Market conditions are such that many operators must consider this question to maximize their selling price. The first of a series examines what operators must do to make this process work to their advantage.
In today’s challenging business environment, there is a new urgency to the question that most vending operators face at some time in their career: Is it time to sell the business?
Many operators are looking to the future and asking this question because they have little appetite for the continuous capital investment and intense effort that will be needed to maintain profitability in today’s ever changing marketplace.
Numerous articles in this magazine have addressed the causes for this situation, so I will not go into them here. Suffice it to say that for many operators today, selling the business now is the best option they have to optimize the capital value they have created in their business.
Operators who aren’t planning to sell must plan to grow if they wish to stay in business.
Few things are certain in today’s world, but I will guarantee you that all the new challenges, including increased costs and ferocious competition, are here to stay and no one can remain at their present profit level without growing the business. Cost cutting may hold off the red ink for a while, but this is a one-trick pony and will only postpone the inevitable.
This article will address what operators must do to maximize their selling price.
When deciding if it’s time to sell the business, ask the following questions:
- Is your enthusiasm and energy for the business still strong? Do you still love this business?
- Do you have the financial depth to stay the course, knowing it may get worse before it gets better?
- Have you invested in technology?
- Do you invest in the training and development of your people?
- Do you have a formal marketing strategy? (Sadly, many operators spend more time planning their company picnic than they do planning for growth.)
If you answered “no” to these questions, it’s time to consider selling the business.
If you wait too long, your company is likely to bring a lower price when you eventually do decide to sell.
TIMING THE SALE IS CRITICAL
If the seller waits too long to sell while the company is experiencing problems, the company risks minimizing its selling price, or possibly becoming unsellable altogether. No investor will purchase a company with a negative net worth. Hence, speed is often essential in maximizing the company’s selling price.
Troubled sellers can go too far in cutting cut costs to improve their prospects for a successful sale. A seller must be very careful about cutting costs.
By not investing and maintaining adequate staffing needed to sustain the company’s performance, the company risks hurting its sale value.
MAIN CONSIDERATION: SUSTAINABLE PROFIT
The main objective in the process of selling the business is to prove a sustainable profit; present and future. Everything else is secondary. A business may claim to be profitable, but this must be verified through a judicious and methodical examination of facts. This process is called due diligence.
The due diligence checklist is shown on the next page.
The first item on the due diligence checklist is recasted Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). To “recast” is to change the form of something, in this case, the seller’s financial statement. The objective of this analysis is to show the company’s profitability as it is now and as it can be in the future when synergies and economies of scale are considered.
What is your company worth? The key consideration is sustainable profit. While there are other factors that influence value in the eyes of the buyer, profit is the overriding element.
There are different ways to determine the selling price based on the profit. I am not going to go into the different formulas used to determine a specific figure.
The important point is that profitability will provide the foundation of the selling price. A well crafted offering letter is a vital requirement for the seller. The main focus should be profit; skip the fluff.
FAIR MARKET VALUE: A DEFINITION
It does not make a bit of difference what you, your lawyer, your accountant, or your brother in law thinks your business is worth. “Fair market value is what a willing buyer will pay a willing seller.” This definition is widely used to define how a sale price is arrived at. In all reality, only the marketplace will answer the question: What is my business worth? Ball park estimates and relating what companies like yours have sold for are used to find the seller’s starting point sale price.
Beyond profitability, the quantifiable factors that add value are:
- Sustainable growth over the last five years.
- The number of proposals on the street
- The historical closing rate for proposed business.
- The number of accounts under contract.
- Age and condition of assets.
- Years of experience and skill of employees.
- Cost saving synergies and economies of scale that the buyer will enjoy when he takes over the business.
Employee handbooks and employee performance evaluation records add value by establishing the quality and stability of the workforce.
Following are some necessary items for a seller to become familiar with and think about:
- Listing agreement: In situations where a broker or intermediary is involved, this outlines fees charged and length of representation.
- Due diligence source information: This is all the documentation needed for the buyer to evaluate business, such as geographic territory covered, an organizational chart, inventory records, accounts, contracts, financial statements, tax returns, etc.
- Confidentiality agreement: This is a signed statement that the buyer and his agents will not disclose the seller’s information.
- Letter of intent to purchase: This is a non-binding, pre-contractual document. It crystallizes oral negotiations between the parties concerning the proposed terms of the transaction. It lists the assets to be acquired, assets not included, liabilities assumed, purchase price of assets, and good will expressed as a percent of revenue, inventory, machines, warehouse, trucks, material and cash handling equipment, employment contracts, etc.
- Term sheet: The buyer’s 1-page outline of the financial proposal, including the gross price less depreciation assumed, total consideration paid, employment contracts, non-compete values, profit maintained bonus, etc.
- Employment stay agreements: These include bonuses for key technicians and managers.
- Inventory and changer funds: These are values paid to the seller at closing. Accounts receivables are purchased by the buyer usually at a discounted rate of 15 percent.
- Purchase and sale agreement: This is a legally binding document that identifies assets purchased, the seller’s representations and warranties, payment schedule and full details of all terms and conditions of the sale. If the seller has assignable employment agreements with key employees, it is viewed favorably by the buyer.
Employment contracts generally include sections such as:
- A non-compete agreement that bars employees from competing directly with their former employer.
- A non-solicitation agreement that prohibits them from recruiting employees or clients of the business they left.
- A non-disclosure agreement that prohibits employees from using information they gained in their former workplace.
A single employment contract can include all of these three provisions.
When preparing to sell, it is also important to clean up any questionable business practices that might have crept into the business over the years. If for some reason you can’t correct them, make the buyer fully aware of the situation. If you don’t, the buyer’s due diligence will discover these items anyway and you will lose all credibility.
Activities that will need to be corrected include:
- Wages paid under the table.
- Services, payments or subsidies made to or received from clients without benefit of a contractual agreement or memorandum of understanding.
- “R factoring” or underpayment of commissions.
- All “side” deals with suppliers, employees or clients.
Next month, we will address the negotiation process.
BUYERS WANT TO KNOW:
1. Number of machines on location
2. Sales broken out by vending, OCS, catering
3. Vending product mix
4. All employees listed by title, date of hire, pay
5. All vehicles owned and leased listed by make, model, mileage, condition
6. Value of inventory
7. Value of imprest fund
8. Detailed statements of revenue and expenses for past three years
9. Number of size and accounts lost in last five years
10. Number and size of accounts won in last five years
11. Type of route control system
12. Current technology used: DEX, GPS, credit cards, etc.
13. All capital investments made in last five years
14. Union activity, if any
15. Average selling prices
16. Number of vending accounts served
17. Number of OCS accounts served
18. Purchasing information: prices, rebates, sources
19. Subcontracted beverage service information
20. All equipment on loan from bottlers
21. All vending, foodservice and OCS equipment owned, including date of purchase
22. Building lease/ownership information
23. Accounts receivable, trial and aging balance, by client
24. All subsidy or management fee arrangements
25. Three years tax returns
SELLER'S DUE DILIGENCE CHECK LIST
- Financials: recasted Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA), verification of reported financials, inventory value, imprest fund, accounts receivable, unpaid commissions, guarantees, identification of adverse trends, add backs, synergistic effects
- Commerce: growth rate, marketing resources, history of lost accounts, selling prices, commissions, merchandising, economic trends and cyclicality, performance of business relative to competition, legislated restrictions
- Customers: geographic mix, demographic mix, delivery logistics, accounts under contract, cure periods, pending expirations, risk of significant customers leaving after acquisition, volume changes, new demands on quality or service, large to small ratio
- Competition: strengths and weaknesses of key competitors, changes in competitive strategy, barriers to market entry, potential or emerging new competition
- Suppliers: prices, rebates, discounts, volume advantages, continuing availability of products, trends in supplier base (e.g., consolidation) potential changes in supplier leverage, changes in costs
- Employees: compensation, fringe benefits, tenure, skill levels, motivation, non-competes, availability of capable management, unionization, risk of key employees leaving, general morale
- Liabilities: tax and other government legislation, pending litigation, environmental factors, violations, liens, “R” factors, side deals
- Reputation: history of regulatory violations, bad press, poor quality history, customer attitudes, credit history with banks and suppliers, community involvement
- Operations: post-acquisition lease termination or term changes, zoning, condition of property, buildings, vehicles, age and condition of equipment, sanitation, DEX capability, technology, required capital expenditures, insurance cost changes
Tom Britten, NAMA Knowledge Source Partner, is, an analyst, intermediary and professional consultant with more than 30 years of industry experience. He functions as a full service resource available to all vending, OCS and food service companies large and small. Contact Britten Management Services, LLC for a free, and no obligation consultation at 813-469-5437 or via email: firstname.lastname@example.org.