• Fred Silberstein

My Business Isn't for Sale … or Is It?

You should talk with M&A specialists about offers to buy your business, even if you don’t think you want to sell it yet.

Key Takeaways:

  • Businesses are getting a lot of offers to sell this year

  • Even if a business owner isn't planning to sell, they should consult with a specialist to understand how these deals work and the real value being offered

  • Not all business sales are walkaway deals

  • Business owners often stay abroad and receive a payout to work with the private equity partners who bought their business

  • Business owners get that money back plus potential profits when the equity partner exits

  • Business owners should consult with an M&A company before accepting or rejecting offers

Right now, businesses are getting a lot of offers to sell, and this is especially true for HVAC, plumbing, and other companies in the recession-proof home improvement and maintenance sphere. However, there is a lot of competition in the mergers and acquisitions space, and businesses need to be careful before accepting or declining an offer.


Many business owners think their business isn't for sale, and they turn down offers without even considering them. This is a mistake, and it happens because too many business owners don't understand how these transactions can work. In other cases, business owners jump on deals because they're excited about the number they see, but ultimately, they could have gotten more in the sale.


This guide explains what business owners need to know about how mergers and acquisitions work, and it provides a few tips on how to avoid selling your business for less than its worth.


Not all deals are walkaways

When most people think about selling their business, they imagine receiving a check from a buyer and walking away from the business. This isn't the reality of mergers and acquisitions, however. Not all deals are walkaways. In a lot of cases, you end up in business with the buyer.


When a private equity firm buys your business, they partner with you. Their leadership and expertise help you grow your business, but at the same time, you also get a slice of the equity firm. As a result, you can't just focus on the number. You also need to think about what the whole offer entails.


Some of the sale price can roll into the private equity firm

When a private equity firm buys an HVAC or plumbing company, the owner gets the majority of the sale price, but some of the price gets rolled into the equity firm. For example, if someone agrees to sell their business for $10 million, $1.5 million to $2 million may get rolled into the private equity firm.


Then, when the private equity firm is ready to exit, the business owner gets back what they invested in the private equity firm, which may now be worth several times more. This is the second bite, and many businesses can get a third bite where they roll into another deal.


Changes to the capital gains tax can affect the profitability of deals

Capital gains taxes are expected to increase next year, and by not jumping on opportunities this year, business owners risk losing a lot of capital. With a lot of transactions, while the first $2.5 million may be taxed at their ordinary income tax rate, the remaining amount is likely to face the capital gains rate.


If the rate increases to 40%, the owner pays double in tax and walks away with a lot less. If $7 million is taxed at a capital gains rate of 40%, for example, you pay $2.8 million in taxes, but if you had sold when the rate was just 20%, you would have paid $1.4 in capital gains tax. You have lost $1.4 million just by waiting a year.


Earn-outs are a contingent part of the sale price

Many people end up selling their business for well under its value — accepting 40% or even 60% less than its worth. Others think they're getting a great sale price, but they don't realize that they might not receive the earn-out portion of the deal.

To understand the value of an offer, you need to know what an earn-out is. An earn-out is a conditional consideration, and to get these funds, your business has to meet certain financial benchmarks. This part of the offer isn't guaranteed, it's contingent on performance.


Growth through private equity partnership is typically better than growth through acquisition

Some businesses want to grow by acquiring other entities, and they don't see selling as a strategy for growth. Buying another business is very complicated. You have to consider how you're going to structure the deal and whether or not you have a good cultural fit.

In most cases, once you look at the pros and cons of making an acquisition, you'll find that developing a partnership with a private equity firm is a better deal the vast majority of the time.


Businesses should consult with M&A specialists when they get an offer

To understand the offers they receive, businesses need to work with someone who understands M&A. These specialists can help you understand how private equity firm offers work and what you need to do to receive an earn-out. If you decide to move forward, they can guide you through the logistics of the deal.


For example, an M&A advisor can help with due diligence. While this process used to take nine to 12 months, it now only takes about four to six months. These companies have proprietary processes that can help ensure you have good long- and short-term chemistry with the company offering to buy you, and they can also help you assess the value of your business.


Multiple factors affect the value of a business

Internal factors, such as recurring revenue through service subscriptions, can affect the value of a business. Similarly, if your business can run without you, you can often get a higher price. However, factors such as your location also have an impact. HVAC companies in areas with hot summers or extreme summers and winters, for example, tend to be more valuable than HVAC companies in areas with more moderate climates.

External factors also impact the value of your business. If your business rounds out the portfolio of a private equity firm in a strategic way, that can drive up the price as well. AN M&A specialist can help you understand all these moving parts, so you obtain the best deal possible.


When you contact an M&A specialist, they often look at your earnings before interest, tax, depreciation, and amortization (EBITDA) to help you develop a rough estimate of your business's value. During this process, they can also help you see where you're overspending or underspending. Even if you decide not to sell, you’ll learn more about the process and get some valuable insights into your business.


Contact SF&P Advisors

Right now is a great time to sell for many people in the HVAC and plumbing industry. Even if you don't think your business is for sale, you may want to consider how partnering with a private equity firm can help improve operations and boost profits. To get a no-cost evaluation of your HVAC or plumbing business, contact us at SF&P Advisors today.