Articles & Insights

By Ryan Wood – Mr. Wood is the founder of Halcyon Advisory Partners, a boutique M&A advisory firm with a specific focus on facility services. Halcyon currently advises The Facilities Group, a portfolio company of Revolent Capital Solutions. Mr. Wood previously advised one of North America’s largest privately-owned facility services providers. 

As a private business owner, whether your company does $10mm or $100mm of revenue, at some point you will likely, at the very least, think about selling your business. Many will even have a discussion about it with potential buyers, and, of course, some actually make the decision to sell their company. 

With many years advising mergers and acquisitions (M&A) in the facility services space and being in my second decade in transaction-focused finance, I wanted to address the three most important foundational elements that will best position you, the private business owner, for a successful transaction. 

I’ll keep these thoughts high level and go more granular in future articles. So without further ado, these are the top three things to consider once you’ve decided to sell your business in order to be as successful as possible, in chronological order: 

1. As an owner, understand your company, inside AND out– Many owners know how to run their company, but they don’t know how that translates to the financial statements and qualitative questions that buyers will have. Furthermore, many owners run personal expenses through their company, or structure expenses and depreciation schedules in a way to minimize taxable income. Once it’s time to start thinking about a sale, it’s also time to clean all of these items up so that they are understood and can be coherently classified (with supporting information) when a buyer starts to dig into the business. 

Some owners actually already do this, but far fewer I’ve observed know their business from the outside. This goes hand-in-hand with #3 but think of this as the macro understanding versus the micro. 

A company that does $30mm in revenue with above-average margins, has very attractive end-markets (industries), and low customer-concentration is, all things being equal, much more compelling for potential buyers than a company that does $100mm in revenue with tight margins (both Gross and/or Net), less desirable end-markets, and high customer concentration. 

Why is that? Because most buyers of scaled companies have a certain degree of sophistication, and understand that with diversification usually comes lower risk (hence the focus on customer concentration); higher margins mean more room for error (you can’t ever learn everything about a company you’re buying, so knowing that there could be certain idiosyncrasies that create downward pressure on margins after the transaction, having some cushion makes buyers more comfortable); and seeing customers in industries that are growing (tech/distribution/healthcare) rather than industries that are contracting or stagnating, provides them better growth prospects once they bring your company into the fold. 

To summarize, some of the concepts you should be able to speak in depth about and optimize before a sale (this will be expanded upon in subsequent articles) are:

- Gross and Net margins

- EBITDA

- Significant fluctuations in your financial statements

- Management team dynamics, structure, and qualifications

- Revenue and customer profiles

- Organization operational structure

2. Bringing on support to increase bandwidth and deal-making experience – Once you’ve decided to sell and you’ve done some initial legwork to prepare the business, it’s time to talk with an expert to move to the next level. Many owners originally think they can get through a deal with their own staff or even just doing it themselves. This is an absolute rarity, and I’ll give you a few reasons why: 

1. Running a business is time consuming, selling it is exponentially more time consuming. Diligence requests usually contain HUNDREDS of requests for information, and many businesses, especially smaller ones, don’t have systems in place to provide the detailed breakouts of whatever is requested, especially in a timely fashion. 

2. It is never a certainty that a deal will get across the finish line, so having employees working on the deal will cause disruption to the business. First, you’re taking them away from what they were hired to do, and that is run the business. You likely didn’t hire these people to sell the business, and therefore shouldn’t expect them to be able to. Second, if the deal doesn’t get done, it could affect morale. Employees potentially wonder why the business didn’t sell, is there a problem? Should they start looking at other opportunities?

For reference, of all the deals I’ve seen done, less than 10% have been successful without some type of outside support, whether that be a banker, consultant, broker, or something similar. Eric Luke, current president of the BSCAI and previous owner of Varsity Facility Services stated “For most owners of Building Service Companies, starting and then selling a company is usually a one time occurrence. I learned from my own experience, that having an experienced advisor to assist me was absolutely critical. The process was simply more complex and time consuming than I anticipated. Having my advisor assist me, meant millions of dollars in final valuation. Despite having one of the largest firms in the country, I simply needed advice from somebody who had done multiple deals to counsel me.”

Additionally, and this is a segue into the final point, usually these third-parties tasked with supporting the transaction can often provide material insights into the market, ranging from general knowledge to industry-specific, high-level expertise. Moreover, an advisor’s job is to also know the financials inside and out, and to be able to prepare the company to be viewed through the lenses of sophisticated private equity investors or sponsored strategic investors, which is a much deeper dive into the finance world than most facility service company owners are ready for. 

3. Know the market – For many owners in the facility services industry who may have started out as a janitor, plumber, HVAC tech, etc., talking about adjusted EBITDA, multiples, earn-outs, equity rolls, escrows, reps and warranties, clawback provisions, and a myriad of other items, may as well be a foreign language. And rightfully so, owners are focused on running their business, not necessarily selling it. Furthermore, having any idea of what Company A sold for in terms of valuation and why, is rarely known or understood by most owners. Usually, these are private transactions where very few deal specifics are shared with the general public. 

Your value expectations, or what you should expect your company to actually fetch in the market, should be formed by speaking with advisors who represent buyers and conversely advisors who represent sellers (be very cautious when working with a firm who does both in the same industry, as conflict of interest is a slippery slope).  Another useful source of information will be third-party consultants/accountants/lawyers/etc. who support the transactions and have no “skin in the game” can provide objective information on relevant transaction comps. 

Certain examples of situations greatly affecting sale dynamics you can expect: 

Has your revenue doubled year-over-year? Expect less cash up front and a larger earn out. 

Want to continue building the business and take some chips off the table? Sell to a buyer who allows you to roll equity. This not only allows you a “second bite at the apple”, but better aligns buyer and seller interests than full buyouts where many buyers will try to not pay the earn out. If you’ve been around the industry long enough, I’m sure you’ve heard the horror stories. 

There are many more concepts like this, which we’ll look to address in-depth in subsequent articles. 

In conclusion and as stated above, for many, building and selling a business is a one-time event in their lives. These three major concepts will undoubtedly help you move towards a successful transaction at the highest valuation, and hopefully in the smoothest way possible.