One of the most frequent questions I get is “Is now a good time to sell?” There are two things to consider when trying to answer this question. One is a “macro” question of how are the overall market conditions and two is a “micro” question of how your business is performing.
I’ve been involved with the sale of special event rental businesses for about 20 years and have seen some peaks and valleys. From roughly 2003 to 2007, the economy was good, Classic Party Rentals was acquiring a number of special event rental businesses and there were a number of event rental business sale transactions occurring across the country with a number of different acquirers. With the recession of 2008–2010, all activity ceased. There were still businesses that wanted to sell, but no buyers and no capital to fund acquisitions. Even though the financial performance of most special event rental businesses improved from 2011 to 2015, there was little to no activity in the market.
Since 2016, we have seen a lot of activity and a lot of interest in the acquisition of special event rental businesses. There are several strategic acquirers in the market right now looking to buy businesses, and there are other buyers on the sidelines waiting for the right opportunity. Since this activity has restarted, my firm has handled multiple transactions totaling nearly $100 million in value. In my opinion, the market for selling a special event rental business is the best it’s been in 20 years.
Next comes the “micro” evaluation of how your business is performing. Over the years, I’ve had businesses that were performing very well when there were no buyers. Conversely, maybe your business is not performing well even though the overall market is good. Given that the overall market is strong right now, if your business is performing well, perhaps now would be a good time to consider selling your business. If your business is not performing as well as it should be, whether you are considering selling or not, now would be a good time to “get your house in order” and take appropriate action.
How is your company performing?
Acquirers are looking for good, solid companies that are able to sustain themselves without significant investment of time or money from the new company. The following are some financial performance factors a special event rental company should meet:
- Increasing revenues, growing at least 5 to 6 percent per year consistent with the overall market.
- Total payroll of no more than 40 to 45 percent of total revenues.
- Average inventory age of no more than four to five years. In general, businesses should spend at least 10 percent of the original cost of inventory on new inventory each year to keep inventory fresh.
- EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is the industry standard for cash flow and should be at least 20 percent of total revenue.
- Management should be solid and proven, with operational (“back of house”) and sales teams (beyond ownership).
- Facilities should be strategically located, with rents no more than 5 percent of revenue with room or contingencies for growth (10,000 square feet for every $1 million of revenues, high ceilings for storage, efficient lay-out).
Beyond the tangible financial measures, other important factors an acquirer will consider as an attractive investment are:
- $5+ million in annual revenues.
- Strong preference for a full line of special event rentals (tables, chairs, linens, place settings, tenting).
- #1 or #2 in market share within the trade area. Acquirers will consider others if they are already in the market.
- Market population of two million or more (a top-50 metro area).
- Diverse customer base with recurring commercially oriented customers.
- Large one-time jobs—hurricane, disaster work, homeowner business—may be discounted or ignored.
How will your business be valued and evaluated?
Acquirers look at all facets of a business: customer concentration and composition, pricing as compared to your competition and the industry, quality of the facility and infrastructure, experience and capabilities of employees and management, longevity and reputation of the business, competitive positioning and reliability of financial data. The primary factors that will affect valuation are as follows:
- EBITDA valuation is generally 4 to 6 times the EBITDA (using the most recent 12-month financial results).
- Size. Companies with revenues under $5 million may be at the lower end. Companies with more than $10 million in revenues may be at the upper end.
- Reinvestment in infrastructure. If your inventory, delivery vehicles, etc. are older and need to be replaced, there will be a discount.
- Uncertainty reflected in pricing. Uncertainty is created by large fluctuations in financial results, one-time or non-recurring revenues, recent employee departures or future issues such as the facility needing to be relocated.
The structure or the terms of the deal are just as important as the price; terms can directly and dramatically impact the net proceeds to the seller. Below are some of the standard terms I see in many of the transactions I have been involved with:
- Asset deal from S-Corp. or LLC is strongly preferred. If a business is a C-Corp., some acquirers will consider a stock deal but only in the case of a highly strategic, larger deal (preferably $10 million+) with a “clean” corporation (no negative history such as lawsuits, environmental issues, etc.).
- Cash or Terms. All-cash deals may come at a discount. Non-cash considerations (note or equity) are more of a premium.
- Some portion (10-20 percent) may be in non-cash consideration (equity or note). It is important for many acquirers to have the owners have a continuing stake in the business to help with the transition and continued success.
- All debt to be paid off at closing.
- Cash excluded from transaction (except customer deposits).
- Most acquirers want the accounts receivable for customer continuity purposes—usually a “target” set for some amount of accounts receivable over accounts payable.
- Most acquirers do not want to buy real estate and prefer long-term leases at fair market rate.
There are a number of complex issues relating to valuation, perception and deal structure that need to be managed to create the best final result for the seller. These issues are outside the core competencies of most business owners and are best addressed by competent legal and financial advisors. When the “macro” and “micro” factors of the business sale marketplace come together, you should look hard at either selling or expanding your business.