How to Manage for the Eventual Sale of the Company

The mind of the garden variety vending operator is swimming with a jumble of hot topics, day and night, every day:

"Who is going to call in sick tomorrow?"

"What's that new motor for truck #11 going to cost?"

"Is the new contact, at my biggest account, going to test the market?"

"My customers probably won't swallow another price increase."

"Why do my suppliers hammer me with price increases I can't recover?" … on and on.

On a less regular basis, you ponder: "Some day I might buy out my competitor, or maybe some day I'll just hang it up; sell my company to one of my competitors." Not tomorrow or the next day … just some day. That's the way we think of acquisitions and divestitures; it is something down the road.

You must plan for the future
Buying or selling a vending company can be the best thing that ever happened to you or your absolute worst nightmare. As a former executive of a national vending operation and now a business valuation/acquisitions consultant, I have seen more than my fair share of the latter.

I am not going to wax philosophical on the virtues of strategic planning. However, I will suggest that it is strongly in the operator's best interest to periodically set aside some quality time to review the checklist (see below). A couple of times a year should be sufficient.

Make it a formal review. Roll each element around and ask where you are now and how you can add strength and depth to the value of your business. Benchmark areas for improvement and measure your progress.

The core item that drives the entire process is the necessity to prove a sustainable profit; present and future. Everything else is secondary. A business may seem profitable, but this must be verified through the judicious and methodical examination of facts.

The sale price will vary based on the synergies of the acquiring company. For example, a company may own a piece of real estate, but if the acquiring company is going to fold the routes into another facility, the value of the real estate is not part of the deal. The seller then has the task of finding a buyer for the real estate.

Key factor: recasted EBITDA
Most of the items on the checklist are self explanatory. A few of them, however, deserve a little more explanation.

The recasted EBITDA (earnings before income tax, depreciation and amortization) is the first on the list for a reason. Primarily, investors focus on their anticipated return on investment (purchase price) from future cash
flows (profit).

To "recast" is to change the form of something. In this case, EBITDA is changed, or recasted, to reflect synergies or economies of scale that will affect the bottom line of the company being sold. This is usually a fairly lengthy calculation.

The objective of the analysis is to show the company's profitability as it is now and a snapshot of greater profitability in the future. This analysis can be prepared by the seller, the buyer or the broker, or any combination thereof.

The recasted EBITDA measures the positive effects of rolling the newly acquired business into an existing business. These are estimates of available synergies and economies of scale, and the resulting favorable impacts on future profitability. They are major factors in the investor's decision to buy or not to buy.

This may seem so basic as to not need any explanation. Yet, I have seen otherwise intelligent people miss this truth altogether. In reality, if an asset does not add value to the buyer's business, or if it duplicates an asset the buyer already has, it doesn't add a cent to the sale price.

Examples of this are sentimental pictures or old machines that have been refurbished to add charm in the waiting room. Such items have value to existing employees, but not to a company acquiring the business.

The recasted EBITDA is a lengthy, detailed analysis that covers the business's entire balance sheet. It is a time consuming process, which
often requires the assistance of an accountant or consultant.

It behooves the seller to make this as easy as possible for the buyer. Good records and the integrity of the seller's information are significant factors here.

Imprest fund paid at closing
The value of the imprest fund, the cash used in the business for change funds, refund banks and product inventory — in the warehouse, in the machines and on the trucks — is customarily paid to the seller at closing in addition to the agreed upon sale price. Again, accurate and complete records are crucial.

Certainly the age and condition of trucks and vending machines are considered, but it's the revenue from accounts that the investor craves. The stability of the revenue generating account base is always a concern. This concern is somewhat diminished by the presence of client contracts that are automatically renewable (evergreen) and cure periods for problem resolution to prevent knee-jerk cancellation.

Customer contracts and contingencies
In the absence of customer contracts, there is usually deep anxiety on the part of the buyer. In order to alleviate this fear, the seller oftentimes makes guarantees that no business will be lost and backs it up through contractual obligation to forfeit a certain amount of the sale price if
any accounts are lost over a mutually agreed upon period of time.

Compatibility of the technology between the acquirer and the seller will also impact value. If one company has routes on handhelds and the other doesn't, a cost will be involved in making the two compatible. If the seller is using more advanced systems than the buyer, then much of the investment that the seller has made will not add to the company's value to the buyer.

Post acquisition roll-in is hard enough without having to reengineer systems to bring them into the 20th century. A buyer will undertake this task only if the price is right.

Things to "clean up"
For a clean, recasted EBITDA, there are some practices that are common in the industry that need to be "cleaned up" if you're serious about some day selling the company.

"Side deals" are problems waiting to happen. Some of most dangerous, not to mention illegal or downright stupid ones, are:

  • Payment of wages under the table.
  • Services or payments made to clients not covered by a memorandum of understanding or an amendment to the contract.
  • R factoring. This is called skimming in other industries; the practice of reducing actual sales to lesser amounts in order to cheat the client and/or the employee out of their commissions.

All of this is certain to be unearthed by an astute buyer and will, at minimum, take a bite out of the sale price, if not kill the deal altogether.

Intangibles can be critical
Hard assets and cash flow alone do not establish the price at which the business is sold. Oftentimes, the best thing the investor gets for his money is good people. This is an intangible; it cannot be quantified. However, it is also a very important factor.

The parties will always hold different views as to the potential of the company. The solution used to make a deal when this happens is often an "earn out" agreement, wherein the seller agrees to guarantee the future increased profitability of the company.

The value of employees
More than 50 years ago, business author Peter Drucker was the first to assert that people should be treated as assets, not as costs or liabilities. While business owners will agree that their greatest and most valued assets are the employees, many do not practice what they preach. They don't mistreat their people, but they don't go out of their way to show appreciation either.

To be a high value company, this has to change. Any company's worth is increased when people are properly managed.

Different than capital equipment, ownership of which can be transferred, people cannot be owned and therefore are not noted on the balance sheet. However, an astute buyer will always view the people he is acquiring not as financial assets that depreciate in value, but dynamic human assets that will increase in value over time.

For example, that sharp young lead route person might be the vice president of operations a few years from now.

Company reputation
Another important intangible is the reputation of the company. This is also impossible to quantify, although it is possible to qualify in some ways. The ways in which it is qualified include membership in civic and business organizations, letters of thanks from customers, and stability of employees and customers.

Involvement in industry organizations also qualifies a company's reputation. The owners and senior executives of the industry's most highly regarded companies are continuously involved in the affairs and leadership of state and national trade associations.

Last year's NAMA honorees, Allen Plaisted of Southern Refreshments, Tucker, Ga., and Barry Frankel of Family Vending Co., Altamonte Springs, Fla., are prime examples of this.

Acquisitions: the only path for many
Mergers and acquisitions are not new to vending. However, the complexities of today's ever-changing marketplace and the resulting difficulty of gaining and sustaining growth have added a new twist. Many companies today view acquisition as the only way to grow the business.

Let me relate one instance in which acquisition enhanced a company's value.

An independent, family owned vending company was facing tough competition from a large national competitor as well as from a couple of small local start-up companies who were offering lowball deals to customers to gain market entry.

Not content to sit idly by in the face of dwindling market share, this company took matters into its own hands. It began an aggressive growth initiative supported by multiple acquisitions. This company made acquisition the foundation of what was to become a successful business strategy.

An acquisition will enable a company to fill in gaps in its route schedule. In addition, it can add knowledge resources for new lines of business in which the existing staff lacks expertise.

Valuation resources can help you
Where do you go for a professional valuation of your company? This is an important question. The vending business is a very specialized field.

Accounting firms and other very competent professionals outside of the vending industry are frequently clueless when it comes to placing a value on a vending company.

NAMA offers a good worksheet to member companies for this purpose; however, the best gauge of your company's value will always be what companies with similar characteristics to yours have actually sold for in the real world.

I promise you, that if you invest just a small amount of time in thinking about the long-term future of your company, it will pay off down the road. If "some day," comes, you will get a better price when you sell and a better deal if you buy.

Tom Britten is president of Britten Managment Services, based in Lutz, Fla. He is a longtime vending industry veteran. He can be reached at 813-792-9719; email: tombritten@msn.com.

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