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Preparation key to profitable sale / Businesses fetching solid prices now

September 22, 1999

Wednesday, September 22, 1999
By McGregor McCance

INSIDE REPORT

HUNGERFORD MECHANICAL. It’s a name you’ve probably heard if you’ve spent much time in the Richmond area over the years.

The company has been around long enough to see long hair come and go as a style and come back again. During the course of those 42 years, Hungerford Mechanical has kept up with the competition as a family-owned and -operated company.

But no more — at least not the ownership component.

On Jan. 1, 1998, Art Hungerford, son of the company founder, closed a deal to sell the 300-employee firm to Houston-based Group Maintenance America.

It was hardly a “sellout.” Hungerford even thought first about becoming a “consolidator” and buying up other regional firms to duke it out with the big hitters that have perhaps forever altered the face of the mechanical contracting industry in Richmond and Virginia.

“When I saw the market changing I was very concerned,” he recalled. “Everything I owned was Hungerford Mechanical and I personally guaranteed everything.”

Ultimately, though, Art Hungerford decided his research and the advice he received from others left him one solid option: sell the business.

The keys here, advisers and Hungerford agree, are research and preparation.

“Selling a business is a lot different than selling a house,” said David E. Phillips, president of Midlothian-based D.E. Phillips & Associates, a business brokerage. “You can’t just put a sign out front and wait for people to come.”

And you wouldn’t want to if you could. Doing your homework helps ensure that your business will attract qualified prospective buyers who will pay what your company is worth, maybe even more.

“Preparation is the key to value,” Phillips said.

While the market for business purchases

changes all the time, it’s generally agreed that the conditions are considered strong right now — even a seller’s market.

Banks are financing deals. Valuations of businesses are relatively solid. And well-managed firms in any number of industries are currently able to enjoy the anonymous competition that multiple suitors bring.

Business owners, like Hungerford, may initially try to explore the possibility of a sale themselves. But it can be taxing, considering most already are devoting much time to running their businesses.

“I found out very quickly that it was an area I knew very little about,” Hungerford admitted.

So he hired an investment banking firm — Dominion Partners L.C. in this case — to essentially explore the market, line up possible buyers, assign a reasonable valuation to his company and get all the associated paperwork in order.

“It didn’t take long for me, maybe six months of thinking about my options personally, before deciding to go out and get some help. In retrospect, I think it turned out to be the best decision I could make, besides getting an attorney,” Hungerford said.

A surging market

Those involved in researching and striking deals say the market has been surging for at least a couple of years, and many expect the trend to continue.

A simple explanation is that the economy’s strength has produced an abundance of companies and investors who are interested in buying others. And this demand creates competition that benefits firms looking to sell.

“It’s a very active market. There are lots of buyers out there,” said Chris Williams, a partner with the Richmond-based investment banking firm Harris Williams & Co. “It is very feasible to develop several alternatives.”

That was the case with Hungerford Mechanical.

A dozen potential buyers expressed an interest in the company. With the help of Dominion Partners, the list was pared to a few whom Hungerford actually interviewed. (Much of the early exploration in

such deals is done with the potential buyer not knowing the name of the seller.)

“A lot of them we discounted immediately,” Hungerford said.

Ultimately, the decision hinged not so much on money, but on whether the buyer would provide a good fit for Hungerford Mechanical from a corporate culture standpoint. Bankers and brokers say that’s the point when a sale has been conducted successfully — when the monetary value can take a back seat to intangibles such as personality.

Hungerford said he was satisfied that Group Maintenance America — GroupMAC as it’s known — would provide a good fit and have the interests of his employees at heart. The business will continue to carry the Hungerford name.

Art Hungerford said he would recommend anyone interested in selling a business to stay patient. He added that he found working with a local firm helpful during the sales process.

“It’s a big move for someone who owns a business to make that bold of a move,” he said. “You have a lot of stupid questions, a lot of anxiety. It’s nice to be able to hop in your car, drive five minutes and sit face to face with your consultants.”

Turning thoughts into action

Depending on the size of a potential sale, different approaches often are used in actually carrying a deal through. For example, deals worth fewer than $5 million have different considerations and potential pitfalls than those worth between $5 million and $50 million, and so on.

But overall, advisers agree, if you are considering selling your business, no matter its size, you should realize some things beforehand:

Complete, accurate financial records of at least three to five years are a necessity.

Documentation showing SCC compliance and payment of taxes is needed.

A management foundation typically is required.

A consolidator generally is interested in retaining the management at least for a couple of years at a company, or having a well-defined management succession plan in place.

That third point reveals another truth about many buyouts: the selling owner isn’t going to have the option in most instances to simply sell and walk away.

“They need to psychologically prepare that it’s not a brief process,” Williams said.

Frederick Naschold, a principal with Dominion Partners, said business owners need to consider timing — not only concerning the economy, but concerning the strength of the individual company.

To get the best value for the company and attract multiple potential buyers, a business owner interested in selling is best served when times at his or her company are profitable.

“You don’t want to wait too late or be motivated by the wrong factors,” Naschold said.

Once the decision is made to pursue a sell, the owner can try to do it alone or hire someone to help.

Advice and assistance

Naturally, investment banking firms say they can provide the kind of expertise and research that will allow for the most successful negotiations. Just as important, they say, their services allow the business owner to continue operating the business without significant distractions that can affect the bottom line.

“You’re not prepared for this,” Phillips said. “There’s really nothing you do in running a business that prepares you for a transfer.”

The two primary functions the banker or broker provide revolve around assigning a valuation to the business and lining up and processing potential buyers.

“We find if people do it themselves they may leave a lot of money on the table,” said Charles P. Moncure Jr., a principal at Dominion Partners.

“Or alternatively,” Naschold added, “they may have unrealistically high expectations.”

But current conditions do lend to expectations that can be high and still realistic.

“It is amazing the variability of pricing that you will have on a company you take to market,” said Williams of Harris Williams & Co. “Typically the high offer will be anywhere from two to two-and-a-half times the low offer.”

Jeff Moore, president of Richmond-based Matrix Capital Markets Group, a national merger and acquisition advisory firm, said owners should be cautious about the first offer that comes across the desk, particularly if it is a direct offer that has not been reviewed or researched by an adviser.

“The problem is, without alternatives and without information it’s very difficult to gauge whether that’s the best offer for you or not. Money is not the only factor,” he said.

When it comes to selecting an advisory firm, Hungerford’s example is considered a solid approach.

He interviewed several firms in person before making his final selection. Hungerford said for his situation the right firm was local, familiar with the market involving mechanical contracting consolidation, and a small shop in which he could work directly with its principals.

Just as other companies will hopefully line up to buy your business, the advising firms may line up to help you through the process.

Determine if they have successfully and recently negotiated a transaction in your industry.

Ask for references. And then ask the references how the firm handled their transactions.

Review the values on businesses that the firms have achieved and compare them to industry averages.

Don’t hesitate to be direct with the firms that want to serve as your adviser.

“It’s not inappropriate to ask the hard questions,” Moore said.

And while a firm will offer recommendations at virtually every step of the process, the business owner has the final word on which buyer has the right price and fit. It’s the owner’s call: Should I sell my business, and should I sell it to Company A or Investor B?

“Finding that partner is a challenge in any deal,” Williams said. “In the end, the decision is up to the seller.”

RICHMOND TIMES-DISPATCH
Copyright (c) 1999, Richmond Newspapers, Inc.


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