The Basics of Buying and Selling a Septic or Sewer Business

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March 3, 2011 seminar presented by Jeff Bruss of COLE Publishing Inc at the Pumper & Cleaner Environmental Expo on buying and selling businesses in the wastewater industry.

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  • We had three businesses sell this year. We had more than 20 listed at one time or another. 2 of the 3 sales were asset sales only, never sold as a business.\n
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  • Every dollar not recorded can be considered $3-$5 lost in a sale price.\n
  • We make a profit of $100,000, but take no pay. The new owner now has $100,000 per year to pay for the business? WRONG! The new owner won’t work for free, nor will they typically want to wait more than 5 years to see a full return on the investment.\n
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  • A 1979 2,000 gallon pump truck has NO value in a sale. A 2003 International or Mack or whatever with a 4,000 gallon tank in great shape might be worth $75,000 full retail, trade-in is probably $60-$65,000, while auction value is probably $50-$55,000. A full 35% less than retail value. Restrooms less than 5 years old are valued at $100-$150 per unit. Restrooms 5-10 years old $50 per unit. Restrooms over 10 years old, no value. Office equipment, no value.\n
  • Contracts can be worth 10-20% of the contracted value in asking price. Customers, especially those that are maintained, are worth anywhere from $1-$3 per name depending one what information you have associated with them and if they are current or not - when you last provided service or business to them.\n
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  • Greater population, generally speaking, means greater value. Geography - living where other people want to live, provides greater value. Distance between routes, number of routes performed per day, week, month can add value.\n
  • 20 year plus businesses are worth far more than those less than 5, even 10 years old. The most difficult business to sell is one with less than 5 years of history. Unless numbers and growth are truly significant.\n
  • Seller’s discretionary income usually 5x, EBITDA usually 2.5 times. Note EXPERIENCED buyer.\n
  • Example one (Best Case), everything is perfect, highest possible appraised price (showing $250,000 25% in gross profit), Middle - 20% profit, Lower - 15% profit, Worst - 10% profit. Acceptable profit margins can change based on gross revenue numbers.\n
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  • Perfect storm examples.\n
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  • Tax advantages, make more than the sale price through interest, risk is yours. Sometimes it’s the only way if a business is valued at less than a local/personal bank will guarantee - less than $250,000 or less than investment firms will look at $5 million and up. Seller terms are usually 5 years. \n\nOffering seller financing upfront will speed up a sale.\nSeller financing is like a performance bond - it acts as your guarantee that the business can perform to the level of the payments required to pay for it.\nYour performance bond can be personal guarantees against private collateral and assets. This would be executed by buyer and spouse saying if they fail you are entitled to all assets necessary to satisfy the debt.\nStock pledge - buyer forms a corporation and you serve as voting member - replace management if necessary. Understanding this threat is there is usually enough to make sure the buyer is serious about running the business.\nInsure it with insurance - a term policy in the amount of the sale until satisfied.\n\n\n\n
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  • The Basics of Buying and Selling a Septic or Sewer Business

    1. 1. The BasicsOf Buying and Selling aSeptic or Sewer Business
    2. 2. Why?• Know your reason for selling. • Health, retirement, new opportunity, family obligations, etc.• With no valid reason, most often times it’s assumed that you have to sell because you’re in trouble.
    3. 3. It Takes Time• The majority of businesses take more than one year to sell.• You should be thinking of selling long before you make the final decision to do so.
    4. 4. It may never sell?• More than 80% of all businesses that are listed for sale, never sell. • Portions may sell - like assets and real estate, but they won’t sell as a business.• Why? • No barrier to entry (except license), poor record keeping, it’s a dirty job, lack of financing options, price.
    5. 5. Okay, We’re Ready to Sell • Be thinking about selling long before you actually make the decision. • Equipment, paperwork, customer lists, record keeping!
    6. 6. It’s all in the Books• The most important thing you need to do is keep good accounting records. • Every dollar that is spent or earned should be recorded. • Money that is not on the books doesn’t exist in a sale. • Maintain a minimum of three years of P&L statements, balance sheets and/or business tax records. Be prepared to update records on a quarterly basis.
    7. 7. Pay Yourself• Take an owner’s draw, salary, somehow pay yourself.
    8. 8. No Surprises, No Secrets • Be prepared to share corporate and accounting information with potential buyers - the good and bad. • Equipment maintenance records, P&L, balance sheets, income statements, tax returns, licenses, depreciation statements, equipment inventories, bank notes, etc. • Document personal or non-operational expenses that impact the bottom line. • Personal auto, entertainment, owner’s draws/salary, cell phone, home Internet access, etc.
    9. 9. Equipment• Equipment can only be valued to the extent in which it can contribute to future profits.• Equipment that has not been maintained or updated has little or no value in a sale.• Your equipment is not as valuable to the buyer as it is to you - especially in an acquisition to an existing business. • Assets are generally appraised at wholesale/auction value for sale purposes.
    10. 10. Customers• Your customer list is potentially your greatest asset.• Maintain it. On a computer. Preferably one from this decade.• Contract as many customers as possible.
    11. 11. So, what’s it worth?• Every business is different, and pricing involves many factors. • Geography, Longevity, Revenue, Expenses, Profitability, Equipment, Customers, Contracts, Urgency to Sell
    12. 12. Geography• Where you are located can add or subtract value • Region, state, city • Texas, Florida, Michigan, California
    13. 13. Longevity• Businesses with greater tenure/history are worth more than start-ups.
    14. 14. The Magic Formula• Wholesale Value of Assets + 15-50% percent of gross revenue = value • Very similar to EBITDA, SDI valuations • Priced to provide a 35%-45% ROI for buyers based on 25% down • Minimum ROI an “experienced” buyer is going to want to see would be in the 25% range
    15. 15. ExampleEquipment (wholesale/auction) $200,000 Annual Gross Revenue $1,000,000 Best Case (50%) $500,000 Middle Case (40%) $400,000 Lower Case (25%) $250,000 Worst Case (15%) $150,000 Basket Case (0%) $0Best - $200,000 + $500,000 = $700,000
    16. 16. $700,000 Valuation• If asking $700,000 and assuming profit of $250,000 (25% of gross)• $175,000 down payment (25%) = $525,000 remaining principle• Setting aside a manager/owner salary of $40,000 leaves $210,000 to go toward paying off the note• $525,000 @ 5% for 5 years = $120,000 per year in payments, leaving a $70,000 profit.
    17. 17. The R.O.I.• ROI = Profit/Investment * (100) • Calculating ROI on your cash investment (the down payment)• $70,000 (profit)• Investment = $175,000 (down payment)• ($70,000/$175,000) = 40% ROI - Excellent buyer return, should have excellent buyer interest. Priced correctly.
    18. 18. $600,000 Valuation• If asking $600,000 and assuming profit of $200,000 (20% of gross)• $150,000 down payment (25%) = $450,000 remaining principle• Setting aside a manager/owner salary of $40,000 leaves $160,000 to go toward paying off the note• $450,000 @ 5% for 5 years = $102,000 per year in payments, leaving a $58,000 profit.
    19. 19. The R.O.I.• ROI = Profit/Investment * (100) • Calculating ROI on your cash investment• $58,000 (profit)• Investment = $150,000 (down payment)• ($58,000/$150,000,000) = 39% ROI - Excellent buyer return, should have very good buyer interest. Priced correctly.
    20. 20. $450,000 Valuation• If asking $450,000 and assuming profit of $150,000 (15% of gross)• $112,500 down payment (25%) = $337,500 remaining principle• Setting aside a manager/owner salary of $40,000 leaves $110,000 to go toward paying off the note• $337,500 @ 5% for 5 years = $77,000 per year in payments, leaving a $42,000 profit.
    21. 21. The R.O.I.• ROI = Profit/Investment * (100) • Calculating ROI on your cash investment• $42,000 (profit)• Investment = $112,500 (down payment)• ($42,000/$112,500,000) = 37% ROI - Excellent buyer return, should have very good buyer interest. Priced correctly.
    22. 22. $350,000 Valuation• If asking $350,000 and assuming profit of $100,000 (10% of gross)• $87,500 down payment (25%) = $262,500 remaining principle• Setting aside a manager/owner salary of $40,000 leaves $60,000 to go toward paying off the note• $262,500 @ 5% for 5 years = $60,000 per year in payments, leaving $0 profit.• In other words - You just bought a $40,000/year job, not a business. But...
    23. 23. In 5 Years...• You’ll be making $100,000 annually.
    24. 24. No More Money• Obtaining financing is nearly impossible.• Be prepared to owner finance.
    25. 25. The Buyer• Inexperienced buyers will pay more than experienced buyers. • This goes for both buying experience and industry experience.
    26. 26. Three Wise Men or Women • You will most likely require three professionals to assist during the sale. • Accountant - Broker - Attorney
    27. 27. Accountant• Understand the tax implications in advance of selling - both personal and professional.• Prepare necessary paperwork and reports.
    28. 28. Broker• Less than 5% of people who inquire on a business will develop into a serious buyer. Are you prepared to deal with the other 95%?• Is confidentiality important? NDA• Can you determine the difference between a qualified buyer and non-qualified? Serious or tire- kicker? Do you have the time?
    29. 29. Attorney• When an agreement is reached, there will be paperwork. • Letter of Interest • Offer to Purchase • Non-Compete Agreement
    30. 30. Don’t Sell Your Job• Your business needs to make enough profit to pay for itself upon a sale AND create a salary for the buyer or a manager• If it can’t, you’re not selling a business, you’re only selling your your job.• Most buyers aren’t looking to purchase a job.
    31. 31. Contact Information• Jeff Bruss COLE Publishing, Inc./B2 Business Brokers 800-994-7990 jeffb@colepublishing.com

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