The first in a two-part series about how to ensure the smooth sale of a pest control business. Here, Andrew Usher from Catand Advisory looks at how to get buyers interested in the offer. The second part will advise how to close the deal and get the sale.
Just this week, I received a call from someone seeking advice because he has already approached the big three – Rentokil, Flick Anticimex and Rollins – on his own, asking if they would like to acquire his business. All three have effectively ignored him or rejected his enquiry. Why does this happen? Well, it comes down to being properly prepared to present your business for sale. Without good preparation, there cannot be a deal.
A few key points are essential: having clean financials, a defined story, a well thought-out exit plan, a transition strategy, and realistic valuation expectations. The list goes on. I always tell people that selling a business is more than sliding your P&L under the door of a manager of one the big three corporates – it should never be done like that. This is why advisors such as Catand Advisory exist! Once the basics are in hand, it’s important to note other issues that can arise, which can prevent a deal from landing on your table.
Quality of profit
A strong and clean financial position is pivotal in securing a solid offer and also ensuring that trust is built from the start with the prospective buyer. Common issues that exist which may cause trust to waiver include: inconsistent revenue; heavy or inflated ‘add-backs’ or personal costs; poor separation between personal and business expenses; lack of audited or accountant prepared financials; and reliance on one-off jobs or non-recurring revenue to inflate the figures.
An independent review of your financials will help in preparing for possible questions that a buyer will raise and having the answers readily available will aid in building trust with them. It ensures that the process is not stagnated whilst issue are ‘investigated’.
Customer profile risk
If the majority of your revenue comes from ten clients or fewer, and you have no contractual or formal relations with them that would run for at least another 3-5 years, this would cause immediate concern for a buyer as there is too much reliance on these customers. There is a high probability that they would simply leave.
Situations such as this may result in more complex earn-out models over a number of years i.e. a lower valuation to counter the risk of customers leaving. As a seller, you always need to respect that after any M&A deal, customers will likely assess whether they wish to continue with the new buyer or seek a new provider, as either way they don’t know the new people – so they are, in effect, regarded the same.
Legal issues
Legal issues tend to arise either during the due diligence phase or whilst negotiating a sale contract.
The involvement of legal representatives is critical, but sometimes the legal process can become lengthy and costly, which can result in a buyer finding this “just too hard”. Sometimes keeping things simple and advising your legal representative that you want a deal helps them to understand that you like the buyer, have agreed on a valuation, and now need the best possible agreement for both parties. Put simply, provide clear instructions to your legal representative and allow them to get it done.
Other areas or issues that can pop up, which seem unlikely, are unclear ownership of IP such as: websites and business names; outdated or lost client contracts; employee disputes; or even EPA or regulatory noncompliance. It seems unlikely, but I have had at least three deals on the table where the sellers found out during due diligence that the seller didn’t actually legally own their own websites. This meant a third party was required to step in and resolve it quickly.
Individual (owner or manager) dependency
You always need to consider and keep in mind that buyers are always asking: “What could go wrong after we own this business?”
If your business is heavily reliant on you as the owner or manager or even if you have a certain key employee that customers or staff know and love, a buyer will question whether the business can continue without you or this particular person – this is a real risk.
Within the Australian labour market, we all know that finding and retaining staff is not easy, especially good staff. Any interested buyer will be in the same position and will see this as a primary risk. This is a further risk that a buyer will need to evaluate in terms of whether a business can survive without you and/or them.
In terms of deal progression, this factor could impact the length of the transition period to the new business, possibly a longer earn-out period, ensuring key staff are involved in the process and sign an employment agreement on completion. There may even be an impact on the level of upfront payment, all of which will put stress on the deal progression.
The second part in this series will look at how to keep the momentum going to seal the deal, and get your business sold.
Andrew Usher, Director, Catand Advisory
