they use their ownership dividends to purchase additional company stock until they own 49% of the business. Each year their equity would increase until it maxes out at 49%. You maintain majority ownership until you decide to retire. At this point, you could sell all, some or none of your stock to the minority owner as the two (or more) of you decide how to proceed. You retire and exit the business, but you still collect your ownership portion of the declared annual dividends. This could continue as long as you and the other owner(s) agree to do so.
- The buyer(s) have no resources. The company loans the buyer(s) enough money to buy a portion of the business with the stipulation that the buyer(s) use their annual dividends to pay back the loan. Once the loan is paid off, the dividends would be re-invested as in scenario number one.
- The buyer(s) have no or limited resources and you “gift” the buyer(s) the funds with the stipulation that they re-invest their dividends to purchase more stock as in scenario number one.
Advantages of such a transaction
The advantage to the buyer(s) is that they essentially buy the business over time for free or for a minimal investment. It’s their dividends that allow them to purchase the remainder of the business while they earn a reasonable salary for their position in the company. (Note: Most people don’t realize that buying a business is like buying a rental property. Done properly, it costs you nothing. It generates its own revenue to cover all expenses and is therefore free).
The advantage to the original owner is that he or she now (1) has an exit strategy and (2) could earn hundreds of thousands or even millions of dollars after they retire and exit the business. In our example, if the business remains steady at the $5-million revenue level and the same net profit margin after the seller retires and exits the company, with just 25% ownership, he or she would receive $187,500 annually ad infinitum. Over 10 years, this would amount to $1,875,000. Yes, the buyer gets a good deal, but so does the seller since the options at this point in time for an installation company are so limited. The actual results would more than likely be better than this scenario as it assumes that the company would not grow either the top or bottom lines, which is pretty unlikely.
Breaking up with a green industry business with minimal repeat revenue can be hard to do; however, with time, a willing buyer and some creativity, you can do a deal that’s good for all concerned.
The ownership transition challenge described above is one that many of my clients are currently facing. The details (figures, values, ownership percentages and so forth) vary, but the three possible solutions outlined here are ones that many of them are considering. Like any such transaction, be sure to consult with your CPA, attorney and competent advisor(s) before entering into such an agreement.
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