The question of who is going to buy your business is not typically on the mind of the business owner about to list their business, but it can be just as important as the cash for the sale itself.
When you spend 50+ hours per week building a business and making nearly every decision in the early years, you can’t help but develop an emotional connection. Somewhere along the way, customers and employees become like family. Building your business is likely your biggest professional accomplishment and putting it in the hands of an ill-equipped new business owner is a thought that would make most sellers cringe. Nobody wants their legacy destroyed.
In making sure the “Who” is a good fit, I advise taking it slow. While most brokers will avoid the seller and buyer meeting, I encourage it. The fact is, buying and selling a business is a life-changing decision that should never be taken lightly. It’s in the interest of both parties to make a good fit because a productive working relationship is going to be critical for a successful ownership transition. The buyer will have questions, and the seller wants the business to continue.
Who are the potential buyers?
Employee or Family
The most logical and seamless buyer may be someone you know very well. It could be a key employee or a family member. These can be great matches because they likely know the business well and can continue with a limited learning curve. It’s my advice that you still use a business broker to handle the transaction, but if the broker doesn’t have to spend money marketing the business and finding a buyer, commission may be reduced.
The downside to selling the business to a family member or employee is that they may have a difficult time coming up with the cash to do the deal. Thankfully some banks have loan departments that specialize in cases like these. Generally speaking, they look favorably on buyers that are on the ”inside” because there is a perceived less chance of business failure.
Selling to a competitor can sometimes make the seller nervous because, in the due diligence process, sensitive details and financial records must be shared. Confidentiality is protected through non-disclosure agreements (NDA), but there is no guarantee that the buyer won’t back out of the deal. This is where a quality business broker can vet the buyer and make sure their intentions are pure. A broker will verify they, in fact, have the intention and capability of buying the business.
As in any industry, there are good and bad actors. I always ask if there is someone you would NOT consider selling to.
Of course, business is cyclical, and as one business owner may be approaching retirement and slowing down, there is another in growth mode trying to build their empire. I speak to buyers every day that want to expand their product service line or do business in another area. They are actively looking for acquisitions. In a perfect world, we have more than one potential buyer competing for the business. These are the scenarios that fetch the biggest sales prices.
The word is out that it’s a great time to be in the residential or commercial service trade. The predictable and recurring maintenance agreement revenue are alluring features of the HVAC industry. While the general public segment represents the largest pool of suiters, it also is the one with the most risk because as industry outsiders, they must rely on employees. If the staff is not technically knowledgeable or committed, the business could falter. These types of buyers are not interested in turning wrenches themselves.
If an HVAC business has over $3 million in sales, and at least $1 million in net income, it will have a significant interest with private equity firms. The bigger the revenues, the more interest they have. These firms are made up of investors looking to eventually turn a profit on their acquisition and sell the business again sometime in the future. Typically, companies like these hire a management team and are absentee owners.
Whomever your buyer is, all will look at business best practices, so if your goal is to sell within a year, I urge you to get started early so that you can make small adjustments to maximize your exit revenue and make sure the next owner can service your customers and employees for years to come. Even if you know who your buyer is, still work with an experienced HVAC broker because they can tell you if you have accurately valued the business and serve as a third party to speed up the due diligence process. You will want a seasoned deal advocate that can explain the handling of prepaid items such as maintenance agreements and other assets. It can be an anxious time when the closing approaches, but having a seasoned business broker on your side can make the business selling milestone one of the best days of your life.