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Top 10 Reasons Shops Don’t Sell

Many auto service shop owners and tire dealers have focused their lives on growing and developing their businesses. When life happens – time for retirement, moving on to another career opportunity, family or health issues – a seller can find that a huge gap exists between what they had hoped the business was worth and what a buyer will actually pay for it.

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Leveraging more than 30 years of experience as both an aftermarket business owner and aftermarket technology executive, Art Blumenthal LLC provides business intermediary and advisory services to both buyers and sellers of industry businesses of all sizes. Art is a member of IBBA (International Business Brokers Association, Inc.). For more information, or to initiate a no-obligation confidential consultation, visit www.art-blumenthal.com.

Many auto service shop owners and tire dealers have focused their lives on growing and developing their businesses. When life happens — time for retirement, moving on to another career opportunity, family or health issues — a seller can find that a huge gap exists between what they had hoped the business was worth and what a buyer will actually pay for it.

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In my experience as an automotive service-specific business broker, I have been able to identify 10 problems that can result in an absence of buyer offers or offers for well under the maximum potential sale price.

10. Unrealistic Expectations

a. Valuation/Listing Price

Let’s jump right in and state that a shop owner’s emotional attachment to their business, coupled with an inexperienced business intermediary’s desire to obtain the listing and please the seller, can be a recipe for disaster. The listing price of a business is one of the critical elements to a successful sale, but overpricing a business will deter knowledgeable buyers from even establishing communication.

Business intermediaries are typically compensated by receiving a percentage of the sale of the business, so obviously he or she is motivated to obtain the highest possible price for the seller. However, intermediaries should be judged by the percentage of businesses that they take on that will actually sell. Taking on businesses that have not been valued properly and stagnate on the market with little activity is a disservice to a motivated seller who has a target date in mind for the next chapter of their life.

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Many sellers say something like, “I need $500,000 for my business so that I can pay off my loan and have enough left for retirement.” Sometimes the profits will have dropped 15 to 30% in the past few years and the seller feels he should get the same sale price that he/she might have been told back when the business was more prosperous.

Buyers, on the other hand, are typically not very sympathetic to what a seller needs and are focused on how much cash the business currently generates each month to cover their bank payments, earn a lucrative salary and receive a return on their down payment investment. Their offer will be based upon a multiple of the cash flow. They want to get the best deal and are often evaluating and comparing multiple businesses for sale.

Sadly, some sellers focus entirely on their needs and ignore the fact that buyers want to pay a fair market value for the business that can be defended to the bank, SBA and third-party appraisers. The typical outcome is that the listing will languish in the marketplace and recovery becomes more difficult. Once on the market for months on end at the wrong price, the process of re-pricing and re-listing creates a whole new set of challenges, the least of which is maintaining credibility. A wise and experienced business intermediary knows the maximum sales price that a given business can realistically obtain and is skilled at presenting it in the best possible light and negotiating top dollar from a buyer.

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b. Unrealistic Terms and/or Structure

Deal structure, asset allocation and tax management must be addressed proactively and early in the process. Often the seller and buyer place all of the focus on the sale price at the expense of the net after-tax results of a business transaction. In most cases, a seller could achieve a deal that provides a greater economic benefit when an experienced tax attorney/CPA assists with structuring the transaction. In addition to structure, there are a number of other issues that could be problematic, including:

• Seller and buyer unable to reach agreement on the amount of training to be provided or the scope of the non-compete agreement.

• The buyer’s unwillingness to put up other personal collateral which may be required by the bank.

• The lack of consensus on how much of the purchase price to allocate to equipment, which has a tax impact for both buyer and seller.

• Seller insists on a stock sale and the buyer will consider only an asset sale.

9. Leveraging the Advice of Professionals

For a successful sale to occur, a shop owner should have the right team of advisors in place. An experienced business intermediary will play the most critical role. This individual will handle everything from the business valuation to negotiating the terms, conditions and price of the sale, as well as everything in between (confidential marketing, buyer qualification, etc.).

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Both a business attorney and a CPA who are each knowledgeable in business transactions are critical players on the team. While a business owner’s current legal and tax advisors may have the best of intentions in assisting their client with the business sale, if they lack experience in such transactions, it would be highly recommended to evaluate alternatives. Too often the attorney or accountant become so overzealous in protecting their client that they lose sight of the “give and take” that is sometimes needed to get to the finish line in a timely manner and without running the meter at their client’s expense.

8. Inaccurate or Incomplete Financials

Maintaining accurate, detailed and clean financial statements that match filed tax returns will be the basis for the business valuation and also the criteria for whether the business will qualify for bank transaction funding. Too often, the business is managed as purely a lifestyle business that is focused only on minimizing taxes and maximizing short-term owner compensation and perks without regard to how a business will be valued when it goes on the market for sale. In these cases, the owner has taken very liberal personal expenses that may not be able to be added back when deriving the adjusted earnings.

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A business broker specializing in the aftermarket will have the experience and ability to analyze financials and often provide the service of “recasting” shop financials. Adding back payroll that is not applicable to a buyer is one of the most common adjustments. The broker and the seller will need to agree on the most appropriate staffing model to present to a buyer. This typically includes adding back the owner’s salary, often a spouse salary, and sometimes that of the shop manager or service advisor if the owner is not actively involved in daily operations and a buyer could realistically replace one of the managers after an initial training period.

Given the importance these documents represent, a business owner should ensure that the books are professionally managed and up to date. Records that are messy, incomplete, out of date or contain too many personal expenses will only give prospective buyers and lenders reasons to question the accuracy of the books. This is one of the main reasons how a seller sacrifices getting top dollar at the closing table. This is especially true when a sudden health emergency or other situation necessitates a sale earlier than originally anticipated.

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7. The Owner Is the Business

It is not uncommon for the owner to play a significant role in the operation and management of the business. This is particularly true with smaller enterprises such as single location auto service shops. Where this situation can present a problem is when the owner is not only the face of the business but also deeply involved with all facets of the company — service writing, marketing, operations and repair. If there are no key employees and there are few written processes and procedures, the business lacks a dependable and repeatable workflow.

When it becomes evident that the business cannot operate effectively without the owner’s hands-on involvement and personal know-how, it becomes problematic. Of equal concern is the relationship the owner may have with the customers of the business. If the customers do business at the shop largely because of their personal relationships with the owner, this situation will create customer retention concerns and possible transition problems when the business is being sold.

Buyers want a business that can operate independently from the current business owner. Ask yourself, “How would my business operate without me if I took a month-long vacation?” If your answer is that it would suffer a great deal, then most likely a buyer who doesn’t want to be a slave to the business will reduce their offer to compensate for additional payroll expense.

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6. Unqualified Buyers

“Tire kickers” are the bane of the business seller. Sometimes it’s a competitor with an ulterior motive parading as a genuine buyer, but more often than not it’s a window shopper with neither the financial means nor the courage to make a purchase.

Either way, some ostensibly interested parties will never actually buy your business regardless of its merits or your cooperation. As a preventive measure, it will be necessary to qualify a potential buyer as soon as reasonable.

If you are on your own in the task of selling your business, you may very well not be able to make that call. Just as you have developed the skills for “reading” your customers, an experienced business broker becomes adept at detecting a tire kicker after just one or two conversations.

A good broker will ask buyer prospects a series of questions to gain insight into their history of investigating businesses and their motivations. If they are not a serious buyer, why risk the disclosure of your confidential financial information and tax returns while wasting precious time giving evening and Sunday tours of your shop? Why subject yourself to the emotional rollercoaster ride of being excited to have a buyer prospect, only to be let down if they go dark after a few weeks?

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Part of the buyer’s qualification, of course, is their capacity to finance the business. One of the first things to work out is whether a buyer has the necessary down payment to finance the business, a good credit score and no history of  bankruptcy. Whenever possible, I get the business “pre-qualified” by a major national bank and engage them early with a buyer to make sure they will qualify for financing.

5. Owner is Aging and Has Slowed Down

It is not uncommon for a business owner to become complacent after running a shop for many years. This loss of energy or lack of “fire in the belly” has a way of spilling over into the business fundamentals: marketing and advertising for new customers decreases; investment spending on equipment upgrades and facility improvements gets cut back; innovation and employee training on new technology comes to a grinding halt; and the business glides on autopilot.

An owner who has become overwhelmed and burnt out almost unavoidably transmits their lack of zeal and drive to their staff and customers in a number of subtle ways. The net result is that the company’s performance slowly begins to deteriorate. Reduced customer satisfaction is reflected in poor Internet ratings/reviews and decreased visits. Unfortunately, this situation can become even more pronounced when the owner finally makes the decision to sell the business and mentally “checks out” at the most important time for ensuring a high value. 

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4. Profound Industry and Specialty Changes

In the early 20th century, those who owned livery stables either converted their businesses to service automobiles instead of horses or became extinct. Significant change still occurs in the early 21st century. The future outlook for the aftermarket industry and the specialties within it will have a direct impact on the valuation and marketability of a business during a sale.

For example, transmission and carburetor specialists, once thriving segments of the auto service industry, are no longer growth businesses. Tire dealers who have not expanded their businesses to include a high percentage of underhood auto service may face stiff and unbeatable competition if a big-box tire store selling highly discounted tires moves in next door. Hybrids, electric vehicles and (eventually) self-driving vehicles will have measurable impacts on the industry in the years to come.

Businesses facing obsolescence or those mired in a shrinking industry will encounter an uphill battle when it comes time to transition or sell the company. Business owners can avoid this situation by maintaining a diverse offering of products and services that are relevant to the market. Not only will this assist in mitigating the impact from declining sales, but also will demonstrate to a prospective buyer that the business has a clear path to growth in the future.

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3. Choosing the Wrong Lender

The time between obtaining loan application approval to securing transaction funding is a process that can take 10 weeks or more. Many deals have fallen apart during this period because the buyer became aligned with the wrong financial institution or loan officer. There is nothing worse for all parties involved to find out six weeks into the process that either the loan terms previously promised were not correct or, worse, that the bank underwriter declined the loan.

In the field of business acquisitions, not all banks/lenders are the same. One bank may turn down a borrower for a SBA 7a loan, while another institution will readily accept it. Every lender has its own unique and frequently modified lending criteria. Additionally, there are third-party financial service companies that can prequalify a buyer, package a loan and coordinate the approval process through one or more financial institutions that are most likely to fund a particular business acquisition.

Buyers should consult with the business intermediary representing the sale to determine which lender has prequalified the transaction for funding. A business intermediary who has a track record with a particular bank can serve as a great coach to help navigate the buyer through the process and provide tips on how to answer questions that are likely to come up during the underwriting process. Therefore, buyers need to ensure they are working with the right lender from day one or else valuable time will be wasted that can cause the deal to become compromised or lost to another, better prepared candidate.

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2. Commercial Property Issues

The mantra “location, location, location” applies not just to residential properties, but also to the retail locations of businesses in the tire and auto service industry. An aftermarket business buyer will seek assurances that they can either purchase the real estate outright or be able to sign a long-term lease with the landlord with renewal options.

Banks will want to see that the buyer has the right to operate their business at the location for at least 10 years from the projected closing date. Additionally, buyers don’t want to feel that they may have to relocate or close the business as soon as they have paid off the loan. Buyers want to know that if they decide to sell the business after a few years, there will still be at least 10 years left on the lease. Ideally, having a lease with options totaling 15-20 years or more will help maximize the value of the business.

Besides lease options, the type and size of the facility can also have a material impact on the sale. If the facility is not large enough to provide the enterprise a sustained growth path, a buyer could become disinterested. Another issue could be the value of the property or the rent was determined before the recession and is now overpriced in terms of current market value or the ability of the business to afford the rent from the current cash flow. Ideally, the rent as a percentage of sales should not exceed 7%. If rent is above 10% of sales, then expect that the value of the business will significantly decline.

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Business transactions involving the sale of commercial real estate can be hampered by Environmental Site Assessments (ESAs) – Phase 1 and Phase 2. A property that is contaminated from underground lifts or floor drains can be very costly to clean up and will have an impact on the closing. When this situation arises, it will be important for the buyer and seller to have a clear understanding of the costs involved to resolve the issue, which party is responsible and whether a price offset will be warranted.

Other complicating factors involving commercial real estate include working out who is responsible for performing any needed deferred maintenance or complying with current building codes.

1. Decreasing Revenues/Profits

The majority of buyers are seeking profitable businesses with year-over-year increasing revenue and profits. When a business has a less stellar track record with varied results or possibly declining revenue and/or profits, complications with the business sale are likely to occur. Not only will decreasing profits and revenue impact the availability of third-party funding, but they will also impact the business valuation. While buyers traditionally purchase businesses based on anticipated future performance, they will value the business on its historical earnings in this case — with the major focus being on the previous 12-24 months. The seller should be able to articulate accurate reasons for the decline when there are deteriorating financials. Many lenders will decline a loan if there is a 15% or more annual decline in sales or cash flow unless it can be clearly shown that the reason for the decline is no longer applicable and the financial performance has rebounded in recent months.

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Cash flow is the driver behind business valuations and business acquisitions. The consistency and quality of revenue and income will be two of the key focal points when assessing an acquisition. It all relates to risk. Those aftermarket businesses with dependable recurring revenue, reasonable expenses, acceptable profit margins and the financials to prove it all will be in the greatest demand.

Summary

Most aftermarket business owners are emotionally invested in their businesses. It is not uncommon for the seller to become so emotionally attached that they look past some rather glaring problems that a business intermediary, lender or prospective buyer will immediately recognize. It is natural for a seller to want to obtain the highest price possible for their business, but ignoring any potential problems will only provide the seller with unrealistic expectations. One of the duties of a qualified business broker is to be honest and direct in educating a business seller on potential challenges, the range of realistic transaction prices and the most creative terms and structuring options that might be utilized. Knocking out any potential issues up front rather than late in the sales process should be what every business owner strives for when approaching the sales process.

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