Automatic Merchandiser has carried several articles over the years on how an operator determines a selling price for the business. The factors that determine the value of an OCS business, however, are different from that of a vending operation.
Automatic Merchandiser recently interviewed Dawn Sanders, director of acquisitions for Filterfresh Coffee Service, Inc., a company that has made numerous acquisitions in recent years, on considerations in determining an OCS company's sale price. Filterfresh is the U.S. subsidiary of Van Houtte, Inc., a fully integrated coffee roaster and equipment manufacturer.
Sanders joined Filterfresh in January 2005 as director of acquisitions after serving as vice president at Branch Banking and Trust Co., where she was instrumental in underwriting, structuring and negotiating deals. Previously, she was vice president of mergers and acquisitions at Five Star Food Service, Inc., based in Dalton, Ga., senior vice president at Sun Trust Bank, and president of Whitfield County at Bank of America.
Following are her answers to questions in an exclusive Automatic Merchandiser interview.
AM: How does a buyer value an OCS business?
Sanders: Although different buyers may value companies differently, most buyers value companies based on several factors, including a multiple of the stabilized recurring earning's stream.
In other words, the most current EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is calculated, then adjusted for nonrecurring and extraordinary items.
Usually, this EBITDA is adjusted for any operational changes the buyer expects to make, especially if there is a planned consolidation of operations such as changes in rents, personnel and benefits. These adjustments can both add and subtract from the original EBITDA number.
Other important factors which also determine value are size, quality of assets and accounts, stability (of accounts and personnel) and market size.
AM: Why would the buyer's adjustments lower the EBITDA?
Sanders: Keep in mind the buyer is projecting what the newly acquired company will generate for him/her on a going-forward basis, so adjustments of increased personnel benefits including health insurance or increased equipment and vehicle maintenance may be factors.
Another factor often overlooked is the projected capital needed in the next few years. Many times, companies delay replacing depleted equipment when they are looking to sell. After the sale, this equipment will have to be replaced or maintenance costs will rise, which impacts the calculated earnings stream, so most buyers will adjust the EBITDA to account for capital required to bring this equipment up to par.
AM: What do buyers look for?
Sanders: The simple answer is buyers are purchasing the earnings stream, so they look for a fair return on their investment. Beyond that, they look for stability among the accounts, route density, quality of equipment, including vehicles, strength of management and quality of personnel.
AM: How important is growth?
Sanders: Growth can show a healthy, vibrant company, so a buyer may place a higher value on a company experiencing increased sales. However, sometimes growth in a marginally profitable business can decrease value when you consider the cost of equipment. Again, keep in mind, value is established from the recurring earnings stream. It is important to remember here that although a growing company may bring higher value, buyers won't pay for sales that aren't already booked or equipment already installed.
AM: What's included in the sale of the business?
Sanders: Generally, all the assets necessary to generate the earnings, including the equipment, vehicles, accounts receivable, inventory and customer deposits. The assets are purchased free and clear from any debts, and it would be the responsibility of the seller to pay off the liabilities, including the accounts payable and any bank debts.
AM: How can a seller create more value?
Sanders: I get this question from time to time as I work with sellers when their expected value is apart from the real value. By carving out unneeded expenses, consolidating routes and implementing those price increases that you've been delaying, you can increase profitability and create value.
Another way to gain profitability is by converting your least profitable accounts to higher margin ones. This process can generate quick profits that can be long-lasting. To do this, rank your accounts by profitability and examine the bottom third. If you restructured these accounts by either making less frequent deliveries, imposing a minimum delivery amount, increasing prices or shipping them UPS, what does your profitability become?
You may be able to lower personnel costs, vehicle delivery costs and repairs. Chances are these low-end accounts are not contributing to your bottom line; however, properly restructured, they could add value to your company.
AM: There seem to be several buyers in the market that want seller financing. Can you offer any suggestions in considering seller paper?
Sanders: First of all, I would strongly suggest to seriously consider the increased risk associated with seller financing. In my experience as a banker, I saw many sellers lose considerable amounts of money by buyers defaulting on notes. In a lot of ways, the seller is in a no-win situation since the repayment of the note is dependent on the performance of the company, and he/she isn't in control of the company.
In order to be in control, he/she would have to demand the note and take the company back if the buyer defaults. This takes a tremendous amount of time, and legal fees can be atrocious. Many sellers are attracted to a higher sales price when discussing seller financing, but they should be aware the higher price is reflective of the higher risk.
AM: When is the right time to sell?
Sanders: I think that can be a very personal question and one that differs for each seller. Age, health and management succession certainly are reasons why someone would want to sell. Access to financing and willingness to increase debt are also factors along with competition. Ideally, you would want to sell when your profitability is at its peak, but another factor is the availability of buyers. Several years ago, buyers were having difficulty obtaining bank financing, so acquisitions slowed and companies carried less value. The market has gotten much better now, and more buyers are out there. Currently, I think values are good.
AM: How can you know if a buyer is right for you?
Sanders: Most of the sellers I deal with have built their companies from the ground up and have a tremendous amount of pride in the success of their company. They should be proud of their accomplishments and, in a lot of ways, their business is like a member of their family.
In choosing a buyer, the seller should look at the way the buyer currently does business to see if they are aligned philosophically. How does the buyer conduct himself/herself in the marketplace? How are customers treated? Is equipment kept in good working order? And, is the business healthy and capable of growing financially? These are questions I'd want to know before I turned over something I'd worked a lifetime to build.
Another factor to consider is the experience the buyer has in mergers and acquisitions. A lot of time and money can be wasted if the buyer isn't a sincere buyer. There are a lot of fishermen out there that don't actually close on deals. Experienced buyers will get to the point quicker and the process of the transaction will be more professional. Most experienced buyers guide the seller through the process and fairly negotiate the deal.
AM: How can you ensure a smooth transition?
Sanders: I think if you are dealing with an experienced buyer, you'll have his/her track record to determine this. Sellers should ask how the buyer plans to integrate their company into the buyer's company, and I think it's certainly fair to ask for a planning meeting to map out the integration issues jointly. It is typical that the seller would stay on for a period of time after the sale to ensure a smooth transition, and it's best to plan how this will happen shortly before the close.
AM: Comment on how you view personnel turnover and consolidation after the integration.
Sanders: Well, we view acquisitions as an opportunity to gain well trained personnel that have proven they can do the job, so we typically look to integrate them into our organization. In the event there are job duplications, we have to look to the weakest person to cut; however, since we are a large company, we usually have other job openings available.
Most of the time employees of the newly acquired company see real benefits in the acquisition since they now have an expanded benefits package like health insurance and retirement. Additionally, they now have a greater career opportunity. I know this wouldn't be the case with all buyers, but we are a national company with over 500 employees, so we typically don't see a lot of turnover after an acquisition.
AM: How can a seller make their employees feel comfortable about the acquisition?
Sanders: I think this is where the seller has to point out the benefits of growth and expansion that are expected after the sale. Typically, the buyer wants to see growth, and I always think growth will generate job opportunities and advancement. If the buyer is a larger company or one with multiple locations, the seller can point out advancements by moving from a small company to a larger one that is obviously focused on expansion.
Typically, the employees will see these benefits and will appreciate the opportunity that is ahead. It is normal for all employees to have a high level of uncertainty in the beginning, but the seller can lessen this by having joint orientation meetings with the buyer. Mergers and acquisitions are so commonplace that most employees have at least given some thought about the possibility of their company being sold. It's the uncertainty that causes problems and clear, open and honest communication can help to alleviate this.