Be prepared, be ready, and know market conditions before selling a business

Aftermarket businesses must be aware of the ‘do’s and don’ts’ when being acquired — and before

Newport Beach, Calif.—There is steadily increasing merger and acquisition (M&A) activity in the automotive aftermarket world today as private equity firms seek profitable businesses to expand their interests. Last year had the largest number of deals on record.

“All segments are doing acquisitions from tire dealers to collision shop chains,” said Rick Schwartz, CEO and managing partner of Schwartz Advisors, who discussed M&A at a CAWA industry event.

Driving that interest is the aftermarket’s stable growth and a large VIO with a high average vehicle age. Many companies that are seeking to expand are realizing that consolidation is an attractive solution, as it presents economies of scale. Technology is also a strong driver of new investment opportunities.

“Mergers and acquisitions creates opportunities, and it doesn’t matter if you’re a seller or buyer,” Schwartz said. “When it comes to running your business, be prepared, because M&A presents a lot of opportunities and if you want to take advantage of them, you have to be ready.”

Sellers of businesses must first determine what their goals and objectives are, as well as the trends in their market segment.

“Even if you don’t plan on selling your business today, you need to start thinking about M&A because your competitors are, and who is doing the buying, as well as how that impacts your business.

“Eventually, you’re going to need to exit from your business because you can’t take it with you. It’s inevitable. You may plan on selling it, giving it to your family, or selling it to someone in your business, but either way, you’ll want to exit your business on your terms, so you’ll want to optimize that exit before you’re forced to respond. Do it on your terms.”

 

What is a business worth?

The first step is determining what a business is worth, which Schwartz said business owners are often nervous about being too complicated. There are three components in answering that question: three years of financial statements, appropriate adjustments to financials to show true profitability, and a reasonable three to five years of projections.

“The second step is determining what makes a business valuable, which is one of the most important,” he said. “When an owner has difficulty in determining what makes their business special, it’s more difficult to place a value on it.”

Features of a business that makes it valuable to a buyer include:

 •   The owner — will they continue to work in the business after the sale?

 •   Management team and employees — make sure they stick around

 •   Loyal customer list

 •   Key suppliers

 •   Physical assets and facilities

 •   Trademarks and other intellectual property

The third step is the legal business structure, whether it’s an LLC, a C-Corp, partnership, etc., Schwartz said.

“The business structure will help dictate how you optimize its value. The bottom line is, figure out what your business is worth, make sure you choose a planner that works best for you, and do your homework ahead of time — be prepared so you don’t find yourself in a situation where you’re forced to sell.”

 

Cautions of M&A

Even friendly buyers can be demanding and will look for angles to reduce an offer price, he said.

“Selling a business can be a lot like making sausages — the process isn’t always pretty, but it’s a good outcome. Know who you’re dealing with when you’re working with buyers.”

Selling a business can also be a large distraction when the owner is in the middle of running it.

“If you’re selling a business, you’re taking on a second full-time job for a short period of time, so be prepared for it. It can also be an emotional roller coaster — deals can be off then on again.”

M&A also has its own vocabulary full of acronyms that buyers are fluent in and that they might take advantage of if sellers aren’t familiar with them, he said.

“Know the whole language of M&A before you get involved in the process, as well as knowing how to manage the process. Regardless of whether or not you’re ready to sell, M&A activity can force you to run your business better.”

 

THREE CASE STUDIES IN SELLING A BUSINESS

‘Prepared and ready to go’

Situation

• WD tried to sell business without help from advisors and failed

• Spent over a year talking to a competitor about buying their business, never got a firm offer, gave away a lot of confidential information

What did the WD do?

• Focused on re-building their business, got their house in order, did what they do best – sell auto parts

• Hired right group of advisors to guide the eventual sale process

Outcome

• “Best fit” buyers were approached when business owner was ready to re-consider selling

• During sale process the advisors managed all aspects of the transaction

• Final sale price exceeded expectations

Lesson learned

• Be prepared, be ready, hire the right advisors

 . . . . . . . . . . . .

‘Not sure if I want to sell’

Situation

• Specialty WD thought he was ready to sell, went through an exhaustive sale process

• Received a firm Letter of Intent from a good buyer

What did the WD do?

• Turned the offer down at the last minute

Outcome

• The business owner was really not ready to sell. Too many issues had not been adequately thought through

Lesson learned

• Deal did not get done, but the business owner was ready a few years later and committed to selling his business

 . . . . . . . . . . . .

‘Let’s go’

Situation

• Specialty business, family owned, made firm decision to sell and got their house in order

• Financials, documentation, contracts and all other materials were ready before any discussions help with buyers

What did the family do

• The family was ready for the sale process, the business was ready to present to buyers and they family knew what they wanted

Outcome

• Final sale price exceeded expectations

Lesson learned

• Be prepared, be ready, know the market conditions

Parts & People

Parts & People is published monthly by Automotive Counseling and Publishing Company, Inc., a Colorado corporation, P.O. Box 18731 Denver, CO 80203, 303-765-4664. President-Lance Buchner. Founded by Lance Buchner and Dave Lucia.