Written on: December 16, 2024 by Jeffrey Simpson
Business owners in the consolidating fuel and HVAC market are frequently engrossed in the day-to-day pressures of running their operations, meeting payroll and responding to a host of market pressures. Even if an owner is contemplating a sale because they’re retiring (or for any other reason), they’ve likely spent some time planning for this critical career step. Too often, the thought of best positioning a company for a sale falls by the wayside, or the owner only addresses it in the months leading up to the sale. While visions of a financial windfall and a comfortable retirement occupy the mind of a seller, the details of how to achieve these goals are often hazy.
By contrast, the most astute sellers take the time to consider their personal goals instead of merely accepting what the market will bear when they offer their company for sale. They ask, What steps can I take early to create value? What individuals or entities are the possible buyers of my company? Which of these buyers will offer me the exit I truly desire?
Have an Endgame in Mind
Thoughtful owners of businesses of all sizes build their operations with an endgame in mind. It is important to develop an exit strategy that best aligns with your personal goals, your business size and its financial health. Depending on your current position, some avenues to exit will be challenging to reach, while others are more of a natural fit. For example, a small business with limited offerings and a thin management team may not garner much interest from a financial buyer or a large strategic buyer. More sophisticated companies may not be able to find a local buyer who has the financing capability to pay a reasonable value for their business. It is important to consider the finite pool of buyers that are ideal matches for your business and are positioned to offer the value you seek.
The Meaning of Value to You
While some sellers will sell to family members or a key manager, most companies will seek a sale to a third-party buyer through a private sale or an auction (i.e., broker) process. Third-party buyers carry a range of options to sellers and provide differing sets of advantages. A friendly, cross-town competitor may be a good fit for your staff and family legacy post-sale, but they require more creative structuring of cash at close, seller notes and perhaps an earn-out to reach an acceptable purchase price in the current banking environment. A large regional or national strategic buyer may offer a better purchase price and structure but give the seller less control over the treatment of employees and customers—a sensitive topic for many small business owners.
Financial buyers, including institutional private equity and other private capital providers, can offer sellers flexibility in structure and tax advantages. These include rollover equity opportunities, continued leadership of the company by the seller and cash at close. However, sellers must exhibit a history of steady earnings, a robust management team and, generally, Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA) of at least $2 million to attract such buyers.
Take the Steps to Level Up
Owners and their advisors commonly identify the breakpoints—both financial and operational—where new potential buyers naturally enter the picture and others fall away. With clarity of purpose, management teams can institute changes that add value and move the company into a category where it will attract a more advantageous pool of buyers. Some buyers are seeking (and are willing to pay for) the latest technology on vehicles, in the field and in the back office. Others may choose to buy less sophisticated companies at a more favorable price to later upgrade the business and realize the value themselves.
I have noted in previous articles that more financial buyers have recently become involved in the delivered fuels and HVAC acquisition market. These buyers can offer attractive multiples and flexibility to allow sellers to continue to take advantage of the future growth of the business. However, they look to the existing management team to lead the business into the future, uncover acquisition opportunities and provide timely, professional reporting. If you want to enjoy the unique benefits of this exit avenue, you should plan to build out your team and invest in the systems to meet these expectations. This investment of time and capital can be handsomely rewarded in both the purchase price and the ensuing tax and “second bite at the apple” benefits.
It’s best to view the preparation for a sale as a starting point instead of merely the ending point. Understanding the different types of buyers in the market and what drives their value calculus gives sellers a chance, with adequate time and planning, to reach the exit they desire instead of merely the exit that is currently available. Whether value to you means only the final sale price or other considerations relating to staff, customers, future earnings and tax impact, you need to take time to understand the variety of potential exit ramps years before your company’s sale and identify your natural exit strategy. ICM
Jeff Simpson is the Founder and managing member of Notch Capital, a private investment firm specializing in buyouts and recapitalizations of lower middle market businesses in the heating, cooling and home services industries. Notch Capital also provides advisory services to help these businesses strengthen their performance and analyze acquisitions.
