September/October 2008
The recent bull market for scrap has recycling owners wondering whether it's time to sell. Before you put your business on the market, however, be sure you can answer these nine questions.
By Jim Fowler
The decision to sell a business is not one most scrap company owners make lightly, and for good reason. These company histories often follow a Horatio Alger-like trajectory: a poor immigrant's arrival in the United States a century ago; his beginnings collecting scrap door to door; the purchase of the first collection truck, scrapyard, and processing equipment; and the gradual handing over of the business to children, grandchildren, and great-grandchildren. For these owners, scrap is in their blood.
Despite such strong emotional ties, the wave of mergers and acquisitions washing over the industry is hard to ignore. There were two sizeable mergers in 2004, three in 2005, seven in 2006, 22 in 2007, and 13 in the first three months of 2008, according to research Vincent Pappalardo of Dresner Partners (Chicago) presented at the ReMA convention in April. As scrap commodities attract the best prices and demand they've seen in decades, company owners are entertaining acquisition offers from scrap consumers and scrap processors bent on expansion.
Those who have successfully sold a business warn the process is neither quick nor easy. It's important to know what you're getting into—both emotionally and financially. To that end, here are nine questions you should consider before you put up that "for sale" sign.
1. Do all the owners really want to sell?
Before you go too far down the sales path, be certain that everyone who has a financial stake in the company is ready to let go. "The owners have to know that they want to sell," says Jim Snyder of the Snyder Group (Brownsville, Pa.). "It's a life-altering decision, and not for the faint of heart." Earlier this year, he and his brothers Chuck and Dan sold the 60-year-old company their father, Barney, founded. "There were a million things to consider—which we did—and then we agreed it was the right thing to do," Snyder says. (Breaking the news to their mother was another matter. (See Sidebar: "Deal or No Deal")
Family company ownership can be complicated and messy. To interest buyers, "everyone in a family business has to be on the same page, and everyone has to act as one voice," says Jay Klempner, who sold his third-generation family business, Klempner Bros. (Louisville, Ky.), a decade ago. "I knew it was the right time and the right thing to do," he says, "and so did my father and my siblings."
One recent seller, who has experienced "the dynamics of a family business for years," agrees. "It was not a decision I would make without everyone being on board," he says.
"The decision to sell a family business is the bridge the owners must cross before they start the process," says an industry veteran who has been involved in the sale of several scrap companies. "Often they really don't want to sell, but they set a 'dream price' knowing they won't ever get it." Except, in this market, sometimes they do get it—and then they face issues they were not prepared to address. After buyer and seller agree on a price, the sales contract will reveal terms and conditions that cause the seller to balk, this veteran says. In such cases, Pappalardo says, "disparity arises and creates conflict that, in the long term, can hurt the business, and no one wants that to happen."
It can take many months from the receipt of an offer to the close of the deal, he says, and it's "arduous for the company and its owners. It will be a painful process if everyone involved is not convinced it's the right thing to do."
2. What will you do after you sell?
The seller must decide what role he or she wants to continue to play in the business and ensure that those terms are part of the deal. Even so, the transition from owner to manager, owner to consultant, or owner to nonowner can be tricky.
"It's been a drastic change for me," says one recent seller. "You're not in control, you're not the owner, you're a manager. I'm not saying that's necessarily bad, but for some, that's a drastic change."
The Snyders say their buyer, Metalico (Cranford, N.J.), told them nothing would change—and, as far as they're concerned, nothing has changed. "They allow us and our management team to run the company as we had been running it," Jim Snyder says. "We do business exactly as we had before, with only one change: [We moved] the timing of our financial reports to fit Metalico's corporate filing schedule."
It's not uncommon for scrap company owners to stay involved in the business after the sale. "I would think that any buyer would want the management to stay," says one scrap executive who has been on both sides of the table. "If you don't plan on staying, I think you are going to decrease the value of your company because talented and successful people in this industry are invaluable."
In fact, one seller says his buyer was interested in the deal only if he continued on as manager. "The buyer said, 'You'll run your company, and I'm here to help you grow the business and grow the profits.' From my standpoint, very little has changed, and I have accomplished my goal. It's great to have my hands in the company and have that outside support."
Among these harmonious arrangements, Jim Fisher says his might still be an anomaly. He sold his third-generation family company, Fisher Steel and Supply Co. (Muskegon, Mich.), to Padnos Iron & Metal Co. (Holland, Mich.), in 1999. "As an owner, to still be working for the buyer nearly 10 years later is a tribute to the Padnos family," he says. "Though I'm not an owner running the business, I am running my own part of the business, and I have the freedom to do that. I think that's why it has worked. They have given me every opportunity in the business and all of the support I could want."
It doesn't always work that way, though. Another seller says he had a two-year consulting contract with the buyer, but three weeks after closing, the buyer told him to clean out his office and leave the premises. "The new owners called me once during the two years for something that had nothing to do with the business," he says.
The bottom line, one seller says, is that "if you want to stay in the business, then who you sell to is more important than price."
| Sidebar: Deal or No Deal
It took nine months for the Snyder brothers to sell their company, the Snyder Group. They mailed the marketing booklet to 28 companies, seven of which toured the facilities. Each proposal they received was slightly different, and the brothers evaluated each one to determine the best fit. "Selling is one thing," Jim Snyder says. "Selling to the right person is something different." Once the brothers selected a buyer, and they were within a few weeks of closing, one more task loomed ahead of them: Jim, Chuck, and Dan knew it was time to tell their 85-year-old mother they were selling the company their late father, Barney, had founded 60 years ago. "We were all concerned about her reaction and what she would think," Jim says. They called and arranged a visit, and Jim relates what happened when they arrived: "When we got to the house, she was watching one of her favorite shows, Deal or No Deal with Howie Mandel," he says. "The show had 15 minutes to go, and when we came in, Mom shushed us. 'We have to watch the end of the show,' she said. 'This is a good one.' "She paused for a moment, and then she said, 'You know, boys, the problem is, some people get very greedy and don't know when to get out. This guy has been offered $240,000, but he's greedy. He's not going to take the deal, and he's going to lose money.'" Sure enough, Snyder says, "he didn't take the deal and ended up with $159,000. "My mother said, 'Let that be a lesson to you: When a good deal is made, you take it.' My brothers and I are sitting there, eyeballing each other, as she switched off the television and asked what we wanted to talk about. "I said, 'Mom, we've decided to sell the company.' "She look at us and said, 'Well, did you get a good deal?' "'Mom,' we said, 'we think we got a great deal.' "'Did you take it?' she asked. "'Yes, we've made the decision to take it.' "'Congratulations,' she said, 'that's terrific.' "Then we told her how much the deal was. She grabbed her heart and said, 'Oh my God, that's a lot of money. Your father would be so proud of you, and I'm so happy and proud of you. I think it was the right thing to do.' "My brothers and I were ecstatic over her reaction. The deal was truly done." Back to Top |
3. Whose help will you need in preparing and selling the company?
It's no surprise that to find the right buyer and the best price for your company, investment bankers say you should, well, hire an investment banker. "You may need attorneys and accountants [too], but keep in mind that they are not 'deal people,' says Bill Peluchiwski, managing director of Houlihan Lokey (Chicago). "We have the appropriate merger and acquisition skills and experience to handle the transaction.
"An investment banker can guide you through the options you have in terms of potential buyers and steer you to a buyer with whom you feel most comfortable," he says. "Obviously, the money counts, but what I have usually found is that the money is the highest when the fit is the best. If you have a good banker, you should end up with the right party."
Rudy Scarito, managing director of Canaccord Adams (Boston), explains further what role she and her colleagues can play in a sale. "The process takes as much as six months," she says. "We spend a month working with management in preparing the marketing document that addresses all facets of the company and all of the issues potential buyers want to know." After that, she says, the investment banker is "contacting potential buyers, responding to their multitude of questions, and then narrowing down the universe of potential buyers, leading ultimately to the final transaction. It's a major undertaking. Even with all that we do, there is still a ton of work we need the seller to do."
Do you need the help of an investment bank? It depends on whom you ask. "A lot of people have negotiated their [own] selling deals, and if you feel comfortable doing it, maybe you can do it yourself," one seller says. "I didn't feel comfortable handling it myself and decided to hire an investment bank, [and] they were worth every dime I paid them."
In contrast, another seller says he "just didn't feel the need for a third party." In his case, his company was not on the market when a prospective buyer solicited him. Though that offer did not interest him, he approached a different company and, using his accountant and attorney, he ultimately completed the deal. What made it work, he says, is that both companies knew what they wanted.
One seller who was not completely satisfied with the attorney who represented him in the sale of his company offers this advice: "Get someone aggressive to represent you in the negotiations, [someone] who knows your business and knows the industry."
Fisher did not use an investment banker when he sold his company, but he did have other advisers, he says. "I think that each of us has core competencies," he explains. "With an MBA, I knew business, and with 24 years in the scrap business, I knew the industry. What I didn't know was how to sell my company. [For] maximizing the value and navigating the journey of selling your company, you have to know when to ask for help from other people, and that's what I did. It's a sales game, but a sales game most of us in the scrap business don't know."
Count Snyder Group as one satisfied investment banking customer. Eric Klenz, director of industrial, corporate, and investment banking for KeyBanc Capital Markets (Cleveland), first approached the company as a prospective buyer of another scrapyard, Snyder says. The group's bid was unsuccessful, but then Klenz asked if Snyder had any interest in selling. His response: "Absolutely not."
Despite that answer, the Snyder brothers were curious about their company's value, so they gave Klenz three years of company tax returns. A few weeks later, Klenz made his proposal: He explained what he thought the company could fetch if sold and how KeyBanc would handle the sale. "The number took our breath away," Snyder says. After a few more meetings, the brothers took the plunge. KeyBanc "guided us through the entire process, and in the end, the company sold for more than the original estimate," Snyder says.
Should you decide to go with an investment banker, pick someone you can work with, Pappalardo says. Interview several bankers "so you can find someone you trust and feel comfortable with."
4. What are the tax implications of the sale?
Consult your tax adviser early in the process of deciding whether to sell, Scarito recommends. He or she can help you place a value on the company and sort out myriad gift- and estate-tax planning issues.
A company's structure can affect the tax consequences of a sale, Klenz explains. Structuring a business as a subchapter S corporation can be more tax-efficient, for example, but you have to file to make that change well in advance of the sale, he says.
Pappalardo suggests that sellers have their advisers look into Section 338(h)(10) of the Internal Revenue Code, which allows a stock transaction to look like a purchase of assets for tax purposes. Though it's complicated, it might offer additional tax benefits.
One seller says he did not get adequate advice from his accountants on the tax consequences of the sale, which he now regrets. As he puts it, "It's not what you sell for, it's what you get to keep."
5. How will you operate the business while it's on the market?
Stick to business as usual, say those with sales experience. "Continue to run the company as though nothing is happening—never take your eye off of the ball," Scarito says, "because you never know if you are going to get to the end result or get a satisfactory end result."
Sometimes, she says, owners "get so focused on selling the company that they forgo some of the hard decisions or growth decisions they might have made. They think, 'Well, I'm not going to be here anyway.'" But that's the wrong attitude, she says. "They need to keep making the hard decisions."
Other owners make a different mistake, Klenz says. They try to make a good business look better by cutting operating expenses down to the bare minimum to boost short-term profits. But that can distract management from the task at hand, he says. Further, acquiring companies and their advisers look for such window dressing and adjust their purchase price accordingly. "Such changes become obvious to a prospective buyer," he says. Instead, "if you've built a good, strong, successful business, stick with what got you there."
Or, as one seller put it, "Build yourself a company that is worthy of sale. Run the best company you can, have good market share in the area in which you operate, and be a good operator in every way. That's how you maximize your selling price."
6. Are your financial books in order?
One company's owners decided several years ago to sell when the timing was right and took several steps to make that future sale go smoothly. "One of our strategies was [to build] strong accounting and computer systems," this owner says. "If you have good records, it's not going to be as time consuming" to complete a sale.
Prospective buyers want to see financial statements, preferably audited ones, as well as budget forecasts that look ahead for one or more years, if the company has them. The Snyder Group did not have audited financial statements when he and his brothers decided to sell, Snyder says. (The company had never taken on debt, thus audited statements were not required.) Getting the statements audited "just made the process take a little longer," he says.
"The better quality, cleaner, and more thorough information a company has, the more likely the valuation will be higher," Scarito says, "because the buyer will have more transparency into the business. Buyers will pay for a well-maintained, well-managed business. Audited statements are better because they give more comfort to the buyer."
7. Have you discovered and addressed any environmental skeletons in your closet?
Environmental issues are a serious concern for buyers, and they should be for sellers as well. Buyers worry about contingent liability, Peluchiwski says. "We spend a lot of time making sure companies are environmentally clean." As a seller, he says, "you want to know if you have a little problem—or a problem you didn't even know you had."
To avoid unpleasant surprises, one scrap executive advises sellers to conduct a "Phase I" environmental audit, which typically includes a review of public and historical records; a search for the company and the property on local, state, and national lists of hazardous contamination sites; and a site inspection that might reveal past or present environmental hazards. "If you find cleanup needs to be done, do it ahead of time," this executive says. "If you don't, it will devalue the business. The more you can get those things squared away at the outset, the better off you are."
Ideally, a company for sale will identify and address environmental issues early in the sales process—"before we start the marketing phase," Klenz says. But "sometimes you can't do that until you bore into the ground with a Phase II audit," in which a company directly tests the air, water, and soil for contaminants. Either way, he says, from the buyer's perspective, "you want to avoid surprises."
When it comes to environmental issues, "don't try to bury them," Scarito says. "Sellers who have been straightforward and forthcoming about those issues tend to do better. As long as a buyer can quantify his financial risk and exposure, it will be figured into the price." The buyers can make an environmental escrow account a condition of the sale, for example.
The financial and environmental due diligence required for a sale can be slow and frustrating, one seller says. "It took about 30 days, and [the buyers] drilled pretty deep into our company," he says. "They want to know everything, and you don't try to hide anything." Another seller put it this way: "It was like being personally dissected."
Fisher, looking back on the process, is more sanguine. "Once you make a decision to sell your company, due diligence is just part of the journey," he says. "It can take a long time, and with all of the issues in the scrap industry, there are always surprises" for both the buyer and the seller.
8. Do you know what your company might be worth?
Snyder recalls his investment banker using a strange term when discussing company value, something that sounded like "uhBEEda." "I had never heard of it," he says, joking, "I thought it was an animal from South Africa."
Buyers, sellers, and their intermediaries use the acronym EBITDA—earnings before interest, taxes, depreciation and amortization—as a proxy for cash flow when talking about business value. Specifically, they value the business at some multiple of EBITDA "negotiated based on the strength of the company," one seller explains. Today that multiplier might range from 4 to 6½, another seller reports.
In his ReMA convention presentation, Pappalardo listed factors other than cash flow that could affect a company's value: its access to key modes of transportation, processing capabilities and capacity, length and quality of supplier and customer relationships, the strength and sustainability of its margins, the breadth and differentiation of its products and services, its market position and reputation, the capabilities of its managers, and the synergies or savings possible from a merger, among other things.
"Make sure that you know everything about your business and that you understand what it is about your business that is going to be most attractive to someone else," Fisher says.
9. Is it time to sell?
Clearly, those who have sold recently answered this in the affirmative. "They say timing is everything," Snyder says, "and coming off of three good years, with the prospect of continuing strong markets, we thought the timing was right. It turned out to be better than we ever anticipated or expected." Another seller concurs that the industry's recent performance triggered his long-planned sale. "We thought potential buyers would be looking at three-year average earnings," he says.
If you agree that "the industry [is] the best it's ever been," and you want to sell, this is the right time, one seller says. "Why sell when things are great? Because that's the time you should sell," he explains. "You have to get out of your mind that, if you're making all of this money, why sell? If you have aspirations of moving on, then you have to do it when it's that time—and this is that time."
Don't second-guess yourself, Klempner says. "As a seller, you make up your mind that you are doing the right thing for yourself and your family. And once it's done, you don't look back. You move forward and enjoy the rest of your life."
If you're still on the fence, go back to question number one: Do you really want to sell? "If you want to exit, it's a great time to exit," Fisher says. "If you don't want to exit, it seems like a great time to stay." •
Jim Fowler is retired publisher and editorial director of Scrap.
The recent bull market for scrap has recycling owners wondering whether it's time to sell. Before you put your business on the market, however, be sure you can answer these nine questions.