Exit Ahead: Don’t Get Stuck When It’s Time to Sell or Retire

by Chasidy Rae Sisk & Alana Quartuccio

A typical shop owner works diligently in their business every day, focused on meeting customers’ needs, ensuring their team receives required training and properly equipping their business to repair today’s complex vehicles. But no matter how much one loves what they do, the day will come when it’s time to retire or sell the business. When that time finally arrives, many realize that – although they’re ready to get out – they aren’t actually prepared.

Rather than being able to exit based on their own signs, they find themselves stuck on the same path…or forced to follow circuitous detours that wind up taking them much longer to get to where they’re trying to go!

“Most shop owners do what they do every day; they run their business and provide services to the public. They’re not necessarily in the business with the intention of transitioning it to someone else, but at some point, they are going to want to retire or sell, so it’s important to learn about the different approaches to succession planning, since this can have an impact on their current goals,” says Jason Marx (Mandelbaum Barrett PC). 

He asks, “What will it look like when you decide to get out? Will you sell the business to an employee, pass it to your children or something else? It’s important to understand how your business will be valued and go about it in a strategic way to minimize tax exposure, maximize value and enjoy a smooth and seamless transition as you pass the business along to the next generation of leaders. And these are topics you don’t want to start thinking about when it’s time to retire – you need to consider your exit strategy as soon as you start your business, so if you don’t have a plan in place, it’s time to map one out!”

Whether you plan to pass the business along to a family member, sell to a valued employee or join the consolidation bandwagon, exiting the business isn’t as simple as typing up a letter of resignation or relinquishing your key to the front door. The process requires forethought and preparation…or at least, it should if you want to walk away with something to show for all your hard work. In fact, exiting the business is not a process that can take years, it should take years, according to industry experts. 

“When many shop owners get out of the business, their decision is a reaction, instead of a well thought out plan,” notes Rick White (180BIZ). “They get tired of the daily grind and just don’t want to deal with it anymore. The problem is how few people consider an exit strategy ahead of that day. And when you fail to plan, you are planning to fail.”

“It’s never too early to begin thinking about it, and, as a matter of fact, every move that a shop owner makes should have succession in mind,” suggests certified exit planner Matt DiFrancesco, whose company High Lift Financial specializes in working solely with collision repair businesses. “Shop owners need to put the vehicle in place, so when the time comes, they are able to exit on their own terms. Shop owners reach out to me at various points in their planning; some may be five years out, some need to get out now and some aren’t looking to get out but want to begin to put the plans in place.”

Maylan Newton from Educational Seminars Institute agrees that one should start thinking about how they will exit their business from the very day they purchase it. He suggests a minimum of five years is needed to prepare, but he recommends, “If you bought your shop today, I’d tell you to pick a day 20 or 30 years in the future and make that the day you plan to stop owning or working on that business. 

“It’s never too early to plan, but in many cases, it can be too late,” adds Newton. “For most people in our industry, the exit strategy winds up being death, and they leave behind a business that has no value to their heirs because they didn’t build a business that stands on its own and is therefore sellable.” 

Although Consolidation Coach’s Laura Gay agrees that it’s never too early to start thinking about one’s exit strategy, she acknowledges that the actual time frame necessary for any specific shop depends on the owner and the business itself. “I think most shop owners fall into the category of not wanting to deal with it until the time comes,” she observes. “Obviously, that’s not ideal, but it’s not a deal killer either. There are plenty of shop owners who are just focused on running their business the best they can, being the most efficient. If you are running a good shop from top to bottom, that’s really what you need to focus on because at the end of the day, it comes down to having a really nice, well-run facility. That is what brings the dollars.” 

Shops often neglect to develop an exit strategy – they simply decide to sell without any advance preparation, and as a result, a lot of shop owners are very disappointed to discover the true value of their business.

White encourages shop owners to invest a little time into their exit strategy. “The business needs to be profitable before you try to sell it, and that means being able to show four or five years of consistent profit. For a shop that isn’t profitable, it may take five years to generate a profit and another five years of maintaining it before selling is in your best interests.

“A lot of shops are barely making a profit; they’re not worth much more than their assets,” he laments. “Yet every owner assumes their shop is worth $1 million…and it’s really sad when they find out what it’s actually worth.”

There are many important factors to consider before deciding to exit the business, beginning with how one will go about the process.

“The first thing to keep in mind is what your strategy is going to be,” says Gay. “Are you going to do it alone, or are you going to get someone to help you? If you do it alone, you have to come up with your own internal strategies on how to handle it, specifically confidentiality and how you are going to look at what the different buyers are and how to make sure you don’t leave money on the table. If you decide you want someone to help you, you need an understanding of what the business is worth versus what you can get for it. That’s a big disparity. You can probably get a lot more for it than what it’s worth in a lot of markets, especially in the northeast. It’s just getting red hot with consolidation, and more and more buyers are entering the market. The important part is not leaving money on the table, and that is easy to do if you don’t know what you are doing.” 

Selling is not the only way to exit, according to DiFrancesco.

“There are three options. They can do an internal succession to a family member or an employee. They can do a third-party sale, whether it’s to a consolidator or a small MSO, or they can look for another third-party buyer in the market who may be looking to acquire shops. There is even what could be called a fourth option where one does an internal succession but does not completely step away. The owner still maintains some control, but they give equity to employees so they no longer have to be involved with the day-to-day stuff. That is a lifestyle exit where they still have control over the business but no longer participate as part of the daily operation. That equity can be structured either as a stock purchase program for key employees or an ESOP (employer stock option program).”

The type of entity one chooses to sell the business to can have a significant impact on how much the property is worth, Gay points out. “If you lease it to an individual or a private entity, the property value will be significantly different.” If someone were to lease to a big name consolidator, the value of the property will go up which may be food for thought when considering leasing to an independent which could result in “leaving money on the table.”

Consolidation is becoming increasingly common in some markets while seeming to skip other markets altogether. 

“This is the age of acquisitions with lots of major players buying businesses while many smaller independents are pulling out,” White believes. 

If consolidation is the route that makes most sense for your business plan, one important thing to realize is that everything is negotiable in the process, from the big stuff to the tiny details, according to Gay. There are many different deal structure platforms taking place when it comes to the sale of collision shops. There’s MSOs buying other MSOs, private equity deals and shop owners looking to grow their business by acquiring other shops, or those simply just entering into a succession plan. But one thing that everyone seems to agree on is that there’s no reason for shops to feel pressured to sell if they don’t want to sell.

Although “the environment with consolidation is very bright,” DiFrancesco insists, “The independent shop really has a place in this environment. It may be a different place, but I think it’s a very important one.”

So, how does one know if they are ready to leave it all behind? 

DiFrancesco recommends shop owners consider what they want life to look like after transitioning away from the business. “If they don’t have a picture of what that looks like, it makes it difficult to be able to structure a plan according to what they want. The starting point comes down to figuring out if they want to fully exit or still be involved but not with the day-to-day operations as they want the flexibility to travel, play golf or go hunting. Once they know what that life looks like, we can start to build out the different ways we can structure a transition plan.” 

White concurs, offering a personal anecdote related to a “challenge after the sale that a lot of people don’t talk about:

“After I sold my shop, I struggled to figure out who I was for a couple years. I grew up in the industry, and that’s what I was: a shop owner. But suddenly, I wasn’t a shop owner anymore! I really struggled with my identity for a while, and that’s something everyone should be aware of. When I’m working with a shop owner who intends to sell, I immediately back them off by one day, so they spend only four days per week at the shop. Then, we discuss how to fill that time with things that will get them excited about enjoying life and help them see who they are beyond being a shop owner.”

According to Newton, shop owners interested in getting out of the business should begin by taking a look at their shop to see what is most valuable. Is it the business itself or the owner? If the owner is the most valuable part of the business, a lot of work will need to be done to change that so the business can be sellable. “They will need to build the business so they – the shop owner – won’t be required to be there.”

“The business has to be able to operate without the owner; you cannot be a key component to the business’ success,” White insists. “If the shop owner is also the lead technician, service advisor and HR, the business isn’t worth as much as it would be if the shop operated effectively without you sitting in the office. The owner cannot be directly tied to the day-to-day operations of the shop because that creates a situation where the value of the business is irrevocably connected to that person’s presence.” 

Instead, the shop’s staff has to be trained to know all the processes, policies and procedures. There should be an operations manual outlining how the business functions so it can be profitable “because people who buy businesses want the ability to profit,” Newton says, explaining if one is able to walk away from the business for 60 days and it’s still functioning, the business will survive. If not, it is not the time to sell. 

Branding is another value-added consideration that owners should evaluate before signing their shop over. 

“If your name is in the shop’s name, that may have a detrimental effect…or if you have a great reputation, you need to decide if you’re willing to leave your name on the shop when you’re no longer there,” White points out. “Their quality and customer service will be associated with you if your name remains on the building, and no one wants their name tarnished based on someone else’s actions.” 

Of course, profitability isn’t the only factor impacting a shop’s value. The assets being sold with the shop make a huge difference in the price tag you can place on the business. Buyers will get more use out of well-maintained (or new) tools and equipment, and they’re also going to consider the condition of the shop facilities and whether additional investments will be necessary before they begin operating. 

Typically, the real estate associated with the shop emerges among the most important assets to consider. 

“Will the purchase include real estate or not?” White questions. “If you currently rent the land your shop is on, the lease options will factor into the value someone is willing to pay. If you own the real estate, hopefully it’s been split out into a separate holding company or realty trust that rents the land to your shop because that protects you from a liability standpoint, but it also allows you to sell the business and maintain the property for additional income.

“At the same time, if the business is worth $1 million, but you’re retaining the real estate, it’s going to be more difficult for the purchaser to get a loan since there’s no real collateral,” he continues. “Are you willing to hold the mortgage note? There are definitive benefits to that as well; you’ll collect more income from interest on the loan, plus you’ll typically pay less in capital gains since the money you’re receiving is spread out over a longer period.”

DiFrancesco often finds that sellers keeping the real estate as an income stream works best for all parties. “If you go to a third party, especially with consolidators, they want the owners to maintain the real estate, and that remains a cash flow stream. On insider sales, I like to see them hold on to the real estate as an income stream, but also if the owner has children who are not involved with the business, the real estate can be part of their legacy. I try to maintain that family unit, so if there is one child getting the business, the others don’t feel slighted and you can structure the real estate to be able to create a fair distribution and maintain that family harmony.”

Sometimes, shop owners tarnish their ability to turn the highest profit in a sale by making some common mistakes, such as neglecting to maintain confidentiality. Alarming staff by talking about their exit plans too early in the process can be detrimental to the value of the business.

DiFrancesco suggests waiting until all one’s ducks are in a row so that conversations don’t begin prematurely. “You’d want to go to the successors first and then talk to your employees once the plan is determined and you know what direction things will go in.” 

“You don’t want to create unnecessary anxiety, turmoil or loss of production with something that may not occur,” Gay emphasizes the need to make sure the time is right before announcing your plans. “The announcement should be thoughtfully decided upon between the buyer and seller. 

“It’s a personal relationship,” she continues, regarding the seller’s relationship with his or her team. “Those people made him or her who he or she is. I was close to my employees. I still am and talk to them often. The buyer is buying your people, what you created, and it’s very important it’s done thoughtfully.” 

“Hopefully you have already planted the seed for them,” advises Newton as he reiterates the importance of the business being able to operate without the owner present daily. “When you aren’t the main person anymore, it makes it easier on your staff to tell them you plan to retire.” 

Maintaining focus on the outcome can also present challenges as the exit gets closer.

“Clients get really excited about the sale, but they forget to keep their eye on the ball,” White warns. “The business has to continue moving forward profitability, and it doesn’t take long for things to go sideways when you’re not paying attention. You need to stay focused on your operation until the day it’s not your operation.

“You need to put your patience hat on,” he continues. “There will be struggles and delays, and you can nearly guarantee that it’s going to take longer and be more challenging than you think it should be…but don’t count your chickens before they’ve hatched! It’s common for a seller to get excited in the nth hour and buy that $300,000 motor home because they know they’ve got $1 million coming in. But then the deal falls through. It’s never a good idea to spend money before you have it.”

Ultimately, it’s about being able to walk away from one’s business in the most profitable manner one can. 

Many may not be aware of the true value of their business, so it’s important to have an assessment done as a first step. “You should always do a valuation, and not just of the value of the business but what your free cash flow is in the business,” suggests DiFrancesco. “That’s what a consolidator or a third-party buyer will look at since they want to buy a business that’s profitable. With an inside transfer, you can utilize free cash flow to fund that transition, so getting that valuation as soon as possible is a key first step.” 

Newton emphasizes the role that having everything properly documented – from wills and a trust, tax information, operation manuals, etc. – plays as it will make the business attractive and more valuable. “The more documentation you do today, the more profitable your business becomes in five, 10, 20 years.” 

“You get one chance to do this, so you don’t want to screw it up,” Gay summarizes. “Make sure you are doing all the right things, and make sure you don’t leave money on the table. It’s so easy to do that if you don’t know what you are doing…you can do so without even knowing that you did.”

Want more? Check out the March 2024 issue of Texas Automotive!