Buyers Don’t Buy What They Can’t See

by Tamera Kovacs, Cetane Associates

Carefully preparing your company for sale can lead to higher offers.

While the process of selling a business is similar for every company, the process of preparing for a sale can be very different. Every seller wants to get the maximum value for their business and have a smooth, uneventful transaction. In addition to maximizing value, they are looking to find a great buyer for their employees and their customers and to have the legacy of their business continue.

There are many items to consider when making the decision to sell a company. We are often asked where to start. Our recommendation is to first speak with a financial planner or your accountant. Understanding what your quality of life will be like after your work-life changes is important for owners and their families.

Tax planning is one of the most important items a business owner can perform prior to deciding to sell. After all, it’s not how much you sell your business for, it’s how much you take home after taxes, and we have seen poor planning benefit the government more than the business owner. As an example, if a business is a C-Corporation, converting to an S-Corporation can save a seller in the ballpark of 20 percent or more in taxes. There is currently a five-year waiting period before a company can realize the tax savings from the conversion. If this is your situation, we recommend having a fair market valuation performed to set the baseline for the value at the time of conversion. This allows companies to take advantage of the S election in the event there is a sale or life event prior to the official conversion date. Any gain in value after the conversion date would typically be taxed at the S-Corporation tax rate.

Another strategy for C-Corporations is allocating a portion of the purchase price to personal goodwill, which minimizes taxes. For more on personal goodwill effects, look up the Martin’s Ice Cream case on the internet. It’s rare that an individual takes on the IRS in court and wins! Mr. Martin did just that in 1998 and C-Corp owners have been reaping the sweet rewards of Martin’s Ice Cream ever since. Before the sale of a C-Corp, it is advisable to get a personal goodwill valuation performed as the IRS likes to challenge personal goodwill. They hate to lose a court case, but they do like to audit.

As a general rule, buyers don’t buy what they can’t see. It really is that simple. But what buyers want to see is the question.

Buyers want to understand how your business has been performing financially: they want to see growth in the company, whether it is EBITDA, gallons, gross profit, customers gained, and sometimes, diversification growth.

If a company delivers propane, the buyer will want to understand how many of the propane tanks (by size) at customer locations are owned by the company compared to those owned by the customer. This is referred to as tank control and is a major driver of the value of propane businesses. You would think that this is an easy task. However, our experience shows that most companies do not keep accurate, up-to-date records on propane tanks. Sellers should be well prepared to answer how many signed tank agreements they have on file as well as fully completed and customer-signed leak checks. After all, in the eyes of the law and most buyers, if it isn’t documented it didn’t happen. Sellers with poor propane tank records often see purchase price holdbacks until tanks can be verified. In addition to tanks at customer locations, buyers will want to understand how many new and usable used tanks you stock in the yard. Sellers need to represent the tank counts and they should be accurate.

Real estate can often be a challenge in a transaction. Are the deeds correct, does the property need a new survey, is the property clean from an environmental standpoint, has there been a recent property appraisal performed to fully understand the value of the real estate (excluding any bulk tanks)? From a buyer’s perspective, if they look at a company with a recent real estate appraisal, property survey and environmental report, it puts them at ease that the company is on top of their business. Something as simple as a well maintained and aesthetically pleasing property can be the difference between a smooth due diligence/transaction and the buyer reconsidering the transaction.

Other important items include what the seller has for safety records, maintenance files, required permits and employee files. Safety and compliance items such as updated driver files and regular safety meetings also show a buyer that the seller is on top of their game. Today, more than ever, being fully staffed with properly licensed/trained employees is an important factor for buyers. Buyers are looking for a team that can continue operating the business. Even buyers of well-run companies in the same market find it difficult to find good, qualified help and will want to know that employees will stay, and their investment will be in good hands.

Well maintained, updated vehicles also play into business value and speak to the personality of the business. Drivers like nice vehicles and companies with nice vehicles tend to attract the best drivers. Maintaining vehicles in good repair is one of those intangible factors that help buyers get a feel for a company. Buyers don’t want to buy a company and have to go out and buy new trucks because the ones that came with the business are constantly in the shop.

Buyers will seek to understand much more about your business, and the key is to provide good data in a timely manner. Good data will also help assure a smooth transition and avoid any issues after the sale. Remember, companies that are prepared for a sale will receive higher offers and will have choices of who is their best-fit buyer. Sellers should be interviewing buyers and not the other way around. Premium companies sell at premium prices and attract the best buyers. The last item to mention is that while most delivered fuel marketers are great at running their business, most have likely not sold a business. Seeking professional advisors such as attorneys, accountants and industry brokers will smooth the process and their guidance will always more than pay for itself.

Tamera Kovacs is a Director at Cetane Associates, specializing in M&A advisory to the retail propane/delivered fuels industry. She can be reached at 913-634-6654 or tkovacs@cetane.com.

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