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Is it time to sell your company?

October 13, 2010
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You started your carpet and upholstery cleaning business from scratch and worked hard to turn it into a successful business.

You are steadily scheduled for work and you have poured your heart and soul into your business.

After years, you finally feel comfortable with a steady flow of income.

However, you see the years start to click away and you feel that you need to be looking at your transition or exit strategy.

Why plan an exit?
Some people think that exit strategy merely means the calendar month and year when one puts down the wand (or scheduling book for multiple truckmounts) and starts his/her residency on the beach with the waves lapping softly in the background.

Well, few of us can afford to just toss out a business (with all its sweat equity and asset equity) and just start anew.

There was a lot of money put into your business, and maybe there is a chance of getting back some of that investment in a sale of your company.

That makes perfect financial sense.

If one can sell his/her company, then this will definitely help with retirement income.

Maybe all that investment is not lost (See “A time to sell” sidebar).

First steps
Take a hard look at what you want to do — not what you must do.

Get your plans down on paper and go over it with your spouse (who is usually pretty involved in your company).

Take a look at your health insurance and see what the timing is to convert to Medicare and supplemental coverage.

Make sure that you take into account things such as the final pay-off of your house mortgage and other debts.

The object is to put pencil to paper to map out where you will be financially if you do not have your company as your primary source of income.

We’re not talking wealth management here. We’re talking very practical planning to help you decide when it is a good time to sell your company.

Most carpet and upholstery cleaning and/or water damage restoration companies, when in their infancy, have little intrinsic value aside from their assets at fair market value.

Unless there is some special situation or desire motivating the sale of a fairly new company, it is a good idea to try to develop that company into a thriving (and sustainable) business that has a value.

Job versus business
Many carpet and upholstery cleaners are single-truck (or portable) operators who have their lives tied up in their van and related equipment.

They work long hours with little vacation and don’t earn any income if they are not doing the physical work.

Even in larger companies, the every-day control of the owner may be such that the business could not possibly operate without (or be separate from) the owner.

Some of you believe that, because you are the owner, everything must go through you and totally depend on you.

In such a scenario the control may give peace of mind to the owner — that all is running to his or her expectations.

Remember the old adage: Control everything and you will be in control.

In these instances, the owner of the company has created a job for the owner.

Think of this as a tradesman.

A plumber is paid by the hour to do the plumbing work. If there is no plumber to do the work, there is no hourly service pay.

Look hard at your company. If it could not run profitably or up to its normal operational potential without you personally being involved, then this company is more of a job than a business.

A job is personal to you. A company or business is something that can operate and make profit for any owner who follows solid instructions or procedures for operating a company (See “Too involved?” sidebar).

If you have a systemized operation, you have the beginnings of a bona-fide business which can be sold to another owner.

Structure your business
Even if you are not contemplating a sale anytime soon, it is a great idea to start preparing your business for an ultimate sale.

The object is to give your company a true business structure so another owner can enjoy financial success with the same company.

Let’s look at some things you can do to make your business a systemized and saleable company:

1. Develop other employees
If you are an owner/operator, consider hiring other technicians or helpers.

This means you start to have coverage when you are not available to do the physical work (whether pushing the wand or scheduling the job).

You need to start the practice of weaning the business away from yourself.

Otherwise, the company will never be separate from you (and you don’t want to sell “you” to someone else).

When you hire others, you need to set up employment and operational policies and procedures so that there is consistency in operation.

Your company will also need an employee manual that puts these policies and procedures in writing.

2. Set your company identity
Make sure you have a clean and clear identity to your company.

Look to make sure that you are not violating a trade name or trademark of another company.

Make sure your identity is not confusingly similar to another’s identity (so there is a clear distinction between the value of your business and the perceived value of that other business).

If you are named Bob and your company is “Bob’s Carpet Cleaning,” you will need to get a neutral name such as “Acme Carpet Cleaning” so that there is an identity apart from you.

If you have a franchise, make sure that your franchise and franchise name can be sold on to another owner.

3. Identify your customer base
You can’t keep all your customers in your head.

An important asset to your business is your core customer base.

Make sure that you have your complete customer base fully indexed in a data retrieval system (computerized or even manual) so that there is value to all that information.

Just a name and address is not good enough.

Document all aspects of that customer: Type of carpet and upholstery, average sales amounts, pets present, mapping, and even information such as length of hose run.

A mailing list has little value.

A fully documented and detailed analysis of your customer base has much greater business value.

Make sure that this wealth of information is guarded and protected, as it is one of your most important company assets.

4. Set advertising and pricing standards
Make sure your company identity and advertising is consistent so that, in any company sale, the advertising can continue seamlessly to the new owner.

Create written advertising and graphics standards for your company.

Set a pricing standard so that others (your employees or a new owner) can easily and quickly provide price quotations to customers.

Get it down on paper.

5. Set rules for scheduling
Again, document your whole system of scheduling and service territories.

The object is to ensure that there is consistency in how someone else can come in and seamlessly continue your work scheduling.

6. Document all physical procedures
Sure you know how to clean carpet and upholstery and how to dry a structure.

You have done it for years.

Make sure that you document everything so that someone else can follow the directions.

Remember, at Dairy Queen are pictures and descriptions of all steps required to make a chili cheese dog so that it is consistent.

Think if you had to train others to do what you do.

Now you get the idea of documenting your operational procedures.

Do you just take it for granted that employees are not to smoke in a customer’s house? Or do you have it in a procedure?

Should you have a procedure which actually says the technician is to get a payment from the customer at the end of the job?

You can never have too many instructions on what needs to be done to make your operation consistent.

7. Document all assets
Make sure that all your assets are clearly documented.

You may already be doing this for payment of business property tax.

Make sure this documentation is correct and up to date.

It will come in handy later when it comes time to sell your business.

Setting the price
You’ve got a systemized business operation humming along and ready to be put on the market.

What should you do next?

The first thing you should do is to research other businesses in similar demographics.

Are there other similar businesses on the market in your area? What are the prices and terms of these sales deals?

If you know the circumstances of other similar business sales, you can better determine if your asking price is within the ballpark.

One of the biggest mistakes one makes in selling a carpet and upholstery cleaning or restoration company is to look at just selling the equipment.

Remember, that only sells a job and not a business. Assets are part of a business, but they’re not the only things that create value.

If you are just selling used equipment, you are not getting the value you need for your business. You are just going out of business.

You’ve already figured out that selling an ongoing business is more profitable than a “fire sale” of used equipment.

In setting the price of an ongoing business, many times the price is based on a multiplier of something called EBITDA, which is “Earnings Before Income Tax, Depreciation and Amortization.”

This essentially looks at the gross profit of a concern which deducts the middle line from the top line.

It is not an indicator of cash flow, but an indicator of a company’s ability to service debt.

Someone who is calculating the value of a company will apply (depending on the market) a multiplier (such as four to six times the EBITDA) and modify the final calculation based on physical assets.

The business generation of funds to pay salaries and expenses is taken into account when calculating the value of an ongoing concern.

Information needed to disclose
If an owner is taking a salary (rather than just taking a draw of profits) then this needs to be disclosed in the sale financials.

Think of owning stock in a company. You would still need people to actually operate the company to generate income.

Think of yourself as the stockholder of your company.

If you are an actual employee who performs work, place the same value of cost on that work as if you had hired another individual to perform that work.

Get with your accountant and make sure your financial statements are in order.

Many times, a prospective buyer will want to look at the last three years of financial statements, income tax returns and property tax bills/payments.

This will help him understand how the company generates and spends cash.

Many times a prospective company buyer will want a disclosure of any legal proceedings currently in place against the company or even contemplated to be brought against the company.

It is all about risk management. If there is too much risk, the selling price of the company goes down.

If there is real estate involved (such as an owned office) then this needs to be disclosed, including third-party property valuations.

Using a business broker
Like anything else, marketing is an important factor in making the sale of a company at the highest selling price.

Many find that a business broker brings value to a sale in that they have an established advertising program in place and contacts for prospective clients.

When approaching a business broker, you need to divulge the same type of information that you would be divulging to any prospective buyer.

You will need to sign a contract with a business broker for the sale of your company.

You and your lawyer should take a hard look at any contract.

Make sure that you understand the constraints of the contract.

See if it gives you the flexibility you need to cancel the contract and the power you need to veto unprofitable sales.

Make sure that you understand the commission structure of payment to the business broker when a sale is transacted.

Ask hard questions of a business broker. Ask them if they have ever handled a carpet and upholstery or restoration company sale.

Ask about particulars about those sales so you can better understand the length of time the companies were on the market and how close they came to projected sales prices.

Self-financing your company sale
There may be potential buyers who don’t have the financial means to pay cash for your business or to finance the complete purchase of your company.

Try to think creatively about ways that you can complete a sale at the selling price you desire.

This may entail your financing all or some of the sales transaction.

If you are carrying the mortgage on your company sale, make sure that it is properly drafted in contract form by your lawyer and that the contract covers all contingencies and gives you the protection you need.

Take a hard look at these types of transactions.

You may not need the whole amount of cash up front.

Sometimes, you can look at the monthly payments of self-financing as a type of annuity payment which can help to supplement your retirement (Social Security and/or pension).

This can give you good cash flow and allow the sale to go through as a win-win situation for both parties.

In such a situation, the business broker will probably still require the total commission at the initial sales transaction.

Timing and transition expectations
When you look at your financial model for selling your company, make sure that you give adequate timing.

Just because you put a company on the market is no guarantee that it will sell quickly.

Business sales usually take much longer than selling a home, so be prepared to have your business on the market for several months.

You may go through several unsuccessful sales presentations before a business sale is completed.

This is where advance planning comes into play.

Make the sales of your company a true plan, with target dates set.

Remaining as a consultant
Some company purchasers may want you to stay on in some capacity as a consultant.

Make sure that any such arrangement is adequately detailed in a contract, setting forth the contractual obligations of both parties (and, most especially, the liabilities involved).

If you do this, make sure that it is for a definite period, and not open-ended.

You want a transition period, but you definitely want it to transition you out of the business, and into your new venture or retirement.

Getting it done
With advance preparation of your business to be a saleable property and good planning of the actual sales process, there is no reason you can’t sell your business at a profit.

Expect to do quite a bit of work preparing the business and all the actual sales documentation.

You know best what needs to be done with your business. A business broker (who may not intimately know your business) may not be the one to magically create all the right documentation on a moment’s notice.

You have the most to gain by a profitable sale, so putting careful effort into preparation will make a successful sale come to fruition.

Dr. Neal Seymour is a speaker, trainer, writer and recognized authority on legal, business and technical operations matters relating to the carpet cleaning and restoration industry. With extensive experience as a corporate lawyer and businessman, Dr. Seymour holds degrees in both engineering and law.

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