Selling a Small Business with SVN | Saunders Ralston Dantzler

September 12, 2020   |   Business

SVN | SRD's Larry Montanus discusses how to market and sell your business effectively to market efficiently and produce profit.

In the following case study, we will demonstrate how these factors were considered to market and sell the business successfully.

  1. Market Value of the Assets
  2. Competitive Advantage
  3. Goodwill of the Business
  4. Diversity and Loyalty of Customer Base
  5. The Employee Profile

The Company

The business was an auto repair shop that the owner had operated for over 30 years. The owner had bought out his partner just a few years prior. Later, the business would generate annual revenue in the $700,000-$800,000 range with a gross operating margin above 20% in most years. It offered a full range of services except for tire sales.

1. Market Value Of The Assets

Constructed in 1995, the 7,900 square foot building sat on 1.4 acres on a busy side street just off the major highway. The building included 11 bays with state-of-the-art equipment. Our analysis of the real estate, the building, and fixed assets resulted in an estimated value of at least $500,000. Our next step was to analyze the other factors for valuing the business.

2. Competitive Advantage

See Goodwill of the Business.

3. Goodwill Of The Business

In this case, competitive advantage and goodwill of the business are closely related and may be interchangeable. Goodwill in this context is not the same as goodwill in accounting. The competitive advantage of a business contributes to the premium buyers pay over the asset value. The premium is goodwill.

This company’s crucial competitive advantage was that it stood out in the highly competitive and fragmented auto repair industry. It competed with several national franchises located in its neighborhood. This business maintained the reputation of honesty, trust, and fair business practices that the owner had established over his 30 years operating in the same location. In addition, flexible pricing versus local dealership repair shops was also an advantage.

4. Diversity And Loyalty Of The Customer Base

There were no major fleet contracts or any one customer accounting for a significant share of sales. This diversity meant that no lost customer could hurt the business. The owner had a loyal, multi-generational customer base.

5. The Employee Profile

The auto repair business requires highly skilled and technically qualified employees. This company had several certified mechanics trained to perform maintenance and use today’s computer diagnostic tools. The labor market for these workers was highly competitive.

Most of the staff were employed at the business for a significant amount of time. One critical sales point was why the owner was willing to stay on for a reasonable period and ensure a smooth transition while retaining key employees.

The Deal

After considering the five key factors and reviewing the financials, it was time to set the price.

Using our real estate analysis as the starting point, we had to determine the premium for the ongoing business. There are industry financial multiples that can be applied, however these are so general that they should only be used as guidelines.

Naturally, the owner valued what he had built at the high end of any valuation model. Our job was to price it at a level that was likely to draw interest from qualified buyers. Since the owner was not in a particular hurry to sell, we placed the initial price nearer to his number.

Our next step was to develop the marketing strategy. One critical component of the strategy was confidentiality. As mentioned above, the skilled labor market was tight and employee retention would be essential to the value any buyer would pay.

The marketing materials were developed in such a way as to keep the company unidentifiable. Throughout the sale process, we required prospective buyers to sign Confidential Disclosure Agreements (CDA) before any specific information was released to interested business buyers and conducted all site visits when the shop was closed.

We placed the marketing brochures on our company website and several business brokerage sites we had used previously. We would also send out several CDAs over the ensuing months.

Our first serious prospect came from the local auto repair industry. The potential buyer had an in-depth knowledge of the business and made an offer far under our seller’s acceptable asking price. The prospect made a slight adjustment, but no deal was reached between the potential buyer and the seller.

The eventual buyer came to us through one of the business brokerage websites. The seller was present at all visits to discuss his business’s specific details including the technical aspects. Just as important however, he was able to get a feel for the potential buyer of his life’s work. The owner felt good about the buyer and negotiations began. More importantly, the business owner agreed to stay on during the transition and provide a small amount of short-term financing.

The buyer was a foreign national with extensive experience in the industry. He was looking to purchase a business in the U.S. and move his family here. The seller’s attorney did a great job of writing the contract and dealing with the citizenship issues. It was essential to pick a competent attorney to navigate some of the intricacies of the deal.

In the end, the negotiated price was just above 80% of the original listing price.

One great side story to the deal is that the new owner asked the seller to stay long-term to manage the business while he enjoyed being a mechanic.

The seller told me he was delighted: “I got my money and I’m still working and getting a check and not writing any.” He is also enjoying his new home.