Get Max Value When You Sell Your Business - Tire Review Magazine

Get Max Value When You Sell Your Business

What If you decided to sell your business? How would you do it? How would you price it? What would you do today to protect its value?

You just turned 63 after spending a sometimes rewarding and always challenging 30 years as the owner of your own tire dealership.  

You still have that desire to serve your customers with the right tires and service for them, but don’t quite have the same “fire in your belly” you did 30 years ago.

Parting with something you love that has been your livelihood for years is never easy. And entering that phase of your business life brings a new set of fears: Will I be able to sell my dealership? Will I get a good price for it? How can I make sure to get the best possible deal?

Does that sound like you – or will it be you in another five or 10 years?

Selling a business is certainly never easy, regardless of the emotional ties. We want to walk you through the basic process of selling your business, from making the decision to sell all the way through to signing the final deal – including how to maximize and properly value your business.

But we want to caution you: You need to hire a professional, either an experienced business broker or an attorney specializing in business sales. You may be a great tire dealer, but don’t go into this alone.

Chances of Success
Although you may be a veteran business owner, you may not realize the odds of succeeding as an entrepreneur. In a recent study, the U.S. Small Business Administration (SBA) found that 50% of businesses are still at it after a four-year period, and another 17% were successful but were forced to close for non-business reasons – such as retirement. So the success rate, at least for the first four years, is a pretty solid 67%.

Third- or fourth-generation businesses are rare today, and most tire dealers today are finding that their children – the beneficiaries of their success – aren’t that interested in continuing. So more and more dealers either have no firm succession plan in place or are planning on selling to an outside party.

The most recent Tire Review Dealer Profile indicates that 30% said they would likely sell their dealerships to a non-family member. Only 20% plan to give the business to their offspring, and 5% intend to sell their businesses to their children. Surprisingly, 30% have no firm succession plans, and 15% claim they don’t plan to retire. That means that come retirement time, 75% of dealers will either sell to outsiders or simply close the doors.

So what’s the success rate for selling a business? Providing that everything is in order and you have a strong, healthy dealership, executing a successful sale will likely take six to 12 months. A survey of business brokers by revealed that 28% of brokers expect sales to take six months, 31% say nine months, and 21% expect a sale process to take a full year.

Needless to say, it will take as much work and patience to exit as it did for you to get started – so be prepared.

Maximizing Your Value
Selling a business isn’t easy, especially in a tough economy. But getting the very best price for your business is even harder, regardless of prevailing conditions.

Obviously, the best way to maximize your sale price is to have leverage – and that means having multiple interested potential buyers. We’re not talking a bidding war here, but if there is only one interested prospect it will take some heavy negotiations to maximize your return.

Experts say that there are almost always several potential buyers out there, and more often than not, yours is the only business of its type on the market. The trick, therefore, is finding these prospects and engaging their interest. Much like selling a house, the potential buyer has to see the potential – be it in sales, profits, long-term growth and/or as their retirement investment.

Here are some ways to make sure you can put your best face forward:

1. Have a diversified customer base. Having too many eggs (sales and profits) in too few baskets (customers) is a huge negative – even if you’re not selling your dealership. If none of your customers account for more than 5% of your total sales, that is a real plus. If you have a customer concentration issue, start focusing on a program to diversify.

2. Bench strength. A buyer will look at the quality of your management and staff, and that could be a major point on an acquisition price. If you have a strong management team in place, try to implement employment contracts, non-competes, and some form of stock or equity participation plan to keep these stars involved through the transition.

3. Recurring revenue. We all want as much business as possible, but there is nothing more satisfying – and important to a business sale – than recurring sales. Consistent sales from a contract or licensing deal are powerful. And if you have trackable consistent sales from returning business, all the better.

4. Proprietary products, services or technology. This is a tough one for most tire dealers, which are basically retail or wholesale businesses selling other companies’ technologies and products. So look at this in terms of what you offer that is different than or superior to your competition. Buyers reward innovation and yawn at “me too” products or services. Look for ways your dealership innovates or uses processes or technology to be more effective and efficient – and make greater sales and profits – than other tire retailers.

5. Eliminate barriers. Having the right permits, zoning, licenses or regulatory approvals can be worth a great deal to a buyer, especially if land and buildings are involved in your sale. If your dealership already does business with government entities – local, state or federal – make sure those are transferable and maintained.

6. Professional support. Having audited financials by a reputable CPA is a major positive. Not only does it keep your present business in line, it reduces the potential buyer’s perception of risk.

7. Solid suppliers. Having a good relationship with vendors is huge. That means being up to date on bills. Prospective buyers don’t want to inherit headaches with reluctant suppliers. And keep your suppliers apprised of your selling plans; they may know of interested parties, and certainly will want to do all they can to maintain the relationship with the new owner.

8. Expertise and exposure. Do your tire and service techs have up-to-date certifications and training? They’d better, because the next owner will want to have an experienced, expert staff so they can hit the ground running. And how involved in your local markets is your business and your employees? Again, the better the name recognition, the more valuable the property.

9. Plan for growth. If you have a business plan – especially a multi-year plan – be prepared to share it with prospects. Make sure your business plan has been updated recently. You can even give them a short version outlining market potentials, new products or services that can be added, cross-marketing opportunities or strategic alliances that can be pursued, or new customer groups that can be pursued – and how you suggest those goals be tackled.

As one business valuation expert said, “When it comes to unlocking the market value of your privately held company, it is not limited to the bottom line. Profitability is hugely important, but a lot of other factors (like those outlined above) can result in significant premiums over traditional valuation approaches.”

Things to Consider
You have thought long and hard about your future and what you want to do with your successful business. If it is successful, and that’s the kind that sells the best, you need to keep on doing what you have been doing – promoting your business, selling quality products and giving good service. That’s the kind of business that will be most attractive to a buyer.

Although there are things you must do yourself to prepare for a sale, you should seek professional help on portions of the sale pro­cess. Consider seeking advice from an attorney, an accountant, a business broker and/or someone who may have recently sold their business. You may also want to contact other dealers who sold their businesses to seek their advice.

Before you do anything, you must maintain the attitude that your business will be sold eventually. So don’t slack off or do anything that might slow your business. To get the best return, you want to have a going and growing dealership.

It is important through the entire sale process to maintain “business as usual.” Continue your advertising and promotion, maintain your presence in the community, work with your suppliers on promotions and (if they know of your sale plans) maintain the morale of employees by assuring them that you will sell only to a qualified buyer who is intent on continuing the business. Don’t let fear of losing their jobs affect employee performance.

One other key is to review the records you have kept over the years and make sure you have gathered them in one easily accessible place. This information – especially financials – will be necessary in helping you to explain your business to prospective buyers. The SBA and the National Society of Public Accountants advise “a small business that fails to keep complete and accurate financial records places its long-term success and continuance in grave, grave doubt.”

The benefits of keeping good records are pretty obvious:

• Good records provide financial data that helps you operate more efficiently, thus increasing your profitability. Accurate and complete records enable you, or your accountant, to identify all your business assets, liabilities, income and expenses that, when compared to appropriate industry averages, help you pinpoint the strong and weak phases of your business operations.

• They are essential for the preparation of current financial statements, such as your income statement (P&L) and cash flow projection. These are critical for maintaining good relations with your banker, and will present a complete picture of your total business operation, which will benefit you, as well.

• They are required for the preparation of complete and accurate tax documents, and to provide supporting documentation in the event of an IRS audit.

If your buyer has made a good faith deposit, you should be willing to make your financial records available, including purchase and sales data for the current year and two previous years, income tax returns and bank deposits.

Getting the Word Out
Advice varies on whether you should “go public” with your sale plans or work quietly through other channels. Certainly you can advertise your dealership for sale in local newspapers or classified ad sites. You could even do so using your own Web site, or use word-of-mouth advertising through the various clubs and groups you belong to.

But – and this is a very big BUT – consider what this news might mean to near-term or long-term business. Prospective new buyers might stay away, and those long-time customers may move on to another tire and service provider. Potential buyers may also become disinterested, seeing your business as tainted. Exposure will certainly get multiple buyers quickly, but it could also hurt your sale price.

There are other options, of course. Consider a professional business broker, who can help you through the process and make behind-the-scenes contacts on your behalf. Talk to your suppliers, as they may know another customer looking to expand. Perhaps another dealer or business interest has previously contacted you.

You know what your business includes because you have been running it for a number of years, but a prospective buyer will not. Write a short narrative about your business, including the date it was started and a history with key highlights. Include information such as how many employees you have, what the neighborhood is like, what geographic areas your customers are from and who your competitors are.

FMV Appraisal
Have your business appraised by a professional to assure that the value you place on it is correct. The value of your business is its fair market value (FMV), which can be based on a range of factors from financial performance to included land and buildings.

Fair market value differs from the intrinsic value that individuals may place on the same asset based on their own preferences and circumstances. Since market transactions are often not observable for assets such as privately held businesses and most personal and real property, FMV must be estimated. An estimate of FMV is usually subjective due to the circumstances of place, time, the existence of comparable precedents and the evaluation principles of each involved person.

Opinions on value are always based upon subjective interpretation of available information at the time of assessment. The important factor in FMV is that it is accepted by the IRS. This is in contrast to an imposed value, in which a legal authority (law, tax regulation, court, etc.) sets an absolute value upon a product or a service.

During the process of selling, make sure you keep notes on who you discuss the possible sale with – including e-mail addresses and phone numbers.

Financing Could Be Key
If you are serious about selling, you will want to assist the prospective buyer in every way possible, and this could include helping the buyer obtain necessary financing.

You probably have more contacts with financial institutions than the buyer, so share your knowledge to cut down on the time needed to make a deal.  

As mentioned earlier, share your business plan with the buyer. This can help the buyer obtain financing, if necessary. Your plan, if written properly, should contain an executive summary of one or two pages, a business description including a vision of the future, a description of the tire and service market in your area and who the competition is, a description of the products you sell (including a list of suppliers), your marketing plan, your management and employees, financial data, return on investment based on cash flow and any other attachments that describe your business.

The buyer must decide how to fund the purchase, which could include personal sources like savings, investment income, a second-mortgage on their home, money from friends or family, a bank or SBA loan, venture capital – whatever.

Since you will be sharing a lot of confidential information with a buyer, you need to get the buyer to sign a confidentiality agreement before you supply any information. This agreement should outline penalties for the prospective buyers if they leak information.

Try to limit the buyer’s due diligence period to no more than two weeks. Due diligence is the process of investigation, performed by investors, into the details of a potential investment, such as an examination of operations and management and the verification of material facts.

It will be necessary to move sale negotiations along as rapidly as possible because any uncertain situation could make the buyer nervous and blow the deal for you.

Have the signed purchase agreement entered into escrow as soon as possible and sign off on any contingencies quickly. Go through the purchase price allocation at the beginning of the escrow process. PPA is an application of goodwill accounting whereby the acquirer assigns new values to the target company’s assets and liabilities based on the price paid.

Negotiations Can Fail
Selling a business can be an emotional roller coaster, especially in the negotiating process, which can fail at any time. One of the key factors is personality – simply whether the negotiators respect each other and there is a likeability factor. Another key is timing, which may not be favorable to the buyer because of external factors like financing.

Negotiations may take a long time, which can scare off a buyer. Issues surrounding the deal – both imagined and real – may put a damper on completion. There also may be different agendas held by the negotiating parties. As would be expected, the lack of complete honesty is a real deal breaker.

The keys here are patience and keeping a level head. As much as the process may make you want to scream, you need to maintain composure, keep a clear head and a positive attitude and work to resolve issues that are keeping you from a successful deal. Keep in mind, too, that you may have to walk away from a bad deal or if the prospective buyer is well off-base on his offer or terms.

Final Decision
As you move through the selling process, make sure you encourage the prospective buyer to do the things you would do if you were the buyer. They include:

• Researching the reputation of the company

• Making sure that the location is viable

• Certifying that the building is sufficient in size and condition (and that there are no liens or zoning issues)

• Assuring that the equipment is in good shape and is adequate to do the work

• Reviewing the inventory of tires, equipment, tools and accessory products

• Obtaining an itemized list of liabilities that should be placed in the sales agreement

While you want to get max value, you also will want to come to a sales agreement that is fair to both parties. You may even want to sign on for a consulting period while the new owner is getting accustomed to the business. That can help you decompress from the hectic years when you have been a tire dealer.

One more thing: No sale is final until you have a signed sales agreement and a check in your hands for the agreed purchase price. At no other time should you assume the deal is done. Many a business sale has been lost because the seller didn’t follow through all the way to the finish line.

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