Business Closure, any advice.

[tillicant]

See all kinds of help/opinions here.
After 43 years, just turned 66, shoulder injury, getting hearing aids, hammered by wife/relatives(relatives are all retired), getting closer to shutting down.
A couple of years ago, had a firm do a business valuation. They called it a brokers opinion and it basically told me the business was just worth its assets. Figured I'd have an auction.
My assets are plenty, excavators, dozers, loaders, dump trucks. Mostly paid off, maintained probably better than most. Recently had two induvial companies contact me with interests in buying my company. Its fairly easy to figure the assets but I am stumped when it comes to the name. How do I put a price on my name. Granted it is a good name. (my actual name)
I wanted to keep my shop/property and use as a rental, but the most interested person wants that too.
I know I have to get an attorney involved, already talked with our CPA & know capital gains(bend over) will screw me.
Also, both interested will keep me and my employees on due to our use in GPS/Grade control that they are not familiar with.
Seems this is just happening too fast.

 

[perma]

Aside from heavy equipment, does the business have real estate? If you do, I think you need a new firm to do another business valuation. It’s seldom that a good known business is only worth its assets, unless it’s like a 1-2 people operation.

 

[tillicant]

Yes, have a property, good visibility in an industrial park. Yes, small workforce but interested party will expand.

 

[Steiny77]

Two partners and myself sold our construction company, all equipment, real estate, etc. to four younger employees several years ago.
It's easy enough to come up with a value on tools, equipment and real estate.

The challenge is what is company name, history, existing clients and goodwill worth?
That should be based more on the business volume, annual profits generated, any cash in the business, and work on the books.
Probably need your CPA and someone that is experienced with business sales to help you out here. Ultimately, it's your baby and you don't have to make any deal if it's not to your liking.

At 66, I'd get the heck out. You probably won't like the way the new owners do things anyway.

 

[tillicant]

Two partners and myself sold our construction company, all equipment, real estate, etc. to four younger employees several years ago.
It's easy enough to come up with a value on tools, equipment and real estate.

The challenge is what is company name, history, existing clients and goodwill worth?
That should be based more on the business volume, annual profits generated, any cash in the business, and work on the books.
Probably need your CPA and someone that is experienced with business sales to help you out here. Ultimately, it's your baby and you don't have to make any deal if it's not to your liking.

At 66, I'd get the heck out. You probably won't like the way the new owners do things anyway.

Definitely set in my ways lol

 

[npaden]

Right now one of the most valuable assets in any kind of service industry is good employees that will stay with the company when it is sold.

A CPA firm with no employees is worth maybe 20% of revenues and then the acquiring firm is going to pick and choose which clients they want for that price. A CPA firm with a solid group of employees is worth 3 or 4 times that much.

If you have some good employees that intend to stick around they are worth probably close to a years salary to the acquiring company.

That's on top of the other assets.

One tricky thing, if you sale as a stock type sale for the entire company you can generally get capital gains treatment on the profit. If you sale as an asset purchase you will get recapture on all the depreciation on the equipment and most of that sale will be taxed as ordinary income.

You want to sell as a stock sale, the buyer will want to buy as an asset purchase (for their stepped up basis in the equipment). There is usually a little wiggle room to either party on what type of sale it goes through as.

You do need a CPA to help, not just any CPA but one that has dealt with this kind of thing before.

Good luck and happy retirement (or slow down if you stick around helping the transition).

 

[rjthehunter]

I'm assuming you're working with the same clients and generals a lot? Do the interested parties have interest in keeping the name? Sales of construction companies like this can be tricky.

The name is definitely worth money, assuming it comes with repeat clients. A common business valuation method is taking yearly profit before taxes, interest, etc and multiplying that by 5 (a lot more goes in to that, but its a rough and tumble way to get in the ballpark). Not necessarily a common method in the valuation of a construction company though. You'd have to be able to explain how you get that number. Client base would likely be your biggest selling point of the name. For the people looking to buy, it would be extremely beneficial to keep you around for another season. I see that fairly often when a business changes hands here. The original owner sticks around for a bit to make all clients aware, and help smooth the transition.

As far as the shop and land. It'd be worth keeping and leasing out. You could even write it in to your agreement that the purchaser will rent said space for x amount of years after the purchase. Good way to keep some money flowing in.

As everyone else has said. A good CPA will be a necessity!

 

[Addicting]

Not exactly sure if this was legit or not but we did an auction with the farm. All equipment was paid for and listed as an asset with the CPA. It went across the lot and we let the name fade into history. We got the check from the sale with no tax papers anywhere. When tax season showed up our CPA wanted the receipts for the year and wasn’t interested in the auction check or proceeds. We only ever ended up paying the auction fees.

 

[Nick87]

No advice. But wishing you a good exit to the business. Seems like now would be the time to get out, being that all assets are at all time highs. (I'm in the same field as you). I've mentioned it to my boss a couple times lately but he doesn't seem interested. He needs to hang it up though but I don't think he will.

 

[Big Fin]

Congratulations in getting to this point. Think about "goodwill" or "blue sky" in this context - How much profit will the intangible assets (not equipment, buildings, or real estate) contribute to the business in the hands of the buyer?

If the contracts, the skilled employees, the reputation of the business are not producing any additional profit, there is no goodwill. Usually not the case.

Here's an example for a small business.

1. Normalize the business earnings. In other words, what would profit of the business be if it paid the owners fair market value compensation. If the owners are taking no salary or low salary, you have to add into the expense the amount that will be incurred to replace their labor. That usually results in a lower number for "normalized earnings."

2. Adjust for any unusual and non-recurring items, whether items of income or items of expense.

3. Given that normalize earnings, project out what the net profit will be (EBITDA - earnings before interest, taxes, depreciation, and amortization). In other words, add back any interest expense, income taxes, depreciation and amortization.

From that number, a buyer will apply a capitalization rate, which is the return they expect to get on their invested capital given the risk considerations. Those risk considerations are very high in small businesses that are heavily attached the name and reputation of the selling owner.

Example - The business generates EBITDA, after steps 1-3 above, in the amount of $1,000,000. In other words, a buyer is going to get a $1,000,000 return on whatever amount they invest in the business.

So, how much are they willing to invest to get a $1,000,000 annual return (assuming earnings will grow at some reasonable rate)?

If they think there is a high risk with this business, they might use a capitalization rate of 35%. So, to get a 35% return, they will take $1,000,000 and divide it by .35 (1,000,000/.35 = $2,857,143). That's what they would pay.

If they think this is a very stable business with senior managers who will stay with them and keep the business running smoothly, they will see a much lower risk and they might use a capitalization rate of 15%. Doing the same exercise, they would take $1,000,000/.15 = $6,666,667 and that is what they would be willing to pay.

How much of that sales price is goodwill? Any amount in excess of the hard asset value. If the exercises above result in a $5,000,000 sales price and the hard assets are worth $3,000,000, then the goodwill component is $2,000,000.

There are rules of thumbs often used, such as 4x or 5x earnings. For businesses with loyal recurring customers, say a subscription business, that multiple might be applied to annual recurring revenue, not EBITDA, as the buyer is just looking for the customers and the recurring revenue that comes with that.

Point being, you have to actually go through the exercises above to get a true number. Using rules of thumb often set unrealistic expectations or leave money on the table. Look for a CPA who is also a CVA (Certified Valuation Analyst). They will use one of the many methodologies best suited for the type/size of your business. It costs money, but it eliminates the risk that you leave a lot of money on the table.

 

[SAJ-99]

Right now one of the most valuable assets in any kind of service industry is good employees that will stay with the company when it is sol

You do need a CPA to help, not just any CPA but one that has dealt with this kind of thing before.

These points are important.

I have done this a few times for people. There is a lack of details in your post which would be important and those details would take hours to get to. I always tell the seller to put themselves in the shoes of the buyer. This is hard, but the seller always overvalues the goodwill. What they want is a big check, but the business/name often doesn't have much real value. Think about the buyer's options. What if your business just shut down tomorrow? Could they just buy the equipment and hire the employees? How long would it take the buyer to destroy whatever goodwill/reputation you have built? Could any of your employees start off on their own? Interest rates are relatively high so taking out a big loan to buy a business might be harder than a different structure for the transaction. That does involve some risk that you need to be aware of.

I usually tell the seller that they don't want to be an employee of the other firm. I can't remember that ever working out well. Also, CPAs are great, but a person who specializes in this stuff is better and they may have different letters behind their name. Any sale is essentially a negotiation, so some lawyers have a lot of experience at it.

 

[tillicant]

Not exactly sure if this was legit or not but we did an auction with the farm. All equipment was paid for and listed as an asset with the CPA. It went across the lot and we let the name fade into history. We got the check from the sale with no tax papers anywhere. When tax season showed up our CPA wanted the receipts for the year and wasn’t interested in the auction check or proceeds. We only ever ended up paying the auction fees.

These points are important.

I have done this a few times for people. There is a lack of details in your post which would be important and those details would take hours to get to. I always tell the seller to put themselves in the shoes of the buyer. This is hard, but the seller always overvalues the goodwill. What they want is a big check, but the business/name often doesn't have much real value. Think about the buyer's options. What if your business just shut down tomorrow? Could they just buy the equipment and hire the employees? How long would it take the buyer to destroy whatever goodwill/reputation you have built? Could any of your employees start off on their own? Interest rates are relatively high so taking out a big loan to buy a business might be harder than a different structure for the transaction. That does involve some risk that you need to be aware of.

I usually tell the seller that they don't want to be an employee of the other firm. I can't remember that ever working out well. Also, CPAs are great, but a person who specializes in this stuff is better and they may have different letters behind their name. Any sale is essentially a negotiation, so some lawyers have a lot of experience at it.

These points are important.

I have done this a few times for people. There is a lack of details in your post which would be important and those details would take hours to get to. I always tell the seller to put themselves in the shoes of the buyer. This is hard, but the seller always overvalues the goodwill. What they want is a big check, but the business/name often doesn't have much real value. Think about the buyer's options. What if your business just shut down tomorrow? Could they just buy the equipment and hire the employees? How long would it take the buyer to destroy whatever goodwill/reputation you have built? Could any of your employees start off on their own? Interest rates are relatively high so taking out a big loan to buy a business might be harder than a different structure for the transaction. That does involve some risk that you need to be aware of.

I usually tell the seller that they don't want to be an employee of the other firm. I can't remember that ever working out well. Also, CPAs are great, but a person who specializes in this stuff is better and they may have different letters behind their name. Any sale is essentially a negotiation, so some lawyers have a lot of experience at it.

Thanks, yes, working on a lawyer familiar with business sales referred.
Staying on was requested by the purchaser, mainly estimating. Purchaser has funding, but may offer to defer over a couple seasons to stretch the capital gains. To do what we do my employees would not afford the equipment.

 

[BackofBeyond]

These points are important.

I have done this a few times for people. There is a lack of details in your post which would be important and those details would take hours to get to. I always tell the seller to put themselves in the shoes of the buyer. This is hard, but the seller always overvalues the goodwill. What they want is a big check, but the business/name often doesn't have much real value. Think about the buyer's options. What if your business just shut down tomorrow? Could they just buy the equipment and hire the employees? How long would it take the buyer to destroy whatever goodwill/reputation you have built? Could any of your employees start off on their own? Interest rates are relatively high so taking out a big loan to buy a business might be harder than a different structure for the transaction. That does involve some risk that you need to be aware of.

I usually tell the seller that they don't want to be an employee of the other firm. I can't remember that ever working out well. Also, CPAs are great, but a person who specializes in this stuff is better and they may have different letters behind their name. Any sale is essentially a negotiation, so some lawyers have a lot of experience at it.

I've both bought, and sold a construction company.

The points brought up here are very important.

And most important advice I can give you, but it's also the hardest thing to do - take the emotion out of it. It's strictly a business transaction. If you don't want your name on the business after you sell, don't let them have your name. Beyond that, even though you've worked your ass off building that company, and it's your baby, it all comes down to what's in black and white on the page. The business has given you a good living, now it's time to get your just rewards, but don't let it be an emotional decision.

 

[LuketheDog]

Congratulations in getting to this point. Think about "goodwill" or "blue sky" in this context - How much profit will the intangible assets (not equipment, buildings, or real estate) contribute to the business in the hands of the buyer?

If the contracts, the skilled employees, the reputation of the business are not producing any additional profit, there is no goodwill. Usually not the case.

Here's an example for a small business.

1. Normalize the business earnings. In other words, what would profit of the business be if it paid the owners fair market value compensation. If the owners are taking no salary or low salary, you have to add into the expense the amount that will be incurred to replace their labor. That usually results in a lower number for "normalized earnings."

2. Adjust for any unusual and non-recurring items, whether items of income or items of expense.

3. Given that normalize earnings, project out what the net profit will be (EBITDA - earnings before interest, taxes, depreciation, and amortization). In other words, add back any interest expense, income taxes, depreciation and amortization.

From that number, a buyer will apply a capitalization rate, which is the return they expect to get on their invested capital given the risk considerations. Those risk considerations are very high in small businesses that are heavily attached the name and reputation of the selling owner.

Example - The business generates EBITDA, after steps 1-3 above, in the amount of $1,000,000. In other words, a buyer is going to get a $1,000,000 return on whatever amount they invest in the business.

So, how much are they willing to invest to get a $1,000,000 annual return (assuming earnings will grow at some reasonable rate)?

If they think there is a high risk with this business, they might use a capitalization rate of 35%. So, to get a 35% return, they will take $1,000,000 and divide it by .35 (1,000,000/.35 = $2,857,143). That's what they would pay.

If they think this is a very stable business with senior managers who will stay with them and keep the business running smoothly, they will see a much lower risk and they might use a capitalization rate of 15%. Doing the same exercise, they would take $1,000,000/.15 = $6,666,667 and that is what they would be willing to pay.

How much of that sales price is goodwill? Any amount in excess of the hard asset value. If the exercises above result in a $5,000,000 sales price and the hard assets are worth $3,000,000, then the goodwill component is $2,000,000.

There are rules of thumbs often used, such as 4x or 5x earnings. For businesses with loyal recurring customers, say a subscription business, that multiple might be applied to annual recurring revenue, not EBITDA, as the buyer is just looking for the customers and the recurring revenue that comes with that.

Point being, you have to actually go through the exercises above to get a true number. Using rules of thumb often set unrealistic expectations or leave money on the table. Look for a CPA who is also a CVA (Certified Valuation Analyst). They will use one of the many methodologies best suited for the type/size of your business. It costs money, but it eliminates the risk that you leave a lot of money on the table.

Randy dropping the CPA mic here...love it

 

[tillicant]

Congratulations in getting to this point. Think about "goodwill" or "blue sky" in this context - How much profit will the intangible assets (not equipment, buildings, or real estate) contribute to the business in the hands of the buyer?

If the contracts, the skilled employees, the reputation of the business are not producing any additional profit, there is no goodwill. Usually not the case.

Here's an example for a small business.

1. Normalize the business earnings. In other words, what would profit of the business be if it paid the owners fair market value compensation. If the owners are taking no salary or low salary, you have to add into the expense the amount that will be incurred to replace their labor. That usually results in a lower number for "normalized earnings."

2. Adjust for any unusual and non-recurring items, whether items of income or items of expense.

3. Given that normalize earnings, project out what the net profit will be (EBITDA - earnings before interest, taxes, depreciation, and amortization). In other words, add back any interest expense, income taxes, depreciation and amortization.

From that number, a buyer will apply a capitalization rate, which is the return they expect to get on their invested capital given the risk considerations. Those risk considerations are very high in small businesses that are heavily attached the name and reputation of the selling owner.

Example - The business generates EBITDA, after steps 1-3 above, in the amount of $1,000,000. In other words, a buyer is going to get a $1,000,000 return on whatever amount they invest in the business.

So, how much are they willing to invest to get a $1,000,000 annual return (assuming earnings will grow at some reasonable rate)?

If they think there is a high risk with this business, they might use a capitalization rate of 35%. So, to get a 35% return, they will take $1,000,000 and divide it by .35 (1,000,000/.35 = $2,857,143). That's what they would pay.

If they think this is a very stable business with senior managers who will stay with them and keep the business running smoothly, they will see a much lower risk and they might use a capitalization rate of 15%. Doing the same exercise, they would take $1,000,000/.15 = $6,666,667 and that is what they would be willing to pay.

How much of that sales price is goodwill? Any amount in excess of the hard asset value. If the exercises above result in a $5,000,000 sales price and the hard assets are worth $3,000,000, then the goodwill component is $2,000,000.

There are rules of thumbs often used, such as 4x or 5x earnings. For businesses with loyal recurring customers, say a subscription business, that multiple might be applied to annual recurring revenue, not EBITDA, as the buyer is just looking for the customers and the recurring revenue that comes with that.

Point being, you have to actually go through the exercises above to get a true number. Using rules of thumb often set unrealistic expectations or leave money on the table. Look for a CPA who is also a CVA (Certified Valuation Analyst). They will use one of the many methodologies best suited for the type/size of your business. It costs money, but it eliminates the risk that you leave a lot of money on the table.

Thanks,

 

[tillicant]

Thanks to all. Wasn't quite ready for that volume of response. It is appreciated.
Wish you all the best holiday season.

 

[SAJ-99]

Business consolidation has changed a lot over the last 20 years. I would guess probably because private equity firms got involved and got more creative with valuation models. The service sector has been in focus most recently - healthcare, finance advisors, CPA firms, law firms ,etc. Participants who thought they were building a durable practice that they could "cash out" on for retirement have discovered few of those benefits at sale. Of course, if you have ever been to a hospital or urgent care lately, you will see how we have all payed the price for improving EBITDA.