Considerations Before You Sell

    • EBITDA – Earnings Before Interest, Taxes, Depreciation, Amortization

    •  Adjusted EBITDA – adjusted to add back owner’s extra expenses that are run through the business, one-time additions or subtractions (PPP, sale of equipment, etc.), owner’s and family’s income in excess of typical salaries

    •  Valuation – TEV (Total Enterprise Value)

    •  Multiple X – This number is multiplied by the EBITDA to get Valuation

    •  TTM – Twelve Trailing Months – Used as the basis of the EBITDA calculations

Expectations

Multiples of 3x-6.5x for companies with EBITDA of $1mm to $10mm

Common considerations when a buyer is deciding on a Multiple:

  • Sales Volume

  • EBITDA as a percentage of Sales (minimum 10%)

  • Trend in sales, profitability – up or down?

  • Owner to stay with business?

  • Management team

  • Geography, Market

    • Owner doing all the work

    • Lack of written operation directives

    • Flat sales, no recent increases in revenues

    • Written operation procedures

    • Written training manuals

    • Success in expanding territory into new marks (bolt-ons)

    • Company can flourish without owner's constant presence

    • Excellent financial records, up to date, including TTM (12 trailing months)

    • Key Performance Indicators tracked and understood

    • Outlook for growth areas/opportunities written

Business Brokers vs. M&A Brokers

  • Business Brokers are paid 5-10% of the Valuation at closing and may have exclusive rights for a period of time, even if you sell the company on your own.

  • M&A (Mergers and Acquisitions) Brokers often represent the Buyers (Private Equity Groups and Strategic Investors), and are paid a commission by the Buyer at closing.

  • M&A Consultant (Shannon Group, for example) are paid a Finder’s Fee by the buyer at closing, have no exclusivity.  Their job is to find candidates for acquisitions for the buyers. The job is to learn the buyer’s criteria (residential roofing vs. commercial; re-roof vs. new-build; retail business vs. storm-related; geography; size; owner’s intentions; etc.) and compare it to the seller’s profile…  narrowing the field to a manageable few buyers.

Getting Familiar

  • o   Company Name

    o   Year Founded

    o   Owner name, Email address, direct phone #

    o   Website Address

    o   % Residential vs. Commercial

    o   % Re-Roof vs. New Construction

    o   % Insurance (Storm-related) vs. Retail

    o   % Self-Performed vs. Sub-Contracted work

    o   # of Employees

    o   Union or Non-Union?

    o   Revenues from 2023, 2022, 2021

    o   Net Profit from 2023, 2022, 2021 (EBITDA if you have it)

    o   Owner’s intentions:

    • Stay on and be part of the growth of the new company

    • Stay on for transition, then leave

    • Leave at closing

    • Describe your management team and their capacities

    • Audited or Reviewed financial statements for the last three years

      • Profit and Loss Statements

      • Balance Sheets

    • TTM – 12-trailing-months revenues and EBITDA

    • Discussion of major customers, and any concentration

    • Discussion of organizational set-up

    • Sales and Marketing  discussion

Private Equity Group – Roofing Platforms

Each of the 40+ Private Equity Groups we work with has at least one Roofing Platform that they have built or are building. Some may have 30 or 40 companies or more across the country. Each of these PEGs has their own set of criteria. For example:

  • PEG “A” is looking for Residential Re-Roofers; not in the storm-related trade; located in the Southeast US; with EBITDA over $3mm; self-performing, non-union; with an owner who wants to stay and grow the new company with them.

  • PEG “B” is looking for Commercial Roofers in New Construction with $5mm+ in EBITDA; 40%+ Gross Profits; in Florida, Texas or Arizona; with an owner hoping to retire (they have CEO’s ready to move in).

Roll-Overs

Many PEGs expect owners who are staying on to re-invest some of their sale price back into the business, and therefore share in the growth.

As an example, Joe’s Roofing had revenues of $10mm this past year just ended.  They had an adjusted EBITDA of $2mm, steady growth, clean books, and a nice plan going forward.  The PEG offered a multiple of 5x, meaning a Valuation of $10mm, which the owner accepted.

The owner decided to invest 30% or $3mm back into the new company.  So, he netted $7mm on closing day (but probably had to pay taxes on $10mm, ask your accountant to discuss stock sale vs. asset sale with you).  And he walked away with an employment contract for $150,000 per year to manage the business; a bonus schedule for increasing revenues and profits; and a nice truck to drive to the sites. 

He also negotiated his $3mm investment into the new company, in exchange for 5% of the value of that company.  This arrangement doesn’t mean a lot of new cash for him, as PEGs generally re-invest ALL the business’ cash into growth.  But it could mean an even bigger payday 5-7 years down the road, and a steady paycheck along the way.

During your 3-5 year pre-market period, I had a  couple of thoughts you may not have considered...

  • Ideal growth levels in the past three years is not 30 or 40%, it's 10-15%.  Steady, upward trend is best.

  • EBITDA of 12-15% flat across the board is ideal.

  • If your work is all self-performed, W-2 workers, that's great.  But if it's all sub-contracted, you might consider using the next few years to convert some or all of the work to self-performed.  If you don't, chances are they will do so post-closing, but deduct from the multiple pre-closing.

  • The basis for valuation is likely to be the average EBITDA of the last three years.

  • Accrual basis is generally preferred.

  • SOPs should be written down, with a working trail that they are being followed.

  • Adjustments to EBITDA ... Keep close track of your personal expenses, cars, life insurance, country club, cabin in the woods, etc. that are paid out of the till.  I'm not saying don't do those things, just keep close track so it's easily auditable (supportable) during due diligence.

  • Start having your financials audited by a good firm if you don't already.

  • Avoid customer concentration.  Try to avoid having any single customer over 15% of sales, or top three over 25%.

  • Succession plan... most PEGs do NOT provide a CEO to take your place.  You would be well served to back away in the last year, and have your management team take the wheel, while you sit on the board.

  • Develop and follow growth plans for the next three to five years, and update it every year, so that when you sell your growth plan is in place and ready for review.

  • Be ready to support your sales mix, who your customer is, how you communicate with him, what his prospects are, how that affects your business going forward.

Kevin Townsell - Shannon Group

(716) 812-0165

Kevin@ShannonGroup.biz