Part 1, deciding to sell
When you open a business, the first thing you should decide is when you intend to sell it and for how much. For most electrical contractors, this directly conflicts with the purpose for which the business exists—to provide future security for family and employees. Yet Michael Gerber adamantly offers this advice in his book “The E-Myth Contractor.
While most business owners seek security and stability, your company must change or grow, or it will stagnate and eventually fail. Unless you live forever or can guarantee the success of your heirs, a sale in the future is not only possible but likely. In recent years, privately held electrical contracting businesses have become attractive targets for independent purchasers. Preparing to field an offer from a buyer may be a strategy worth considering.
Why would you sell? Perhaps you are bored with the daily routine. The industry may have changed in ways you don’t want to have to accommodate. You may want to retire, but there are no family members who are ready or willing to step into your job. Key managers might not share your vision of the future. The company may be well-positioned for a lucrative sale. You might want to extract cash or free up space in your building for other interests.
Review your options. What would be your goal in making a sale? Certainly you will want to obtain the highest possible price. Do you care whether it continues to operate at your current standard of quality and maintains its reputation? Do you want to ensure loyal employees keep their jobs? Will your name remain on the letterhead? Do you want to make a quick exit and move onto other activities, or would you like to retire and do nothing? In that case, perhaps the optimal price and assurance of continuity are less important than the timing of a sale, especially if you already are financially secure.
After you have reviewed your priorities and possible reasons for selling your company, keep a written summary handy to counteract any misgivings you might face during the selling process. Allow yourself to be sentimental, but keep yourself on track. After deciding to sell, you will begin to leave your company mentally, and you want to finalize a sale before the business begins to lose value because you are unable to focus on operations.
It may be tempting to save the sales commission by marketing the business yourself, but a professional intermediary will be more prepared to get the deal done. You are unlikely to get the best deal if you do it yourself because your judgments about the value of your business are clouded by your emotional and financial investment. You don’t have the necessary contacts to locate qualified buyers or the background to deal with the legal, tax, accounting and regulatory issues you will face. Most important, you can’t broker a sale and run the business, too.
You will need to hire a business transaction attorney (not your corporate lawyer) to keep everything legal and a tax adviser to make sure you keep the money you receive from the sale.
What is your business worth? By definition, “fair market value” is the price a willing buyer and a willing seller negotiate and agree on at a certain and specified point in time, in a free and open market. The presumption is that neither party is under duress, although the parties almost always operate under either financial or time pressures. You can control your asking price. The actual selling price is determined by the market and the buyer.
Merger and acquisition activity generally operates within a cycle of about three years. In a seller’s market, a few buyers seek high-quality deals, and prices rise. As more buyers enter the market, competition briefly drives prices even higher. In the resulting buyer’s market, there are fewer buyers for the remaining companies, and prices decrease. So, timing is a critical factor in establishing value.
Other factors include a strong niche or market advantage, depth and competence of the management team, a loyal customer base with no customer contributing more than 5 percent of sales revenue, a good reputation in the industry, and operations running at no more than about 70 percent of capacity. Buyers also want minimal inventory, an unsaturated market, responsive and available suppliers, sufficient investment in employee development and training, adequate pension fund reserves and a strong balance sheet.
A strong balance sheet includes high and growing net worth, fixed assets that work to support revenue growth, sufficient working capital to finance improvements, accrued liabilities for taxes and benefits (so cash flow is not prematurely used for these purposes) and small, steady pension plan payments. Balance sheets should not show old or obsolete inventory, too much leased equipment, high long-term or mortgage debt or declining net worth.
Ultimately, the fair market value is subjective. In Part 2 of this series, which will appear in the July issue of Electrical Contractor, we will consider the steps of the actual selling process.
NORBERG-JOHNSON is a former subcontractor and past president of two national construction associations. She may be reached at firstname.lastname@example.org