Most businesses are not ready to be sold. As a result, many sales occur blow their potential value. According to a poll conducted by KPMG in 2020, 38 per cent of Canadian business owners surveyed wish they could retire, transition, or sell their business but are not prepared.
Now with the ongoing COVID-19, I am sure that number has likely increased. Statistics on the number of listed businesses that do sell range from a high of 40 per cent down to 20 per cent. Businesses with annual sales under $1 million are the hardest to sell. The majority of businesses sell to employees who often have little money to invest or are wound down. You will usually get the best dollar, with the lowest risk, by selling to a third party.
The two key questions that business owners should ask themselves are how do I become one of the “lucky” 20 to 40 per cent, and how do I get the best price? It’s not “luck” that will get you the best result; it is ensuring that you have done everything possible to make your business attractive. Focus on these elements so that you are one of the “lucky” ones. If buyers don’t see “great value” in acquiring your business, then they will pass.
Getting a professional valuation of your business is relatively straightforward. There are many professionals who can do that for you. The valuation doesn’t necessarily reflect the sale price. In my experience reviewing plumbing and HVAC businesses, I find the sellers are looking for five to seven times earnings before interest, tax, depreciation, and amortization (EBITDA), and the buyers want to pay three to four times. This is usually the sticking point.
Consistent profitability is a major plus. EBITDA of at least 10 per cent of sales is very important. Check to see if your segment of the industry is in a period of growth, stagnation, or slowdown mode. How do you benchmark compare to your competitors?
I completed 23 annual financial surveys of HVAC contractors for HRAI. Consistently, I found that 25 per cent of companies made between 10 per cent pre-tax profit to 22 per cent, 25 per cent made between five per cent and 10 per cent; 25 per cent made from zero to five per cent, and 25 per cent lost money. Many buyers are looking for up to five-year vendor take back for 25 per cent of the purchase price. Buyers that are heavily financed need this. Therefore, think about what kind of financing you are prepared to offer and what security and interest rate you expect.
Oftentimes, HVAC and plumbing contractors in small towns tell me that they can’t put their prices up because everyone knows what everyone else charges. In urban areas, they tell me the reason they can’t put their prices up is because of too much competition. Base your charge-out rates on value, not price.
Many potential buyers are attracted due to synergies. This could be reducing overhead costs, greater efficiency in work or cross-selling. For example, a plumbing contractor buying an HVAC business, or vice versa, often makes a great deal of sense. Many customers, especially those run by property managers, like to have one supplier providing as many services as possible.
Unless you are in a rural area, sticking within eight kilometres of your customer base should be sufficient for you to get more business than you can possibly handle. Wasting time in traffic is neither productive nor profitable. Higher density concentration with your customers is often a real plus.
Also, keep in mind whether or not the work you do is attractive to the current market. In a previous article, I talked about the upcoming difficulty in getting technicians and pointed out that some trades are going to have greater difficulty in recruitment than others. Do tradespeople want to work in your part of the industry? Is your business recession-proof? Even with COVID, customers need service and retrofits. Take an additional look at your business and determine if it is desirable. Are there synergies with other businesses? Is it established and low risk?
Some companies can be run easily by a professional management team; however, these are usually larger businesses. These tend to be the easiest to sell. Smaller to mid-size HVAC and plumbing businesses tend to need an owner with excellent technical knowledge. Automation has become a major factor in developing efficiencies and reducing costs. Established systems that help the business run smoothly and effectively are essential. Have you maximized automation?
Companies that have good employees with a low turnover rate have a greater chance of being sold. Your two main assets are your customer base and your employees—they are very intertwined. Also, watch for long-term employees that could require severance as that will lower your value.
Lastly, I want to reiterate this again as I have in the past—FIRE YOURSELF. Make sure the business can run without your ongoing presence. The more the business relies on your everyday presence, the lower the value.
More and more, I am seeing potential buyers wanting the owner/manager to stay in place. In smaller to mid-size contractors, they are a key portion of the goodwill. Most owner/managers want out within a reasonable time of selling the business. This can be a tough balance to negotiate.
The above are simple strategies but are not easy to implement. You need to create a mindset for both yourself and your employees to tailor these strategies to your business and to implement them one at a time. Don’t overwhelm yourself or your team.
If you would like to email me some questions, I will review them and publish them in a future article without identifying the source of the question. You may be surprised to find how many of your peers have the same questions. Have a safe and successful 2022.