Buy…sell…or something in the middle?

Posted on Feb 20, 2017 in Features

No doubt about it….lift truck dealers as well as certain OEM’s are interested in buying your dealership. On the other hand, there are just as many dealers interested in selling because demand is there along with low interest rates which benefit all parties involved.

Go a step further and we find there are plenty of financing sources out there looking for “yield,” including banks and other sources ready to finance a reasonable deal.

Sounds too good to be true…does it not? Maybe and maybe not, depending on how you go about being on the buy or sell side.

Let’s use a sale transaction to demonstrate how to review a deal efficiently.

The steps involved are as follows:

Make a decision to investigate the sale or purchase of a dealership.
Dig out ALL of your dealer agreements especially the sections dealing with ownership transition.
If you are SURE you want to pursue a transaction have a discussion with the OEMs you have agreements with and have them list your options and what you have to do to have the franchise transferred to a new owner.
Do some soul searching to determine if you want to be involved post-close or not. And if so, under what terms and for how long.
Decide if you can live with a standard non-compete agreement….because you will have to for at least a five-year period.
Discuss with your spouse and or other family members as necessary NOW to get buy-in.

So far, so good. You really have not spent much money yet, which is the point of the steps outlined above. If, after going through the process up to this point, you did not run into any deal breakers and are still comfortable with the process, we can move on the next steps. Which are…

Document your normalized financial history for three-years.
Draft an offering memorandum covering the history of the company, an employee summary for all department heads, service and parts department personnel, a review of the sales team and a list of management personnel who will stay and what your plans are (staying or leaving.)
Each type of hard assets needs to be detailed in terms of number of units, average age, cost and book value. Hard assets would include receivables, parts, rental units, various inventories, vehicles, shop equipment and other assets of value.
Income statements need to be adjusted for one-off transactions as well as add-backs representing expenses that might not be incurred by the purchaser. The items noted in this section have to be fully documented if you hope to have the changes stand up as far as the buyer is concerned.

You can now take a shot at estimating a price range for the company in the 4.5-6.0 EBITDA range depending how your normalized numbers stack up against industry standards, how many potential buyers are at the table and how financeable your company is. Keep in mind that a seller will get the higher of the orderly liquidation value of the assets or the value of the EBITDA multiple. I have seen them go both ways.

Ok, we are now done with Step 2 and you still have only minor expenses to deal with. BUT THIS IS WHERE THE RUBBER MEETS THE ROAD because we now have to figure out what exactly you will walk away with net of taxes and bank debt. Most of these deals are NOT going be stock sales because the buyer wants the depreciable assets he/she can depreciate. Consequently, we are mostly dealing with asset sales. Going a step further, these deals are normally net of debt and cash…..seller gets to keep any cash but has to pay off the bank debt and most other company liabilities. The buyer is buying the assets net of cash and that is it….nothing else. If they assume some of your debts, those debts will be considered to be part of the purchase price payment.

So now the seller has to have his accountant figure out what his tax bite will be from selling the assets along with any proceeds from the sale of goodwill. In most cases, where a significant rental fleet is involved this will not be pretty. Once you accountant comes back with the bad news you can figure out what you keep.

Proceeds from sale
Less-bank debt and liabilities
– income taxes

=Net proceeds

Now it is decision time and now is when a lot of deals fall apart (which is why I suggested you don’t spend any money until you get past this exercise) because the net proceeds do not meet expectations.

So now what? Well, we can squeeze out a higher multiple if we have multiple buyers bidding on your company. Or, you can agree to some form of incentive agreement which pays if agreed upon post-close EBITDA numbers are hit (which probably means you are staying around.) You can also agree to sell a portion of the company if it appears that the buyer has the ability to build the business and make the remaining ownership interest more valuable four or five years out. You can also sell the company to management, taking some of the paper, in exchange for a higher multiple. And, of course, you can wait for lower tax rates or just hold off and take steps to improve your EBITDA numbers. What may work for those of you with material tax liabilities is to consider selling shares to an ESOP to avoid and defer any tax bite, which of course makes it easier to hit your cash proceeds goal.

In terms of where we stand regarding taxes and interest rates I believe we can expect lower tax rates some time in 2017. On the other hand it appears that interest rates are going higher and thus will lower purchase prices since more of the future cash flow is required to service the debt used to buy the company. I believe this is easy to understand…the difference between paying 3% interest on a loan vs 5% on a loan ….the interest increases taking more of the company cash flow.

So up to this point you have not incurred any major expense regarding a sale or purchase of a business. You have cleaned up your financials, estimated your company value, drafted an offering memorandum and calculated the tax bite based on the various sales prices you used. Quite frankly, you could probably avoid the offering memo draft until after this stage of the analysis.

If you can live with the estimated net proceeds you can now prepare a list all the potential buyers you can think of, pay a lawyer to draft non-disclosure agreement, prepare a seller piece that does not disclose who the seller is, have a third party contact the potential buyers to see who may be interested and do your best to get at least three real players to the table. By real I mean companies with the financial ability to do the deal. Next, throw out a price or EBITDA multiple to the buyers along with the offering memorandum and you are on your way and now start running up legal and accounting bills as part of the due diligence and closing process. Most buyers will send you a letter of intent spelling out their offer, conditions and closing terms, which will have to be discussed with your attorney and accountants to see what it all means.

At this point I would suggest you use a deal attorney who will move to get the transaction closed as opposed to fighting over every word and dollar to the point of driving the buyer away.

Following this process will save you a lot of money as well as let you sleep nights. No sleepless nights wondering what the company is worth or how much you will get from the sale. And no matter what the results of Steps 1 and 2 there are more options to get you higher net proceeds if you wish to take the risk associated with such a transaction. Even the ESOP is not a bad move, but is somewhat more complicated and expensive to do, which many owners can live with when they see how much more they can walk away now that the tax bite is not part of the deal any longer, but is deferred into the future and may never come to light at all depending on your financial needs.

If you are interested in learning more about this process make it a point to attend MHW’s one-day seminar in June 2017 in Chicago where we will go through this process along with a review of any anticipated tax law changes and their impact on this type of transaction.

And of course, if you need a review of Steps 1 and 2, I can help you out for a very competitive fee. I work with a few industry people and have the templates to analyze your financial data and draft the offering memo should you need one. No reinventing the wheel I promise you.

I believe every dealer should have an idea of what his/her company is worth as part of their annual financial review of the company. Is value increasing or not in value? If not, why not? And what are you going to do about it? This is especially important where there are internal buy-sell agreements between shareholders.

Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail [email protected] to contact Garry.