Equipment Dealer Exit Strategy: No matter what, do this (Part 2)

Updated Jul 24, 2019

Stone Maze

For the purposes of limiting the scope of this discussion, we’ll focus on just three primary methodologies for exiting the business. This week, we’ll look at selling to an outside buyer. Next week we’ll examine creating an ESOP (and thus creating your own buyer) and transferring the business to a family member, most commonly offspring of the owner.

But before that, here’s a quick checklist of considerations, regardless of the exit path you ultimately choose:

  • Valuation of your dealership. Select a professional with extensive experience in this specific, capital-intensive industry. They’ll use templates and formulas that take into consideration your assets, the cash flow and performance of the company, the leadership team, the real estate, and more. Adjustments will have to be made if you’ve got personal assets on the books like boats, cars and country club memberships. Equipment dealership advisor Garry Bartecki, who is also CFO at Illini Hi-Reach, says the value of the dealership will usually wind up at five to six times the adjusted EBITDA number. In the case of forming an ESOP, the valuation process will be extremely formalized and highly objective.
  • Employees = value. Remember when we said the stakes of this decision are high? Be careful, experts say, in how you communicate with employees and take note of how they feel about your exit plan. Do they respect your designated replacement and feel confident about who will be at the helm after you? Are they worried what an outsider will do? If your key people leave, the value of your business is diminished. Also, a time of transition creates vulnerability – beware of competitors pirating your best salesmen.
  • Next owner(s) must understand this business. Whether it’s your kid or other family member, a current leader in the business, a private equity group, or a buyer from the next county, it’s essential that the next owner has the wherewithal to operate at a professional level, has a track record of success, as well as deep comprehension of the sales process and profit centers.
  • Get a board. Besides key family members and members of your leadership team,your board should have at least a few non-family representatives, such as an attorney, a tax/accounting professional, a banker, a business consultant, etc. When the hard conversations between family must be had, other people sitting there raising questions, says Bartecki, can help “stop the yelling and screaming.”
  • Know your tax position. Again, bring in only the pros who know your industry and sit with them every couple of years. Understand your business structure – S Corps vs. C Corps and what it means to the exit plan you’re favoring. “Be really careful … a lot of guys are jumping to become C Corps when they shouldn’t; and it’ll cost them when they sell the company,” says Bartecki. “And you’ve got to really, really understand your federal tax position – because that will absolutely kill you if you make a mistake.”

Considerations for selling to an outside buyer

A clear advantage to the non-family sale of your business is that you’re more likely to get cash, the whole enchilada, up front.

Which leaves you with the following key considerations:

1) Remember your manufacturer still has to approve the deal. If you proceed without their consent, they could drop you, and if that happens, your buyer could back out, too.

2) As a seller, you want to get the best possible price for your business. Here are some out-of-the-box ideas to help you locate qualified buyers who are also more likely to get the OEM stamp of approval.

(A) Merger.“I think mergers could be a good way of thinking about an exit strategy,” says Lance Formwalt, Siegfried Bingham PC, Kansas City. “You can combine with someone without impacting your balance sheet so to speak. It’s a tax-free transaction, generally, and a way to maybe increase the scope of your business.”

A merger may help you increase margins and become a stronger player in the business, Formwalt adds. And that could make your company attractive to more private equity buyers, who tend to favor larger dealers versus small.

“Then the other benefit is, in some of these merged companies, you can have five, 10, or more owners,” Formwalt says, who adds that many times, your likely buyer may be another owner. “That’s a much simpler transaction that can have better tax consequences than if you’re going to sell your business to somebody else.”

(B) Expansion As An Exit Strategy? Hear us out. You want to create some competition for your business to get the best price. Depending on your age and how much time you’ve got before you want to exit, and depending on your OEM’s perspective and territory boundaries, perhaps engineering more qualified “neighbors” is an option. Could you be expanding your geographic footprint over the next five to 10 years, gaining more adjacent dealers who could become future prospective buyers? Formwalt thinks so.

(C) Offering Memorandum. This is Bartecki’s approach: “You’ve got to generate some competition. You can sell it to one guy that you know, but you’re never going to know if you got the best price. You get three or four guys looking at it, you’ll get the best price. So, I put the offering memorandum together, clean up the numbers, give some rough projection numbers – then I go out and say, okay, within 100 miles, let’s see who’s out there that might be a potential buyer. I send them out a letter, with a nondisclosure agreement attached. If they want some information, they sign the nondisclosure agreement, but I don’t give them anything unless I’m sure they’re qualified to do it and have the money to do it.

“Then, if you’ve got two or three guys bidding on it, chances are you’re going to wind up with a higher number than you would have gotten otherwise,” Bartecki says. “And you’ll have more flexible terms. You’ll be able to do more things. You might be able to stave off some of the tax issues.”

Editor’s Note: The entire white paper on developing a dealer succession plan can be downloaded here.