The 4 Requirements to Sell
– by Matt Michel
How do you plan for selling your business and know when the time is right? Read on for insights from industry expert Matt Michel.
Many contractors are worried that they missed out on the great private equity contractor land rush. While the deal making appears to be slowing somewhat from the recent frenetic pace, it has not stopped. Nor will it completely, at least for the right companies. In the current environment, here are the four requirements you should look for to sell your company.
1. You Have Good Market Conditions.
The market conditions today are less attractive than a couple years ago. The economy is not as strong and the cost of money is greater. While not all buyers leverage their purchases, many do and the increasing cost of capital has an inverse relationship to their willingness and ability to pay premium prices.
In addition to higher interest, the shipment cliff impacted the industry this year. The shipment cliff reflects the 40% contraction the industry experienced during the 2008/2009 time period. It means fewer systems to replace today. Until this year, the impact of the shipment cliff was muted by rising prices (i.e., when shipments drop 10%, but prices rise by more than 10%, the unit reduction is hidden if one only looks at gross revenue).
This year, the impact became apparent. Through July, residential air conditioner shipments were down more than 16% according to AHRI. Heat pumps were down more than 8%. This cools the attraction of HVAC to private equity financiers who saw the industry as one that grows perennially after witnessing the industry’s stellar performance during Covid.
Fortunately, the shipment cliff will end in the next 12 to 24 months. Following the shipment cliff will be a decade run of ever-increasing growth, year over year. Be patient. Market conditions will improve dramatically in the next couple of years.
2. You Can Demonstrate Three Years of Growth & Profit.
When people buy companies, they are buying a stream of future profit. Buyers project your current trends into the future. If you are growing by an average of 20% per year, it is presumed that this will continue, resulting in a greater valuation than a company with identical financials, but a flatter growth curve. You will get more money if you can wait until you have several stellar years in a row.
3. You Put a Solid Team in Place.
A buyer is not purchasing you, though the buyer might try to tie you up for a few years. The buyer is purchasing an ongoing business. If the company cannot operate without you, it is not a true business. It is a customer list, a few techs, and some old trucks and obsolete inventory. Add a solid management team that can run the business without your presence for the day-to-day operations and you have a business that is attractive to buyers.
4. You Have a Reason to Sell.
If the market is good, you are growing and profitable, and you have a solid team in place, why sell? The goal of every business owner is to have a profitable business that can run on its own. Once attained, this type of business is less of a daily firefight, rushing from one crisis to the next. It becomes a pleasure to operate. Why not enjoy it and bank the proceeds?
There is no urgency to sell. FOMO or fear of missing out is no reason to sell. FOMO is tantamount to a stress sale. When you “have” to sell, you will under value. The best time to take out a loan is when you do not need one. The best time to sell a business is when you do not need to sell it.
Sell not only when the market conditions are right, company performance and trends are right, and management team is in place, but when you are ready to walk away. Walk away when you need to take care of a loved one, when you want to devote yourself to another cause or opportunity, or when you are just getting tired of the business and it no longer brings you the joy it once did. Whatever the reason, walk away on your terms.
For more ideas on increasing summer sales without burning out your people, turn to the Service Roundtable to access their massive library of downloadable and customizable sales, marketing, and business management tools. Call 877.262.3341 or visit ServiceRoundtable.com.
A serial entrepreneur with 40 years of industry experience, Matt Michel is member of the Contracting Business Hall of Fame and a Speaker/Writer/Rancher with Ranchlands of Texas LLC.
Other Recent Features
Industry News | November 27, 2023
| November 27, 2023