What to Do If Another Company Offers to Buy Your Business

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What to Do If Another Company Offers to Buy Your Business

If you have built a well-run portable sanitation business that has earned its good reputation, don’t be surprised if another company offers to buy it. The better your business is, the more attractive it becomes to a potential buyer.

In a previous JohnTalk article, we mentioned reasons why you might want to consider buying another company. Those reasons hold true for a business wanting to buy yours. The offer could come from a competitor that wants to grow quickly or reduce the number of competitors, or a new competitor that wants to enter your particular market.

Whatever the reason, when the offer is made, you should already be prepared to respond to it.

Decide Whether or Not to Sell

It’s your business. You’ve built it with your own hands. Deciding to sell your business is one of the hardest decisions you will make because it will affect you personally as well as financially.

And you will do it only once, so you have to get it right.

One thing is certain. Selling your business should never be a spur-of-the-moment decision. Think it through. There are ways to prepare well in advance so that when you receive an offer, you’ll be confident that your response has a foundation of facts and your firm commitment to support it.

The first two questions to ask yourself are, “Why do I want to sell my business?” and, “Why don’t I want to sell my business?” Make a list for each side. Reasons “for” may include:

  • You want to retire
  • You don’t enjoy the work as you once did
  • The work is becoming too physical as you get older
  • It would be better for your family
  • You thought the next generation would take over, but they’re not interested
  • A company with more capital can grow your company more than you could
  • You want to start a new business in a different industry

As you consider how selling your business will personally affect your lifestyle and the well-being of your family and employees, also keep in mind important financial motivations.

Is it a good time to sell?

From a business standpoint, the best time to sell is when:

  • Your business is doing well (NOT when it’s on the decline)
  • Buyers are active (a seller’s market)
  • The future of the portable sanitation industry is trending upward
Are there changes or risks in the portable sanitation industry that you can’t or don’t want to deal with?

More competition, consolidation and increasing capital expenditures are some pressures that may bring down your passion for your business. In portable sanitation as in other industries, large corporate companies entering the local market may be a significant issue.

Assemble Your Professional Team

Let’s continue by assuming you are prepared to sell your business, should you get the right offer. You can enter this important stage of your career with a feeling of confidence knowing you can rely on professionals to support your efforts:

  • Your accountant
  • Your attorney

For other aspects of the selling process, you may want to employ the services of:

  • Professional appraiser
  • Business broker

We will cover their services later.

Prepare Your Company to Be Sold

If you are at a point in your career where you might consider selling your portable sanitation business, you should start preparing your company to be sold. Preparation doesn’t mean you’ll have to sell, only that you’ll be in a better position to take full advantage of the sale. Business experts say it can take a year to prepare a small business for sale.

How do you respond when an offer is made? Here are some important steps to take, as suggested by SCORE, NFIB (National Federation of Independent Business) and other professionals who offer guidance on the buying and selling of businesses.

1. Determine the value of your company

EBITDA

You can use EBITDA for a good ballpark figure. EBITDA, or “Earnings Before Interest, Taxation, Depreciation and Amortization,” is an accounting method that measures your company’s fiscal condition and its ability to create income. It’s easy for your accountant to do, and EBITDA highlights performance and profitability potential, which is what buyers want to know.

Portable restroom companies usually sell for three to six times their EBITDA.

To learn more, read the JohnTalk article on EBITDA.

PROFESSIONAL VALUATION

A professional appraiser can provide an in-depth, realistic estimate of business worth. The American Society of Appraisers (ASA) says that valuing a business requires more than number-crunching. An appraiser takes into account finance as it applies to business and insight into how particular industries operate.

SCORE says that some financial documents used in your valuation should include:

  • Income statement
  • Cash flow statement
  • Balance sheet
  • Tax returns from the previous three years
  • Seller’s discretionary earnings (SDE)

SCORE recommends getting a valuation expert through ASA at the organization’s website under “Find an Appraiser.” Visit www.appraisers.org.

Also, check the National Association of Certified Valuation Analysts (NACVA) for its free online service to help you find a credentialed business valuation expert in your area. Look for the Member Directory at www.nacva.com.

Also, check with your local Chamber of Commerce. See if you can work with an appraiser who has had some experience with portable sanitation businesses.

2. Know “your number”

“Your number” is the price or price range that you have determined is how much your business should sell for. According to SCORE, by preparing ahead of time, you’ll know if an offer is worth exploring.

Having an established price range also demonstrates your professionalism, which shows the company making the offer that you have a well-run business.

Your number may change over time because your business changes, as does your willingness to sell.

3. Clean your financials

If your financial statements have discrepancies or errors (such as keeping your family’s cars on the books), this can be a “red flag” for the company making the offer and can break down a potential deal. Work with your accountant to prepare clean financial statements and business tax returns dating back at least three years. Like knowing “your number,” this step also adds to your image of business expertise.

4. Update your business plan

It’s always a good idea to revisit your business plan every few years, but NFIB says an updated plan can add some persuasion when selling your business. Your plan should include a financial model that projects company performance for the next three years or so. You want to show positive performance or sales growth.

5. Improve sales

The best time to sell is when your business is doing well, so you want to take steps to show a prospective buyer that your business is on the upswing. And it never hurts to have more customers. This is called “value enhancement.” You might consider some new marketing efforts to get the ball rolling. You may also want to improve the physical aspects of the business: upgrade your inventory, have work done on your vehicles, or give your storage facility a good cleaning.

SCORE suggests making an effort to improve the satisfaction level of your customers if this is an issue. When the prospective buyer interviews your customers, they will give your service positive reviews.

6. Get documents in order

There are many legal documents and lots of paperwork involved in selling a small business. Information and documentation, necessary for everything from due diligence to the asset purchase agreement, will cover all aspects of your business. Assembling and updating them beforehand will save time and help the process run smoother.

Information and documents that may be officially and unofficially necessary during the sales process include:

  • Profit and loss statements for current and past 2-3 years
  • Current balance sheet
  • Cash flow statement
  • Business tax returns for the past 2-3 years
  • Personal Financial Statement Form for Buyer to Complete
  • Offer-to-Purchase Agreement
  • Note for Seller Financing
  • Inventory list
  • Asset Depreciation Schedule from Tax Return
  • Supplier Contracts
  • Client List and Client Contracts
  • Staffing List with Hire Dates and Salaries
  • Employment agreements
  • Employment Policy Manual
  • Business Licenses, Certifications and Registrations
  • Insurance Policies
  • Outstanding Loan Agreements
  • Description of Liens
  • Product/Service Descriptions and Price Lists
  • Business Plan
  • Executive summary of overview of the business
7. Have cash resources on hand, including a line of credit

SCORE says having cash or access to a line of credit puts you in a better bargaining position during negotiations. It often takes several months to close the transaction. You do not want to be in a situation where cash is tight and you need to take whatever terms are offered.

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Check Out Your Prospective Buyer

Even though an offer to buy your business can be the beginning of a life-changing event, try not to get too excited. Investigate the company first. Go through their website. What other companies have they acquired? Interview the previous owners, if possible, about their selling experiences. Talk to the buyer’s customers. Is the service of high quality? Are they treated well? Determine if the prospective buyer seems like a “good fit” for your business culture. Do you believe you can establish trust in the upcoming negotiations?

Business Broker

Hiring a business broker may be a smart investment when selling your portable sanitation company. A business broker is a professional with training and experience in buying and selling businesses. A broker can guide you through the entire sales process. They can vet the potential buyer, prepare documents, negotiate sales terms and complete the closing.

A broker may help you get top value for your company, and you’ll have more time to run your business while the sales process proceeds.

Choose a prospective broker carefully. Your Chamber of Commerce is a good starting point to find a broker, as is your local SCORE chapter.

When you have some brokers in mind, check their websites. You’ll want to know their qualifications and experience. Ask for some previous clients you can talk to. Look for a broker who has handled businesses similar in type and value as yours. Usually, the broker charges a commission that ranges from 5 to 10 percent of the sales price. Ask what other fees might be involved.

Due Diligence

As sales negotiations become more serious, the prospective buyer will begin the process of due diligence. It is an in-depth appraisal of your business operations and finances. Due diligence opens the business to full view and can include reviews of accounting practices, revenue, debt, business inventory, contracts, tax returns, tax liens and outstanding legal obligations. Especially because your business is portable sanitation, the buyer may make sure your company meets all local health and environmental requirements and has all proper licenses and permits.

You will be revealing confidential information, so you should require the prospective buyer to sign a non-disclosure or non-compete agreement before the process can begin. If you are well-prepared, due diligence can be completed fairly quickly. Don’t let it drag out.

Seller Financing

It’s a common practice for the seller of a business to finance a portion of the sale by giving a loan to the buyer. Seller financing offers advantages to both the buyer and seller. It gives the buyer access to more capital, and the interest rate on the loan may be lower than current bank rates. For you the seller, it may enable you to sell at a higher price (it gives you leverage in negotiations) and help close the deal quicker. Because you will be charging interest on the loan, you’ll be making more money, and the monthly payments mean you will have a steady cash flow coming in.

Seller financing offers safeguards to protect your investment in the buyer. You can examine your prospective buyer’s credit information, such as a credit report and personal financial statement. As with any other type of loan, you can request collateral and a personal guarantee as security.

Additional loan requirements can help protect you after the sale, such as requiring the new owner to maintain certain minimum inventory levels, and Control of Business for Non-Payment, which are terms that give you the right to take back the business should the buyer miss a payment.

Non-Compete Agreement

You may be asked to sign a non-compete agreement. It is a legal agreement that you will not open a new portable sanitation business or work for a competitor for a specified time and within a specified geographic area. There may be other requirements; for example, if you start another company, you can’t use a company name similar to the name of the company you are selling.

Most states enforce non-competes, as long as they aren’t too restrictive. For example, it should be in force for a reasonable amount of time, such as one or two years.

Since you are being legally required to limit how you can use your business experience, you should be compensated fairly in exchange. Work with your attorney to negotiate the terms of the non-compete.

The Sales Agreement

When you and the buyer have reached an agreement, it’s time for the most important part of the sales process – creating the sales agreement. It is the legal contract between buyer and seller that defines all aspects of the sale.

The sales agreement is highly detailed and must contain all the terms of the purchase. It is critical to make sure the document is complete, accurate and legally enforceable. 

According to the SBA, essential items that should be addressed in your agreement include:

  • Names of seller, buyer and business
  • Background information
  • Assets being sold
  • Purchase price and Allocation of Assets
  • Non-compete clause
  • Any adjustments to be made
  • Agreement and payment terms
  • List of inventory included in the sale
  • Any representation and warranties of the seller and buyer
  • Determination as to the access to any business information
  • Determination as to the running of the business prior to closing
  • Contingencies
  • Fees, including brokers fees
  • Date of closing

You will almost certainly want to collaborate with your attorney and/or business broker to create this document.

Closing Day

Work with your broker, attorney and accountant to develop a checklist of everything you will need to do and bring to the closing. You can have a smoother closing by reviewing closing-day materials with the buyer in advance.

Schedule your closing when all parties are available. Morning is recommended so you have time to resolve any unexpected issues and go to the bank afterward. On the day of closing, you and the buyer will make any final adjustments, review and sign the proper documents, and you will receive payment. Bring the keys!

Finally, you and the buyer need to jointly complete IRS Form 8594, Asset Acquisition Statement.

Looking to Take Your Portable Restroom Business to the NEXT LEVEL? Download our FREE Guide: “Your Guide to Operating A Portable Restroom Business.”

Thinking About GETTING INTO the Portable Restroom Industry? Download our FREE Guide: “Your Guide to Starting A Portable Restroom Business.”

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