Owners of smaller, independent tent and event rental companies face plenty of decisions when contemplating their retirement. One of these is how, or even if, the company will continue after the owner’s exit. There are several possible options. For example, a family-owned business may continue on as such if other family members are interested in taking over. Or the company can be sold to a larger entity that subsumes it into its operations, name and all. Or the owner can step away but hire a replacement to run it as is, maintaining the name and brand.
This latter strategy is one George Smith and his brother-in-law William Pretsch planned to use when they were looking down the road at retiring from their rental business, Mahaffey USA. Smith, former president and CEO of the Memphis, Tenn.-based company (there was also a Houston, Texas, location), says that in 2014 the pair hired someone to train as a replacement for when they stepped away.
But that plan shifted in early 2021 when Smith was approached by an investment banker about selling the business. For a variety of reasons, he decided to change course. By December 2021, guided through the approximately 10-month selling process by the banker and estate planning attorneys, Mahaffey USA was purchased by Sunbelt Rentals.
Smith says because he and Pretsch were the only ones running the company, they never considered it a family business and didn’t want to turn it into one after their departure, concerned it could lead to complications. But Marlin Sensenig, president of Tents For Rent LLC in Lititz, Pa., had no such qualms; he knew when he purchased the company in 1984 that he wanted to involve his six children.
Sensenig plans to “progressively move out of ownership,” becoming less than a 50% partner by 2025 and having no ownership at all by 2036, serving in an advisory capacity instead. Currently, three of his children are active partners in the business, with the other three choosing to be non-active partners.
Sensenig relied heavily on a financial advisor, a PR expert and prayer while making the necessary decisions about the transition. His ultimate goal has always been to provide his adult children with the opportunity to “enjoy working together as siblings and give them profitable Christian employment.”
There were, and still are, the usual concerns around this arrangement—for example, if hard decisions are required or if one or more end up leaving the business. But Sensenig addresses these by reminding his offspring that “relationships are far more important than money.”
Smith and Sensenig wisely began planning their retirements well in advance. Kevin Zwierzchowski, owner of Z Rental Consulting (ZRC), suggests starting this process at least five years ahead of the planned exit. Located in Novi, Mich., ZRC works with equipment rental business owners in the areas of “sales representation and fair market business evaluation.”
The first step in any planning process is to establish a solid relationship with an attorney and a CPA , he says.
“Having a strong CPA will help to present the financial information and having a trusted attorney will help in the explanation of the legal issues during the process,” Zwierzchowski explains.
The amount of financial information he says buyers like to see is considerable. (Family members contemplating taking over the business may want this as well, especially if not intimately involved in its operations. It also may be necessary if outside funding is required.)
Some of the documentation Zwierzchowski collects includes:
- Three years of annual profit and loss (P&L) statements and balance sheets
- Three years of monthly P&Ls and balance sheets
- Detailed general ledgers for the
past three years
- Three years of capital expenditures (CapEx)
- Current rental asset information (original equipment cost, date acquired by rental class)
- Historical customer information (revenues by customer, profitability
by job, etc.)
- Future customer commitments
“Lenders are requiring more financial information to have a better understanding of normal results of business in this space, factoring in COVID and spikes from demand after COVID,” Zwierzchowski explains. “It’s important for owners to understand the need to have solid financial information about their business in order to present it most favorably.”
Smith agrees, noting that one thing that helped during his selling process was that the financials were in great shape, thanks to then-chief financial officer Cherie DeVore. He advises timely documentation of any blips in the financials rather than trying to recall them after the fact.
An important component in the planning process is the quality of the company’s asset base, says Zwierzchowski. He suggests disposing or selling non-core assets or those no longer contributing to revenues/profitability (like the tent that hasn’t been rented in years because it needs repairs and so on, he says) to make the transition easier for a potential buyer. Another is the facility’s presentation.
“Just like when selling a home, you would clean up your house, cut the grass, organize the clutter, it’s the same when selling a business,” he explains. “Organizing the warehouse, painting the chipped wall—general cleanup is very important so that the potential buyer doesn’t have to see through the clutter but can focus on the positives of the business.”
During and after
Even though retirement is the objective, it might not happen immediately. Owners may need to decide how long they want to remain in the business after its sale, exploring their interest in any post-sale employment or consulting. This could also become a condition for the sale.
“Most owners are very interested in making sure their business is a success after they leave and will do what it takes to make this happen,” says Zwierzchowski. “In addition, most buyers, along with financing sources, like to see owners involved in some sort of transition plan. The factors that dictate the length of time requested include the current management in place under the seller (is there a second-in-command), the experience of the buyer, the type of buyer, the complexity of the operation, the current systems in place and so on.”
For example, after the purchase by Sunbelt, Smith ran the day-to-day operations at the Memphis and Houston locations for about a year to assist in the transition. But now he works strictly on an as-needed basis. As mentioned, Sensenig plans for a gradual departure, allowing him to “make changes without making waves.”
During the sales process, it’s essential to keep the attention on the business, says Zwierzchowski, adding that not doing so is one of the most common mistake owners make.
“We tell owners we work with to focus on continuing to run the business and drive revenue, profitability and customer satisfaction and let us focus on selling the business,” he says. “By not focusing on running the business, results suffer and potential buyers do not see its true value.”
They should also continue to invest as if they were still going to own and run the company, since failing to do so will negatively affect valuation, Zwierzchowski adds. Also, they should expect the selling process to take anywhere from nine to 12 months, but possibly longer.
“The size and complexity of the business, the structure of the selling entity, the type of buyer can all factor into the time it takes to close a business,” he says. “In addition, with the current borrowing environment, the loan processing time has been taking longer than historically, adding to the transaction time.
“Buyers will spend time looking at the seasonality of the business to understand any ups and downs,” he continues. “Many times, for smaller businesses, potential buyers are looking to close a transaction as the business enters into its busy season.”
Pamela Mills-Senn is a freelance writer based in Seal Beach, Calif.
SIDEBAR: Assessing value
Although the process around selling a business can vary depending on the entities involved, the approach Kevin Zwierzchowski, owner of Z Rental Consulting (ZRC) in Novi, Mich., takes provides an idea of what sellers might, or should, expect.
“The initial conversations and meetings with owners are built around learning and understanding the business and the current state of operations, understanding the owner’s goals for a potential transaction and agreeing upon an anticipated value for the business,” he explains, adding that when assessing valuation, they look at 10 factors. Some of these are:
The revenue base
“Different levels of revenue drive different expected values and also different buyers, thus affecting value,” says Zwierzchowski.
For example, businesses with revenue below $3 million tend to attract entrepreneurs and strategic buyers but aren’t likely to appeal to a financial buyer, he says. But smaller buyers like family offices, as well as entrepreneurs and strategic buyers, may bite on businesses that have revenues of $3-to-$5 million. Businesses with more than $10 million in revenue will get the attention of strategic and financial buyers.
“We like to compare profitability (adjusted earnings before interest, taxes, depreciation and amortization or EBITDA), both dollars and percentages, to other clients we have worked with along with industry standards,” Zwierzchowski explains.
Financial performance trending
Potential buyers want to see revenues and profitability trending up, with any dips explained; for example, because of COVID. Zwierzchowski says they also look at trending for the current year—why he advises sellers to stay focused on running the business while undergoing the sales process.
ZRC collects information on the entirety of the rental assets, including the make, model and age of rental fleet and the original equipment cost (OEC). The return on investment generated for the previous three years is also examined and compared to industry standards and equipment mix.
The company also explores strategic, niche, geographic and infrastructure factors along with looking at industry multiple comparisons and performing a buyer return analysis. Once understanding and agreement has been reached on all the factors, the sales process can begin, says Zwierzchowski.
SIDEBAR: Enhancing the appeal
A situation common to many small business owners is that they tend to resist delegating to others. It’s a reluctance that can prove disastrous if something unexpected happens that either temporarily or permanently takes the owner away from the company. This is why succession planning—designating a person or persons to take over in the owner’s absence and establishing a chain of command—is essential. Ditto the ongoing training and information-sharing necessary to ensure business continuity.
Such a strategy can also make a business more appealing to potential buyers, says Kevin Zwierzchowski, owner of Z Rental Consulting (ZRC) in Novi, Mich. This is why he advises establishing a “second-in-command,” someone who can step in and take over the business for the owner if/when necessary.
“In a number of cases, the majority of the business can revolve around the current owner,” he explains. “He/she has all the customer contacts, all the vendor contacts, makes all the hiring/buying and other decisions for the business, not delegating authority to someone else on the team. Depending on the future buyer, this will have a negative effect on the sales potential of the business.”
By designating a second-in-command, the owner stands to increase the number of interested buyers and will also help ensure the business runs more smoothly during the sales process, Zwierzchowski says.