Coming up with an exit strategy is never easy. What do you need to do to successfully sell your business? Professional Remodeler’s Jud Mostenbocker (who sold his own company to his son) talked to radio host and former remodeler Rosie Romero, who sold Legacy Custom Builders in 2002 to a group of employees, and Chuck Solomon, who is preparing to sell his Raleigh, N.C., company, Remodel and Repair Solutions. Portions of that conversation appear here. To listen to the full discussion, click here.
Jud Mostenbocker: Rosie, why did you want to sell your company?
Romero: When I founded the company I deliberately did not use any family name, and it was a generic, marketable name. I started the company to sell it. That was always our vision.
Mostenbocker: Chuck, why are you trying to sell?
Solomon: The primary reason for wanting to sell is because we’re trying to move to another area of the country where my wife previously lived. We’re not in any hurry to do it. That’s the impetus to wanting to sell, because I can’t manage it from afar.
Mostenbocker: How long does this process take?
Romero: We started talking about selling the company probably a full five or six years before it came to be.
Mostenbocker: Chuck, how long have you been in this process?
Solomon: Probably since the summer, three months now. Ideally, I’d like to find someone who actually has not only the financial ability but also the ability to take care of my customers going forward. I’ve not identified that person. I’m in discussion with a handful of individuals who’ve expressed interest, but I’m not in a hurry. This isn’t a fire sale or a thing I need to do immediately. I’m really looking for a best fit.
Mostenbocker: Did you put a schedule together for this thing?
Romero: It was a loose schedule. Everyone knew I wanted out and the sooner we were going to be able to facilitate that the better. When this president opted to buy the majority stock, it accelerated everything we were going to do. In a couple of months we had it done.
Solomon: I have a general schedule. It’s probably more based on phases rather than dates – a due diligence period, a contracting period, a negotiation period. I’m going to have specific dates once I identify the buyer to keep things moving on. If you don’t have deadlines and specific dates on things, you tie up things where if someone doesn’t work out you might lose out on another prospective buyer.
Mostenbocker: Have you looked inside the company as well as outside the company?
Solomon: I’ve explored it with some key people as well, and that option is open and continues to be open. Sometimes it comes down to dollars and cents and financial ability. One of the things that I have done is I’m currently interviewing some business brokers. These are people that work on a fixed commission; when they identify the buyer they collect a commission on the sales price. I’ve interviewed a few, and plan to interview a few more. I’m hoping to cast my net a bit farther with a business broker that I hire.
Mostenbocker: Rosie, you never varied from that, going within the company?
Romero: No, not seriously.
Mostenbocker: Rosie, how did you come up with a value for the company?
Romero: We were fortunate in that we had done a C-corp to S-corp conversion in 2000, which required a full audited appraisal of the company and when it came time to sell in October 2002, we were able to just recontact the company and do an updated evaluation. To come up with an appraisal of the book value of the company is one thing. To come up with a sale value is another. They do earnings before interest, taxes and adjustments; and look through the whole operations of the company and figure out without this current owner here, what is it going to cost to maintain the current operations.
Mostenbocker: The accountants seem to have four or five different ways to come up with a value for the company and you’ve kind of got to go through and pick what fits for your company. Is that correct?
Romero: It is. You just sit down with the people you’re negotiating with and say, by the book value it’s this, by the street value it’s this and where in all of these three or four numbers, can we all be happy with each other. One of the methods is the weighted average, and they take last year’s financial results and they weigh it heaviest, then the year before and they weigh it a little bit less, and they go back five years, with the fifth year being weighed the least. So anyone seriously focused on selling their company needs to sell it at the height of activity when it’s the most productive and profitable. As soon as it hits the peak and turns down, that downturn is going to weigh heavily on the sales price.
Mostenbocker: What have you learned from this?
Solomon: The single biggest thing is to ask for help. I don’t have any
experience selling a business such as this, so I’ve sought some professional help to help guide me with that. I had a cold, hard slap in the face of reality with what I thought my little baby was worth and then I actually started talking to professionals and heard what they though it could sell for, so I swallowed hard and moved forward from that.
Mostenbocker: Is there a reason for that you can put your finger on?
Solomon: Maybe you think things are bigger and better because it’s your baby. There’s a bit of an emotional attachment there. I’m just trying not to give it away. The reality is, the business brokers were saying we sell similar-type businesses and this is typically what you can expect a buyer would pay. A lot of it I wasn’t aware, it was an educational process for myself.
Mostenbocker: Let me go back to this idea of who helps you. As an instructor for NAHB, we teach that you have an advisory group which. consists of a lawyer, an accountant, a banker and the insurance company. Rosie, did those four people take a role in making this thing happen as far as a sale is concerned?
Romero: Indirectly. They were all involved in that first appraisal process. When it came down to (the sale), at that point it was just the president and me across the table eyeball to eyeball. I wouldn’t recommend other people doing it the way I did it.
Solomon: The people that I have, who work for me, my CPA and attorney have helped. No to the banker and insurance agent at this point.
Mostenbocker: When we first started into this, I always kept those four people involved and interestingly enough, the insurance agent came up with a scenario that could have tripped us up really bad. I was a sole proprietor and the advice from the accountant and the attorney was that when my son took over it ought to be an LLC at least, and in that process we were going to change it all at once. The insurance company stepped in and said, Jud, you need to become an LLC and sell it to him because he’s going to lose all of the years of experience you have as far as insurance is concerned in the LLC. So if we had not gotten out of the sole proprietor and into the LLC, we would have muddied it up.
Mostenbocker: What would you do different, if anything?
Romero: I’d be a lot more strategic on the timing. When we sold in October 2002, it was kind of a down cycle in the economy. Here’s a perfect way to put this in perspective: When we completed the sale, they wanted me to retain some amount of ownership so the marketing material could still declare Rosie Romero as an owner. My attorney said you have 7 percent or less, that way no matter what they do with the company you can never be held liable. When they finished buying that 7 percent in October 2007, the economy had come back. I got as much money for my last 7 percent as I had gotten for my 93 percent in 2002.