Invest in Your Business So Potential Buyers Won’t Have To
In past issues, we have looked at several important considerations that matter to strategic and financial buyers when looking for an acquisition of a multi-unit tire and service retailer. These were revenue size, geography, the stores themselves, area demographics, growth trajectory, people and management, profitability, synergies, and the business environment.
Here I’ll highlight additional issues that matter most to acquirers. They are again not listed in order of importance.
Quality of financial reporting. To the extent any buyer wants to be reasonably confident the numbers you disclose accurately reflect the real revenue and profits of your enterprise, the quality of financial reporting matters. They’ll do their own due diligence at great expense to confirm your numbers, but rest assured they’ve seen it all. Nothing will be a surprise when it comes to analyzing the accuracy and “GAAP-ness” (i.e., generally accepted accounting principles) of your financial reporting. Nevertheless, a business with accurate and transparent financial reporting will fetch more in the marketplace as it reduces the perceived risk for the buyer.
Delayed investments matter. If you’ve delayed investment in equipment, store maintenance, advertising, inventory, employee training or anything else, it will likely show. And it’s totally appropriate for a buyer to lower the value of your business based on what he or she will have to invest after they take over. No one wants to pay top dollar for your business and then immediately turn around and have to buy new equipment, stock up on inventory, fix a roof or whatever.
As for real estate, most acquirers prefer not to buy your real estate, but will if they absolutely have to. Owning real estate is a different business, with a different set of skills required to be consistently successful at it. So keep yours if you can and become a landlord. All the wealthiest tire dealers I’ve met over the years did exactly that and it worked out just fine.
Valuation expectations. If a seller has an unrealistic expectation about what his business is worth and takes a hard-line stance on it, that matters because the likelihood of getting a deal done is significantly reduced. Time is money, and acquirers would rather spend their time on deals that actually have a chance of happening. They may walk away at some point, agreeing to stay in touch in case anything changes, but they will be chasing other opportunities in the meantime.
I think the degree to which you can play hardball depends on your reputation, the quality of your operation, and whether or not there are substitutable options for buyers in your same market. If a similar competitor can be enticed to sell out at a comparable price in your market, you have less leverage. Remember that.
Stock vs. asset sale. Why are so many tire and service dealerships still formed as C- Corporations? I run into a lot of old C-Corps whereby the only way a transaction works is to sell the stock, or else the seller will get killed with taxes.
Most buyers prefer an asset sale so they can mark up assets for depreciation and don’t have to assume past unknown liabilities (environmental, discrimination, etc.). An asset sale is not a problem if your form of organization is an S-Corp or an LLC. But if you are a C-Corp and plan to make some sort of transaction down the road, say in five years’ time, please ask your accountant to review why you should not switch to an S-Corp or LLC structure now. If they can’t justify it, think about getting a second opinion or changing accountants. It can save you millions.
Brands carried. This can go several ways. If you’re too strongly associated with one or several brands of tires, potential buyers might have second thoughts about the challenges they would face in switching to their preferred brands. But if you are less identified with a single brand and known for carrying multiple brands, you are perhaps more desirable to a broader array of potential acquirers.
Environmental issues. I hope you run a clean operation and your sites have not had any chemicals dumped on them. Any past violations will come up and cause heartburn for any buyer. Greater environmental liability means more risk, and lowers valuations and appetites. It slows deals and can even kill them. Take the initiative and remedy problems in any area that you suspect might prove problematic — before the sale.
In closing, these are just some of the things that I’ve seen that matter to an acquirer. Because there are so many things that come up in a transaction, it’s impossible to list them all. But if your business can be perceived as dominant in your market, if you offer some new twists that an existing acquirer does not have, or if you simply are large and profitable, interest in and valuation of your business are likely to be much higher. ■