Exit Strategy: Preparing Your Business for Sale

Preparing your business for sale is a strategic endeavor that can significantly impact your transaction's success. In this insightful episode, hosts Chris Jenks and Jeff Pavone of Amplifi Capital Group offer an in-depth guide to getting your business ready 12 months out from a potential sale. From meticulous financial cleanup and operational optimization to crucial legal considerations, they share actionable advice to help you maximize your business's value and navigate the complexities of a sale. Learn how understanding KPIs, building a strong management team, and proactive problem-solving can transform your exit strategy. This isn't just about selling; it's about building a more robust and profitable business for the long term.

What You'll Learn:

• The importance of financial cleanup, including normalized financials and owner add-backs.
• How to prepare accurate and compelling financial forecasts for potential buyers.
• Strategies for building a strong management team and reducing owner dependencies.
• Best practices for vendor management and optimizing business KPIs.
• The impact of strategic maintenance and capital expenditures on business valuation.
• Essential legal preparations to ensure a smooth and timely transaction.

Don't leave value on the table when it's time to sell. Equip yourself with the knowledge to make your business an undeniable asset. Visit us at www.amplifycapgroup.com for more insights and resources.

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Transcript

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I think one area too is just having a good record to help contextualize performance. Just having good good records and being able to kind of recall to certain events to help in the normalization exercise is definitely key. If you're looking at getting max value, we've got to tell the best story possible of showing them what your company's going to look like over the next couple of years. Standardize your operating procedures and have it well documented. I think that goes a long way of actually having formal SOPs that you could point to. Could somebody reach and give you an extra turn or half a turn or something? Sure, it depends on the story. All right, everyone. Welcome back to another episode of Behind the Business with Amplify Capital Group. My name is Chris Jenks, and with me is Jeff Pavone. And today I want to talk a little bit about 12 months out. How do you prepare your business for a transaction? And I want to provide some insights from Amplify Capital Group and provide more or less a practical, you know, step-by-step guide and framework for how you can better prepare yourself ahead of running a process and going into a transaction as a as opposed to being behind the eight ball. So as I think about it, you could kind of break apart the preparation across a couple of key categories. Again, financial, operation, legal, organizational. To me, one of the best starting points here would be financial cleanup. So, Jeff, what are your thoughts in terms of taking that first step here? What should any business owner be thinking about as you're gearing up for that sale or running that process 12 to 24 months in advance? So, you know, understanding, you know, what a normalized set of financials will look like to a buyer, right? And and so, you know, where we get involved, we'll take a look at your financials and we'll start looking at every one of your KPIs from your your man your employee wages, and we'll start breaking it down. So you s so the first thing you do you need to understand is you need to better understand what is a buyer really buying. So if the buyer is buying a four-wall car wash, which is strictly that one site level, what is needed to run that four-wall car wash? And then separating out some of the other cost. So when we look at it, I start with the kind of labor cost, and I look at, all right, what's normalization? And let's say you have some family members on that payroll for whatever. It's it again, you're running it like an owner, it's your business, you can do what you want with it. But I would say uh if you're thinking of selling, it's it's the the more important thing is to be able to separate and improve it. So you you can continue to operate that way, but we've got to be able to prove it. So but having a having the cleanest set of books, having a a proper set of books that you can you can defend is uh to a to a buyer is going to be critical uh moving forward. When then when you look at going down each one of your line items, let's say you're doing insurance, and that insurance you're including home model for your personal use. You know, again, could we add it back? The answer is sure. We can add it, we can add back uh certain personal costs. I think the the most important thing is at least to be able to track it and itemize it so you can prove it. So if you're going to do something on a personal level, you've got to make sure you can prove it, and it's got to be really clear. If in a in a perfect way, you're it stopped doing some of those uh personal activities part of a sale to make it even cleaner. But if you're doing it, just make it easy for us to track and prove. So owner adbacks is definitely one of them, making sure you clearly categorize owner adbacks. You know, I think one area too is just having a good record to help contextualize performance. You know, for example, we're in the car wash business, right? Weather, pretty important factor, helps explain a lot of the volatility and just general cyclicality and seasonality of our business. Um, if you have those extreme events, you know, having a good record and just recollection of what those events may be would really help in the normalization process. Um, you know, again, you might be a car wash in California, and we know a couple years ago we had some exceptional weather and you have other things, whether it be you know fire-related activities, just having good records and being able to kind of recall to certain events to help in the normalization exercise is definitely key. I I would say, you know, showing and be prepared to have monthly numbers available for at least three years. And why is that important? You know, our what we need to do is show trends. I mean, the buyer is the buyer is looking to do this thing without risk and wants to see upside. And so if we've got monthly numbers, you know, let's say you open a site up three years ago and and you know, or two years ago in January, February, or one number, and now we're in October, November, and the trending up, you know, we got a we got a good business case to make for what your next 12 months are gonna look like based on those trends. Same thing with car count, same thing with membership count, right? How do you defend against a a performa going forward? But I gotta tell you, be prepared to have breakdowns by month, including car counts, membership, uh revenue, profit. I think general kind of good practices around record retention, too, right? Go through and ahead to your point, Jeff. You want monthly, so maybe you start pulling your sales report monthly and just storing that away. Um, you know, your financials will tell one side of the story, but often what you want to show too is your point of sale reports and your general sales reports to help um, you know, defend those financials you're providing. So I think, you know, to summarize here, I think general from a financial perspective, cleaning up the financial statements first and foremost, having good records around owner adbacks and any other extraordinary or unusual one-time events that may flow through the PL, definitely important. Get your arms around that. Um, understand those catalysts form normalization, whether it be weather related, um, you know, that that's also important. Um, making sure that going back to my comments on the point of sale reports, what you're showing the PL reconciles to the cash that's showing on your point of sale reports is going to be one important thing to do. Um, we often don't talk enough about the balance sheet either, right? I think we talk a lot about the PL because of course EVITA is the biggest driver valuation. Um, the balance sheet often gets neglected. I will tell you right now, you know, having a good understanding of your inner company liabilities, um, you know, any old receivables or any looming items or issues and accounts payables, making sure they also have a clean balance sheet is also very important. Um I also think, you know, forecasting-wise, making sure that you're going through that exercise of putting some thought behind how you're forecasting the business. So as we talk about financials, there's more than just the historical PLs and balance sheet of your business that matter. Um, you're almost always, if you're going to go ahead and market your business, need to provide a forecast for a minimum of 24 months ahead. We often suggest you probably want to do more like three years of forecasting in your business. So making sure you're going to that exercise to think about what your business looks like in the future and having a good process around forecasting and budgeting to project future results. I think that's one area that often goes miss. Would you agree with that, Jeff? Oh, yeah. I mean, for for sure, the um the buyer is going to be looking at this thing. And again, if you're looking at getting max value, you know, we've got it we've got to tell the best story possible of showing them what this what this what your company is going to look like over the next couple of years. And so could somebody reach and give you an extra turn or half a turn or something? Sure, it depends on the story, right? If you're if you've got a if you did a recent price increase in October and we're in December, and all of a sudden your numbers jumped up, you know, qu can we forecast that out that next year? You're gonna have, you know, those are the kind of things that but but it's got to be realistic, right? So I would say, you know, you you've got to be, you know, one is you want to have really clean books and records, two, you want to be able to show the performance of what this what they're buying into. Um and so being able to tell the story of of why this is a good deal for somebody certainly gonna help uh you get max valuation. And something we talked about in other podcast episode, too. If you're if you're at a deal that has this size to justify it, this isn't necessarily in that 12 to 24 month range, but as you're preparing to get yourself to the point of marketing your business, the sell site quality of earnings definitely goes a long way. Yeah. You know, one of the other bigger, bigger potential things to clean up, and it gets overlooked a lot, is a lot of these you know, chains, and if you got multi-sites, that might mean you have multi-partners and investors. And and cleaning up your cap table and having an alignment from your investors is going to be critical. Back to your balance sheet side of it. There can be a complete misalignment when when you got investors invested in one site but not in another site. And so, you know, to to clean that up beforehand, that that that is one of the bigger exposures we see of a deal blowing up is something to do with a partner or an investor's or misalignment. Um so cleaning that up uh before you go to market, I think would be hugely beneficial. That is a really good point. Um, you know, a lot of a lot of chains will grow and they form capital at the store level, right? Where you have a single store with its own cap structure, which as you think, what allocations, as you go through the process of actually determining what's driving value for the broader transaction, that often becomes a sticking point. But taking it one step further, too, a lot of groups will separate that real estate from the operations, right? So making sure you clean out that cap table and understand kind of how the value how the value is being driven. Um, that's a really good point, Jeff. So think a couple things on the financial side we addressed, you know, operationally. Um, to me, I think about really understanding the KPIs behind my business. Um, that's really important. So now let's maybe shift gears. We talked about some of the financial considerations uh to help prepare yourself ahead of a sale. Let's talk about operationally. So we'll dive into KPIs in a minute. To me, I think one clear starting point here would be your management team, right? Um, what you really want to do is kind of demonstrate you know, can this business sustain and perform after ownership is out of the picture? Um, so to me, is I think one of the first things to tackle from an operational perspective, making sure you kind of have your bench clearly identified in terms of who your leaders are, who's gonna be accountable for the business going forward, but more importantly, reducing owner dependencies, right? Um a lot of times, especially in the car wash business, owners and operators live in their tunnels. So to be able to show that you have a deep bench and different dependencies and sales, customer service, sales, and clearly articulate who runs it day-to-day is pretty important. Um anything you want to add on that topic, Jeff? No, I think um, you know, one of the first things we'll ask when we start evaluating a company is getting an org chart. And that org chart will start looking at, okay, saying, what do we need here to operate uh your business? So post-sale. So everything you everything you need to do as a seller is to think, what what what goes away when I go away, right? So what what what do you need that what needs the state to run this business? And again, so one of them, it could be you, right? You could be going away. So what does that team look like of district managers and other people? How do how do you maintain the consistency of the quality? Because they're buying they're buying your business for a lot of money, how do you maintain that consistency? So that's why we look at the org chart right away, and then you've got to look at the compensation levels that people are getting. And again, if if uh let's say you're walking away but you are kind of running running point as a district manager for the company, they may add back, let's say, $100,000 instead of what you've been taking out of the business, because they've got to they've got to continue to operate with some sense of labor. So just understanding that, you know, let's get your org chart, let's start working on it. How do we continue to run that operation that you've been running so successfully post-closing? And even along these lines, and this is, I think, a good piece of feedback and advice if you're planning to sell or not, uh, but if you are kind of that one-man Rainmaker show in your operation, um, it's really good practice. I mean, standardize your operating procedures and have it well documented. I think that goes a long way of actually having formal SOPs that you could point to, uh, whether it be around maintenance protocol or you know, effectively converting retail visits to unlimited members. Um, documented those procedures is going to be one important thing to get your arms around. You know, the other thing we talked about in another episode, uh, vendor and supply chain management, vendor management key. Um, really taking that opportunity to review your vendor contracts and making sure that you're getting the best procurement pricing possible. Um, because that's gonna be one area where you know you you you may not necessarily get yourself full credit if you're going into a process and you're marketing the business and you realize that your chem expense or your water expense is too high. Sure, we could attempt to make that pro forma adjustment to show that the opportunity you know for for value creation is there by having more effective vendor management. But the reality is if you want to get credit for that, implement it yourself. So I think one area that you should start looking at is vendor management. Um, but take that with a grain of salt, right? I think what you can't turn that into is I'm now gonna pull back my chem dispensing or water application for the sake of better managing my cost of goods to boost EBITDA. Because at the end of the day, what you're doing is you're deteriorating the quality of your product, in which case your customer is gonna realize it and you're subjecting yourself to probably more harm than good. So as we talk about vendor management, I think it's important to understand are my expensive are my expenses in line with where they should be? And am I procuring the best pricing possible for my business? That's a good exercise, but don't go through the danger of trying to pull back expenses. We've heard horror stories about large national chains that found themselves in stress and they're only applying soaps to the first half of the car. Don't go down that slip slippery soap, uh, but definitely get your armor on those key vendor contracts. So so one of the the prize buys from a buyer perspective is looking at a seller who's got weak KPIs. And let's say you've been overpaying for chemicals or you, you know, your under like your your pricing is is wrong, and if you up your pricing, you're gonna get a lift on it. And so they kind of come in and give you a health a wholesome multiple on your EBITDA, and they're licking their chops, saying, this is a real this is we can't wait to close this deal. You know, where you can really benefit is understanding, again, what is a what is really good look like, how do we normalization and then how to get there. So in some cases, let's say you're overpaying for chemicals by 25 cents a car, all you got to do is make an adjustment one month or two months, and then we can normalize your last 12 months we'll go back and normalize your next 12 months. The same thing can apply in certain labor costs. If you've got, if you let's say you have labor, here's a great example. Let's say you've got extra labor because you're building a new site and you've got a new store opening three months from now, and so you've you've fattened up your labor to have a manager in waiting to go take that's you can add that back, right? You can normalize that that expense and say it was really expensive applied to your new store opening. And so those are the kind of things we that we think about. We think about looking at when you look at having a, you know, when you're selling, you've got an existing chain of mature stores, what's mature to look like? Then you've got some, let's say you've got new development sites that are ramping. So how do you get proper credit for that? How do we look at it? So, you know, we're we're kind of looking at this thing and seeing trends of how your stores are are trending, so we can apply it to the new build to get you the proper value. So there's there's a lot that goes into this before you think of selling. And you know, these are just a couple examples. I think take taking tying that back though to kind of operationally things that to focus on here, you know, mentioned knowing what good looks like. I think you know, if if you're contemplating putting yourself in a position where you want to sell your business, start really going to the exercise of you know pulling the data of your business, understand the metrics that drive value, specifically in car washing. Um, you know, we we've talked extensively about kind of metrics around your membership platform. It could be everything from the lifetime value of your customer, your customer acquisition cost for a new subscription, member, membership penetration rates, conversion, trend, you name it. There are no shortage of data points that matter when position your business to a seller. So going through that exercise of pulling that data in, organizing that data so you have that transparency in the optics, having an understanding and pulling in the right advisors to know where you should fall and how you should benchmark relative to those KPIs, and then holding your teams accountable as you're measuring to try to get to those optimal levels. That's one key area, right? So, you know, again, I think about customer acquisition cost. Um, it's something that may seem silly, but as we have conversations with operators, promotional efficacy is one of the most under-talked about topics in not just car washing but broadly. Um, you know, especially in a competitive environment like car washing, you find operators that often get to this battle of promotions, in which you're now training your customers to driveway hop to different car wash facilities based on who's offering the best promotion of that month. Uh that's a dangerous game, right? It's a race to the bottom. And I'll tell you right now, a lot of buyers are starting to better understand kind of customer acquisition costs to make sure the growth of that membership base is in fact sustainable, right? You could find yourself offering just ridiculous promotions in which you're bringing loss leaders to your business unnecessarily just for the sake of padding your membership base, but you may be doing that at the detriment of your business. Um so again, I can't tell you how important it is that if you're thinking about selling, understanding the metrics, the KPIs that really matter to the buyer pools, and making sure that you're aligning your business to hit those optimal levels. Yeah, so that to that point, if you were less than uh, you know, efficient efficient maximum efficiency, and it could be coming down to, like you say, conversion on membership. And it could be maybe you don't have uh a salesperson at the pay station for every time a somebody drives up. There could be simple fixes to your numbers, and all of a sudden you make those simple fixes and they move the needle and that and that move that needle significantly. You know, all of a sudden, you know, if you've got enough trends, and even if it's for a few months, you can take that out over your performa, demonstrating to these to the buyer that these this is this is what this is why we're you got to demonstrate why we're gonna get to this new performa. And it could be simple fixes like that. I mean, so it could be that you were overstaffing on labor and you made adjustments, and now you got a few months of of getting that labor pull down. Um so I it could be a water problem. You could be at a point where you're spending too much on your utilities, but you adopted a a new technology that got your water bills down 20 percent. So this is why I say if you if you're in a position where you've got a year, the worst case scenario that can happen is if you have time when you're preparing your company, you just got a more profitable company. There's nothing to lose. So if you've got time and you've got a big enough investment in their company, this is your life's work, I'd say I would I would know what good is, I would know how to get it better, and I I would get to know what people are paying for so I can get the most out of it. You know, last thing I want to touch on operationally, um, maintenance too. Um, we talked a lot about this in past episodes, but I think where buyers are a lot more diligent today is understanding kind of the integration of an asset post-transaction. And I think uh there are certainly groups, I mean, they're gonna they're gonna penalize you if you're deferring maintenance. So it's not to say go crazy and overspend, but to make sure that you're keeping your facilities up to standard and you're spending the appropriate amount of dollars to keep you know that very expensive equipment, which is the lifeblood of what we do functional, is also gonna go a long way with the group. I think um a lot of sellers may think the opposite, right? Well, well, I'm gonna sell here pretty soon, so I'm gonna pull back on my maintenance spend because it doesn't matter to me. That couldn't be more false, right? These groups now they have teams that are dedicated to their facilities, and before they even think about putting a deal under LOI, they're gonna be understanding kind of the quality of the asset itself and to ensure that there aren't any traps or blind spots post-transaction as they look to integrate that asset into their platform. So, yeah, t taking on that, I mean when you look at um if you decide you're gonna sell in a year, then you need to behave like you're gonna sell a year. And it doesn't it doesn't say you're gonna defer maintenance. You're gonna you got you want your car wash chain to operate today like you do every day. On the other hand, there are costs like you could be experimenting with marketing, and that may be, you know, all of a sudden you you want to brand a a profoult team, which is strictly a branding exercise. I would say anything that's vanity related, you know, it could be, you know, new signage on your building, but it's not gonna drive one dollar of revenue or bottom line. You gotta look at every dollar that drops to the bottom line is ten dollars or more in your pocket. And so I would just be smart about it's gotta be something that's gonna give you a return on investment, or don't do it. The other thing is when you look at your investment, let's say you that that doesn't apply to like CapEx. So let's say your rollers or chains or you know your conveyor is at the end of a life cycle. A buyer is going to go and do an inspection, say it's at the end of the life cycle, and they're gonna ding you, call it 60 grand or some amount of money. So going to fix it isn't going to hurt you because it's a capex expense. So I would say the place not to shortcut yourself is on CapEx because when a buyer comes and looks at your beautiful building and car wash, they want to see a beautiful building. Run building. That's that I mean, sort of like when you go buy a used car. If you go see a used car and the thing looks spotless, perfect, and and everything's got all your maintenance records, you feel way more comfortable buying it than something that's going to be distress. If it's if it's if it's distress, worn out, you're they're going to they're going to hurt you more than what it will cost to have had that maintained properly. And again, um from proper accounting practices, you should be able to get that back because it's a CAPES expense. Yeah, just clarifying that, right? So CapEx lives in the balance sheet, not the profit and loss statement. That's also, I mean, look at that historically too, not just in the context of going forward. But if you're this ties back to kind of our first portion of this podcast here, which is as you're preparing financially, definitely a good exercise to come to PL and look for opportunities where there may be expenses that could be capitalized and live in the balance sheet to make sure you're not, you know, in unintentionally penalizing your EBITDA. So maybe just I want to wrap up with just one more thought here that's gets get that gets overlooked. If you're selling a multi-site chain and you've got certain assets that are really dogs, let's say, you know, at the end of the day you've got a chain that does really well, but you've got one or two sites that are actually below performing uh from a multiple standpoint. At some point you've got to look at it and say, first off, the buyer's not going to want to buy them anyway. And if you're putting them in the overall portfolio and taking it out to market, does it help you or does it hurt you? For the most part, it's gonna hurt you because they're gonna look at that as it's going to negatively bring down the value of your company. You may want to take a look at some some real dogs and say, can we get rid of them? Can we sell it off as real estate? Can we just uh lop it off our company? I can tell you, nobody wants it anyway. So I would say I would be looking at operations as one thing to to to really maximize value. I'd look at your team and say, do I have a team that we can scale and get behind? But I'd also be looking from a strategic standpoint of my portfolio and my asset, saying, are there things that we should just get rid of and make it easier for a buyer to buy our company? I think that's overlooked in a lot of cases. That's a good point. You know, another thing we didn't touch on too, Jeff, I think legal. Uh that that's a big part of it too, right? There's a lot of work you can do on the backside to make sure you're prepared from a legal perspective. It could be everything, you know, if you do have different partners, you know, making sure your operating agreements and you know reflect current ownership structure and up to date. Um, you know, we talked about kind of vendor review and making sure that your contracts are maintained. Um, I'll tell you, I mean, once you start going through the exercise of putting together disclosure schedules, um, making sure that you have a good understanding of all the contracts that you have out there to making sure they're assignable. That's very important. If you have lease properties, going through the terms of your leasehold provisions to make sure that you understand what it's going to take to assign that leasehold interest, um, making sure you're up to date with your permits, licenses. Um, another key area could be doing a you know UCC search yourself to see if all assets are free of liens. That that could be very helpful exercises. You're preparing yourself from a legal perspective. Umstanding employee claims or customer claims, try to get those closed up. Um, I think legally there's a lot you could do to better prepare in advance to make sure that you're eliminating any of those curveballs as you get inevitably to that process of you know running diligence, um, getting all of your real estate records in place, you know, surveys, um, make sure titles clear. I think there's a lot of work that often doesn't get done on the legal side of things ahead of a sale, and ultimately you're going to find yourself playing catch up during diligence and subjecting yourself to very lengthy delays and potential potentially very expensive legal bills on the backside as well. So this goes back to maybe just uh rounding up uh everything today is if you have a cho a chance to prepare your company, a from an operation standpoint to your to your facility standpoint, to your legal tax and and HR and you've got a really clean company to go sell, you literally could go out, we you know, from a process standpoint, you can go out and find a buyer within 30 days, and that buyer could have a 60-day diligence and they're closing shortly thereafter. Or it can or it could take an enormous amount of time getting from start to finish, and the longer it takes, the more chances are that that deal is not gonna close. So it it really, you know, it typically not the buyer holding up a a diligence timing standpoint. It's typically the seller being unprepared and having all of these different loose ends. And so the the more you can close all those loose ends and be ready be ready to go to market with a good clean company, I've got to tell you, your life's gonna be easier, the less chance you are you'll have disruption in your business, your employees will have a problem. I I think it's just, you know, get prepared, go to market the right way, and and you'll have a tremendous result. All right. I think that's a wrap. Want to thank everybody for joining us in this episode of Behind the Business. If you're looking for more information, please go ahead and visit us at www.amplifycapgroup.com. Thanks again until next time.