Guide To Help Sell an Automotive Company

Business Valuation: What's Your Automotive Company Worth?

A business valuation is a way for you to understand how much your company is currently worth. Many factors influence an evaluation, and much of it is in your control to make adjustments before you sell to increase your company's value.

Below are five of the most common factors that affect a business valuation.

1. Profit History

Prospective buyers will ask to see how much profit your company brought in over the last three to five years. They'll look for increased revenues and decreased expenses during that time. If your business performed the opposite, it would lower your business valuation. It's critical to be honest with your company's performance since buyers will ask to see financial statements during the due diligence process.

2. Potential for Growth

You don't have to act on items that could improve your business' future growth, but buyers will want to see that there's potential. That said, external factors you don't have control over, such as trends in the automotive industry, can also impact growth. The more perceived potential a business has for future growth, the higher its business valuation will be.

3. Diversification of Customers 

Buyers want to know that you have, at a minimum, several clients with whom you work. That way, if one client stops working with your company, you don't lose your source of income. Your business valuation will be higher if you have a large customer base.

4. Dependency on Clients

If you only have a few clients who bring in most of your income, this is a risky situation for buyers. If one of those clients stops working with you, the company's profit will plummet. For this reason, business valuations favor companies that have income spread out among a large number of customers.

5. Owner Dependency

If you're the driving force behind your company and the person who brings in the most significant quantity of income for it, your business valuation will be lower. Buyers want to know that your company can sustain itself with the team you've built once the sale goes through.

What is the Role of M&A Brokers in Selling an Automotive Company?

M&A Advisors are your biggest advocate during the process of selling your business. They will ensure you have all your paperwork in order, perform a professional business valuation, vet potential buyers, and negotiate the best deal possible for you. 

The vetting process can be intensive since many buyers will often show interest. However, they may not be serious about buying your business or are a competitor fishing for information. That said, selling to an acquisition-oriented company can be a lucrative move. 

To set yourself up for success with acquisition-oriented buyers, you should be able to show a strong history of success within your automotive sector. You don't need to be a large company to gain growth through acquisition interest. Instead, these buyers are more concerned about your current profitability and the growth potential your business has.

In addition to acquisition buyers, potential buyers you may encounter include the following:

• Competitors
• Employees
• Individual investors
• Private equity groups
• Family offices
• Investors (strategic, synergistic, or corporate)

If you're working with a competitor, you mustn't reveal sensitive information that they could use against you, should they decide not to purchase your business. Knowing how to sell your business to a competitor takes time and experience. 

Since it can be challenging to know just how much information to release, it's best to hire an M&A Intermediary to represent you. Your M&A Broker should have knowledge of the California market as its different to any other state in the US.  They should also have experience in vetting potential buyers of all backgrounds and this will help ensure you receive the fairest deal for your business.

Phases that Your M&A Broker Will Manage

Your M&A Broker will support you with everything from forming your exit strategy to ensuring a smooth transition once you've sold your company. Below are the responsibilities that your M&A Broker will take on your behalf.

Exit Plan

An exit plan determines the best path you should take to sell your business. It forms the strategy to execute listing an automotive company for sale and identifies areas that you can improve upon to maximize your business's profits. Utilizing an M&A strategy is the ideal approach since brokers will be able to ensure that no stone is left unturned with preparing to sell your automotive company.

Business Valuation

You're likely wondering, what's the value of my business? There are several methods of business valuations you can use to secure the highest value for your company. Knowing how to calculate the value of a business for sale is complicated, but by following M&A trends in the automotive industry, your broker will be able to give you an excellent estimate.

Marketing

Your M&A Broker is responsible for preparing all activities to promote your company's deal origination. They'll also consult with their contacts, many of whom might know of people who are interested in purchasing your automotive business.

Buyer List

As you prepare to put your company on the market, your M&A Advisor will vet a buyer list. They'll cover their recommended prospects with you, and you'll give the okay regarding who they should go after to get the best value for your company. 

Deal Origination & Outreach Program

During this phase, your M&A Broker will actively market the deal and contact vetted buyers. Their goal is to generate interest for your company and get offers.

Distribute and Content

Through social selling and targeting, your M&A Intermediary will continue to seek out and vet buyers. Lower and middle-market M&A Advisors have experience knowing where and how to perform these tasks, which would otherwise be time-consuming for you as the owner.

Evaluation

Once your M&A Broker generates enough offers, they'll evaluate them and conduct a market offer analysis. While this is an exciting phase for business owners, having your broker perform this task will save you time since they'll be able to pick through people who don't appear serious. That way, they'll present you with the best fit offers.

Negotiation: Buyer due diligence

Once you've selected your preferred buyer, your M&A Advisor will work on negotiating with that person. A portion of the negotiation involves agreeing to a set amount of time that the prospective buyer has to perform due diligence. Generally speaking, this is a thirty-day period. 

Letter of Intent 

A Letter Of Intent (LOI) is an initial, non-binding agreement between the parties in a proposed deal. The LOI establishes the aspects of the deal for buying and selling a business.

Due Diligence

The due diligence process offers buyers the opportunity to do an in-depth analysis of your company to ensure that everything you shared with them is accurate. Thirty days is the standard amount of time an owner offers a buyer to perform due diligence. During that period, the buyer will assess the following items:

• Income statements

• Records of accounts receivable and payable

• Balance sheets and tax returns, including business activity statements from the last 3 to 5 years

• Profit and loss records from the previous 2 to 3 years

• Cash deposit and payment records, as reconciled with the accounts

• Utility accounts

• Bank loans and lines or letters of credit

• Minutes of director and management meetings

• Audit work paper files, if they're available 

• Your claims about why you're selling your business and how your perception of your business' reputation

• Privacy details involving employees, trading partners, and customers

• Stock

• Details about your plant, equipment, fixtures, and vehicles, including whether they're licensed and if they're in good working order

• Intellectual assets of your business such as intellectual property, trademarks, and patents

• Existing contracts with clients and staff

• Partnership agreements

• Lease agreements

• Details of your company's automated financial systems

• Information about your company's credit and historical searches 

• Business valuation to ensure the asking price is fair

Warning Signs for the Buyer

Just like you're cautious about vetting buyers, potential buyers looking for California businesses for sale also take care in making sure you're a good fit for them. Your M&A advisor will work with you to ensure you avoid the following signs that could cause a buyer to not follow through with buying your company.

1. Failure to disclose important information, including your reasons for selling, financial statements, licenses, permits, and staff contracts.
2. Refusal to agree to a trial period or rushes the due diligence process (you should give the buyer a minimum of 30 days).
3. Reluctance to introduce them to your suppliers, landlord, or estate agent.
4. Current involvement in legal proceedings.
5. Excessive eagerness to close the deal quickly.
6. Questionable credit record and history.

If you want to sell your business online, you'll still be expected to allow time for due diligence and follow the same steps as you would in person.

Negotiating the Definitive Purchase Agreement

Offering middle-market businesses for sale involves several steps. The M&A Advisor works closely with you and your legal advisor, especially while negotiating and finalizing the Definitive Purchase Agreement. This Definitive Purchase Agreement helps both parties reach their goals for the transaction and allows no room for error as it completely represents the legal wishes of each party. 

A good M&A Definitive Agreement is the lynchpin of a good transaction. Both seller and buyer exchange a large amount of information from different sources.  This is often over many months of conversations.  These exchanges are then condensed, with their individual interests, as best as possible into the Purchase Agreement.   

Items a typical Definitive Purchase Agreement may include:

1. Treatment of Shares, Options, and any other Securities; if appropriate to the transaction
2. Representations and Warranties
3. Covenants
4. Solicitation (“No Shop” clause)
5. Financing
6. Termination Fee (or “Break-Up Fee”)
7. Indemnification
8. Material Adverse Change (MAC) and Material Adverse Effect (MAE) Clauses
9. Closing Conditions

The Definitive Purchase Agreement can have potential pitfalls, so your M&A Advisor needs to keep the communication open with the Buyer and their Deal Team as well as the Seller and their Deal Team.

The M&A Definitive Purchase Agreement also needs to include details about tax obligations and consequences, especially if shareholders are involved.

Avoiding Pitfalls if you have a Buy-Sell Agreement

What if the seller is two or more individuals?

Many businesses have multiple owners or shareholders. Getting an agreement from a majority of the shareholders about selling the business and being willing to accept an offer can be challenging. One of the shareholders may not have any interest in selling the business at all or may want something specific most buyers will not be willing to agree. If this is the case, hopefully there is a Buy-Sell Agreement in place as this will outline what each shareholder needs to do.  A few years previously I had a transaction with 9 shareholders.  One shareholder with a minority interest initially refused to sell.  Eventually they changed their mind but it was stressful while this played out.

If no Buy-Sell Agreement is in place and there is tension between the owners and shareholders, the pressure to decide the future direction of the business may be challenging.  This article provides additional information for an owner or shareholder with how to avoid buy-sell agreement pitfalls. To help their clients, M&A Advisors should understand the importance of assumption of liability, so their buyers and sellers know who is responsible for any lingering claims. 

The agreement also needs to have information about indemnity clauses regarding operations. For Automotive Companies, concerns about environmental liability, breaches of warranties, and other issues need to be factored into the indemnity clauses of a Definitive Purchase Agreement. 

Buy-sell agreements can be confusing, so it is helpful to learn how to understand buy-sell agreements and how a buy-sell agreement can save a business.

Buy-Sell Agreement Benefits

The benefits of a buy-sell agreement are that it reduces the chance of having a lawsuit if an issue arises between you and your business partner. If one of your partners doesn't hold up their end of the deal, the agreement allows you to take action, such as dismissing that person from the company. 

Additionally, the buy-sell agreement establishes how you and your business partners will handle bringing in a new partner if the situation arises. It's also beneficial because it offers insurable risk if, for example, your business partner passes away.

Buying and Selling A Business in California

Every state has its legal intricacies, and buying and selling an automotive company in California is no different. To sell your business, you'll need to make sure you have all the proper California licensing. You also need to understand state tax implications, which can vary depending on if you're undergoing a stock or asset sale.

Finally, California is unique because it requires an escrow in nearly every business sale circumstance. Doing so will protect both you and the seller. Your M&A broker and an attorney will ensure you have completed all the necessary steps for selling your California automotive business. 

Negotiate the Terms

During this phase, it's your last opportunity to make any changes to the terms you've already established between you and the buyer. Your M&A advisor will ensure they secure the best terms possible for you, helping you to maximize your profit.

Finalize the Contract

Once the final negotiation stage is complete, your M&A advisor will finalize the contract with the buyer. Are you curious about what kinds of items go into ensuring flawless deal finalization? Our Business Transition Checklist will help you out.

Closing

During the closing process, you'll sign a business bill of sale, which is a document that confirms the transfer of ownership. Your M&A broker will then finalize the transaction and close the deal.

Transition

Transitions can be a sensitive time in the sale process. For this reason, your M&A advisor will stay by your side after you close on the sale to facilitate the business transition and ensure it goes smoothly.

Mistakes to Avoid When Selling an Automotive Company in California

Selling your business on your own is a mistake for various reasons, one of which is that you're so personally connected with your company that it can be difficult to analyze it objectively. Lower middle-market businesses for sale benefit from hiring lower middle market M&A brokers to avoid several common pitfalls.

Let's look at six reasons why you should seek the support of an M&A broker.

1. Dependency on One Factor

If your business' success relies on a single customer, employee, or vendor, it's going to be challenging to sell your automotive company. From a buyer's perspective, they'll lose large profits if a vendor or employee quits. Ideally, you should aim to have 15% or less of your revenue from a single source. Your M&A broker will offer advice on how you can overcome dependency.

2. Lack of Growth Forecasting 

Buyers want to know that your company is in an excellent position to grow. You don't have to move forward with those growth strategies, but you will have to research and show proof that there's potential. As part of the exit strategy, your M&A broker will support you with designing a growth plan.

3. Few Profits

The more cash your company brings in above your expenses, the more valuable it will be. An M&A advisor can help you increase your cash flow by offering advice on accelerating accounts receivable and extending accounts payable. 

4. Lack of Recurring revenue

If your business sells a product that doesn't have the potential for recurring revenue, it's less valuable than a company with, for example, a subscription-based model. Your M&A broker can help you brainstorm ways to boost revenue or show a growth strategy for recurring revenue.

5. Commoditized Company

If there are many companies like yours, it'll be challenging to secure a high paying buyer since commoditized businesses require keeping prices low to keep up with their competitors. Commoditized automotive company owners should work with their M&A broker to identify ways to differentiate themselves on the market.

6. Dependency on the Owner

Suppose your company's profits and success depend on your presence or personal relationships with customers or vendors. In that case, it's going to be difficult to sell it for a high value. Your M&A broker can advise you on ways to step back from your company while keeping it thriving, thus making it more attractive to potential buyers

Problems in Growth Through Acquisition

Although selling your company to a buyer with a growth acquisition strategy is exciting for you as the owner, it's often stressful for your employees, clients, and vendors. These people often have an initial distrust towards the new management and are leery about the impact of their work and relationships until they gain confidence. 

On the buyer's side, they may not have done their full due diligence before purchasing the company. That's a common scenario for lower middle-market mergers and acquisitions companies since they tend to acquire businesses quickly. As a result, poor matchmaking and miscalculations during the transition can occur.

To prevent issues that arrive with growth through acquisition, you should work with your M&A broker to include clauses in the final agreement that will reduce the chances of a conflict.

Selling an Automotive Company FAQ

Now, let's look at some common questions about selling an automotive company in California.

I want to sell my business: where do I start?

A lot of people wonder, how do I sell my business or how to sell my business? Successful mid-market businesses for sale begin with an exit strategy. An exit strategy will help you vet buyers, ensure your paperwork is in order, and identify ways for you to increase the value of your business before you sell it. 

While it's possible to do so on your own, experts recommend hiring an M&A broker to support you. In the meantime, you can take a look at our Buying and Selling a Business Checklist to get you started.

How much can I sell my business for?

One of the most common questions business owners have is this: how much is my business worth? Everyone wants to put up a multi-million-dollar business for sale, but knowing how to value a company based on revenue is the wrong approach. For this reason, whether you want to put up your automotive business for sale in California, having an M&A Broker perform a professional business valuation is critical. 

If I sell my business, how much tax will I pay?

Mid-market companies for sale all have to pay taxes, but the amount you pay depends on the state you live in and the type of transaction. An M&A Broker will support you with analyzing different approaches to help you secure the lowest tax amount possible.

How do I sell my business privately?

Wanting to know how to sell a business privately often goes along with a business owner wanting to know how to sell a business quickly. If you have a niche that someone directly approaches you about, such as a smog shop for sale in Sacramento, you might be inclined to sell your business privately. You also might want to sell a business online through private means.

However, even when dealing with lower middle market private equity, it's best to hire a professional M&A broker. That way, you can ensure the sale is legally binding, and you secure the highest value possible for your company. 

Conclusion

Selling an automotive company is an exciting and intimidating period in one's life. If you're itching for lazy retirement days or changing gears with a new project, enlisting the support of an M&A broker will save you time and help you maximize profit from selling your business.

At Rogerson Business Services, we have years of experience selling automotive companies in California. Feel free to reach out to us for a consultation whenever you're ready.