When I entered the restoration industry, how I would exit was one of the furthest thoughts from my mind. With the reality of running a business and dealing with the employee issues; cash flow challenges; ever-changing insurance company programs; satisfying homeowners and business owners and trying to keep my sanity, exiting the business just didn’t get much attention.

The reality is, a successful exit is no different than most other projects you have started and completed: You must have a plan and define a goal to work toward.

When I entered the industry in 1996, consolidation was in its infancy. There were very few buyers, and for those interested in entering the restoration industry the most popular alternative was to buy a franchise.

Between 1999 and 2007, the industry saw dramatic changes. Big money entered the market with the creation of BELFOR USA, financed out of Germany. ServiceMaster expanded its service offerings, C&B Services used a public vehicle to acquire COTTON, and other regional players executed roll-up strategies, some successful and some not.

All of these developments created viable exit opportunities for small-business owners. With the current recession and financial crisis, banks have reduced lending for mergers and acquisitions, especially in the restoration industry where we do not have long-term contracts, own few assets and forecasting long-term financials is difficult.

So what options exist in today’s environment for a successful exit from an insurance restoration company?

No. 1: Management Buyout

Although this may seem like a long shot, many companies have engineered successful management buyouts. These transactions often involve the top managers in a business and typically require the seller to carry between 25 percent to 75 percent of the purchase price as future consideration, such as a seller’s note.

If the new owner is able to secure bank financing for a portion of the sale, any seller note is subordinated to the bank. As a seller, you should be confident in the leadership team that will be running the company upon your exit, as their success will determine the likelihood of the seller note being paid.

No. 2: Private Sale

This is when the seller contracts with a business broker or investment banker (depending on the size of the business) and puts the company up for sale, often as confidentially as possible. For companies with annual revenues under $20 million, a local business broker is most common, while those with revenues greater than $20 million will find local or regional investment banking firms can be engaged to find potential acquirers.

It is very important that you feel comfortable with the person representing you to buyers, communicating your business’s historical performance and successfully describing the possibilities with your business, so check references carefully. Your advisor can assist you in valuation, sometimes listing a specific price and other times going out to market without an asking price, which can work like a private auction.

No. 3: Employee Stock Ownership Plan

An ESOP is structured with your employees owning a sizeable piece of the business, either through acquisition or the granting of shares as compensation. An ESOP is different than a management buyout because it requires participation from a broad set of employees, not just upper-level managers. With employees also owning a piece of the business it can lead to improved results and dedication.

The process of setting up an ESOP is complicated, involving many legal, accounting and tax considerations; your best approach would be to find competent advisors with a history of successfully structured ESOPs to review your options. 

No. 4: Liquidation

Although the term “liquidation” is often considered negative, there are scenarios when it is the best alternative. If your company has tangible assets (dehumidifiers, trucks, vans, air movers, scaffolding, heavy equipment, trailers, etc.) and is considered too small to put up for sale through a business broker, selling your assets through an auction can deliver immediate cash.

Many small companies that don’t have much depth in the organization for succession are good candidates for liquidation. Often, a business considering liquidation can contact competitors directly and get the best purchase price for their assets. With these sales, business owners need to understand all their liabilities, including loans or bank agreements, as well as any other contractual obligations.

No. 5: Merger

The term “merger” is frequently abused, but many sellers like to use it because it sounds bigger and better than an outright sale. The reality is, if there is a merger of any type, one of the organizations is in charge and the other is being taken over.

In this case, a seller should identify a company that is capable to managing the seller’s existing assets, liabilities, and jobs in progress. For jobs in progress, a valuation is often placed on the expected profit and collections of those jobs or, sometimes, this is included in the overall purchase price.

This transaction is typically structured with some cash up front and a payout over time. As you may work with the new owners for some time, make certain the “chemistry” is right. Fit is everything, and the wrong fit can make a few years feel like a lifetime.

Regardless of the structure of the deal, the most talked about element of any contemplated transaction is the valuation “formula.” I know I didn’t understand what a “4x multiple” meant back in 1996. I wasn’t even sure what EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) was, as I was managing my business off the cash flow reports.

Basically, most buyers will look at operating earnings, also known as EBIT, and add back depreciation and amortization to arrive at EBITDA. This basically shows the amount of cash the business generates. Buyers take this number and forecast what EBITDA could be in three to five years.

These forecasts attempt to predict all of the business issues we deal with daily – and while they are educated guesses, they are still guesses. Based on these forecasts, future cash flows will be discounted and a value to the company will be determined. This value will then be divided by the current EBITDA to determine the value, usually expressed as a multiple of EBITDA.

When people quote industry multiples or like-size transaction multiples, they may be directionally correct, but some can be very misleading. I have seen 3x multiples that appear too pricey and 7x multiples that appear fair. It all depends on the business performance, the structure of the deal and the future opportunities.

When you look at selling your company, before a buddy or advisor gets you locked into a multiple, step back and determine what you want from your future, how much money up front you need, who you want to sell to, and what legacy you want to leave behind.

We all spend too many hours building the equity in our companies to not think about the legacy we want to leave. Selling your business may be the exit you want – if so, do some homework to understand the process, carefully decide on the advisors you hire, and understand all your options. You will most likely only exit your business once – finish strong.