FREQUENTLY ASKED QUESTIONS
Our focus on mechanical, HVAC, refrigeration, plumbing, rep firms, and controls businesses helps us ensure that we provide high value and competitive services. Our goal is excellence in everything we do and focus is often a key component of excellence.
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Our focus has the most impact on how we value businesses and how we market businesses. Our valuations are very specific to the types of factors a contractor needs to consider to accurately value their enterprise. Our knowledge and relationships with potential buyers mean that we can efficiently connect a seller with likely buyers as we already know what buyers are looking for in the market.
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.
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
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.
The time-frame can be anywhere from a few months to a year and varies based on the marketability of the business. Once we get to know your business, IEI can provide a more specific time-frame for your business and a specific marketing plan.
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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.
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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."
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.