Selling the Family Business: Pain or Relief?

September 22, 2008
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A business owner puts a lot of sweaty equity into his or her company, investing precious time and financial resources to build up a business that provides an income to support a family, a lifestyle, and a positive impact on the community it is located in. In many cases, that same business remains in the family for years, decades, and even centuries. Family businesses represent the essence of small-to-large entrepreneurs throughout the United States.

For many, it is essential to keep the business within the family and continue to grow it from generation-to-generation. Having a successful family business ensures future generations of careers and job security.

But what if there are no family members to pass the business on to or if there are no family members willing to carry on the business? As devastating as this can be for a family legacy, the reality is that many family businesses are sold every year to outsiders, or an employee, or groups of employees who continue to uphold the tradition of the family and in some cases, continue to use the family name because of its good reputation.

Getting from point A (preparing for sale) to point B (finalizing the sale) takes a lot of forethought and planning. Selling a family business is as much an emotional decision as a business decision and there are many factors that go into it.

Some of the factors are not as obvious as others. “Each family is different, but my observations over the years have revealed a pattern where most sellers stay on too long,” said Jim Hussey of Marina Mechanical, San Leandro, Calif.

“This tends to stifle the creativity and vision of the next generation of leaders. I have seen where second-generation leaders with tremendous skill and potential have remained stagnant in the shadow of an elder statesman who doesn’t see that it is time to go and let the ideas and methods of the new leaders take the company to the next plateau of success. Unless you are one of those exceptional multigenerational companies, the sale should include a clear and brief timetable for total transition of leadership.”

Fortunately, some leaders know when it is time to get out and turn over the reins. The reasons have a lot to do with burnout. Dennis Morgan, Modern Aire Inc., Havre, Mont., knows the feeling. “After 30 years, I truly am burned out,” he said.

“My business remains very profitable. I have excellent employees and a very dedicated customer base. However, I find myself operating on autopilot and have no energy left to continue building my business. I must admit I am very comfortable financially. However, I am not doing justice to the business and I really need to get out of it in the next couple of years.”

Mark Green

To get out, as in Morgan’s case, there should be an organized plan. According to Mark Green of the Family Business Consulting Group, there are seven key steps that must be completed during the lengthy selling process. These steps are:

• Readiness to sell the business;

• Willing buyer;

• Valuation agreement;

• Financing available;

• Successful due diligence;

• Definitive agreement;

• Signed documents.

“Obviously the most crucial is a readiness to sell the business and this means that the owner has a business that can be sold beyond an asset sale,” Green said.

“The owner is prepared to take the necessary steps to sell the business and is prepared intellectually for the process. In order to obtain the best price, the business ideally would show consistent profitability, have a strong management team, a strong balance sheet, good business systems in place, and a healthy pipeline of new business opportunities. Beyond this, the owners must emotionally and intellectually be ready to sell their business.”

THE CRUCIAL FIRST ORDER OF BUSINESS

The most obvious cliché for preparing to sell a business is to “get your house in order.” That’s the advice that Lon Cassel of Clockwork Home Services gives to his clients. “Get ready to impress a potential buyer,” he said. “Compile three past fiscal years of financials to include balance sheet and profit and loss statements and the current month to date. Show your growth on a colored chart from the first day in business to current revenue. Some professionals will want to analyze the current financial month and go back 12 months.”

Michael Pudetti of Advanced Heating & Cooling, Penfield, N.Y., said he has no family to pass the business onto since his children have their eyes set on other professions. He predicts he is 14 years away from selling but could sell sooner “if the right deal comes along,” he said. “In my mind, everything is for sale at the right price. I can’t take it with me.

“I think the first step would be to spruce up the business so it looks attractive, just as you would do to a house or car that you were going to sell. Make sure all the numbers are in place and the business is showing the profit needed for the price you are asking.”

For some business owners, they experience physical and mental burnout and the end comes sooner than they expect. Preparing to sell can sometimes be an afterthought, especially if a family member does not want to buy the business or an emergency arises.

But the roles can be reversed, too. The buyers can also be thrust into a business before the seller has had a chance to clean up the business. Take the story of how Tim Holtsclaw became the owner of the business of which he had been the general manager. Holtsclaw worked at J&K Heating and Cooling, Lakeland, Fla., when in 2006, the owner passed away leaving his daughter in charge. Holtsclaw and his co-workers saw pink slips in their future.

“I made a purchase offer to the president along with her mother, who was the major stockholder in the company, to purchase J & K and they quickly accepted,” he said. “When that happens, there is your first sign that you did not do your homework. I, along with the owners, placed a personal value on the company that should never have been considered, when it came to purchasing or selling.”

Holtsclaw learned a lot about the company’s shaky financial situation, its debts, and poor credit after he made the purchase. The business was not saleable, yet he jumped in anyway. It was an emotional decision - and emotions can steer people in the wrong direction.

“Selling a business is a tremendously emotional process, and it is often emotions that drive the entire process,” said Green.

“Whether it is the founder of the business attempting to exit the business or a third-generation family member dealing with the guilt and sense of letting previous generations down, in each case it is all about the emotions.”

Putting emotions aside may be difficult, but Cassel said it is important to think clearly and be organized. “I would recommend compiling a history on the company to include a current organizational chart with first names, titles, length of employment, and job descriptions,” he said.

“And get with your attorney to produce a solid confidentiality agreement with a potential buyer. This is very risky, especially when you have a competitor involved. He will find out everything about your business and possibly tell suppliers and maybe even some valuable employees that you are considering selling your business.”

Lon Cassel

HIRING A PROFESSIONAL

Cassel suggested keeping an attorney close by to handle the legal details. He also said it is important to work with a professional who has had experience preparing businesses for sale. Pudetti said that a professional can help bring the two sides together and “keep them in the same ballpark.”

“I think it would be very important to hire a professional,” he said. “A good evaluation would help both sides right from the start.”

Hussey agrees about hiring a professional, but with some reservations. “It is important for tax purposes to have a professional establish an arm’s length, independent value for the business,” he said.

“The ultimate price will be the number agreed upon between the buyer and seller. Once the baseline is set, outside consultants can be very helpful and bring solutions to difficult issues that have been tested through previous experience. However, the danger exists that an outsider will favor a more businesslike approach to a transaction that might actually tolerate some creativity between family members who have relationships and commitments that transcend the business. In these cases, leave the consultant out of the equation.”

Green noted, “Selling or buying a business is not like anything else you will ever do and to not work with professionals that do this everyday is a huge mistake.”

Cassel said a professional can see more than just the value of a brick-and-mortar business. Value goes beyond that. “Experience in the purchase and sale of a HVACR contracting business is extremely important,” he said. “It is important for someone valuing the business to understand that the value of a large residential service customer base is worth more. Most accountants value cash flow or multiple of profits (earning) and don’t really understand the value of a customer base.”

SELLING IN TODAY'S ECONOMY

Back in the heyday of consolidation there were a lot of HVACR contractors, family businesses included, that benefited from over-valuation of their businesses and higher-than-normal selling prices. Ken Bodwell, Innovative Service Solutions of Orlando, Fla., seized his chance to sell during consolidation.

“In my original business called All Temp Services, my wife as well as both my sons worked for me,” he said. “I sold the business to Comfort Systems USA and after a year as president, I became their national accounts sales manager. I sold my business to them because I mistakenly felt this was an opportunity to raise the bar and provide a higher level of training for my sons and employees.”

But consolidation was a blip on the radar screen and the reality is that selling an HVACR business is tough under any circumstance, especially today in a down economy. The solution is to make the business as saleable as possible or wait out the economic slump and sell at a later date.

Pudetti believes it is a buyers’ market and that some of these buyers are out-of-work former techs, looking for bargain-priced businesses. “Right now the credit crunch hurts the possibilities but the loss of jobs could possibly help,” he said. “People who lost jobs might be in the market to be their own boss. Take the 401(k) plan and buy a business, be your own boss.”

Cassel does not see a bright outlook for sellers, in spite of the number of potential buyers. “I think many contractors are fearful of the future,” he said. “Consumers are having financial issues and putting off purchases of systems. Getting paid for services is getting harder. Many Baby Boomers are wanting out because they are tired of the battle. Many owners will sell out at a low price because of the fear of the future and go to work for the buyer.”

Green is also pessimistic. “The economy swings up and down and right now things don’t look so good for the next 12 to 18 months,” he said. “Indications are that a global recession is taking hold and it is especially hitting some sectors hard such as the construction industry which HVACR is part of. These swings up and down do affect selling a business.”

Sidebar: Be Wary

Lon Cassel suggested that business owners be careful about what professionals they hire to help sell their business. “Professional broker companies will cold call HVAC contractors saying they have buyers for their HVAC company,” he said.

“Or sellers will get an invitation to a seminar on how to ‘Value Your Business.’ The seminar is somewhat educational, however it is more of a sales pitch on the broker selling the business for them at no fee, unless they sell the business.

“They send a sales person to sell owners on how they can get so much more for their business. They say accountants value business on past profits and they value it on future profits at very high multiples of profit. They charge $20,000 to $30,000 for a very professionally looking valuation booklet and sell very few HVAC companies.

“Ask them to provide a list of the HVAC companies that they have sold in the last two years and make sure it is of the same size as yours. I think they will get the answer I got when I was planning to sell my business. ‘We can’t share that confidential information with you.’”

Publication date: 09/22/2008

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