Deciding to sell your business is never an easy choice.
Whether you are prepared or not, a lot goes into the process to ensure you secure the most value for your company. Working within the tire and service industry, I’m often asked the steps companies can take to prepare a business for sale and attract investors. While there are a lot of factors to consider, I advise businesses to focus on three core areas:
In this article, I will expand on this question, as well as offer thoughts on managing the costs associated with a sale process and the importance of working in tandem with legal and financial specialists.
This is the second in a series of articles that answers the most common questions I am asked by tire and service business owners.
How do I prepare my business for sale or to attract investors?
There are a few key areas to focus on when preparing to sell your business that are attractive to investors. Businesses that are prepared with their finances, legal compliance, and operations before going to sale are much more likely to have a successful transaction.
Financial Clean-Up
Maintaining clean financials is an obvious starting point. In the tire and service industry, buyers and investors will scrutinize revenue streams like tire sales, repair and service sales, fleet maintenance agreements, and national account business. It is important to ensure your financials or your point-of-sale reports clearly separate revenue from these different sources.
While not necessarily required when selling your business, reviewed financials help streamline the process and can eliminate frustrations from both buyers and sellers. This means owners should have a clear understanding of the assets in the business and what is included in a potential sale. It is important to note that buyers, whether financial or strategic, will run a thorough financial diligence to ensure the accuracy of the financial statements.
Legal Compliance
Ensuring you are in compliance with all laws before going to sale is another important box to check. This includes reviewing compliance with state and federal regulations on waste disposal, such as tire recycling and hazardous materials. If your shop is located in California, for example, buyers will look for compliance with strict environmental regulations like the proper disposal of used oil and tires, not to mention strict labor laws.
Managing the legalities of running a business can be daunting, but you don’t have to do it alone. A professional employer organization (PEO) can help you with payroll, HR and offer additional legal guidance. Additionally, consider hiring an attorney or certified public accountant (CPA) who can run a UCC search to make sure there are no outdated liens on the business that need to be removed.
Marketing and Branding
A strong and proven customer base in extremely attractive to potential buyers or investors. Online reviews and ratings on platforms like Yelp or Google My Business can help to highlight your reputation and showcase your already established customer base.
For example, if your business is known for carrying premium brands like Michelin or Goodyear, this is a significant selling point to emphasize.
Tire and service companies can also show success in digital marketing, such as a high conversion of appointment scheduling and phone calls through your website.
What are the costs involved in selling my business?
It takes a dedicated team of lawyers, accountants, advisors and other professional service providers to ensure a successful sales process, and that often comes with a cost. I am often asked what those costs look like and where you should expect them. The majority of the costs stem from two areas: lawyers and bankers.
Legal Fees
Legal fees can vary depending on the size of the transaction, the complexity of the deal and the size of the firm selected. I have seen costs as low as $30,000 and as high as $300,000. Buyers generally will use a large firm and are likely to spend double what a seller will unless they have an in-house legal counsel.
The seller’s counsel is responsible for negotiating the key legal terms of the purchase agreement. While advisors will work on key business points, proper legal representation will ensure you are protected while moving the deal toward closing.
Using an experienced M&A attorney is critical to move the transaction forward while avoiding costly legal fees negotiating on terms that are not critical. Commonly negotiated points that can delay a transaction include net working capital, non-compete clauses, employment security, and topics related to real estate, such as purchasing properties owned by the seller or new leases.
Deal Preparation
Additional costs include hiring advisors that are able to market your business and prepare you for closing a deal. For companies with multiple locations, investment bankers help clear the market and find the best possible buyers and terms.
Bankers generally include a nominal monthly services fee to cover the costs of compiling materials, creating financial models with projections, and the work of reaching out to hundreds of potential acquirers in the space, negotiating pricing and terms and walking through the diligence and closing process with the seller. They will charge a small percentage of the total enterprise value for their success.
Brokers for sales of smaller companies (typically 1-2 locations) will generally skip the monthly services fees but ask for a higher success fee upon closing. I have seen brokers charge as high as 10-12% of the total sale price.
Can you help me structure a deal that minimizes tax implications?
Investment bankers and brokers cannot and should not be providing tax advice, but what they can do is help structure deals unique to each individual seller’s needs by working in tandem with a CPA or financial advisor.
While many business owners may not be actively looking to sell their businesses today, it is stil imperative to connect with your CPA or financial advisors ahead of a transaction. Preparing years in advance can save millions in taxes.
Most of the transactions that we see in the tire and service space are asset sales on a cash-free debt-free basis. This means that buyers will purchase all your assets aside from the cash and cash equivalents in your business, but you are responsible for the debts such as accounts payable, credit cards and any other liabilities on your balance sheet.
Deal structures may also have tax implications and help defer tax liabilities at close. These structures include:
Earn Outs—Additional transaction value depending on future performance of the business. The terms of the earn-out can be negotiated with your advisor and buyers.
Seller Note—Seller will carry/finance part of the transaction and earn interest income for the term of the note. Most notes range from 2-5 years and currently between 6-8% interest.
Equity Rollover—If selling your business to a private equity firm, you might retain an ownership stake; generally, between 10-30%. This allows you to defer taxes on that portion until it’s sold in a future transaction, potentially at a higher valuation.
Early preparation drives business value
Attracting the right buyer or investor requires preparation in all areas of your business. Understanding what drives business value and the costs associated with closing a deal is imperative for the most successful transaction.
In the tire and service industry, those who can demonstrate a strong customer base, clear operational efficiencies, and a forward-looking strategy (e.g., EV readiness, mobile tire services), are poised to drive the most value for their business.
