by Alana Quartuccio
Every shop owner spends years pouring blood from their veins and tears from their eyes as they strive to make their business successful. The average owner spends decades running their business. Throughout the years, it not only becomes their main source of income, but it’s their livelihood too. It’s their whole world. Walking away from that is not an easy thing. When the time comes to exit and sell or pass the business on to a family member or employee, it’s going to take a lot more than putting up a “For Sale” sign.
In fact, exiting the business is not a process that can take years, it should take years, according to some industry experts.
“It’s never too early to begin thinking about it, and, as a matter of fact, every move that a shop owner makes should have succession in mind,” suggests certified exit planner Matt DiFrancesco, whose company High Lift Financial specializes in working solely with collision repair businesses. “Shop owners need to put the vehicle in place, so when the time comes, they are able to exit on their own terms.”
Shop owners come to him when they are at the point of thinking about transition, and what stage they are at varies per individual. “I get some who are maybe five years out, some who need to get out now and some who aren’t looking to get out but want to begin to put the plans in place.”
According to DiFrancesco, the first thing all shop owners need to think about is what they want their post-transition/exit life to look like. “If they don’t have a picture of what that looks like, it makes it difficult to be able to structure a plan according to what they want. The starting point comes down to figuring out if they want to fully exit or still be involved but not with the day-to-day operations as they want the flexibility to travel, play golf or go hunting. Once they know what that life looks like, we can start to build out the different ways we can structure a transition plan.”
Consolidation Coach’s Laura Gay agrees that it’s never too early to have exit plans in mind. “I think most shop owners fall into the category of not wanting to deal with it until the time comes,” she observes. “Obviously, that’s not ideal, but it’s not a deal killer either. There are plenty of shop owners who are just focused on running their business the best they can, being the most efficient. If you are running a good shop from top to bottom, that’s really what you need to focus on because at the end of the day, it comes down to having a really nice, well-run facility. That is what brings the dollars.”
Maylan Newton from Educational Seminars Institute believes that one should start thinking about how they will exit their business as soon as the day they purchase it. He suggests a minimum of five years is needed to prepare, but he recommends, “If you bought your shop today, I’d tell you to pick a day 20 or 30 years in the future and make that the day you plan to stop owning or working on that business.
“It’s never too early to plan, but in many cases, it can be too late,” adds Newton. “For most people in our industry, the exit strategy winds up being death, and they leave behind a business that has no value to their heirs because they didn’t build a business that stands on its own and is therefore sellable.”
What is the first thing a shop owner should keep in mind when they make the decision to get out?
“I think the first thing to keep in mind is what your strategy is going to be,” says Gay. “Are you going to do it alone, or are you going to get someone to help you? If you do it alone, you have to come up with your own internal strategies on how to handle it, specifically confidentiality and how you are going to look at what the different buyers are and how to make sure you don’t leave money on the table. If you decide you want someone to help you, you need an understanding of what the business is worth versus what you can get for it. That’s a big disparity. You can probably get a lot more for it than what it’s worth in a lot of markets, especially in the northeast. It’s just getting red hot with consolidation, and more and more buyers are entering the market. The important part is not leaving money on the table, and that is easy to do if you don’t know what you are doing.”
Selling is just one option as many other forms of making an exit exist.
“There are three options,” offers DiFrancesco. “They can do an internal succession to a family member or an employee. They can do a third-party sale, whether it’s to a consolidator or a small MSO, or they can look for another third-party buyer in the market who may be looking to acquire shops. There is even what could be called a fourth option where one does an internal succession, but does not completely step away. The owner still maintains some control, but they give equity to employees so they no longer have to be involved with the day-to-day stuff. That is a lifestyle exit where they still have control over the business but no longer participate as part of the daily operation. That equity can be structured either as a stock purchase program for key employees or an ESOP (employer stock option program).”
So, how does a business owner know if they are ready to move on?
According to Newton, it’s important for shop owners to take a look at their business and see what is most valuable. Is it the business itself or him or herself – the owner. If the owner is the most valuable part of the business, a lot of work will need to be done to change that so the business can be sellable. “They will need to build the business so they – the shop owner – won’t be required to be there.” Staff has to be trained to know all the processes, policies and procedures. There should be an operations manual outlining how the business functions so it can be profitable “because people who buy businesses want the ability to profit.” Newton says if one is able to walk away from the business for 60 days and it’s still functioning, the business will survive. If not, it is not the time to sell.
When the time is right, most will find that keeping the real estate as an income stream is the right thing to do.
According to DiFrancesco, “If you go to a third party, especially with consolidators, they want the owners to maintain the real estate, and that remains a cash flow stream. On insider sales, I like to see them hold on to the real estate as an income stream, but also if the owner has children who are not involved with the business, the real estate can be part of their legacy. I try to maintain that family unit, so if there is one child getting the business, the others don’t feel slighted and you can structure the real estate to be able to create a fair distribution and maintain that family harmony.”
What type of entity one chooses to sell the business to can have a significant impact on how much the property is worth, according to Gay.
“If you lease it to an individual or a private entity, the property value will be significantly different.” If someone were to lease to a big name consolidator, the value of the property will go up which may be food for thought when considering leasing to an independent which could result in “leaving money on the table.”
Confidentiality is another thing to consider. One doesn’t want to alarm their staff by talking about their exit plans too early in the process.
DiFrancesco suggests waiting until all one’s ducks are in a row so that conversations don’t begin prematurely. “You’d want to go to the successors first and then talk to your employees once the plan is determined and you know what directions things will go in.”
“Hopefully you have already planted the seed for them,” advises Newton who stresses the importance of the business being able to operate without the owner present daily. “When you aren’t the main person anymore, it makes it easier on your staff to tell them you plan to retire.”
“You don’t want to create unnecessary anxiety, turmoil or loss of production with something that may not occur,” Gay emphasizes the need to make sure the time is right before announcing your plans. “The announcement should be thoughtfully decided upon between the buyer and seller.
“It’s a personal relationship,” she continues, regarding the seller’s relationship with his or her team. “Those people made him or her who he or she is. I was close to my employees. I still am and talk to them often. The buyer is buying your people, what you created, and it’s very important it’s done thoughtfully.”
Ultimately, it’s about being able to walk away from one’s business in the most profitable manner one can.
Many may not be aware of the true value of their business, so it’s important to have an assessment done as a first step. “You should always do a valuation, and not just the value of the business but what your free cash flow is in the business,” suggests DiFrancesco. “That’s what a consolidator or a third-party buyer will look at since they want to buy a business that’s profitable. With an inside transfer, you can utilize free cash flow to fund that transition, so getting that valuation as soon as possible is a key first step.”
Newton emphasizes the role that having everything properly documented – from wills and a trust, tax information, operation manuals, etc. – plays as it will make the business attractive and more valuable. “The more documentation you do today, the more profitable your business becomes in five, 10, 20 years.”
“You get one chance to do this, so you don’t want to screw it up,” Gay summarizes. “Make sure you are doing all the right things, and make sure you don’t leave money on the table. It’s so easy to do that if you don’t know what you are doing, you can do so without even knowing that you did.”
Want more? Check out the January 2024 issue of New Jersey Automotive!