Did you ever wonder why one owner seemingly has buyers strongly interested in their spray foam contracting business while another owner’s business seems to languish on the market with very little interest?
It starts with understanding what the drivers are that create business value, how value is determined, and then what steps are necessary to prepare your spray foam contracting business for a successful sale.
BUSINESS VALUE DRIVERS
There are many characteristics that buyers, including spray foam contractors, look for in any business. Those business owners that successfully sell their businesThermofoam understand that these characteristics, or value drivers, are built in to the business from the start, and they intentionally create those value drivers. These value drivers also lead to improved profitability, sustainable growth, and a more fulfilling lifestyle for the owner.
A Stable and Motivated Management Team
Probably the most important value driver for a buyer. A buyer knows that with a solid management team in place, prospects are good for continued business success. Successful owners align their management team with the owner’s business goals and with a well-defined vision of where the business is going, as well as with a definition of what constitutes success, and clear measurable steps and objectives on how that success is achieved. This is complimented with short (one-year), intermediate (three-year) and long-term (five years or more) incentive compensation plans that reward key employees as the company performs – usually measured by increaThermofoam in pre-tax income. Without a strong management team, it may be very difficult to sell your business or it may require the owner to remain involved for several years.
Solid Operating Systems and Procedures
Operating systems include computerized accounting, reporting, forecasting, and business management systems, as well as manual procedures used in the business. The establishment and documentation of standard business procedures and systems demonstrate to a buyer that the business can be maintained profitably after the sale.
A Stable, Diversified Customer Base
Buyers generally look for a customer base where no single client accounts for more than 10 percent of sales. A diversified customer base, including geographic diversification, helps insulate a company from the loss of any single customer or adverse change in a particular market.
A Realistic, Sustainable Growth Strategy
Buyers tend to pay more for companies with realistic strategies for growth. Along with their team, successful owners develop annual written plans for growth, accompanied by financial and cash projections, that describe how that growth will be achieved based on industry dynamics, demand for the company’s products, new product lines and markets, manufacturing capacity, etc. It is these detailed growth plans that attract buyers, as well as communicate the objectives and goals to the management team.
Effective Financial Controls
Financial controls are not only a critical element of business management, but they also safeguard a company’s assets. Effective financial controls support the claim that a company is consistently profitable. The best way to document that your company has effective financial controls to a buyer, and that its historical financial statements are correct, is through an audit by an established CPA firm.
Stable and Growing Cash Flows
While all value drivers contribute to stable, growing and predictable cash flow, it is especially important in the year or so preceding a sale of the business that cash flow be substantial and on an upswing. You can begin increasing cash flow now by focusing on ways to operate your business more efficiently and by increasing productivity and decreasing costs.
You have achieved a fair amount of success in your spray foam contracting business and that success has been achieved in part by rigorous application of the value drivers. You are now considering a sale of your company. How does a buyer determine how much he or she is willing to pay for your business?
The ultimate value of a company is the price that a willing buyer pays to a willing seller. Generally, the negotiation of a price will start based on one or more of the three traditional valuation methods:
Asset-based approaches that separately value the assets of the company to determine the value of the company as a whole.
Market-based approaches that use comparable sales of similar businesses.
Income-based approaches in which the Company’s earnings, EBITDA (earnings before interest, taxes, depreciation, and amortization) or revenues are multiplied by a factor-based on an appropriate return on investment to achieve the “Enterprise Value” of the Company.
In the case of the asset-based approach, all liabilities are usually deducted from the value of the assets and in the case of market-based or income-based approaches, all interest bearing debt and current liabilities beyond normal terms are deducted.
Once a base value range is established, then the final price is negotiated, which may include adjustments for the strength of the management team, unique or proprietary assets or attributes, brand and reputation, and other relevant factors.
Companies in the spray foam contracting business are sometimes valued using an income-based approach determined by multiplying EBITDA by a factor that is determined by the buyer’s required return on investment. EBITDA is generally calculated on an “adjusted” basis to exclude certain owner-related transactions and normalize owner/management compensation levels.
Companies in the spray foam contracting business may be better valued by looking to the value of the business assets. This is especially true for companies that have accumulated a lot of equipment and facilities over time.
PLANNING FOR A SALE
Some planning for a change in ownership can only occur in the months before the contemplated transaction such as consultations with attorneys and accountants, but it is important to do as much pre-planning as possible in the years preceding a sale. Some of the common planning tasks include:
Design and Create Your Exit Plan
Starting as early as a year before the plan, owners need to take the time to ponder and weigh their options and consider the many issues involved in a sale of a business. This is the time to engage professional assistance to help you determine your options and design a sale or transition strategy.
Closing the Gap
There is likely a difference between the value you desire to receive and the value you are likely to receive if you sell your business today. Many owners are in denial when it comes to objectively quantifying the size of this value gap and exactly how they are going to close it within their planned departure time frame. The best way to close this gap is to define within your annual growth plan the steps to create value with deadlines and accountability.
Tax Planning and Implementation
Obtaining the full value for your spray foam contracting business involves minimizing taxes. Keep in mind that one of the headwinds you may face is increased tax on income and capital gains. Good planning with your CPA and trusted advisors can not only minimize taxation upon the transfer of ownership interest, it can also save taxes on an ongoing, annual basis.
A methodical approach to preparing the business, preparing yourself, and preparing the next owner, if he/she is a child or employee, tends to create a better outcome for all involved. So think about the sale of your business from the beginning and as a process, not an event. Take the time to build your value drivers into your business and think about how you are creating value in the business and then start planning in the years ahead of a sale.