National Clothesline

Have you thought about selling your business? If you have, there are things you can do to increase the value of your company. With the proper preparation, you might receive more money for your company than you expected.

Before you think of selling, sit down and determine if you can afford to deprive yourself of the money-making machine that you own.

Take it from me; it can be a very frightening situation. Giving up the weekly paycheck and the fringe benefits that go along with ownership is a life-changing event.

Winston Churchill said, “Some regard private enterprise as if it were a predatory tiger to be shot. Others look upon it as a cow that they can milk. Only a handful see it for what it really is — the strong horse that pulls the whole cart.”

Are you ready to give up your horse?

You make your decision and you are ready to move on with your life and sell the horse. What do you do next?

First, if you are keeping two sets of books, get rid of the second set. The buyer might need to get a loan based on what your sales are or have been. Declaring too little income could keep the potential buyer from borrowing sufficient funds to close the deal.

If your sales are in the multi-millions, chances are you are declaring everything. Your company might be the target for one of the companies that is looking to acquire a number of high volume drycleaners and subsequently do an IPO.

Watch the headlines for US Dry Cleaning Corporation. US Dry Cleaning is a new company that hired Deborah Rechnitz away from ownership of Methods for Management. Because US Dry Cleaning is a public company, you can get all their corporate information on the internet.

The filings with the S.E.C. make for interesting reading. US Dry Cleaning currently owns three companies, one in Hawaii and two in California. Their acquisitions have all been central plants with dry stores.

In addition to US Dry Cleaning, Zoots and Men’s Wearhouse are rumored to be looking to expand nationwide.

How are these major organizations going to measure the value of your company? Will they use a ten to 12 multiple of monthly gross sales or a four to six multiple of your net profit? Perhaps the buyer will use a combination of both measurements.

Will that methodology work for you? Can you accept 65 percent or 75 percent cash and the balance in stock to replace the horse you are selling? If you are a “C” corporation, will they buy the stock or just the assets?

Speaking of corporations, is your business a “C” corporation, an “S” corporation or some other kind of business entity?

If your company is a “C” corporation, you will have a major tax problem. If you find someone who is willing to buy the “C” corporation’s stock, and not the assets, you could reduce the selling price to reflect your tax savings.

It takes 10 years to switch from a “C” to an “S” corporation. Do you want to wait 10 years to sell?

Most importantly, find the business broker who sells the largest number of drycleaning plants in your city. That broker who sells the most locations knows the largest number of potential buyers with the greatest amount of financial resources.

Prior to signing a listing agreement, find a good business and tax attorney to help you with negotiations and any potential IRS problems.

The buyer might want you to finance his purchase. A friend of mine did that and the buyer eventually declared bankruptcy. My friend, who sold his plant, and retired, is no longer retired. If you finance the sale, demand the same kind of security a bank requires.

The first thing a buyer will look at is your sales volume and the overall profitability of your company. How profitable is your organization?

Ask your CPA about EBITDA. You need to know what sophisticated buyers are looking at.

Perhaps all the buyer is interested in is your sales. The buyer may feel that he or she can do a better job than you do, and make more money than you have been making. Thus, your profitability may not mean as much to that individual.

The buyer will want to look at your leases, how much time is left on those leases, what your rents are, and any other costs. A buyer who is sincere will read those leases and go over them with a fine-toothed comb.

Your store location or locations are extremely important. How is their appearance? Does your signage stand out from the crowd?

Can you drive by your plant and be proud of the location?

Can you walk up to it, look in the window and feel good that you run a neat, clean business that would be desirable to both the consumer and the potential buyer.

Are you fully computerized? Do you still write tickets by hand? Are you using the old file card system for order location?

A good computer system, as I have continuously pointed out, is imperative in the profitable operation of your business.

What is your price level? Are you doing 99-cent laundered shirts or $3.50 shirts? How high are your drycleaning prices? Are you charging $3.50 or $7.50 for a pair of pants?

Your sales and production staff is very important to the potential buyer. That buyer might secret-shop your plant. It is a fast and easy way to determine the quality of your service and the quality of the work you produce.

How experienced are your employees? Are they minimum-wage workers or old timers who might be slightly over paid due to their length of service with your company? What is employee turnover like?

The age and condition of your plant equipment and delivery vehicles will be scrutinized. Are you a perc operation? Will your perc machine need to be replaced?

Do you have environmental issues? How many spills have occurred that you do not know about?

Will the buyer or the buyer’s finance company want a Phase 1 or Phase 2 test?

How is the competition in your neighborhood? Is there a cleaner on every corner? Does that cleaner on the next corner know what he is doing? Have you secret shopped your competition?

After you have answered these questions, you will be better prepared to face the onslaught of buyers. The buyers will ask the craziest questions, so get ready.

Be prepared for your employees to question why strangers are visiting your plant. If you have a seven-day operation, it will be difficult to hide the potential buyers unless they visit after closing.

Working with your accountant is of paramount importance. You know what your salary is, but you will need to know the offset of your salary. Salary offset is the amount of money it would cost the company to replace you with an employee. Payroll taxes, interest expense and depreciation are valuable numbers.

Itemize everything that the business pays for that is personal in nature. You might be surprised as to what that total comes to.

If you have been paying cash, you will now be writing checks for those items, assuming your CPA allows you. Start with insurance, gas and other expenses for your cars, lunch, travel, cell phones, and the free cleaning and other services you get. It will be your accountant ’s job to help provide that information.

Now total all the one-time expenses you have had over the last three years. Painting the buildings, designing a new logo, or paying off a lawsuit are all non-reoccurring expenses that can be added back to increase the value of your company.

All of that information, and more, should be put into a presentation folder by your business broker. The broker is going to get a percentage of the selling price, so be certain your broker earns that commission.