Remodeler's Exchange: An Inside Look at Selling the Business

Contributing Editor Tom Swartz talks with present and past owners of remodeling companies who took different approaches to selling their businesses. This month’s conversation is with Ken and Jeff Moeslein, a father-and-son team that recently completed a transfer of ownership in the family business, and Shawn McCadden, who successfully sold his business nearly 10 years ago. During the conversation, they discuss finding a buyer, setting a price, and negotiating the transition

December 15, 2014

Tom Swartz: Tell us a bit about your company and your succession strategy.
 
Shawn McCadden: I started my company, Custom Contracting, in 1991 with goal of wanting it to eventually be employee managed, and then to someday sell it. By 1996, it was fully managed by a general manager, and I had removed myself from the day-to-day activity of the business. I sold the business in 2004 to the general manager who had been running it. At the time it was a design-build remodeling company, but we had always done and continued to do general repair work. At the time of the sale, annual revenue was about $2.5 million and was growing at the rate of about 15% to 20% per year.
 
Jeff Moeslein: We’ve been in business since 1987. We started out as Swingline Windows, the replacement window company Ken started. Over the years we added doors, siding, and other exterior product lines, and in 2003 we joined the Owens Corning basement finishing program. Shortly after that we expanded into full service remodeling, which led to a rebranding of the company in 2007 as Legacy Remodeling. Exterior replacement is still the company’s bread and butter, but we also perform a good number of additions and kitchen and bath remodels. Revenue this year will be about $5 million.
 
 
Tom: Ken, when you were negotiating sale of the company to Jeff, how did you determine fair market value?  
 
Ken Moeslein: We’re a C-corporation, so it was relatively simple. We had common shares that had a valuation on them when the corporation was started, so when we decided to transfer ownership, it was easy to make the calculation. When everyone agreed that it was a good number, the company purchased my shares. So at this stage, Jeff is the only shareholder, and the company holds the rest.
 
Jeff: Instead of writing one check for the whole amount, Ken agreed to take payments over time, which makes it much more manageable for me and the company. I am paying him back over 10 years, so it is as if Ken has loaned me the money.
 
Ken: I am fully retired and it’s Jeff’s company to run, so the payment schedule is part of a retirement plan, if  you want to think of it that way.
 
 
Tom: Shawn, you did it a different way, selling to an employee. How did that work and how did you come up with a fair market value?
 
Shawn: I had been thinking about the possibility of selling for a while, and also about setting the value. One big question was making sure the buyer had the ability to pay, either with their own money or via a loan. At that time, I considered myself to be a stockholder, so I thought about what return I wanted. For me that was a percentage of the installed sales volume, so the question was how to structure the deal so I got paid before the company paid other vendors. As the sole owner, I was already getting 10% in net profit, but I was also taking on 100% of the risk. If I wasn’t going to be involved in the business, I didn’t want the risk; by selling it, the risk was taken on by the buyer.
 
I worked with a broker, an attorney, and an accountant to come up with a number. But I also had to finance it for the buyer, who was the general manager who had already been running the business. We agreed on the value and on the terms of my financing.
 
In some ways I created the buyer. The general manager already understood the business, knew the finances, and so on. He prepared the annual budget, showing my 10%, and also showing how he would be compensated. There was enough revenue to adequately compensation everybody.
 
And he also came to realize that he could grow the company to $3.5 million in revenue without increasing overhead. All of that net profit would drop to the bottom line, which was to his advantage, but it really was more comfortable for both of us. I can’t tell you the exact sale price—that’s part of my agreement—but it was north of $1 million.
 
We agreed to payments that would be manageable for him, and ended up with a 10-year note, with a balloon payment at the end. We’re right at the doorstep of that balloon payment, but the recession changed things, so we’ve extended the term with another 10-year note.
 
 
Tom: Jeff and Ken, when did you set up the 10-year term? Has the recent recession affected it?
 
Jeff: We completed the sale one year ago. As for the recession, we’ve already crossed that bridge. Pittsburgh isn’t out of the woods yet, and I have missed one or two payments, but they are added on to the end, so the original 10 years might become 11 years.
 
 
Tom: So all of you are on a 10-year program, and you’ve also had to deal with a bad economy.
 
Shawn: I have no interest in running that business again, so I want it to succeed. To maximize the sale price, I was willing to negotiate as times became tough. But the principal balance stayed the same. Payments are applied first to interest, then to the balance. 
 
Ken: On my end, I’m not expecting any additional interest charges. Maybe that’s one difference in a family succession.
 
 
Tom: Shawn, you’ve told us in an earlier conversation that your father had a remodeling business that you had intended to buy. It didn’t quite work out as planned. Can you explain what happened?
 
Shawn: Sure—and I think this is important for anyone contemplating succession to family members.
 
I started working in my father’s contracting business when I was in high school. My father and I had agreed that I would buy the business, and although we’d agreed on a date, we hadn’t agreed on a value. Truthfully, I was running a business within my father’s business, and I was making twice the gross profit he was. So it may have been that he realized I was making a lot of money for his company, and that would go away if he sold it to me.
 
So time passed, and when we were already three years past the agreed-upon date, I decided to go it on my own. I had a young family and the timing seemed right. I was making good money working for my father, but I had my own goals. So I did my due diligence with a lawyer and an accountant, and I gave my notice.
 
And my father has not spoken to me since that day in 1991. It’s been hard on my mother, and for a long time it was difficult for my siblings (I’m the eldest of eight children). At the time, they thought I was doing something to my father, but over time, as they started families of their own, they came to understand that I did what I did for myself and my family.
 
 
Tom: Thanks for being so candid about what was obviously a difficult decision.
Now I’d like to get some idea about the overall timeframe. Shawn started thinking about transferring ownership from day one. Ken, when did you decide that Jeff might be interested in the business?
 
Ken: Before I started my business, I was working in the corporate world, but I wanted something else, so my wife and I started this busness. We weren’t thinking about selling it, but when Jeff graduated from Penn State, he came to work for us immediately. So he’s been involved for a lot of years, and he’s held different jobs at different times—production, sales, marketing.
 
His degree was in administration of justice, but we needed someone with more of a business background. So he went back and got an MBA. In 2003 I named him President, and from that point on we started thinking about how we would make the transition. Basically, I asked Jeff what would it take for him to be happy.
 
Jeff: Back in 2003, when we acquired the Owens Corning basement business, Ken kept running the replacement business, and I had the opportunity to work in the Owens Corning business, which I built into a $4.5-million business. It was a great opportunity for me to learn the ins and outs of a balance sheet and the practical side of running a business day to day.
 
But as the economy went downhill, the basement finishing division went downhill as well, because it relied on financing, so we moved away from it. But I had a 4- or 5-year period of running a business on my own, with the security of having Ken still here. So there was a nice transition period without my feeling that I jumped into the deep end.
 
Ken: Jeff says he was glad I was here when the recession hit, because it was my third recession. It might have been overwhelming for one person, but together we came through it.
 
Jeff: I’ve been here since 1999 when I graduated college, so it’s my sixteenth year. I was involved in a lot of ways when I was younger, so by the time we talked about my taking over, it was Ken’s business on paper, but I also felt it was mine. I was given the opportunity to institute some of the processes, so I felt like I helped build it.
 
But as much as we might sound like we have it all together, there are also days when we butt heads. We have enjoyed working together, and we have mostly agreed on where we want it to go. But like anything involving family, there are times when you have to stop and realize that you’re not on the same page and commit to solving those problems.

 
 
Tom: For contractors who are contemplating succession, are there tax advantages in the way you structure the agreement?

 
Shawn: Because I started my business with very little money, the entire sales price was considered capital gains. So as I collect it, I am paying capital gains, which is lower than income tax. On the buyer’s side, he can use profits to make the payments, but only the interest is tax deductible; he has to pay taxes on the principal before he pays me.
 
Rather than do an asset sale, I did a stock sale, which means the buyer takes over everything—not just assets, but also the reputation and the credit rating. I had a good credit rating, which the buyer inherited even though I had taken my name off it. That was a big advantage, because he didn’t have to establish his own credit. He mentioned the value of that recently when we were renegotiating the note.
 
Ken: The fact that Jeff was slowly taking over the company benefited him because all of the vendors got to know him over a long period of time. Shawn’s point is well taken—the transitition was seamless, because the vendors trusted Jeff’s creditworthiness. Jeff was able to assume the good will and credit because the vendors had gotten to know him.
 
Shawn: The same was true in my case. When I started my business, I took advantage of my reputation in the community so peple would
identify me with my business. But after 3 years, I started removing myself. I took my name off the letterhead, I didn’t have an email—in fact, I eventually moved to a neighboring town. I wanted people to think of the business, not me.
 
 
Tom: Jeff and Ken, was there any tax advantage when Jeff bought your shares?
 
Jeff: Legacy purchased Ken’s shares, which was 70% of the company. I still own 30%, but the rest is owned by the company. So the company really didn’t change. There is a once-a-year credit review, but after talking to our accountants, everyone agreed this is the best way to do it.
 
 
Tom: Obviously, there is more than one way to go about this. Do you have any final advice you would you give to someone who is contemplating selling or buying a business?
 
Jeff: First, I think it’s important realize who you’re working with. As a buyer, you need to be honest and forthright about the opportunity in front of you. In my case, there were certain costs that I didn’t want to continue to support, and it was difficult to put those out there—moreso because it was a family business. But I felt I had to do it, so I was upfront about it. You only get one chance to do it, and it’s hard to undo, so express all of your concerns.
 
To be honest, as a buyer, I was working with a pretty flexible seller. I had the benefit of negotiating with someone who was interested in finding a way to make it work for both of us. 
 
Ken: In the context of family, you have a buyer and seller, but you also have a father and son, a wife and mother, grandparents and siblings. We wanted to make sure that we could continue to function as a family without any questions that one of us got the better deal. Jeff never had any interest in going anywhere else, so we just made it work.
 
Shawn: First, if you want to sell, sit down today and write the “For Sale” ad of what it is you’re going to sell. Think about what you would want to see in that ad as a buyer. Hopefully, it would describe a business that has value. If you don’t know where you’re going, any road will get you there, but if you’re going to sell a business someday, you need to plot your course now.
 
In terms of the transition, think about the fact that you are not just changing ownership, but also the leadership of the business. You can’t expect the buyer to come in and instantly be seen as the leader. So if the transition happens while you are still there, the new owner can prove their leadership to customers, vendors, and employees. From what I have seen, when companies didn’t do that the business failed, either from lack of the right leadership, or from people leaving the company because they weren’t comfortable with the new leader. PR

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