Before You Hand Over the Keys

When is it time? Time for what, you may ask? Time to move on. Time to stop and smell the roses. Time to play golf. Time to live in warm climates every winter. And most importantly, time to have the funds you need to live your life comfortably.

We call this the Ownership Transition Move - making the decision to sell, setting a timeline, then planning and executing to do it right. Sounds easy, but it's tougher than you think. This is especially true for contractors, since you may not have the classic customer relationships, the assets to provide equity value or the sophisticated systems and horsepower that manufacturers and distributors have available.

So how do contractors achieve this transition goal? Believe it or not, just like everyone else, just in a different way. Everybody selling a business has to have something to sell; they have to be able to value it at a reasonable (or "doable") value; they need a buyer or transition partner; and they need the financing to make it happen.

Assigning value
First of all, you need to determine what you need to live on and compare it to the amount you would have available, with the gap being filled from amortization of the estate. In short, you need to work backwards to see if it works. If not, that's a subject for another column.

Next, let's discuss value. We discussed "fair value" in a previous column ("Defining Equipment Value", December 2007), where we probably listed 20 definitions of the term. When valuing your business, it's not much different. We all know about business cycles and understand there are times to sell and times not to sell. For some of you, now is not the time to move forward. Yet, that should not keep you from planning and selecting a departure date.

Most industries have rules of thumb to assist with valuing a business. It depends on your cash flow and balance sheet value. Some methods value assets, some make it a factor of sales, some a multiple of earnings and so on. It depends on what kind of business you operate. There are plenty of people and organizations out there to help put you in a "range" of what your business is worth as of "today."

A consultant telling you what your business is worth is one thing; getting the financing for that price is another. To test the result you received, discuss the value with your bank to see if it would finance the purchase at the price given. If not, and the bank knows your business, maybe the price needs to be adjusted downward to make it work. Cash is king and nobody is going to buy the business if they can't pay for it. You could, of course, offer to take paper for the excess good will you are asking for, keeping in mind that you are now the bank. Risky business, but doable.

Finding a buyer
Who to sell to is the next question. Family, a competitor, employees or a complete stranger are all viable options - as long as your key employees stick around. Let's face it, without you and your key employees, what is there to sell?

In the contracting business, your key employees help keep business relationships, know your vendors, know the subs you work with and, in most cases, will not shy away from the risk because they know the company.

The more time you have to lock in your management team and key employees the better. And the more time you have to execute the departure, the more chance you have to wind up with a successful strategy. Selling to existing employees should also be high on every seller's list of potential buyers.

You need an accurate set of books and tax returns to support the transaction in order to make the deal happen; arrive at a fair price; have a bank provide the financing; and make it easy to track post-sale performance should you take paper. Coming up with a value that can't be supported by the value you place on the company is not going to work. It is in your best interest to get the accounting right so potential buyers know what they are really buying.

So if you can picture yourself on a beach in Florida, start planning now. ?

Selling TipsWhen it comes time to sell your company, follow these steps

  • Make the decision
  • Determine annual income requirements
  • Determine a range of values
  • Pick a buyer
  • Work up a program to lock in the buyer
  • Stick to the plan if the business cycle is in your favor

Garry Bartecki is director of dealer/distributor services at BDO Seidman, LLP of Chicago, as well as a consultant to the AED. He has also worked as an independent CPA and consultant to equipment dealers. He can be reached at (312) 616-4677 or gbartecki@bdo.com.

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