Thinking About Selling Your Business? Know Your Options!

By Victor S. Parra, Contributor

Victor S. Parra

Not too long ago I read an interesting article in the Wall Street Journal (WSJ) about selling a small company. The article was entitled, “Who will inherit the family business? Often, it’s Private Equity.” Needless to say, the article jumped right out at me. I suspect the issues these families had to address are similar to some you may be facing right now. What particularly grabbed my attention was the finding that “private-equity firms are joining America’s family business. The industry that made its name taking private big corporations has shifted its focus to smaller targets…some of which have been family-owned for several generations.” Sound like our industry, the private bus business?

Before getting too far into this, let’s begin with the first step. You’ve decided you want to sell the company business. You’ve reached agreement among all the family members who have a financial stake in the business. Getting to this point is not easy, but you’ve done your homework. You’ve hired an investment banking firm that knows this industry to do an Opinion Of Value (OOV) of your business.  An OOV is a comprehensive review of your business that tells the sellers what the business is worth in the open market. THIS IS NOT THE ASKING PRICE. It is prepared solely for the seller and not divulged to any prospective buyers. But it is an important first step. It sets the seller’s expectations about how much they will receive at closing.

Now you may be asking yourself, “Why do I need to hire an investment bank?”

For several reasons. First, investment banks are registered with FINRA, the Financial Industry Regulatory Authority — a government authorized organization that oversees U.S broker dealers — and the U.S. Securities and Exchange Commission (SEC). As an FINRA/SEC registered institution, investment banks must adhere to rigorous regulations designed to protect the client, you! In fact, once retained all telephone conversations between you and the investment bank are recorded and turned over to the SEC to ensure the investment bank didn’t run afoul of these regulations, didn’t over promise or provide you with wrong information about what takes place during the sales process. As the client, you are protected!

Second, investment banks are so tightly regulated that financial institutions such as private equity groups and other financial investors are more willing to work with them, thus providing access to a range of financial resources to support the sale of your company. More importantly though, knowing how tightly regulated investment banks are builds the seller’s confidence and trust knowing the FINRA/SEC is watching… and listening! (As a side note, I sometimes wonder what it would be like to be the person(s) who listens to these mostly dry, straightforward conversations, hour after hour after hour. Suspect these folks drink lots of coffee and probably own stock in Starbucks…)

Now let’s talk about the options you might consider in selling your family business. This process can be difficult and emotionally gut wrenching, particularly if the family business goes back several generations and is well respected in the community. Do you let go of the family name on the side of the bus? Does the new acquirer value your brand as you do? Is this the legacy you want to leave behind for the business your grandfather built? Additionally, do members of the family working in the business want to stay on?

If these issues are important to you, then they need to be sorted out at this point. They will help you decide which option you should consider.

Speaking of options, let’s get right into the heart of the matter. Since we’ve already brought up financial investors, i.e., private equity groups (PEGs), let’s begin with this option.

First, many think when they hear private equity that it’s all about slash and burn. Their only interest is to break up the company and sell off the pieces to make a profit from the deal. That is NOT the case.

PEGs are obligated to their clients, whose interest is getting a better return by investing in solidly performing businesses than putting their money into the stock market. As a result, PEGs value you and your management team, primarily because most PEGs know nothing about how to run a bus company. As the article I referenced earlier notes, “management is often left intact…buyout firms pledge to retain employees and plow more money into the business.” Some will even put your management team under contract to ensure they stay with the company. This could also hold true for the family members who play important roles and want to continue working in the business.

After the acquisition is completed, PEGs will then rely on your team to continue running the business, and, at the same time, to identify opportunities for growth. These may include adding equipment, pursuing larger and more profitable contracts, going into new customer markets, buying competing bus companies and other strategies.

To this end, PEGs may also ask owners/management team to stay on to help grow the business, allowing them to retain equity stake in the business, say 10-20%. By doing so, the value of the owner’s share will increase as the business grows. In the example cited in the WSJ article, “…the family earned a whopping eight times their money based on the value of their stakes when the private equity firm invested.”

Lastly, because PEGs are incentivized to increase the value of your business, we’ve often found – and the WSJ article confirms – PEGS will often pay more for your business than a strategic buyer, another bus company.

Now, I know what you’re thinking. The only real option is to sell to a private equity group. Not true! Other bus companies bring a great deal to the table as well. Let’s discuss them.

First, now that COVID is largely behind us, many bus companies are financially stronger and seem to have a lot of cash on hand. And since the market has contracted, the number of FMCSA-registered private bus companies has been reduced by more than 50%, 3,100 pre-COVID to approximately 1,400 now. That means there are fewer bus companies to serve the same market, thus driving up prices and profits. The supply/demand equation is working for our industry. Hopefully you too have found this to be the case.

Strategic buyers also bring management expertise and customer and marketplace knowledge to the table that PEGs don’t have. Thus, the transition is often smooth as the acquiring bus company can bring in their management team to take over the business entirely. And if the owner and family want to retire and leave the business completely, then selling to another bus company is usually the best way to go.

Lastly, valuations matter less to the acquiring bus company than to a PEG. To attract investment from a private equity group will require at least $3-$5 million in EBITDA (Earnings before interest, taxes and depreciation) before they (might) consider purchasing your business. For some that could be too high a threshold. Plus, PEGs are not interested in your real estate. Instead, they will lease your garage, your yard and other real estate back to you. Lastly, while this may seem obvious, it’s important to point out that most buyers — PEGs, other financial investors, as well as other bus companies — DO NOT BUY YOUR DEBT. All your outstanding debt must be satisfied either before or at the time of sale.

This is a lot to digest, I know. I’d be happy to discuss the selling of your business, get into more detail about each step in the process and/or answer any questions you may have. Please feel free to reach out to me at vparra@strategic-focus.com.

In the meantime, you have my best wishes for continued success!

Victor S. Parra is a retired President and CEO of the United Motorcoach Association (UMA) and currently is Managing Director of Strategic-Focus Advisors, LLC, a consulting firm that works with Corporate Finance Associates (CFA) — a 60+ year old investment bank, providing M&A guidance in the transportation space. Concentration is in the middle market.