Question 1

Why does IEI specialize in the HVAC and mechanical industries?

Accepted Answer

Because focus is what lets us do the two things that matter most in a sale — value the business correctly and get it in front of the right buyers — better than a generalist can.We work exclusively with mechanical, HVAC, plumbing, controls, and rep firm businesses. So when we sit down with an owner, we aren't starting from zero. We already understand how service and new construction behave differently, why a maintenance base is worth more than the same dollar of project revenue, and what backlog quality actually means. We get up to speed on how a specific company makes money in days rather than months, and owners don't spend the first month of the engagement teaching us their industry.That understanding shows up directly in valuation. The factors that move a contractor's multiple are specific to this business: revenue mix, recurring maintenance agreements, customer and project concentration, WIP and margin discipline, and the depth of the management team below the owner. A generalist values the financial statements. We value the business.It shows up just as much in how we run a process. We already know the acquirers in this space — strategics, consolidators, private equity platforms and their portfolio companies — what each is looking for, where they've been active, and what they'll pay up for. That means we don't blast a confidential opportunity out to hundreds of names hoping something sticks. We approach a curated group of credible buyers, which protects an owner's confidentiality with employees, customers, and vendors, and typically produces better terms because we're negotiating with people who already understand what they're buying.Focus isn't a limitation on what we can do. It's the reason we can do it well.

Question 2

How does IEI maintain confidentiality during the sale of a business?

Accepted Answer

It is of the utmost importance to maintain confidentiality. We work with owners to understand their specific needs for confidentiality and maintain the highest respect for those needs throughout our engagement. We initially communicate with potential buyers without disclosing the name of the business for sale. We only disclose the name of the business once we have a serious pre-screened buyer who has signed a non-disclosure agreement.

Question 3

How does IEI perform a valuation?

Accepted Answer

The industry standard valuation calculation is a multiple of EBITDA approach. It starts with making the industry appropriate expense adjustments (often also referred to as add-backs) to determine the adjusted EBITDA for the past three years. IEI then helps owners understand a likely multiple for their business based on numerous factors that industry buyers take into account.
 
The adjusted earnings is then multiplied by the company specific valuation multiplier to determine the enterprise value. A working capital adjustment is then made to ensure the business transfers with an appropriate amount of working capital. Nearly all of our clients go through a cash free and debt free transaction so we add the cash in the business and subtract the debt on the balance sheet. Finally, we also ensure that owners are educated on the transaction fees. While transaction fees aren't often considered part of a valuation, we believe that owners should know sooner rather than later what their net proceeds are so they can plan accordingly.

The entire equation is:
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Earnings (EBITDA) + Adjustments (add-backs) = Adjusted Earnings
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Industry Multiple Range + Company Specific Performance = Company Multiple
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Adjusted Earnings x Company Multiple = Enterprise Value
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Enterprise Value +/- Working Capital Excess/Deficit - Debt = Equity Value
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Equity Value - Taxes - Transaction Fees (CPA, Attorney, M&A Advisor) + Cash = Sale Proceeds

Question 4

What fees should I expect for a transaction?

Accepted Answer

It’s very important for an owner to consider fees and more importantly taxes when planning a company sale. You’ll have attorney and CPA fees, Uncle Sam will take a significant chunk, and then you have fees from an M&A advisor or investment bank such as IEI Advisors. By far and away the biggest "fee" is going to be in taxes so owners should consult tax professions to help truly understand what their final proceeds from the sale will be.

The only part of that equation that IEI controls is our fee, and our goal is to quote fees at or below the industry average while also providing high value industry expertise. In fact, a high M&A fee is a part of the reason IEI was formed. An HVAC owner friend sold his large service and construction business and paid an investment bank a ridiculous fee. The idea that there had to be a fairer price for M&A services is at the core of our purpose.

IEI's fees are broken down into two types of fees. We charge a modest retainer that is well below the industry average. We have no interest in making a profit on our work with a client if the client isn't successful in selling their company. Therefore, the primary fee for IEI is our success fee which is a percentage of the total sale price. When we complete a valuation for owners, we also quote a success fee which owners can expect to be at or below industry averages.

Question 5

How long does it take to sell a business?

Accepted Answer

The time-frame can be anywhere from five to ten months and varies based on the marketability of the business and engagement of the owner. Once we get to know your business, IEI can provide a more specific time-frame for your business and a specific marketing plan.​One thing that sellers often don't consider is that buyers may want them to actively work in the business for a year or more to complete a smooth transition to new ownership. This is a more likely scenario for smaller businesses. Owners should consider this possibility when estimating the overall time-frame it may take them to exit the business.​For a more detailed guide on potential ownership transition times for businesses of various sizes, our insights blog has a post on the topic called "Don't Wait for Too Late."

Question 6

What can I do to prepare to sell my business?

Accepted Answer

The high-level things are simple. Fast growth and strong profitability are the two goals that will help your business sell quickly and at a high valuation. In addition to focusing on those two objectives, there are a few more things you can do.

Your financials will be scrutinized by potential buyers. You should also consider getting accountant reviewed financial statements annually as buyers will trust accountant reviewed statements more than statements produced in-house.

Buyers look favorably on recurring revenue and therefore growing your maintenance base should be a high priority. That includes both new client maintenance sales as well as targeting traditionally T&M clients to transition them to a maintenance agreement.

The capabilities and experience of your management team can also be a factor. If you want to sell your business and walk away, you need to have key managers overseeing important aspects of the business. Alternatively, you can sell with a commitment to a two or three-year transition period to work with the buyer to hire, promote, and train the management team that will take over the business when you leave.

Owners who have personal or family expenses on their books should consider reducing those expenses or moving them off of their books entirely a year or more before a sale. While many of these expenses can be added back to profitability as a part of the sale process, an excessive amount of personal expenses on the books is often viewed unfavorably.

Beyond this quick list of operation and financial adjustments, there are certainly additional items that IEI can recommend on a case by case basis.