By Ron Coleman
The Canadian Federation of Independent Businesses (CFIB) predicts $2 trillion worth of small business assets will change hands over the next decade. According to Investmentbank.com “only 30 per cent to 40 per cent of businesses actually ever sell.”
That creates opportunities and challenges. If you are going to be the seller within the next few years, how do you attract the right buyer? If you are the buyer, how do you find the bargains? This two-part article will go over both buyers and sellers. Let’s start with the sellers.
The average size of those contractors, in today’s terms, would have sales of around $3 million. Profits before tax ranged from a high of 25 per cent to negative figures. The value of the business is likely four to five times the normalized earnings before interest, tax, depreciation, and amortization (EBITDA) for the last three to four years. Remember to exclude COVID-19-year results. If you are selling shares, you will be expected to leave some working capital in the business (probably in the range of 10 per cent of sales). On an asset sale, you don’t leave anything in the business other than what is specifically identified in the transaction agreement.
For 20 years, I did financial analysis of HVAC and plumbing contractors for the Heating, Refrigeration, and Air Conditioning Institute of Canada (HRAI). Some 25 per cent of the contractors made more than 10 per cent pre-tax profit; 25 per cent made between five per cent and 10 per cent; 25 per cent made zero to five per cent; and 25 per cent lost money. Several contractors were consistently between 15 per cent and 25 per cent profit each year.
Setting up for the sale
To attract the right buyer, you need to make a minimum of 10 per cent pre-tax profit, or you will get little value for your business in a sale. Also, you need to make the business operate without your ongoing presence. Very few buyers want to buy a turnaround situation and if they do, they will pay a small price for the business.
Selling assets or shares makes a big difference to the amount of money that you will actually keep after keeping the CRA happy. This is a discussion for you and your accountant. Selling to family members negates much of the tax advantages, as these are not “arms length” transactions. Employees and family members usually don’t have a lot of spare cash, so your risk is higher if they fail. We did cover this topic in a previous article.
So, how do you make yourself an attractive suitor for a potential buyer? There tends to be more sellers than buyers, so buyers can be picky. Rarely do they want to buy a company that is not making money or is reliant on one or two key people.
In my book, “Becoming Contractor of the Year,” I recommend firing yourself. Give yourself 90-days notice and focus on what you should do to make the company independent of your everyday presence. Become a teacher and teach others to do what you do so that you don’t have to. This empowers your people and means the business is less reliant on you.
Illusive free time
Once you free yourself up from the day-to-day operations look for tasks and activities that are adding no value and eliminate them. Some procedures that were valid even five years ago are no longer needed. Find and destroy! Eliminating unnecessary procedures is not an easy task but will increase your profitability. Next step is to increase automation. There are numerous software programs that can automate many of the routine process. Use these to develop systems and structures to make the business more autonomous. This will eliminate many of the mundane tasks that are time-consuming and prone to error.
Talk to your construction association to find out what others are doing and what guidance they can give you. Choose the software best suited to your business. Eliminate waste. Push as many tasks as possible down to either entry-level people or automation. Talk to other contractors who are not in direct competition with you. These are people you meet at association meetings, trade shows, and annual conferences. HRAI has operated peer group programs, which have been very successful
Most companies need several years to prepare their business for sale. The above points are your starting block.
A major issue is who do you get to help you sell your business? You certainly need your accountant and your lawyer. I have shown you how to make an educated guess at the value of your business. If you are getting a formal valuation, do get quotes as the price can vary significantly.
Key industry experience
Keep it simple. If you use a business broker, make sure they have experience in your industry and that you understand their fee structure. Read the fine print. Whoever buys your business likely knows the industry and the future prospects.
The most likely buyers, apart from family or employees, are companies that are in your field of work or related field. A plumbing or HVAC contractor that wants to expand geographically would be a good prospect. A plumbing contractor who wants to get into HVAC or visa versa also is a strong option.
One of the major consolidators are also serious contenders. All these are businesses that will have a synergetic value that will reduce both their job and overhead costs and should be willing to pay a premium price for the right business.
If you want to know how to groom your business to attract the most attention from a motivated buyer, you will need to wait until we complete part two of this article in our next publication. Don’t wait for that; get started now and give yourself 90-days notice!