By By Harrell Kerkhoff
Maintenance Sales News Editor
As a business owner, do you see your company as an “investment” or simply a means to a solid “career?” Either way is fine, but treating a company like an “investment” can be greatly beneficial when it comes time for retirement and striving for a successful exit strategy, according to Peter J. Holton, who spoke during an educational session at the recent ISSA/INTERCLEAN® North America 2014 trade show in Orlando, FL.
Holton is managing director of Caber Hill Advisors, of Chicago, IL, and discussed “Exit Strategy: How To Treat Your Business Like An Investment.” He is a national business broker who specializes in working with janitorial contractors and distributors.
“Most business owners want to eventually retire and feel comfortable. These people also want to sell their companies for what they are truly worth,” Holton said.
This, however, is often easier said than done.
“Here is an alarming statistic — 80 percent of U.S. business owners who try to sell their companies on their own fail,” Holton said.
He added it’s far better to have help with this type of endeavor, and for the business owner to treat his/her company as an “investment” long before the time to sell finally arrives.
Holton stressed four key points to understand when trying to successfully sell a company. They are:
• It’s never too early for an exit strategy;
• Think objectively about your business;
• Understand the concept of risk as well as turnkey businesses; and,
• Spend time determining the right time to sell.
Holton explained the difference between an “investment” and a “career,” and why the former better helps a business owner prepare his/her company for sale when the time is right.
According to Holton, an “investment” is defined as, “An asset that is purchased with the idea that it will provide income in the future or appreciate and be sold at a higher price. It generates annual income and a long-term gain.”
Meanwhile, a “career” is defined as, “An occupation or profession, especially one which requires special training, that is followed by the person’s life’s work. It only generates an annual income.”
“When it comes to an exit strategy, all business owners start at the same point — the very first day they open their companies for business. They start investing their time, seek income for themselves and family, and seek funds to make payroll, purchase the right equipment and keep the lights on,” Holton said. “However, there comes a point when each business owner makes the decision whether to stay on the ‘career’ path or the ‘investment’ path regarding his/her company.”
He added many business owners start asking themselves certain questions that can determine if they want to view their companies as a “career” or an “investment.”
These questions can include: Do I want to acquire other companies? Do I want to invest in my employees? Do I want to have the nicest products available? Do I want to have that new piece of equipment that nobody else has? Do I want to have a good accounting system?
“These are all questions that can lead business owners to either an ‘investment’ or ‘career’ path, depending on how they are ultimately answered,” Holton said.
He added it usually takes a person 6 to 13 months to sell his/her business in the janitorial industry. However, it’s good to have a complete exit plan in place 4 to 6 years prior to the owner leaving. It’s also essential to understand the valuation range of a company when looking to sell. How a specific market values a business can be very different from how an owner values his/her business.
On the “investment” side, the owner is willing to take steps to better understand his/her company’s true value so that expectations are aligned with reality. This also helps the business to be priced properly for sale. On the “career” side, the owner does not understand his/her company’s true value and bases valuation expectations on rumors, blue sky scenarios or wild guesses, according to Holton.
“The No. 1 reason companies don’t sell is due to the business owner’s unrealistic expectations,” Holton said.
He added that a successful business owner must work with the mindset that his/her business “is the best around.” This confidence is necessary to conduct business and become successful. However, this mindset does not translate well when trying to successfully sell a company as retirement nears.
“The reality is, your company is only worth what the buyer is willing to pay. Therefore, an ‘investment-minded’ owner must take steps to better understand his/her company’s true value. This allows expectations to become more aligned with reality. It also helps the owner to properly price the business for sale,” Holton said. “People ask me all the time, ‘How much is my business worth right now?’ I respond, ‘I have no clue. I need to understand you, as the client. I need to understand your business. I need to look at everything about your company including its financials, operations, sales, distribution and equipment.”
Geography can also be important.
“If you are trying to sell a business in New York City right now, you might receive a larger multiple (valuation) than if the company is located in northern Michigan. I’m not saying northern Michigan isn’t desirable, but my point is there are different factors to be considered,” Holton said. “Also, if your company has an exclusive contract to sell certain types of highly-demanded products, this can provide more value than if it’s selling standard products that can be purchased anywhere.”
Understanding A Buyer’s Perspective
When it comes to selling a business, it’s also important to take a buyer’s perspective into consideration. Concerns of potential buyers often include:
• Cash Flow and Return On Investment (ROI): Is the business profitable? What kind of loan can cash flow cover? Are revenue and cash flow growing at the company?
“Buyers also want to purchase companies that are up-to-date and current. They are looking as well for the next ‘cutting edge’ product,” Holton said. “If you are the seller, think like the buyer.”;
• Staffing: Is the current owner the major revenue producer? If so, how do you replace that owner once he/she leaves? Are there current staff members in place who are willing to stay post-acquisition?
“I recommend to business owners who are in the process of selling their companies to wait 30 to 40 days prior to closing a deal before telling staff members that the business is being sold,” Holton said. “If you tell the staff before this time period, such as one year or so prior to the sale, a lot of these people will begin looking for another job.”;
• Ease Of Operations: Is the marketing in place for the company well-planned and easy to replicate? Are company policies and procedures documented? What type of software system is currently being used? Is the software system up-to-date? How stable are the employees? Is there a high turnover rate?; and,
• Risks: What happens when the current owner leaves? What happens if the level of non-recurring revenue drops? Is the company’s customer concentration made up of only a few major clients?
There are always risks involved in business transactions, Holton said. Helping reduce common risks, however, can lead to more success for both the seller and buyer. Holton outlined four basic risks and how they can be mitigated:
• Owner Risks: What exactly is being sold when a company changes hands? Does the transaction include such tangible assets as equipment, inventory and furnished buildings? What about intangible assets such as key files, customer contacts and valuable contracts? Does a company have any real value once the past owner leaves?
Holton said it’s important to recognize that there is a real risk of losing clients/revenue when the outgoing owner leaves his/her company. Two primary ways to reduce such a risk include that of having the owner move out of his/her sales role prior to selling the business, and therefore begin to generate a very small percentage of total revenue; or, having the owner agree to a transition period. This means the past owner stays with the business for a period of time, such as three years, and works with the buyer to form as smooth transition.
“It’s also good to have quality people in place at the company long before it’s sold. Is there a general manager already in place who is willing to stay on? Is there somebody already in charge of sales and/or operations? Is there a ‘right-hand man’ who can be counted on after the new owner takes control?” Holton said. “As a small business owner looking to sell, it’s important to think about such things.”;
• Revenue Stream Risks: There are often two kinds of revenue streams at a company that must be considered by both the buyer and seller, according to Holton. “Non-recurring revenue” is revenue from one-time projects. “Recurring revenue,” meanwhile, are funds acquired through a customer who is under contract and billed weekly, bi-weekly, monthly or quarterly.
“Business owners usually have a portfolio of recurring and non-recurring revenue in place. Understanding how much revenue comes from each streamline is important when judging the true value of a company,” Holton said;
• Substitution Risks: According to Holton, a company offering cutting-edge products, is isolated from its competition, creates a monopoly, has future earnings in place and is more sustainable presents fewer risks to the buyer than a company that simply offers standard and commodity products and focuses heavily on relationship selling; and,
• Customer Concentration Risks: Problems with a company can occur, Holton said, when a small number of customers generate an abnormally large percentage of revenue. This can be extremely risky as the loss of one or two key accounts can have a disproportionate impact on the health of a business.
“It’s important that not all of the business for a company can be found ‘in one basket,’” Holton said.
Benefits Of A Turnkey Business
Developing a “turnkey” business is important when working toward the “investment” philosophy of company ownership, according to Holton. It ultimately allows a new owner of a company to begin operating “from day one.” He/she only needs to “turn the key” in order to be up and running. This was made possible due to certain strategies and processes that were put in place by the former owner, helping turn the company into a “franchise.”
“There are great examples of franchises, such as Starbucks and McDonald’s. A franchise allows the new owner to start making money during the first day of ownership. This is due to the company’s existing brand, customer base and well-known products,” Holton said. “It’s possible to set up a janitorial company as a franchise. This can be done through ‘investment.’ The owner takes a certain amount of profit from the company and puts these funds back into such areas as accounting, business management and human resource systems — all in an effort to help the company remain profitable and grow.
“Making a true ‘investment’ in a company allows the owner to turn the business into a turnkey operation. He/she understands both short-term and long-term benefits.”
Selling a business can also be influenced by current conditions in the overall marketplace and what Holton described as “company timing.”
“Is the company ready for that next step? Is the right amount of cash flow set in place. These are some of the questions that must be answered,” Holton said. “The least important factor is ‘personal timing.’ Most buyers don’t really care about the current company owner’s age, whether or not he/she is turning 65 or 70.
“What buyers do want to know, however, revolve around profit and risk after taking over.”
Holton can be reached at 312-618-0715
or via email at email@example.com for
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