BY KEN LUCCI
As we enter 2021, operators are required to make critical decisions in order to assure basic survival and facilitate recovery, not to mention the rebuilding of their companies in the coming months and years. Banks that readily issued vehicle loan deferrals in the beginning of the pandemic are soon expecting monthly payments to resume. As significant operational expenses return before adequate revenue, many operators will be faced with the ultimate and unfortunate decision: rebuild or close.
The pandemic hasn’t been kind to our industry, and even the best capitalized operators didn’t expect to face 25 percent of business (or less) for almost a year. As such, there is a new definition of success for sellers, which may simply mean relief from crushing debt and not having to add more money to a business where adequate revenue cannot be guaranteed and may take years to return.
Even amid the pandemic, there are still qualified buyers looking for companies to purchase, and successful transactions are taking place all over the U.S. When we represent sellers, we define qualified buyers as companies with demonstrated experience acquiring and integrating businesses, and most importantly, verified financial capability to successfully emerge from this crisis. We caution sellers to primarily consider seasoned luxury transportation companies with demonstrated financial stability now, and advise built-in protections that will help assure sellers will be paid in full.
If you are contemplating selling your company instead of rebuilding, there are many factors that can lead to a successful transaction. Whether you are attempting to merge two companies together or selling outright to another company, a seller must prepare their business for sale before starting the process.
Ken Lucci has also provided an exclusive checklist to help you prepare to sell your business that can be accessed here.Buyers are scrutinizing financials much more than before the virus because they want to know how and what revenue has returned and are afraid of inheriting unforeseen debts, thus the pre-sale due diligence process is more robust now. This requires sellers to embrace full transparency and have reliable and current information at the ready.
Documented pre-pandemic financial performance: Have 2018 and 2019 financial records available including tax returns and internal financial statements. It is advisable to have these reviewed prior to furnishing them to any potential buyer in order to determine true historic earnings and formulate foundational business values.
Full disclosure of your current financial situation: Be prepared to share the good, the bad, and the ugly. Buyers expect to gain a complete understanding of where your business stands today and if there are any financial entanglements that involve you personally. Transparency and full disclosure are a must.
Current monthly P&L and documentation of expense reductions: In order to understand any steps you have taken to assure business survival, it is best to have monthly P&L statements available for each month of 2020. In addition, buyers will want to have granular information as to what expense cuts from pre-COVID levels you have executed to determine current expense levels.
PPP and pandemic loan obligations: If your business has taken Payroll Protection Plan or disaster loans, buyers will want information on these debts, including if you have applied for loan forgiveness.
Short- and long-term liabilities: Whether the transaction dictates that the new owner agrees to inherit certain debts or all liabilities are paid in full from transaction proceeds, buyers want to know what obligations the company has on its balance sheet. Of critical importance are outstanding balances or any ongoing expenses associated with assets being purchased, whether intangible assets like websites and telephone numbers or fleet loans and blanket business liens. Granular information on all debt obligations must be provided to determine if there are encumbrances on the assets they will be buying.
Current revenue by silo and source: Buyers expect your business will have greatly diminished revenue compared to 2019 year over year performance. What they hope to see is marginal increases in monthly performance so they may project what revenue recovery will look like as a new owner.
Financial forecasting scenarios: If sellers are expecting to receive fair value for their businesses in this climate, then it is best to be prepared to show potential buyers well-formulated financial forecasts with several revenue return scenarios. Forecasts should take into account both 2019 historic revenue per customer and 2020 revenue trends from March until now in order to demonstrate any increases from the absolute depth of the crisis. It is advisable to create several scenarios, including worst case, modest projections, and total returning revenue over the next 36 months that plateaus at 80 percent of 2019 average performance.
OTHER CONSIDERATIONS FOR A SUCCESSFUL DEAL
Make the best case for the value of your company: To say that this is a “buyer’s market” is a vast understatement; however, while there are plenty of owners who want out, there are much fewer companies with sellers who are really prepared for a transaction. Having all of the above information available for qualified buyers will dramatically increase the likelihood of a successful transaction.
Create a presentation package on your company: Every business for sale has a story to tell that will emphasize its positives and the potential benefits to a new owner. When selling a business, this story is best told with a professionally created presentation package that includes the history of the business, a description of the market, details on competitive advantages, key customers, and the local competitive landscape. The better the presentation, the higher the end-value sellers will realize.
Display full transparency: No buyers like surprises, and that is why most successful transactions have a thorough due diligence process performed by qualified third parties. To enhance the chances of a win-win transaction, sellers must be completely transparent about the business they are trying to sell. Not having data or holding back information will scare off seasoned buyers. As a normal practice, anything that is disclosed prior to any transaction should be protected by a Non-Disclosure Agreement signed by the parties so holding information back defeats the purpose of achieving the highest value for the business. Further, all parties should be prepared to answer uncomfortable but necessary questions that require “bare all” answers. The more questions asked and answered before transactions become final, the better chances of a fair and profitable outcome for all.
Be realistic about transaction value and structure of successful deals: Pre-COVID this may have been a less definitive statement. But in this current climate, sellers should expect to receive the highest value for their company paid out over several years as a structured earn-out transaction that is ultimately contingent on future revenue produced by their customer list. Put simply, buyers will pay for your company in the form of ongoing monthly commissions on future revenue your asset list produces from now until a defined point in the future. In addition, most buyers are unwilling to put large sums of cash down, unless they are paying for fleet vehicles with these funds.
The price paid for all service businesses is based on a careful analysis of past, present, and future revenue with much greater emphasis on current and the likelihood of future revenue. This is true with law practices, medical offices, and any other business where revenue is generated by providing a service to customers on an at-will basis. Sellers need to come to grips with the reality that there is no guarantee of future revenue from at-will, noncontract customers in any economy much less a very uncertain one. Thus, the value of your business will be realized and paid out from the future revenue it creates.
Work with professionals: The chances of successfully selling your business will increase exponentially with the right advice from transaction attorneys, CPAs, and M&A advisors—especially in a volatile business climate. As you make critical decisions for your business and your future, do not be afraid to seek advice from professionals who deal with these matters as their primary business.
Ken Lucci is a consultant to the chauffeured transportation and hospitality industries. He can be reached at firstname.lastname@example.org.