Selling a business is hard. It’s even harder when you don’t know how much said business is worth.
Experts from Performance Brokerage Services and Morgan Stanley tried to offer truck dealers guidance on that latter point Thursday during an American Truck Dealers (ATD) webinar.
The event was kick off by Morgan Stanley’s Brad Stanek, CFP, financial advisor and executive director, who shared no matter how unique and distinctive business sales can be, all owners should enter the process with the same goal in mind.
“You want to maximize the value of your life’s work,” he said.
Stanek said the best way owners can do that is to acknowledge exiting is inevitable, and beginning planning for that day well ahead of its arrival. But he said far too many dealers fail to do that, which ultimately results in transactions where “owners are not fully satisfied by the outcome of their sale.”
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As for what goes into a sale, Pat Albero, partner at Performance Brokerage Services, says most dealership evaluations are based on four components: real estate; fixed assets; net worth in a business; and ‘goodwill’ or ‘blue sky.’
The first three are tangible assets — fundamental possessions an owner has that can be included in a transaction. Albero says assessing value to those assets can be contentious but generally follows a consistent process. A seller reveals all its possessions related to a business to a buyer, and the two parties work in conjunction with advisors to determine proper value for all of them, based upon appraisals, market rates, book values, etc.
Albero says it’s that final component, goodwill or blue sky, that often creates the most confusion during a transaction. Albero and his colleague Dan Argiro, partner at Performance Brokerage Services, say blue sky often refers to a number that is a multiple of a company’s EBITDA (earnings before interest, taxes, depreciation, and amortization), which in the M&A sector is common tool to determine the value and profitability of a business.
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The Performance Brokerage duo say far too often dealers go into transactions expecting or hoping for an EBITDA multiple that is unrealistic for their company because of gossip or bad information they heard from a contemporary in a dealer space. When pressed by Stanek, Albero said three to six times EBITDA is a common range for truck dealer businesses, but added every company is unique. It is possible for a business to exceed (or come up short) of that range depending on how it is positioned when a transaction gets underway.
Argiro also noted when business owners hear of a fellow dealer getting 10x EBITDA goodwill/blue sky (or even higher), they should be skeptical of that news, as its likely factually incorrect or doesn’t properly reflect the full complexity of a transaction.
Added Albero, “If you hear someone who traded for 10x or more, that’s not normal in our industry.”
To get as close to that number as possible, Thursday’s speakers reiterated the importance of having detailed, written exit plans and, if necessary succession plans, developed well in advance of the date a sale begins.
The speakers also spoke of the importance of having a strong, professional and industry experienced advisory team to help an owner once selling a business becomes a reality. On that note, Stanek spoke specifically of issues he’s seen in other industries where a business owner relies on an attorney with whom they have a personal relationship, but who doesn’t know the industry. Stanek said those partnerships can backfire, not due to any intentional mistake, but because someone unfamiliar with an industry may be be unaware of what is customary within that industry. “You can scare buyers away,” he said.
Business owners also should consider every path forward when they first decide it’s time to sell. Just because a father wants to sell to his son doesn’t mean the son wants the responsibility of owning the business, the speakers said. Stanek said, “The person taking over needs to not just be good at what they do but passionate about what they do.”
Albero added, “All should be options to be put on the table until they are able to be eliminated.”
Finally, the speakers spoke of the importance of not letting a future or impending transaction impact the way a dealership runs every day. The team at Performance Brokerage said the most common mistake they see sellers make during transactions is take their foot off the gas — slowing the pace at which they complete tasks necessary to finish a sale. Albero said most dealer sales take six months. Dealers should be prepared to do whatever it takes during that period to move a transaction to completion.
Argiro agreed, adding dealers also shouldn’t “take their eye off the ball” of running their business effectively just because they’re in the process of a sale. “Keep it a well-oiled machine,” he said, as buyers will be excited to purchase a business that is running successfully and profitability.
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Dealers also shouldn’t count on the economy to bolster the value of their operation.
Morgan Stanley’s projections for 2024 are a year of little economic growth with a slight chance of another slowdown, said CFP, CEPA and Financial Advisor Paulina Matel. A better than expected year will unquestionably help a dealer’s recent financials look good, she said, but a buyer will rely on more than one year’s business records when developing their offer. The most valuable businesses are the ones that have several years of profitability to display.
