National Clothesline

Before I tackle this month’s question, I think it would be appropriate to bring my final two presidential quotes to the table…

As our presidential election is this month, I thought it would be good to quote our two most famous presidents and perhaps lend some advice to our incoming president.

George Washington said, “Associate yourself with men of good quality if you esteem your own reputation; for ’tis better to be alone than in bad company.”

Abraham Lincoln said, “Whatever you are, be a good one.”

Let us all hope our new president is a “good one.”

“I was making a good living, but things have kind of slowed down. I am thinking of selling. What should I do to put my business on the market?”

In the current business climate, it is my opinion that now would not be a good time to sell. It is a buyer’s market for a number of reasons that I will spell out. If you are determined to sell, let us look at what you can do to get the most money you can.

In order to maximize the selling price there are a number of steps that you can take. Due to the current financial situation, with lending institutions being very tight, consider preparing your company financially over the next six to ten months to maximize the selling price.

If you are keeping two sets of books, get rid of the second set. The buyer might need to make 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. Of course, you might get lucky and have a buyer come in with an all cash offer.

Look at your profit and loss statement. What can you cut in the way of expenses? I know of one company that was spending 4 percent per annum of gross sales on marketing. The owner gambled and stopped his marketing for one year prior to listing his business for sale. That 4 percent increased his profits and the selling price went up. I do not recommend this step for everybody. In this economy, that would be a dangerous step. However, you might consider a 50 percent reduction of your current marketing expenditure.

What kind of business entity do you have? The person who asked the above question about selling his business had a sub chapter “S” corporation. If your business is a “C” corporation, you will probably have a major tax problem. It takes 10 years to switch from a “C” to an “S” corporation. Do you want to wait 10 years to sell?

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

Next, find the business broker who sells the largest number of drycleaning plants in your area. The broker who sells the most locations knows the largest number of potential buyers with the greatest amount of financial resources.

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, be certain to get as much information as possible about the buyer. Ask the business broker to get a personal financial statement from the buyer so you will have some idea of the person’s assets.

The first thing a buyer will look at is your sales volume and the overall profitability of your company. Remember what I said about multiple sets of books. A buyer will probably request your company tax return.

Perhaps the buyer is only interested in your sales. How can the buyer believe your sales numbers if you have not declared the income? Can the buyer look at your supply purchases and determine volume from the number of hangers or poly bags that you buy? Could the IRS do the same thing?

A buyer may feel that he or she can do a better job than you do, and make more money than you have been making. Your profitability may not mean as much to that kind of buyer.

On the other hand, the buyer might be very sophisticated and base an offer on a multiple of your profits. The magic number is usually in the range of four to six times net profit, including everything you have run through the business.

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 will read those leases and go over them with a fine-tooth comb. If you are fortunate enough to own the property, you will have a future source of income.

Your store location is extremely important. Parking and visibility are the most important attributes of a location along with the population density and demographics of the area where you are located.

Do you have a sign that can easily be seen and read? Can you walk up to your place of business, 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?

Your employees might be important to the potential buyer. Their experience level could be crucial if the buyer has never been in the drycleaning industry. Be ready to answer any questions that might come up about your staff.

Other things the buyer might look at are the age and condition of your equipment. Are you a perc operation? Will your perc machine need to be replaced? As the potential seller was not in California, perc was not a current issue, but who knows what the future will bring to all the other states?

Finally, the buyer will probably look at the competition in your neighborhood. Is there a cleaner on every corner? Does that cleaner on the next corner know what they are doing?

Get ready to answer questions. Buyers will ask all kinds of crazy questions.

Working with your CPA is of paramount importance. You know what your salary is, but you will need to know the offset of your salary.

If the buyer is going to be active in the business, then payroll offset is of no consequence. 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.