Need Advice on soon to come offer to buy my family business

Discussion in 'Growing and Managing a Business' started by Aufan, Jul 23, 2013.

  1. Aufan

    Aufan
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    This is my first post but after reading some other post I wish I had found this forum long ago.


    I have just recently been contacted by one of our competitors parent company and I was informed of their interest in buying my small family business. There are moments I would love to sale and others that I see an advantage to just hanging on to what we have. It has made a nice living for several family members for the past 40 years. My Dad started the company in 1974 and I have been with the company since finishing school in 1983. I became the company president about 12 years ago when my Dad retired.

    I'm in the process of gathering the info needed for the initial valuation. This is all going through our accountant for advice but I'm really wondering where their initial price will be and was hoping some of you might give me some ideas to think on while I wait for my accountant to return from vacation.

    Using the following info what would be your best guess as to where their first offer should be. I know there are many factors to consider and I am getting professional advice but I'm just trying to see if my thoughts are close.

    Company started: !974. Type of Work: Utility Construction Number of Employees: 45

    A rough look at some numbers in general:

    2009 EBITDA : 620,000

    2010 EBITDA: 975,000

    2011 EBITDA: 785,000

    2012 EBITDA: 345,000

    2013 EBITDA: 1,285,000 ..... ....... Earned Revenue: 5,500,000.00 ........... Projected Profit: 650,000

    2014 Revenue should increase 5 - 6%

    As you see in the numbers we are at our peak and probably are at our strongest point in history. We lost money last year for the first time in 14 years. This was due to projects with our largest client was late in the year starting. This year (2013) we are far ahead in every category.
    In the proposed deal the company name remains the same. All employees will remain and myself and 3 key employees will work under contract for a period of time (probably 5 years). I have several employees that have been with me between 20 and 30 years with 2 that have over 30 years of service so I also feel obligated to protect their job and family

    Please view this from my view point. I have never considered selling until now and the only reason I consider it now is I know two companies this group has already purchased and it has worked like a dream for them. I'm looking at it like taking some chips off the table and still playing the game. If this sale don't happen at some point I will retire and then it will be up to the younger family members who will run the company to pay off my stock over a period of time. I am 48 years old and hope to retire at 60. If the company goes broke later on so will my retirement. I really don't like depending on others for my retirement but they won't be able to pay me off in one payment at retirement.

    Whats your thoughts? Like I stated above I'm getting professional advice but its taking awhile and its driving me crazy. Thanks so much for any help of any guess.
     
  2. beartheweak

    beartheweak
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    I won't comment very much on company valuation because that's a serious task with a lot of work involved. But I hope you're not fully investing your retirement in your company. I would recommend some diversity. You wouldn't want to be 60 years old and see the company fall apart when you leave it. That would, as you are worried about, leave you broke and force you out of retirement. I'm sure you've considered diversifying already though.

    Ball park, they would probably offer you anywhere from $2M to $10M plus whatever hard assets are tied up in the deal (you didn't mention this in your post). Personally, the company looks like it's doing well for itself. Hold it for another 7 years or so, build it up further in that time, then sell. This will greatly enhance the cash added to your retirement than if you sold now (you still have 12 years until retirement!). Then invest that cash completely in other ways (stocks, smaller businesses, etc.).

    If you hold, and if they like you now, then there is still a chance they will show interest in you later.
     
  3. Rocky

    Rocky
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    There are various things that you should consider when deciding about the selling price. (Although consultation from a accountant and lawyer is essential you can think on these lines)

    Consider your annual earnings, the current assets of the business and the future earning potential.

    When you sell the business you might have to pay taxes on your capital gains so you need to consider how to minimize the amount of taxes you pay.

    You need to think about the amount you would be left with after the sale and paying for all the legal and transaction costs.

    And also consider what you would do with all that cash after selling the business. You need to invest some if it keep some liquid cash as well to be on the safer side.
     
  4. AnushaJain

    AnushaJain
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    I don't think you should sell your family business,you must try to increase it and take it to the zenith's height.You are damn lucky that you have such a great business in your hand,understand its importance..
     
  5. andrrival

    andrrival
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    Business expansion is really a big decision and in my opinion it's a kind of risk.So we should be more rational in making such kind of decisions.Thanks to all here.
     
  6. scottbaird

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    You should not sell your business to any other company. There are always ups and down in every business. So I recommend you to try to increase your company value and revenue by hiring some best employees
     
  7. Aufan

    Aufan
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    I'm not fully invested in the company for my retirement but it does make up a huge portion and it is enough $$$ that if something happen I would be back at work. I would say at this moment I'm 50 - 50 and the price will be the deciding factor. This business is great right now but at the same time we are enjoying our best years in company history others are going bankrupt. These contractors have been around 15 - 20 years and were not fly by night companies.
    I keep thinking back to how fast you can find yourself in a giant hole when things turn south. There is huge expense in this business and the loss of one big contract can break you. Its just the nature of the beast.
    Thanks to all that replied.
     
  8. TimeRider

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    Welcome Aufan to BusinessAdviceForum!

    It's Business and in Business there is profit and loss! Your company is very old family business. I don't think you need offers to sell your business But I hope you will have many offers from the customers. I think people will definitely work with old companies as they are there for long which in a kind makes trust to work with such companies. People will work with old and reputed company than a new one.

    It's the first time you came in loss and I know how it affects. Point is keep moving on. Try advertising and promote your family business. I hope you can recover the loss which have made you think to sell the business.
     
  9. alicemenezes

    alicemenezes
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    It is a big decision. Don't go only by how you feel about it, but have hard facts at your disposal that will help you analysis. Simulate what the company maybe like once it has been bought. Will it be better than now?
     
  10. ArcSine

    ArcSine
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    Welcome to the forum, Aufan; right out of the gate let me offer my congrats for the success history you and your family have put together. I'm sure it's been a lot of hard work.

    Very difficult to comment on the pricing question, as valuation is much more about the future than the past. Historical numbers are valuable in helping to give an indication as to what the future might be, but many other factors carry more collective weight in making this forward-looking assessment.

    Also, with respect to recent EBITDA, the pricing multiples based thereon will vary considerably across different industries. The appropriate multiple, given any set of EBITDA stats, depends on things like the given industry's earnings volatility vs. stability, economic outlook, and so on. With a little exploration within your particular industry (a trade association, perhaps?) you might find some data on recent sales of comparables, such that you could develop at least a rough range of EBITDA-based pricing multiples for deals which have gone down lately.

    Re the sell-vs-hold-for-now issue, a very general premise is that you should own a business if you can manage that particular collection of assets for greater economic value than anyone else can; you should sell if another party could generate greater economic value with that same asset collection. Sticking to this maxim gives one the best chance of sailing off into retirement-ville with the most jingle in one's pocket.

    How do you see the future playing out for the company under both possibilities? Does the suitor have the deep pockets such that they could implement expansion plans, say, or asset upgrades, and thereby wring more value out of your business than what's within your reach as an independent entity? Might they have the ability to increase efficiency by eliminating redundancies (e.g., maybe they already have a very effective marketing program which could be leveraged across your company, reducing the marketing costs you currently have on your P&L and thus squeezing even greater EBITDA from your assets than what's possible for you as a stand-alone)? If these or any of a dozen other similar issues hold, it might be that you'd get more from a sale than the present value you'd realize by continuing to operate as an independent.

    On the other hand, maybe the next generation of family members and/or other successors who are being groomed, have over the years developed a unique and superior expertise within this industry, such that they would likely manage your company much more effectively and profitably than this would-be acquiror. If this is true for any of a number of specific reasons, you'd probably realize greater long-run retirement value from a down-the-road sale to the next gen rather than from an immediate hand-off to the competitor.

    Obviously, this "how will the future play out under each alternative" thought experiment will include a serious consideration of how you see the industry itself trending. Also, give thought to what this competitor's plans--that is, growing by gobbling up other players--might mean to your ability to compete going forward. Will they collapse under the weight of mismanagement of poorly-planned buyouts, or will they become the Wal-Mart of your industry?

    As already suggested in other posts, the concentration-vs-diversification of your nest egg assets must be an important consideration, either way. As a side note on this particular point, in the event of a sale to the competitor, you'd achieve at least some (albeit small) degree of diversification even if a large chunk of the sale consideration is in the form of stock in the acquiror. This is because your equity would then at least be spread across a larger multi-operation entity.

    Should you choose the immediate sale route...

    • Be sure to play up the longevity and loyalty of your employee base. Valuable to a buyer.

    • While not straying from truth, have a reassuring response ready to the matter of the "major customer". You mention the effect of the "largest client" in producing a net loss for 2012 (late-starting projects) and I'd imagine this same factor is partially responsible for 2013's huge improvement (as those same projects really come to fruition). If your total revenues are concentrated in one or a few customers--especially to the extent that EBITDA makes large swings under the effect of such concentration--that's a risk factor in the eyes of a buyer. Be ready to address that question with an explanation of whatever risk-mitigating steps are being taken.

    Again, many congrats on having built and grown what appears to be a very successful long-run business. I have a feeling that which ever path you choose, you're gonna do well.
     

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