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Seller Question #3: What Responsibilities Will I Have After I Sell My Business?

Most business owners give a lot of thought to what they are going to do once they no longer own their companies. But with all the anticipation of retiring, traveling, spending more time with family, starting a new venture or simply slowing down, it’s easy to forget about what you’ll be doing immediately after the sale. All of those other dreams and goals have to wait – first you have to fulfill your post-sale obligations to the new owner.

As simple as you might think your business is today and as quickly as you think a new owner should be able to pick everything up, try and remember your first day in your business and how much you didn’t know or understand. Buyers interested in acquiring your company are going to want to ensure that you will provide whatever training and transition assistance they need to make the ownership change a smooth one.

What that training entails will depend on literally dozens of unique aspects of your business and the buyer, but below you will find some of the most important concepts to consider when thinking about how long you’ll be with your business after the sale and what you’ll be asked to do by the new owner.

Your Duties as the Owner

Buyers have to understand what you do, plain and simple. They need to know everything from what your day-to-day duties are all the way to what you might be responsible for doing only once a year. When buyers have a clear picture of exactly what shoes need to be filled after the sale, they can propose a transition and training plan that makes sense for them and ensures the business will not suffer.

Try to keep in mind the big picture here – whatever it is that you’re responsible for ultimately has to be taken over by someone else after the sale. So the more heavily involved you are in the business, the longer a buyer is probably going to want to you around to train and transition. In fact, there are instances where the owner is so irreplaceable that the buyer has no choice but to request that you stay on board for an extended period of time. There can also be scenarios where you “are” the business, and it makes it difficult for any buyer to imagine purchasing your company, period. With this in mind, as you start to give thought to the sale of your company, take some time to do an honest assessment of your involvement and duties. Then start to identify jobs you can delegate to other people within your organization. You may even discover a new hire is needed to make the business more efficient and attractive. Those types of adjustments will ease your post-sale obligations to the buyer.

Remaining with Your Company

It’s not uncommon for business owners to remain with their companies after they’ve sold them. This type of arrangement is more prevalent in larger businesses where the buyers tend to be private equity groups, investors and even industry buyers, as opposed to new owner-operators. Depending on your buyer, they might be planning to step in and assume your role, they might already have someone pegged to replace you or they may have no solution and need you to stay for a period of time. Many business owners will initially shy away from the idea of continuing to run their companies after the sale – what’s the point in selling it if you have to keep running it, right? But before you jump to that same conclusion, actually give some serious thought to what pains you about owning your business.

 

In the majority of cases like these, the things owners despise about running their companies are the very responsibilities the new ownership takes over. Things like insurance, financial reporting, managing cash flow and capital expenditures are examples of the responsibilities new ownership assumes, taking the day-to-day pressures of owning the business off your shoulders. So don’t dismiss the idea of continuing to work for the business after you sell it without really giving it some thought first. You may end up loving the opportunity to be an actual employee rather than the owner, and only worrying about your job instead of every tiny aspect of the business.

Operational Systems & Processes

Your business’ operations are yet another critical component a buyer needs to be comfortable with post-closing. Of all the aspects of your business that a buyer must manage after the sale, learning the operation should be the simplest and most straightforward. However, if the business owner hasn’t documented that operational process, then training can be a huge headache. Before you decide to sell your business, simply write everything down! Every aspect of your operational procedure needs to be detailed. Whether it’s as simple as how the business gets opened and closed every day, or as complex as how 100 delivery trucks get routed every morning, write it down and explain how those things happen.

Having this type of operational procedure on paper has a number of benefits to you, personally. The most obvious benefit is that it will make training a new owner significantly easier and more efficient. Additionally, if a buyer knows you have this type of documentation available, they will most likely request a shorter training period because they feel confident they can be trained quickly. Another added benefit to having transferrable procedures is that your business will be more attractive to potential buyers and ultimately more valuable.

Customer Retention

Customer transition is critically important to buyers. Once they understand the customers’ relationship with the business owner vs. the business, they will be able to better formulate a transition plan and explain what they need your help with after the sale. If you’re a business owner that has close, direct relationships with your customers and you are their primary point of contact, it wouldn’t be unreasonable for the new owner to request that you remain with the company for a period of time to help transition those relationships while still being involved with the business.

On the other side of that coin, if your duties with the business call for little or no involvement with the customers, then the new owner has less to be concerned about when it comes to customer transition and will most likely not ask for an extended period to help with those customers. This type or transition service is something you should expect to be included in the purchase price of your business and not a service you receive additional compensation for.

Employee Loyalty

Another major concern buyers have is employee retention – when you leave the business and they take over, will they have a problem retaining your employees? In most cases, your employees and the buyer want the same things – no changes. Buyers are typically concerned that once you leave the business after a sale that some of your employees may use that as an excuse or opportunity to look for another job and leave. On the other hand, it’s typically for employees to be highly concerned about keeping their jobs when they hear you’ve sold and a new owner is taking over.

The reality in the vast majority of cases is that the buyer doesn’t want to lose anyone and the employees don’t want to go anywhere. So how do you make everyone comfortable? In some cases buyers might ask for you to have your staff sign employment agreements prior to or after closing, they might ask that you agree to temporarily assume the duties of any key employee that leaves the business after closing, or they might even ask you to agree to assist with identifying and hiring replacements for any employees that leave the business within a certain time period after closing. You know your staff better than anyone, so you just need to have a plan to deal with any retention issues you think might occur.

What all of this post-closing discussion really boils down to is you taking a thorough and honest look at your organization and identifying where the true transitional risks are for a buyer. And once you know where those potential risks are, being willing to assist the new owner of your company for an adequate period of time after the sale to mitigate those risks and help ensure they are set on a path to successfully taking over your company.

If you have questions like these and what to discuss how the different answers impact the value of your business, please reach out to us and we’ll be happy to help. As always, one of the first steps in this process is to have us provide you with a no cost, no obligation business valuation.

Selling Your FedEx Ground Line Haul Company Starts by Educating Buyers

FedEx Ground contracts are “the best-kept secrets in trucking” – but buyers need to understand why before they’ll pay top-dollar

The U.S. trucking industry is a large, sustained and critically important segment of the U.S. economy. In 2017, the trucking industry generated nearly $700 billion in revenue, and 71% of freight moved in the U.S. touches a truck, according to the American Trucking Association (ATA). While the trucking industry is a massive operation with millions of trucks on the road and millions of drivers employed, the overwhelming majority of trucking companies are small businesses. The ATA estimates that about 97% of these companies operate less than 20 trucks.

Of course, one of the biggest names in trucking and logistics is FedEx. This $50 billion company breaks itself up into four primary business segments – FedEx Express, FedEx Freight, FedEx Service and FedEx Ground. Every one of these segments has its own unique market position and offering, with FedEx Ground providing small package delivery services over the road, and ultimately to homes and businesses. According to a Market Realist report, FedEx Ground accounts for 25% of FedEx’s total revenue, but it has the highest operating margin of any segment in the company.

While most buyers may think FedEx Ground is just another trucking operation, FedEx Ground line haul contractors understand how unique and valuable their businesses really are. So educating buyers about these differences becomes paramount when you’re trying to sell your FedEx Ground line haul business. The first step in this process is to find out how much your business is worth. We have provided some basic formulas you can use to estimate the value of a FedEx Ground line haul business and get a rough idea of where you stand. Keep in mind, however, there is much more to putting an accurate value on your company than these simple guidelines. A professional business broker can analyze your entire operation and give you a true market valuation.

  • 2x-3x SDE (Seller’s Discretionary Earnings), with SDE up to $250,000
  • 3x-4x SDE, with SDE up from $250,000 to $500,000
  • 4x-5x SDE, with SDE above $500,000

While these rules of thumb are helpful to give you a general idea of your business’ value, there are several additional important factors that can significantly impact buyer interest in your business and the final sale price. These key factors can include the number and quality of your dedicated routes, the points you have on each truck, the total number of trucks you’re running, the condition of your trucks and your personal involvement in the business. A professional business broker with experience selling FedEx Ground businesses understands these factors and can provide you with an accurate market valuation of your business. Most buyers don’t understand what makes FedEx Ground different. Our firm has valued and sold numerous FedEx Ground line haul businesses and know what buyers need to understand to truly appreciate and get excited about your business.

Line Haul vs. Home Delivery

You’d be surprised how many buyers interested in FedEx Ground opportunities don’t realize the difference between line haul and home delivery. While that confusion is understandable to someone from the outside, you know how important the difference is between the two – and buyers need to understand that. In our experience, we’ve found that buyers are much more attracted to the operational efficiencies, scheduling ease and cash flow consistency of line haul operations, and those are the traits most buyers expect to see when they look at a FedEx Ground business for sale. Some of them get turned off quickly when they see a home delivery business instead but don’t realize there is a difference. So it’s important to always start at step one with a buyer and make sure they understand the differences in these to segments of FedEx Ground and the benefits of a line haul operation.

Dedicated Routes, Points, and the Open Board

Most buyers looking at a FedEx Ground line haul business for the first time are probably used to a more traditional trucking contractor model and how loads and routes are typically assigned by dispatch. FedEx Ground’s dedicated routes are unique and lucrative, and buyers need to understand the true value of owning these routes. They also need to be educated about the point system. This is one of the harder aspects of the FedEx Ground line haul model for buyers to grasp because they don’t have a feel for the value of a point. Nonetheless, they need to understand how points are earned and ultimately used to improve dedicated routes or obtain new ones. Finally, buyers need to be taught about the open board and how the terminal’s route assignment rotation works. This helps them better understand the value of the dedicated routes and points also.

Deciphering the Settlement Statement

One of the beautiful things about FedEx Ground line haul is the weekly settlement statement. One of the confusing things about FedEx Ground line haul is also the weekly settlement statement. Because so much of the operational financial information needed to run a FedEx Ground line haul business is included in the weekly settlement statement, many owners rely on that reporting to manage their businesses and fail to maintain proper financial books and records. When it comes to selling your business, however, this can create a challenge for a buyer to properly evaluate and understand your business’ financials. So it becomes imperative for you to make sure your business has complete financial records that paint an accurate picture of the entire operation. For example, even though the majority of your fuel is deducted from your settlement, your P&L should still show an expense line for fuel. The settlement statement needs to be used as supporting documentation for your financials, not as your actual financial documentation.

Acquisition Financingfan-of-money-in-hands

Buyers and sellers both need to understand the difficulties in obtaining third-party financing for FedEx Ground acquisitions. Most buyers acquiring businesses priced from $500,000 to $5 million are going to pursue SBA financing, as well they should – for businesses in that price range, SBA financing is a tremendous tool. While we have heard rumors of FedEx Ground deals getting done with SBA loans, we have yet to speak to a lender, buyer or seller directly who managed to actually get an SBA loan approved. Without getting too detailed as to why the SBA avoids FedEx Ground deals, the two primary objections the lenders have are: (i) the businesses only have one customer – FedEx – so there is a tremendous customer concentration risk, and (ii) they do not like to finance deals with rolling stock as collateral. Any FedEx Ground owner and an interested buyer can argue why these two objections should be overcome in the specific instances of a FedEx Ground line haul business, but lenders very rarely deviate from their risk profiles and make exceptions. What this means is that in most cases, owners need to be prepared to seller finance a portion of the sale, and buyers need to be prepared to make a larger down payment than they would with a third party loan.

The Owner’s Role

Buyers must completely understand the owner’s role in a FedEx Ground line haul business. Not only because the buyer needs to make sure he/she feels comfortable assuming the owner’s responsibilities, but also because the buyer ultimately has to be approved by FedEx and the terminal manager to take over that contract. That terminal manager wants to ensure whoever takes over a successfully run operation understands what the current owner is doing and feels confident the buyer can replicate those duties. It doesn’t matter if the owner is a full-time driver or lives in a different state from his/her home terminal and visits quarterly, buyers need to make sure and understand exactly what role and duties they will be responsible for.

Overall, FedEx Ground line haul businesses are tremendously valuable and attractive to buyers – but to successfully locate a buyer, negotiate a deal and manage the operational and financial due diligence process through to closing is a difficult task. For buyers to get and remain excited and motivated, you can’t just assume they understand why they should be excited. Buyers have to be educated about what makes FedEx Ground line haul businesses “the best-kept secret in trucking,” as one contractor put it.

Today’s market conditions for these types of businesses make this a tremendous time to consider selling your FedEx Ground business. Whether that’s in the cards for you today, or you still need some time to get your company ready to sell, a professional business valuation is a great resource to have. That’s why we always offer business owners a no cost, no obligation business valuation before doing anything else. Feel free to contact us today and we can get that process started for you.

 

How to Sell a Wood Cabinet Manufacturing Company

When you are seeking to sell your cabinet manufacturing company it is important to be prepared to go to market.  In this article, we are going to discuss the factors that are involved in selling a cabinet manufacturing company as well as areas that you are able to benchmark to help improve the value.  Sigma is always here to help as you navigate this process. 

Industry Outlook

In recent history, cabinet manufacturing in the US has improved due to an increase in construction. The increased demand and improvements in residential construction have really accelerated the cabinet and vanity manufacturing industry forward. As the housing market continues to grow, we can expect rapid growth to continue in the overall construction industry. As we will discuss later, this fluctuation in the residential housing industry is both a positive and a negative factor when it comes to selling the business.

Factors That Influence Value

Cabinet manufacturing is considered in the categories of other light manufacturing operations, and since demand for all manufacturing is at a premium, pricing will command higher multiples. This is primarily due to the buyer demand for manufacturing.

Industry

Considerations that strongly influence the ability to sell, as well as the price, are the housing market and construction industry. This is great when the industry is on a rise, but can be a drag on the valuation when the industry is headed down.  Keep in mind that the best time to sell a cabinet manufacturing company is when the industry is on the rise not decline. Industry buyers are willing to pay a premium when the economy is rising and looking for bargains when it is in a decline.

Niche

When your business serves a specific niche, it will set your business apart from the competition and give an uptick on the value. This niche can be a type of product such as custom or it can be a specific customer type that you service. “Riches are in the niches,” is especially a true statement in the cabinet manufacturing industry.

Customer Concentration

As in any industry, the number of customers is an important factor when looking to sell a cabinet manufacturer.  The industry standard is the largest customer being around 25% of the revenue of the business.  Close behind this calculation is the number of customers that it takes to make up 80% of the businesses revenue.  If that number is greater than 5, it will create an uptick in the business valuation.

Equipment & Inventory

One of the specific factors for a cabinet manufacturer is an issue of how the business handles production efficiency.  This can mean higher labor costs, raw goods costs and production delays for the amount of revenue and profit that the business produces. Some wood cabinet manufacturers have state-of-the-art equipment that increases this efficiency. When analyzing this matrix it ultimately has a strong impact on the value.  Equipment can add or decrease value when pricing the business. It is not uncommon for a custom shop to have automated equipment that, in turn, results in a higher price even compared to other shops that have the same level of profit.

Benchmarking

The following is an industry analysis based on IRS data as provided on tax returns.  This is based on a percentage of revenue:

  • Cost of Goods: 25%
  • Facility Costs: 10%
  • Payroll/Labor Costs: 35%

When comparing your business to the above three factors it can help determine where you may need to adjust your business if your seller earnings are not where you would like it to be.

Pricing

The best way to determine a factual value/price for a cabinet manufacturer is to look at the market.  Ultimately, what other cabinet manufacturers are selling for will have a strong impact on what your business will sell. The following is a chart that outlines that price of the business as a percentage of SDE, EBITDA, and Revenue.  

 

Minimum

Max

Average

SDE as a % of Revenue

5.90%

35.93%

17.53%

EBITDA as a % of Revenue

3.54%

29.99%

13.68%

Multiple of Revenue

0.16

1.00

0.53

Multiple of SDE

1.50

5.54

3.00

Multiple of EBITDA

1.85

6.17

3.96

The efficiency of earnings is typically the largest factor in a cabinet manufacturer’s value.  The best determining factor for the efficiency of earnings is based on SDE or Sellers Discretionary Expense or profit.  At the end of the day, the performance of the business is the most important factor.  The number that stands out the most is the Multiple of SDE of three. Revenue is typically not the best way to determine the value as it really isn’t an indicator of how efficient the business is in making a profit. The reason we included revenue here is more as a benchmark for you to see where the profitability typically is for the industry.

The reason the SDE is a major determining factor is that buyers are interested in ROI or how long it took them to get their initial investment back.  Looking at the chart above, the average ROI that is expected in this industry is three years.  While the high ROI is 5.54 when you dig deep into the data it is easy to determine as we said earlier that efficiency and state of the art equipment drove up these specific business sales. 

If you are interested in receiving a formal business valuation then contact us today.  We will analyze three to four years of your business performance to better determine where your specific business falls in the range above. 

 

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