The Ins and Outs of Selling Your Flooring Business

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Ever thought about selling your business? It came to me recently that many retailers in this industry may have had this precise thought cross their minds, and that is when I called industry consultant Jim Buckles. After picking Buckles’ brain as long as he would allow, we came up with an outstanding podcast, which you can listen to at floortrendsmag.com. The following are excerpts of that conversation.

Buckles: The key question as to whether a business is saleable or not is: Are you the critical decision maker? When you leave the office to go to a tradeshow or take a vacation, does nothing happen without people calling you for direction? If that is the case, you do not have a business, you have a support network for you, and that is no busi-ness.

You also have to take a look at what the business provides financially. This is the one area that requires some difficult choices and very serious thinking. You may be renting the building from yourself; your car may be owned by the business and your phone, your health insurance is paid by the business and your kids may be on the payroll and are not really providing a service for the business per se.

This brings us to two things: One, if we take all these things out, how much is the business actually making? Secondly, how much money will the owner need to make the sale realistic for himself? Where I usually like to start when a client says they are ready to sell is asking if what they are really saying is that they want to quit working at the business. Very rarely is someone truly ready to sell unless they have been preparing for it for some time and have checked all the boxes and can say, now I am really prepared to sell versus just ready.

Now the first thing they have to look at is why they want to stop, and what is it I need out of the business? Do I just want a big chunk of cash? If so, what are the tax consequences, because taxes will have to be paid. Are my kids in the business and do I want to figure out a way to transition the business to them? If that is the case, I may re-ally want the income from it, but don't want to be involved every day. Then the question, what do I need, a big chunk of cash or am I pretty comfortable? What are my needs? What do I need to maintain my lifestyle?

The other piece is the effects of getting the buyer up to speed and teach them how to make decisions to make it possible for them to be the owner and decision maker and make it possible for me to check in once a month, get the financials and talk with the team.

This whole process promises to be as challenging as making a will, because one needs to think about what it is that you want to happen next? What are my actual needs and when will it all begin?

Jim Buckles, flooring industry consultant. Photo: Jim Buckles.

Buckles: This is not uncommon. The odds are that this individual does not have sufficient assets to be able to buy the business outright, so the seller is most likely looking at an installment sale. In this option, the retailer has a vested interest in ensuring the business continues to operate profitably while working himself out of it over a five-year period. In this arrangement one must take a serious look at the organizational chart and the management team. Often the business will have people in key positions, operations, accounting, installation, and others, who started in the business with the owner and have worked there for 25 years. Then the question becomes, who takes over for them? A 3D chart of sorts is good to develop for personnel needs over two years, three years, and five years, because most likely, many of those key positions will become vacant over those time periods.

Buckles: Ideally three to five years because they will need time to ensure the business is its most marketable and its most profitable. The retailer needs to go from wanting to sell to actually being prepared to sell.

Buckles: The first thing the owner needs to do is get the balance sheet and financials cleaned up, looking first at the balance sheet determining if it's strong and if there is ample working capital, or if it’s weak because a great deal of cash has been pulled out. Then the balance sheet needs to be made stronger, the owner needs to brutally identify all those little things the business pays for, such as the owner’s cell phone, perhaps the business is paying for the cable and internet at home because he needs access to the business when he’s not there, as well as the owner’s car and perhaps his wife's car. Also, the company-owned weekend getaway place, that’s used a couple times year to for employee events. This is a process of extricating the owner’s personal life from the business. Then you can see how strong the business is in reality. With many businesses, the bottom line is barely making what its discounts are on purchases. It has basically been set as a means of pull as much out as possible.

TF: Once the decision has been made to sell, how is a value placed in the business? How is that established?

Buckles: There are several different ways of doing it. One is fair market value by somebody who is not in the business, and just looking for a pure investment. Because they are not in the business there is no add-on value, but they are going to want to pay less because they don't know the business and they want to make sure that it pays itself out.

Another option is selling to someone within the industry, which probably has the greatest possibility because they are usually looking at the numbers and the bottom line, which they know could be half a million dollars more because they already have the infrastructure in place to handle what the current owner is paying half a million dollars a year for. They would pay more because they may be looking at the present value of an income stream saying over the next 10 years, which they feel will make a certain amount. The current value of that money is X. Others will look at it a multiple four times earnings. Just to use round numbers, say the business is making a million dollars at the bottom line, people from outside might offer three, a guy down the street says he can make that second throw off one and a half. So, I'll offer six.

Then there is the final liquidation value. The is the option for the afore mentioned retailer that doesn’t own a business but instead owns a job and can see no way with the people currently in place that someone could come in and run it successfully. Then the option is liquidation values. What can I get selling the things I own? Inventory would be perhaps10 cents on the dollar and the cutting machine, the office furniture will not yield very much.