The remodeling industry has a growing problem on its hands that must be addressed immediately.
As Rick Pratt sat in an auditorium for his daughter's graduation from Syracuse University in May 2005, strains of pomp and circumstance filling the room with inspiration and hope, he had an epiphany. If he sold his business, Classic Homeworks, which he had spent 20 years growing into one of metropolitan Denver's most successful design/build firms, he wouldn't be giving up on anything.
|Rick Pratt has had a lot more time for mountain biking since he sold his Denver business, Classic Homeworks.
Photography by Susan Goddard
As Rick Pratt sat in an auditorium for his daughter's graduation from Syracuse University in May 2005, strains of pomp and circumstance filling the room with inspiration and hope, he had an epiphany.
If he sold his business, Classic Homeworks, which he had spent 20 years growing into one of metropolitan Denver's most successful design/build firms, he wouldn't be giving up on anything. And he certainly wouldn't be selling out. He would merely be graduating from one very successful and rewarding stage of his life to embark on another, exhilarating journey.
A few days later, he listed the business for sale.
"After flying to Syracuse and sitting through my daughter's college graduation ceremony and hearing all these conversations about 'go out there, find something you love to do' and 'the rest of your life is right now before you,' I literally leaned over to my wife and I said, 'You know what, this doesn't have to be about me quitting or getting out,'" he recalls. "'This can just be about me graduating from one thing and moving on to the next.'"
So ended the emotional turmoil that had prevented Pratt, 47, from taking the giant step he had been considering for some time. Selling a remodeling business you built from nothing, leaving behind customers who are literally your friends and neighbors, isn't something that's done easily or without thoughtful contemplation.
Sometimes, the emotional hurdle is the most difficult challenge to overcome.
"Ideally, you reach a place like I did where it's a really good, positive, intentional, all-for-the-right-reasons decision," Pratt says, "instead of a decision you make because you're afraid of the economy or your health is suffering. You don't want to be in a place where you feel like you have to sell, and it's your only choice, or you're desperate, or it's killing you. I wasn't there.
"Truthfully, I was experiencing some burnout. But I don't know anybody in this business that doesn't experience that at some time or another. So, in the end, I don't think that was the motivating factor for me to sell, because I've been experiencing burnout off and on for probably 10 of the 20 years I've been in business."
Like many remodelers and other small business owners, Pratt, CR, used to receive frequent e-mails from brokers asking if he was interested in selling his business. Although he never seriously considered it until the last year or so, he kept the thought in the back of his mind until the time came to consider his sales options.
In early 2005, that time came and he contacted a couple of brokers.
"I interviewed some brokers just to see what that was all about," he says. "But I didn't like their deals. They wanted a 12 percent commission, and they wanted to list my business for less than I thought it was worth. So at that point I decided it really wasn't worth it and just went back to work."
As it turns out, however, his conversations with brokers ended up making him think more seriously than ever about selling the business. He discussed his options with the leader of his local business networking group at TAB (The Alternative Board), Jim Strohan.
Several months later, after his foster daughter Tasha King's graduation, Pratt took the true first step: he listed his business for sale on three different Web sites he found through a Google search. The ads cost him less than $400 for all three.
"It was inexpensive," he recalls. "And I immediately started getting inquiries. And I believe that the two serious inquiries I received were two of the first ones. I continued to get other inquiries for a while, but I ultimately ended up getting two offers for my business from those ads."
Pratt, whose company had done $1.55 million 2003 and 2004, was very careful not to put too much detail about his business in the ads, although he needed to give enough important information to draw interest. "I really wanted to promote my business and make it look as good as possible right from the get-go," he explains. "First impressions are part of the sales process. But saying that we were a 20-year-old design/build remodeling firm that worked in the central part of Denver pretty much defined the business."
Several people who are connected to his business — one current employee and a subcontractor — saw the ad and recognized it was likely Pratt's company. Fortunately for Pratt, the employee never told anyone else at the company, and there were no negative outcomes.
"You have to be careful about how you list it, because it is possible that people in your community will figure out it's you," he cautions. "And that could backfire on you. It is something that you want to keep secret because you don't want to upset anybody. I had a very hard time with that, personally. I talked to my wife about it, and my business counselor (Strohan), and my attorney, and I think I even talked to my pastor about it, because I was really uncomfortable with keeping it a secret. It felt unethical and immoral to have something so big going on and have other people's lives be affected by it but not share it with them."
But everyone he talked to advised him to keep it quiet, so he did and remains thankful of that to this day.
"I interviewed some brokers just to see what that was all about. But I didn't like their deals. They wanted a 12 percent commission."
The Sales Process
Behind the scenes, though, things got serious fairly quickly. Although he received numerous inquiries, two prospective buyers pursued Pratt's company seriously right away.
His first order of business was to create and have them sign a confidentiality agreement, which would allow him to release significant financial and proprietary information without fear of it getting out into public. Instead of having his attorney draw up the document, Pratt saved money by finding one on his own and asking Strohan to help him finalize it.
"Perhaps the most important role I had was as a resource Rick knew he could call on," Strohan says. "Selling a business, one founded and nurtured by the owner, is a very difficult and emotional process. Rick was able to discuss ideas, issues, concepts, valuation, negotiation and other items with me before addressing those items directly with the purchaser. That better prepared Rick, raised potential alternatives, better ensured focus on the key issues, greatly reduced the emotion and facilitated the entire process."
"Jim's been a part of a number of business sales on his own and assisted with sales for other members of TAB," Pratt says of Strohan, "so he was a great resource and helped me prepare for each meeting with the buyers."
Pratt had four interested parties sign the confidentiality agreement, but he only went so far as to release company information to two. When he did, he released three years' worth of financials, his Web site URL and detailed information about his internal processes.
"You really need to have that document in place before you start releasing information," Pratt says. "I made them wait for the financials until after that. I didn't offer that up immediately. I waited until I knew they were seriously interested and we had conversations on the phone and I felt like they were a qualified candidate. Then, with the confidentiality agreement in hand, I released the financial statements so they could get serious about it."
It worked. In short order, both parties made Pratt aware that they were interested in making an offer. Pratt quickly got together with Strohan and created a letter of intent, a process which he had used extensively in his business when clients were interested in having detailed plans put together prior to a design/build project. The letter of intent was straightforward and to the point, including the cost of deposit, exactly what would be turned over to the new owner upon closing, a non-compete clause, the total sales price and the lease agreement for his property, which Pratt decided to keep and rent to the new owner rather than selling.
In retrospect, he says, more detail at this point would have eased the process that followed. There were also two parts of the contract Pratt says he would like to have had his attorney look at more closely.
The first was the three-year non-compete clause, which might limit Pratt's ability to do any consulting work within the greater metro Denver area.
"I allowed the word 'participate,'" says Pratt. "So not only can I not be a principal or owner, but now I can't even go to work as a salesman or even an office manager for a company in this area."
"It's also a geographical area that's much, much broader than the company needs," he says. "The farthest job we'd ever done was within a six-mile radius from our office. And there's only been about six of them outside of a three-mile radius. I can't believe that I allowed that. As a result, I gave her a non-compete in a much larger area than she'll ever use or need. Although I don't want to go back and start another remodel business, I don't want to limit my other options so much."
The second thing he would change involved compensation, in which he would have included commission for the sales he made that were passed on to the new owner on the backlog. No work had yet been done on these projects, but because Pratt invested time and resources to make those sales, he felt that a fair compensation would have been appropriate and should have been put in writing in the final contract.
"At the time we sold the business we had approximately 45 percent of our next year's work in pre-sold contracts and letters of intent," Pratt recalls. "That was more backlog than typical in the history of my company. I should have included 50 percent of the sales commission for the jobs that were already sold. So I lost tens of thousands of dollars on that. At the same time, I had my chance to get it all in writing and spell it all out, and I didn't do it.
"I finally let it go. I told myself this is still a really good deal, you're still getting everything you wanted and you get to move on with your life."
"I spent well under $5,000 total to make this whole deal happen because I did all my own contract work."
To speed up the final stages of the sale, which was stagnating at the point where both parties said they were interested but neither had made an offer, Pratt took matters into his own hands.
"Both of them kept saying they were serious about buying and saying they were going to get back to me, but I finally got tired of waiting. So I went back to them and said, 'There's two of you that are serious, and I'm ready for you to step up and make me an offer. He gave them a deadline, and on the last day, he received offers from both parties. One was a full cash deal, the other included Pratt's floating the buyer a $100,000 loan. But neither was for the full asking price, although ironically the lower of the two was the exact same price a broker he spoke to months prior had told him to sell for. Pratt responded to both offers with an e-mail counter-proposal.
"It was really fortunate for me to have two people who were interested and to have the opportunity to leverage them against each other," he says. "Their original offers were within $15,000 of each other in price, so I found it interesting that they both had done their own analysis of what my business was worth, and they both did it different ways, and they both came in around the same place as that broker did. When I made the counter-proposal, the offer with the $100,000 loan came in at full price."
The other offer was for less. But the lower offer was asked him to work in the business for just two months after the close (a standard request in such a situation), while the full-price offer included an unpaid six-month period for his services. He accepted the lower offer and closed the deal shortly thereafter.
"Given that both parties seemed equally qualified, I decided that the time and the risk on lending the money over a 7-year period was less important than the total dollars," Pratt says. "That's a personal decision that everyone would make differently. But it's very rare to get an all-cash offer on a business deal like this. Most people would not have that choice and would have to allow for lending some money. So I was fortunate."
With capitol gains taxes currently at 15 percent, FICA taxes not required, and a reasonable ROI on the potential of the sales proceeds, Pratt ended up getting almost four times total owner's compensation. The deal, which was basically a blue-sky deal (he sold very little actual physical assets, including only seven computers, six desks and a pickup truck) was taxed almost completely as capitol gains. The exception is that the value of the no-compete is taxed as income.
"I spent well under $5,000 total to make this whole deal happen because I did all my own contract work and just had my attorney review them," Pratt says. "I never met with my attorney in person. I just emailed him stuff, he would review it and we would talk on the phone. And even at $225 an hour I don't think he spent more than 12 hours on the deal.
"I will tell you that I paid a price for that. I don't think it'll come back and bite me, but a little bit better counsel would have served me."
|Rick Pratt's remodeling consulting business, Bridgeman Endeavors, offers systems implementation, coaching and help selling businesses.|
Pratt ended up working almost three-and-a-half months in the new owner's business to tie up loose ends, finish unfinished jobs and clear the books. The agreement was only for two months of his time, but the additional month-and-a-half was necessary for both parties, and he was paid for this additional time.
"Most of that three-and-a-half months was necessary in terms of being able to tie up those loose ends and being in the same office and dealing with transition issues. I don't think either of us had any idea how much work was going to be involved in that."
The first thing he did when his "early and temporary retirement" began in March was to compete in the 2006 U.S. Extreme Freeskiing Telemark Championships in Crested Butte, Colo., where he won the masters division.
Pratt has also spent a lot of time setting up his remodeling consulting business. "Retirement" also will allow him to focus more time on his other venture; he co-owns Adventure Trekkers, for which he spends two weeks every year in the Utah desert running guided bike tours.
So, whether it's volunteer work for Anthony Robbins events, first-aid courses (he's a Wilderness First Responder), Outdoor Emergency Care course to become a certified ski patrolman, or an upcoming three-week photo safari to Africa with his wife, Deana, Pratt is not just sitting around on his deck sipping Margaritas and watching the sun set over the Rocky Mountains.
"I am and will continue to be busy and ambitious in different ways," he says.
Pratt can help you sell your business and/or provide coaching, consulting and systems implementation through his company, Bridgeman Endeavors. Contact him at 303/887-3717 or Rick@BridgemanEndeavors.com.