Regardless of the stage of life you are in, positioning your BSC for a potential sale should always be something on your mind. As I speak with BSC owners around the country, most are looking to exit the business at some point and of those, most are looking to fund their retirement through this exit process. So whether you want to pass the business on to family or employees or just sell outright, you should being doing things now to make your company as valuable as possible when that exit inevitably comes. For purposes of this article, we will focus on the keys to building value in hopes of selling to a larger BSC or other individual outside the company.
How purchase price is determined
Whether you are selling to another BSC, an employee, a family member, or an outsider to the industry, the way to calculate the sale price is the same. Nearly all buyers are going to be willing to pay a multiple of yearly EBITDA (Earnings Before Interest, Taxes, Depreciation, & Amortization). In the BSC industry, this multiplier is usually between 3x and 6x, depending upon several factors. The more desirable the company and smaller the risk, the higher the multiplier. So for instance, if you have a $5M company with a 10% EBITDA ($500k profit) and your risk profile is low, then you could expect a 4x or 5x multiplier. This multiplier would translate into a purchase price of $2M or $2.5M.
BSC owners should position their company to maximize the multiplier. Here are five ways you can make that happen.
Sales Multiplier Tip #1
The first tip to maximize sales price is to have a niche. There is an old saying that is certainly true: “the riches are in the niches.” When you have a niche, you have more speciality; therefore, your strategic position is stronger. Niches can be related to geography, service type, customer type, etc. But know this, if you will do everything for everyone, you don’t have a niche and your value is likely lower. If everyone is your customer, no one is your customer. Pick a niche, stick to it, and you will find a buyer looking specifically for that niche. When a buyer REALLY WANTS you, you can demand a higher purchase price.
Sales Multiplier Tip #2
While this is perhaps the most controversial of all the tips, I am convinced it is largely true. The larger your accounts, the more attractive your business will be to a potential suitor, especially another BSC. Larger accounts offer a host of benefits. First, because of their size, there are many ways profits can be improved (labor reduction, supply savings, extra-bill services, etc). This gives the buyer “upside” which makes you more attractive. Second, large accounts are less complex from an organizational standpoint, requiring less overhead to maintain. The headache factor is less when you have one large account vs. thirty small accounts. Third, larger accounts are more easily managed from afar, making them more attractive to an out-of-town purchaser or absentee owner. Finally, large accounts generally have less competition from smaller janitorial contractors, making the likelihood of losing them less. For these reasons and more, having larger accounts will help you get a larger sales multiplier.
Sales Multiplier Tip #3
Being able to function without the direct, daily involvement of the owner is critical in maximizing your sales multiplier. When a company relies heavily on the involvement of its owner, it will be in a vulnerable position once the owner is absent. This is an obvious risk for any potential purchaser, one that will certainly drive down the purchase price. To limit this risk, you must begin positioning your company to run without you. The upside to this move is that while you are making your company more valuable, you are at the same time giving yourself more freedom.
Sales Multiplier Tip #4
Having been involved in the acquisition process myself, I can attest that “clean financials” are a REALLY BIG DEAL. When a person is looking to acquire a business, the financials (and specifically the profit), are the primary consideration. In order to accurately assess the financial position of the company, accurate financial statements are CRITICAL. When a potential buyer can’t make heads or tails of the numbers, the inherent risk greatly increases. Clean and specific financials, clear of personal expenses, along with periodic audits from a CPA will give buyers a comfort level needed to make a strong offer. Messy financials will have the opposite effect, driving down the sales multiplier.
Sales Multiplier Tip #5
The final tip is broad but equally important - lower risk wherever possible. Risk is a key driver to the sales multiplier. The lower the risk, the higher the multiplier - the higher the risk the lower the multiplier. There are several ways you can lower risk and make your company more attractive to a potential buyer. Here are a few key risk-reducing items:
Ensure that all accounts are contractually secure and relationships are strong. Ideally, you have other managers in your company who have strong relationships with your key clients.
Do not have more than 25% of your business with one customer. Over-leveraging yourself with one or two clients is a recipe for disaster. Work diligently to spread risk out over many customers.
Show a track record of growth for the last few years. This shows that you are not positioned to loose business, but rather upside exists and can be realized quickly.
You may not be looking to get out of the business right now or even in the near future. I understand that. However, it is never too early to begin positioning your company for when that day comes. The process can take longer than you realize and your desire to sell may change sooner than you think. An added bonus to the above tips is that they increase your profits, make your company more stable, and give you more freedom as an owner. It truly is a win-win.