Selling a Garage Business

Selling up

Is it an option?

There are always questions asked on groups and forums about selling a business within the motor trade, as it can seem like a daunting task. Businesses do sell but a lot don’t, this is often due to a lack of preparation to get the business into a place that makes it attractive to buyers. There is precious little advice for sellers and very often agents do not understand the trade and so do not attract the correct type of buyer.

In this post I would like to give you some pointers as to what to expect when selling and some things that may surprise you about the process.

What should I consider?

Once the decision is made you should be planning to get the business ship shape and ready to sell. What I mean is, waking up and deciding that “today I am putting the business on the market” may not be the best way forward, unless your business is in perfect shape already.

There are a few things to consider.

1. Understand your finances! I cannot tell you the number of times I had to correct potential purchasers of detail they had missed in the business accounts. There were even some accountants missing fundamental facts when looking at them.

2. If there are loans or lease agreements, decide if they will be sold with the business or settled before sale. The same could be said for assets, are you selling all the assets owned by the business? The buyer needs to know what they are buying.

3. Are you going to offer a handover period? This is generally negotiable between buyer and seller but make sure it's in the sales particulars. It is attractive to buyers as it means you are still around. Bear in mind though that this can be a difficult period. You effectively sit and watch someone else run your business and you have no authority. My advice would be not to get tied into a protracted handover. I have seen three- and six-month handovers, I feel this is far too long unless you have good reason.

4. How does the business look to a potential purchaser? By this I mean aesthetically. It is very often missed by the seller, and many agents don’t even come to the business so they will not point anything out. Ask someone who has never seen it to come in as a customer, or potential buyer and tell you what they think? Remember you want to sell it for as much as you can and although buyers are not customers you want them to want the business.

5. Consider whether you will tell your staff of the sale when going to market, or only if it sells?

6. What happens to the business once you are removed? It is possible to sell a business if you are an integral part of the operation, despite what you may have heard. However, it is easier if you remove yourself from various parts of it before going to market. This should be done as a process well before you want to sell. The goal is to work towards almost making yourself redundant. By doing this you will attract more potential buyers. There is a process to achieving this but it’s one for another blog. Contact me if you would like some help with it.

How will I sell?

Commonly businesses will sell through an agent. However increasingly they are being bought by another local business. Then of course there is the staff buyout.

It is worth doing some homework yourself before involving an agent. Think of your staff. Do you have staff who may want to take over the business? Having the conversation is always enlightening, you will probably be told that they cannot afford it. Well, there are funding options here and I will come to them in a while.

Next think about local businesses who are expanding who may want to purchase your business. They could be the ideal purchaser as they know how to run a garage business so would need less input from the seller after the sale. You could approach these businesses and see if they are looking?

Then the agents. I had success with an agent, despite all the horror stories of them taking your money and not delivering. If they could not sell businesses, they would not exist, so it must work to a degree. You need to be happy with what you are signing up to with regard to the length of the contract and the commission rate. My advice would be to only sign up with an agent that takes the bulk of the commission when it sells. Most will want some form of fee upfront to cover their advertising costs. Some will want all the commission upfront, but this type of contract is never going to end well in my opinion. Also try to be pragmatic, they are salespeople so take your rose-coloured specs off when speaking to them. I will give you an example. I was told that once an offer was accepted it would take about 12 weeks to complete. I never believed this, it took 6 months, and that was quick compared to most.

So, what’s it worth?

Your accountant should be able to help you here and of course agents will value it. Don’t be surprised if the valuations wildly differ. Ask them how they came to their figure and consider if the way they have calculated it seems acceptable to you. All agents have a different way of calculating the value and some are plain ridiculous in my opinion. The main difference tends to be how they calculate adjusted net profit. If you are not familiar with the term, it’s a calculation used to get the net profit once the owner has been removed. For instance, if you are a director, you will be taking a salary and maybe pension contributions, there may also be a car lease payment. These are probably not going to be present once the business is sold. In this case they will add these onto the net profit. Hence, adjusted net profit. The new owner may well do the same, but these will be a benefit to them on top of the unadjusted net profit. My issue is that some agents go to town here and add in various other costs to the business that they argue are just accounting tax efficiency calculations. Their goal is to raise the net profit to make the business more valuable, on paper that is. I found this unacceptable, and any decent accountant will spot it, in my opinion.

Leasehold or freehold will make a difference. There are buyers who only want freehold, but a lot will be looking for leasehold due to cost. A long lease will be attractive to buyers so even if your lease is coming to an end ask the landlord what length of lease they would give a new owner. This will have an impact on the valuation.

Most importantly, don’t be afraid to consider what you would pay for it? It’s a reasonable question to ask yourself.

Funding options

Why am I talking about funding options when you are selling the business?

I wanted to explain this as it came a real surprise to me. Somehow there is now an expectation that the seller may well lend the buyer the money. This could be via an earn out scheme, where the business must perform to enable the seller to get their money, or it could be bonus payments if it exceeds expectations. The problem here is that it generally draws the seller back into the business to ensure the performance is there.

Vendor finance seems commonplace now and prospective buyers will look at the business and come back with an offer which states how they will pay you over the next few years. They could be performance related as above or a straight loan where you will charge interest on the money they owe you. Unless the buyer has paid a very big deposit or you know them, I would be very wary here. However, this type of deal could be very useful if it is a staff member. Someone you have known for a long time, and you know can run the business. There are quite a few inexperienced purchasers wanting to “have a go” at a business when the risk is not theirs. If they have not had to pay for it and intend on paying you out of the profits, what risk is there, and in turn what drive is there for them to make the deal succeed?

If you are approached in this way, no matter how much you want to sell, consider if they will be the right buyers? Can they make it work? Do they have the experience to do it? Whilst the agents will tell you they are carrying out checks on buyers, they are only doing the minimum. They want to sell the business and not flag potential problems. The agents do not forewarn you that vendor finance may be the case before you sign up. So, if you only want a cash sale then state it to the agent before you sign up.

If you would like some advice of planning for a sale or of the sale process, please get in touch and we can arrange a meeting.

Above all if you are selling, good luck!