Talk of large consolidators buying collision repair businesses continues to dominate the press. But even as large consolidators continue to gobble up smaller regional MSOs many potential sellers face difficulties in completing a sale transaction. In fact, by some estimates, only 10%-20% of private companies that are listed for sale will successfully sell (and some experts predict even numbers as low as 5%).[i] To ensure that your business does not become one of these unsellable companies, here are three proven ways to sell a collision repair business.
Sell to Family and/or Management
Selling to a family member active in the business or an existing management team is often a quick and effective way to sell a collision repair business. Selling to family members active in the business is a good way to ensure that a successful business remains in the hands of a trusted family member, while allowing the seller to monetize the years of work they have put into the business. Not all collision repair businesses have family members active in the business, but often senior managers or veteran employees may have an interest in acquiring the company from an existing owner. This type of transaction is often referred to as an ESOP, or Employee Stock Ownership Plan. The transaction can take place over time through a gradual employee stock ownership transfer or through an immediate transaction. These transactions often involve using bank debt to fund a large chunk of the purchase price paid to the Seller.
The benefit of selling to active family or management is that both parties are deeply involved in the business and inherently understand the operations of the company. Additionally, these types of transactions are often able to be completed confidentially and result in minimal disruption to existing operations. In the collision industry this is important as referral partners and other customers often are uncomfortable with management and ownership changes, and may even require the new owners to re-apply for referral accounts. Transaction advisory fees are also minimized as there is less due diligence and negotiations that involve M&A advisors, attorneys, and real estate professionals.
The flip side to these types of transaction is that they rarely maximize proceeds to the existing owner. Also, because the seller often finances a substantial portion of the transaction, post transaction the seller is still financially involved in the business. This high level of financial concentration has been known to cause post transaction issues where sellers still feel they have a say in the day to day operations of the business.
Selling to family or management is an effective way for an owner to monetize the value they have built over time, but it does require planning and forethought to minimize post transaction difficulties and emotional fall out.
Sell to a “Strategic”
Selling a business to another business in the same industry is referred to as selling to a strategic (vs. a financial buyer, more on that below). In the collision industry the most logical buyer of choice is often one of the large consolidators, or possibly a smaller regional or local consolidator. But many business owners face challenges in selling to a consolidator. Selling to an existing competitor or industry peer often leads to the maximum valuation of your business in a transaction. However, many owners find it difficult to manage the day to day operations of a business while also confidentially managing the sale of the business. Managing a transaction is an all-encompassing task, as demanding and sometimes more demanding than managing day to day business. Even with the help of professional advisors, selling a business is an emotional and distracting task. Most business owners have never sold a business before, and even those who have sold a business most likely only completed one or two business transactions.
Another challenge that is often underappreciated by the seller is the difficulty in managing the buyer through the sale process. Sophisticated buyers have substantial due diligence requirements encompassing financial, legal, environmental, operational, real estate, IT and HR documentation. These requests for documentation can be overwhelming even for the most prepared sellers.
The process of buying a business is as time consuming for the buyer as it is for the seller, perhaps more. Even the largest consolidators have constraints on their ability to manage and finance multiple deals simultaneously. Just because you say your business is for sale does not mean you will automatically receive an offer. Or that the verbal assurances you received will translate to an actual written offer. Or that the written offer matches the verbal offer. As the industry continues to age and more owners look to exit their business, the challenge for the large consolidators is not identifying businesses for sale, but rather identifying the best deals with the highest probability of closing.
But the best deals are not necessarily the cheapest deals. The best deals are when a buyer knows they have a reasonable likelihood of closing at a fair price. In fact, consolidators will often pay a relative premium to companies that have professionally prepared financials and a team dedicated to seeing a deal through to closing. Consolidators are often concerned that sellers are more interested in “kicking the tires” to see what their business is worth than actually following through on a sale. To maximize the value of your business in a sale put together a professional financial package, dedicate a team to managing the process with the buyer so you can continue to manage your business, and be prepared to pull the trigger when the time comes.
Sell to a “Financial”
A major hurdle in negotiations around the price of a business is over the future value of the business. Many sellers believe that they should be compensated for a portion of the future value of a business whereas most buyers will take the position that no future value ought to be shared with the seller because the buyer is the one actually executing the future growth of the business. Leaving the mechanics of financial valuation aside for a moment, selling to a “financial” is a way for a business owner to realize value today (i.e., take some money off the table) while also continuing to grow the value of the business in partnership with an equity partner.
Selling to a financial group often requires that you sell a majority stake in your business. But due to the way private equity deals are structured, as the business grows the minority stake becomes very valuable. Think of your business as a pie. The idea of selling to a financial partner is that together you will make a very large pie. While the entire pie is no longer yours, your slice of the pie is much larger than the pie you could make on your own.
Most private equity groups will only invest in businesses that have reached a certain size, normally $50 million in revenues or $5 million in EBITDA. However, some private equity groups looking to invest in collision repair are willing to invest in companies with as little as $3 million in EBITDA. But if you are of suitable size, continue to have a desire to grow, are willing to give up control of your business and answer to a board of directors, selling a majority stake in your business to a private equity partner can be well worth the effort.
Selling a business is a complex, time consuming and emotional process – clearly a decision not to be taken lightly. But valuations of collision repair facilities are at all-time highs. If you have been considering a “liquidity event”, i.e. converting the sweat equity you have built over time into liquid assets, now is a great time to do so. But even straight forward transactions can get complicated quickly; so it is best to work with an experienced team who has experience in collision repair transactions and negotiations, and who can help manage the process for you, both emotionally and financially.
If you are interested in discussing the differences between financial, strategic, and employee transactions, please reach out to me via my contact page. The pace of change in this industry is astounding and I find it fascinating. I also just like to talk to real humans in an industry I am passionate about. I keep all communication confidential.
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