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Food for Thought on Thanksgiving: 11 Ways to Create a Better Exit

Written by David Roberts and Madeleine Roberts, Focus Advisors Automotive
Published
Nov. 21, 2022

Heading into the holidays, many owners are incredibly thankful for their success in the collision repair industry. Focus Advisors is equally thankful for the opportunities it has enjoyed in representing dozens of owners in their successful exits.

From that experience, Focus Advisors knows there are many pitfalls a seller can encounter that can get in the way of achieving the business’ true value.

Whether an exit from the body shop business is in your immediate future, or not remotely on your radar, there are 11 practices that will ensure you are best prepared, and they’re best implemented sooner rather than later.

Happy Thanksgiving from Focus Advisors!

1. True Paint Loan Costs

Understanding the ins and outs of your paint loan or “prebate” impacts the assessment of your business in two ways.

First of all, the discount you’ve negotiated with your paint distributor will affect your profitability. And since buyers will appraise your business based on your earnings before interest, depreciation and amortization (EBITDA), every dollar saved in gross margin can turn into four, five or six dollars in valuation.

If you have some time before your planned sale, give some thought into paying that loan off then trying to negotiate the best terms possible to maximize your gross margins.

Secondly, when a buyer purchases your business, they expect you to pay any and all outstanding obligations. For this reason, any financing left on the loan will be your obligation to pay, so you will be paying it off anyway by the close. If you can pay it off sooner and negotiate a better discount off list, that additional margin goes into your pocket and becomes the basis for a better valuation by the buyer.

2. Terms in Your Franchise Agreement

If you’re a franchisee, it is likely your franchisor has terms in your contract that dictate how and when you may terminate your franchise agreement.

Some franchise agreements provide the franchisor with a right of first refusal (abbreviated ROFR) and require the remainder of the contract to be paid in full before agreeing to the termination. This means the franchisor has the right to match any offer you receive from a buyer, and if they decide not to match it, require you payoff the remainder of your franchise contract before allowing your transaction to close.

So if you’re thinking of selling, understand the ROFR, the other termination conditions, and proper steps to notify and terminate in your franchise agreement so you and your buyers are fully aware of the time and conditions necessary for a successful sale.

3. Including Cash Sales Instead of Hiding the Revenues

Look, we get it, cash is king. But in our business of selling companies, any short-term advantage of cash transactions can backfire in terms of valuation if those sales haven’t been properly recorded and accounted.

Buyers all look at your financial statements with a fine-tooth comb, and they count just the earnings that you can prove with journal entries in your books and deposits to your company’s bank.

So if you have a lot of cash transactions that haven’t been recorded and accounted like all your other transactions, prospective buyers might not accept those transactions as valid sales and the value of your business will go down, possibly by a lot.

4. Undocumented Employees

In this tough hiring environment, one of the main assets a buyer is looking for is your team. They want to see that you have good management and a loyal team that can handle technical and administrative aspects of the business.

But many of the buyers are large corporations or have private equity backers that are in the business of minimizing risk, so they must verify the work eligibility of each employee because once they take over the business your employees become their employees. If you have folks on the payroll that might not clear that hurdle, it’s important to plan your course of action now and at the very least, fully disclose it to potential buyers.

5. Assignability of Leases

When you’re selling the business you’ve grown over the last few decades, one of the last things that comes to mind is your landlord. But if you are renting your facilities and plan to sell your business, you will want to avoid an outcome where your landlord can get in the way.

Not only will the buyer become the new tenant, but they will need to have ideally 10 years left on the lease. Nobody will buy a business if there’s a risk they will have a leasing problem and lose a location shortly after buying it.

The first step is to review your existing leases in detail and make sure there’s an “assignability clause” included. This will allow you to transfer your existing lease to a prospective buyer.

If you don’t have an assignability clause, consider approaching your landlord to amend the lease to include one, and while you’re at it start discussing his or her receptiveness to a new 10-year lease. It’s especially helpful to do this well ahead of going to market so that your landlord won’t be a roadblock for you.

6. Accounting According to GAAP Rather than Tax Minimization

Neither Focus Advisors nor your potential buyers are the IRS, so Focus Advisors understands the reasons for reducing your tax liability through the business.

Some tax minimization techniques are easy for intermediaries to untangle from your P&L, like increased management fees and distributions, and personal spending. But others are more difficult and may have the unintended consequence of making your business look less attractive.

Examples are deferring sales from December to January or paying A/P in advance. Both of these practices alter your gross margins, can be difficult to normalize, and make one year look worse than it really was. And definitely don’t start pocketing cash sales---see the note of caution about that above.

7. Clean Set of Books

I’ll say it again: well-maintained and GAAP-formatted books are crucial to achieve your highest value. The more detail you can have for sales, cost of goods sold or expenses, the better. And the more backup you can provide about transactions, the easier it will be to determine what kind of expenses can be added back to create your EBITDA.

Potential buyers expect to look at the last 12 months of financials and have granular detail about line items. Just about every business has had some exceptional events occur, with parts purchases, labor issues or miscategorized expenses. A detailed P&L makes it easier for your intermediary and buyer to figure out what happened and accept them as exceptions that don’t count against your businesses’ valuation.

Furthermore, once your business is in due diligence, buyers will ask many questions and follow-up questions about your financials, and having detailed records simplifies that whole process.

8. Maintaining Your DRPs

It’s always a good idea to continually evaluate each DRP and consider renegotiating with the ones that are a drag on your time and profitability.

But before you consider dropping one, even if it’s to support a new one, make sure you won’t see a corresponding drop in sales. Buyers look at your last 12 months of performance, so even a temporary drop in sales during that period will lower your overall valuation.

9. Preparation of Management Succession

Buyers want to hit the ground running with a full team, and hiring management talent is difficult. Give some thought to your employees and whether any of them can take over day-to-day operations.

Focus Advisors frequently asks its clients, “If you took off on vacation for two weeks, would your shop run on its own?" If the answer is anything but “yes," it’s well worth training someone capable of fully managing the shops in your absence. In today’s market, if you don’t have someone who can run your shops after you walk away, you won’t be attractive to most buyers.

10. Using a Capable CPA Often Pays for Itself

Keeping good books and staying current with them requires both a good bookkeeper and a good accountant.

Most people recognize that having the right numbers in front of management can assist in improving the overall performance of the business. However, having poorly maintained books affects both information and performance.

Documenting cash sales, charging real costs of sublet work, avoiding bank fees and gaining margin by timely payment arrangements occur when a professional accountant is spending time on things they do well. Don’t only do your books during tax season, and don’t handle all that uncategorized revenue at the end of the year.

Instead, invest in a good CPA and accounting platform, and close and review your books at the end of each month. Having timely financials with supporting documents for the transactions creates a lot of value in the sale.

11. Schedule a Confidential Conversation with Focus Advisors

Focus Advisors is the leading M&A team for the collision repair industry, and prides itself on deep expertise of the industry and its players, and cultivate longstanding, trusting relationships with groups all over the country.

Focus Advisors would be more than happy to have a confidential, no obligation discussion of your business and address any questions you might have. It routinely takes a look at folks’ financials to advise them of their value in the market and their room for value creation. The earlier you connect, the better, because Focus Advisors can advise you on ways to improve your business in the months---or years---before an exit.

Focus Advisors hopes these tips can help create significant value for your business. Implementing them well ahead of a sale will also pay the dividend of a better functioning business (read: less day-to-day stress) for you. After these last few years, you deserve it!

Source: Focus Advisors

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