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Remember the first time you stepped into a smoky fire-damaged home?
If you’re like me, you’re embarrassed to admit the many missteps and mistakes you made. But hey, at least you got the job done. You probably learned a lot from that first experience and approach fire and smoke remediation a lot differently today. Not only are you more efficient, but the results are superior, too.
They say experience is the best teacher.
Now imagine you’re selling a business for the first time. What missteps and mistakes are you likely to make? No doubt you’ll learn a lot from the experience – what to do and what not to do next time. That is, if there is a next time. For many, selling their family business is a one-time deal. All the hard-earned knowledge gained, never to be used again. All the millions your mistakes cost you, gone up in smoke.
There’s a better way. My name is Jeff Moore. I bought 8 restoration companies last year and one already this year. As of this writing, I’ve closed 17 deals. I’m not too proud to admit that I’ve made mistakes along the way. In fact, I’m still learning.
One of the first lessons I learned is that the pros – brokers, bankers, attorneys, accountants – close more deals every month than most restorers will in a lifetime. Think they know something you don’t?
I’m writing this article to help you avoid some of the biggest mistakes first-time sellers make. I’ve asked business brokers, lawyers, accountants and even sellers with whom I’ve negotiated deals, to weigh in with their advice.
My hope is that after reading this book, you’ll know what the pros know.
You want to sell your restoration business. Where do you begin? Although every deal is unique, all tend to follow the same basic steps, from assembling your team and preparing your business for sale, to due diligence and ultimately closing the deal. Here are the five basic steps nearly every business owner can expect:
While it’s possible to receive an unsolicited offer from a potential buyer out of the blue, most business owners take a more considered proactive approach. Gokul Padmanabhan, president of Restoration Brokers of America, suggests beginning the process by assembling your team.
Your team may include your accountant, attorney, business broker, investment banker, and other advisors. They’ll help you assess your company’s financials, assets, market position, and growth potential; determine a valuation range; market your business to potential buyers; and negotiate the deal once a buyer is identified.
You may be wondering: why do I need to hire all these people? My brother-in-law is an accountant and has been doing my books for 20 years. He knows my business inside out. I trust him like a brother.
Remember what I said in chapter one: the pros close more deals every month than most restorers (or their accountants) will in a lifetime. Ask your brother-in-law how many companies he’s sold this year – heck, ever. Chances are you can count his answer using the fingers on one hand. Welcome him to the team, then ask him for referrals to attorneys and business brokers.
Your first consideration when preparing your business for sale is identifying your personal and professional goals. Why do you want to sell your business? What do you envision for your future after the sale? Do you prefer to continue running the business or retire?
Clearly identifying your goals will help determine the type of buyer you’re seeking. In the restoration industry, buyers fall into one of two categories: strategic, typically a larger restoration company, such as ATI, to whom the owner sells a majority stake; and financial, often a private equity firm. Both options have pros and cons.
A strategic buyer possesses the experience, knowledge, and resources to help take your business to the next level. They typically take a majority stake or buy your business outright, folding it into their existing operations. You may continue managing your business as a subsidiary in collaboration with fellow restorers who offer operating experience and expanded resources to help you grow, join the management team of the new company, or retire from the business entirely.
A financial buyer, such as a private equity firm, typically offers the capital you need to expand, but lacks the operating experience and expertise to help execute. On the positive side, you and your current management team remain solely responsible for continued growth of the company. On the negative side, you and your current management team remain solely responsible for continued growth of the company! Do you and your team possess the knowledge, experience, and desire to take your business to the next level?
Now that you’ve identified your goals and determined the type of buyer you’re seeking, your broker or other advisors typically assemble a marketing package called a Confidential Information Memorandum (CIM). Your CIM may include underlying numbers, key metrics, service offerings, referral network, market reach, customer base, commercial/residential split, and other key data. The objective: attract as many potential buyers as possible.
Your broker will share the CIM with prospective buyers once they’ve signed a non-disclosure agreement (NDA). They’ll ask interested buyers to submit a proposal called an Indication of Interest (IOI), a formal declaration of interest and the price range they’re willing to offer. Think of the IOI as the buyer’s pitch to you as to why you should consider selling your company to them.
With a short list of potential buyers in hand, you may wish to conduct your own due diligence on them to evaluate their financial resources, synergy, and culture.
Once you identify a serious buyer, the real work begins, agreeing on valuation and terms. All buyers use EBITDA (earnings before interest, taxes, depreciation, and amortization) as the baseline for valuation. Buyers are usually willing to pay a multiple of EBITDA. The multiple could be a factor of one, two, three, all the way up to the teens in some cases. While EBITDA is a more straightforward calculation, determining the multiple involves more subjective factors, including:
Upon reaching agreement on price and terms, the parties sign a non-binding letter of intent (LOI), outlining the key terms of the proposed deal. This is when the attorneys and accountants huddle. Together they draft a comprehensive purchase agreement spelling out the final terms of the sale, including purchase price, payment structure, closing conditions and any contingencies.
Prior to closing, expect the buyer to conduct a thorough due diligence process. Typically lasting 60 to 120 days after the LOI is signed, due diligence typically requires the seller and their representatives to complete a series of questionnaires and upload a range of documents, such as income statements, employment records, and lease agreements. Some tasks are as simple as answering yes/no questions, others are more complicated. Some may be completed by the seller, while others fall to your accountants and attorneys. Everything is either independently audited or verified by the buyer.
Simultaneously, both parties are working toward satisfying the closing conditions stipulated in the purchase agreement. Once due diligence is completed and all requirements are met, the transaction closes and ownership of the business transfers to the buyer.
Sound overwhelming? It needn’t be. Remember, you’re not alone. Consult with your accountant, attorney, or business broker. Talk with former restoration business owners who’ve sold their businesses (your fellow RIA members are a terrific resource!) Most importantly, talk with your family.
The first step in selling your business is assembling a winning team who can advise you on the transaction and help you successfully close the deal. Your team will likely include a CPA, an attorney, and a business broker.
Some members of your team may be onboard already, perhaps a trusted accountant, attorney, board member, or business mentor. These are people already familiar with you and your business, and with whom you enjoy a longstanding relationship, trust implicitly, and feel comfortable around. While they may not possess M&A experience themselves, they can likely refer you to their contacts who do.
Numerous seasoned professionals specialize exclusively in restoration industry M&A. If you regularly attend industry events, you’ve probably met some already. Perhaps you’ve attended their presentation at a conference or read their article in C&R Magazine. Reach out and introduce yourself. Ask them about their recent deals and see what advice they have to offer.
Fellow members of the Restoration Industry Association and other associations are another valuable resource. Strong relationships have always been key to success in our industry. Many restorers have recent, first-hand experience selling their restoration business and are happy to share it with a fellow restorer. Without a doubt, the premier networking event of the year is RIA’s International Restoration Convention and Industry Expo held each spring. It’s an ideal place to network and make contacts. I’d go as far as to say it’s a must-attend event for any restorer thinking of selling their business.
Now that you’ve identified potential players, it’s time to select who you want on your team. As with any hiring decision, you’ll conduct interviews, check references, and get to know the candidates. Once you sign your star player, typically a business broker, don’t be surprised if they recommend – or even insist – on bringing other players onboard to fill key positions. Be open to their suggestions. Business, much like sports, is a team effort and star players rely on trusted teammates to win.
When Miami’s Major League Soccer team, Inter Miami CF, signed star player Lionel Messi in 2023, the deal also included former FC Barcelona and Argentina teammates Jordi Alba, Sergio Busquets, and Luis Suarez, along with coach Gerardo Martino. It proved to be a winning combination for Miami.
At ATI, I have the pleasure of coaching an M&A team comprised of talented players, including employees, outside counsel, and a crack CPA. Together we’ve successfully closed a score of deals. It’s not only that each player is terrific at their position, but that we play well together. That’s what a winning team is all about.
“There’s a little bit of disconnect between an owner’s perceived value and market value,” observes Gokul Padmanabhan, owner of Restoration Brokers of America. “Sellers want to sell high, and buyers want to buy low.”
Gokul should know. He’s sold more than 350 restoration companies over the past decade, including a handful to ATI.
So how much is your business really worth?
Buying a company requires a leap of faith. Will the acquired company continue to perform as it has in the past? Will management and key employees stick around? There are no guarantees. To the contrary, the business landscape is littered with examples of acquisitions and mergers gone bad, resulting in billions in write-offs.
Hoping to avoid such disastrous results, savvy buyers in the restoration industry take a hard look at companies before committing to a deal. They’re looking beyond revenues and profits, to the quality of those revenues and profits. What are they hoping to find when they peer under the hood of the earnings engine?
Consistent, repeatable results.
Past performance is no guarantee of future results. Sound familiar? This common refrain has long served as a disclaimer in the financial services industry. It’s as true for an investor buying a mutual fund as for a company making a multi-billion-dollar acquisition.
All buyers use EBITDA (earnings before interest, taxes, depreciation, and amortization) as the baseline for valuation. Buyers are usually willing to pay a multiple of EBITDA. The multiple can vary widely, typically falling in the range of 3-8X. Subsequently a $10 million restoration business generating $1 million in EBITDA could sell for anywhere from $3 million to $8 million. EBITDA is a pretty straightforward calculation whereas multiple is more subjective. Several factors influence the multiple, and subsequently the purchase price, including:
Macroeconomic environment: Recently investors have been flocking to the restoration industry due to the non-discretionary nature of the work, effectively making it recession-proof. People are eager to avoid the kind of market volatility associated with an investment like cryptocurrency. Other factors, such as interest rates, can also impact multiple.
Synergy: Mitigation and reconstruction represent the industry’s two primary service offerings. ATI is the nation’s largest family-operated company that provides both services. When an acquiring company like ATI is evaluating the fit of a business, it is considering how well the projected synergy of the combined entity will drive future growth.
Geography: The disaster restoration industry is driven by, well, disasters. States with large populations that are prone to disaster, such as California, Texas, and Florida, are particularly attractive.
Ratio of cat work to overall revenue: By its very nature, CAT revenue varies widely from quarter to quarter and year to year.
A late season Category 5 hurricane makes landfall. Suddenly your phone is ringing off the hook. Blockbuster fourth quarter sales make up for what had previously been a lackluster year. Restorers know this, particularly those with one office serving one market.
Buyers know this, too.
Buyers and investors, including banks, venture capital and private equity, hate surprises. Remember, they’re looking for consistent, repeatable results That means as few wild downward or upward swings as possible. Buyers prefer a predictable, growing stream of revenue and profit. For that reason, buyers literally value $1 of CAT work less than $1 of recurring revenue.
Who cares what buyers think? You will when it comes time to sell. During due diligence, a buyer will determine what percentage of revenue and profit results from cat work. Savvy buyers who understand our industry expect to see some CAT work, but prefer it represent no more than 15-20% of total revenue. Any more is a red flag. Further complicating matters, there is no generally accepted definition for what constitutes CAT work. At ATI, we define CAT work as a named storm or one-time event.
Significant losses, one-time in nature, also tend to get discounted. For example, you scored a $2.5 million job last year. Historically, your largest job is $250,000. Expect a buyer to discount the excess profit, as it’s atypical and likely not repeatable for your business. Some buyers may exclude the entire amount; others may adjust it to the typical, largest size job you tend to repeat yearly, such as a $250,000 house fire.
The same holds true for a job in a new market. For example, if your restoration company specializes in residential, but took on a commercial building from the ground up, that too may get adjusted. Again, it differs from your ordinary course of business and may not be repeatable.
As a buyer, I’m looking for repeatable revenue. I always take a hard look at CAT work and one-time events. Was it in the restorer’s back yard? Or were they chasing a storm? Most buyers, including myself, will exclude 100% of the latter from both revenue and EBITDA calculations. I also look at job size. A restorer who historically tackles six-figure jobs who scores a seven-figure job every five or ten years, does not spell repeatable to me. These types of jobs may be profitable, but they’re not repeatable.
CAT work can provide a welcome revenue boost and be very profitable. Just remember that when it comes time to sell your company, every dollar from those jobs may well be valued less than a dollar to potential buyers. Regardless how a buyer or investor defines CAT work, the higher the ratio, the lower the multiple, and subsequently the purchase price.
When all is said and done, how much your business is worth is determined by a collaborative process of give and take between buyer and seller. Arriving at the right valuation takes into consideration factors such as macroeconomic environment, synergies, geography, and more. A seasoned business broker, attorney or other advisor with restoration industry experience is an invaluable ally in this process. The right valuation is one both buyer and seller arrive at together that is equitable and mutually beneficial for to parties.
Whether we’re hoping to pass the torch to our heirs, or seeking to exit the business altogether, too often we focus on how much we want to leave to our heirs that we fail to consider how much we’ll leave to the IRS.
My Dad, Gary Moore, founded ATI in 1989 and built it into America’s largest family-operated restoration company. Not long ago, my brothers and I sat down with Dad to talk about succession. Turns out we had a lot to learn. What followed was a year-long crash course in succession, estate planning and trusts.
According to Robert Bancroft, Managing Director at Morgan Stanley Private Wealth Management, my family’s experience is all too common. (I highly recommend reading Robert’s succession planning white paper which succinctly outlines the advantages of a well-considered succession plan for you, your family, and your employees.)
Turns out most businesses have no exit or succession plans at all. If yours is one of them, preparing your business for sale includes preparing yourself and your family for what comes next. Failure to consider succession ensures chaos should you become incapacitated, or worse. Failure to consider the tax consequences of a sale or death of the owner ensures your heirs will face an unexpected tax bill.
Do yourself, your partners, employees, and most importantly, your family, a favor. Take the time now to educate yourself. I’d like to tell you there’s a shortcut; unfortunately, there’s not. Talk with industry peers. Seek out professional advice. Develop clear exit and succession plans and thoughtfully consider exactly the kind of legacy you want to leave your heirs.
They’ll be glad you did.
A proud second-generation restorer, Jeff Walker began his career in his family’s restoration business in Denver. He soon traded his snowboard for a surfboard and moved to San Diego, where he founded his own restoration and construction company. “We did really well for a really long time,” Jeff recalls. “Then the Great Recession hit, and our construction business took a nosedive.”
One day Jeff received a surprise call out of the blue from J&M Keystone, a company he’d long admired. He went for an interview and was hired the same day. “I go home and share the news with my wife, Lisa. That’s when she tells me she sent J&M my resume. She was tired of the ups and downs of business ownership!”
Over a decade at J&M, Jeff rose from project management and business development to operations manager and eventually general manager and equity partner. Jeff was living the dream, until he learned that J&M Keystone’s majority owners had decided to sell. His first thought was, “Oh my God, I’m going to lose everything. I’ve got a house payment, I’ve got three dogs, I’ve got a wife, I’ve got grandkids. I’ve poured my heart and my soul into J&M Keystone.”
That was in 2001. Today Jeff still resides in San Diego, enjoys surfing and spending time with Lisa, their two daughters and four grandchildren, and he works for ATI. “When ATI acquired J&M, we had 110 employees and $17M in revenue,” he recalls. “They promoted me to regional manager. Within a year I was promoted again, this time to regional director. I now manage both the former J&M office and ATI’s San Diego office with a combined $40 million P&L.”
We hear endless advice on how, when, and to whom to sell our companies. Rarely do we hear from owners themselves. Hundreds of restoration companies have merged or been acquired over the past five years. That means hundreds of owners like Jeff Walker have a story to share. My advice is talk to them.
What do they wish they’d known before selling their business?
What would they do differently?
What are they doing now?
Was selling the end of their story or merely the beginning of a new chapter?
Having worked closely with dozens of founders before, during and after the sale, I assure you the answer to the last question is the latter. Some founders are looking to exit the industry and retire. Still others are eager to propel their companies and their careers to the next level, with access to resources they could only dream about previously. Founders who join the ATI family may continue leading their company as an ATI subsidiary, assume a new leadership role with ATI, or retire. Together we tailor a path that’s right for them.
What will you do after selling your company? Selling your family business is not the end of the story, but rather the beginning of a new chapter. What adventure awaits when you turn the page?
Fewer.
Bigger.
National.
Those adjectives describe the restoration company of the future. Restoration has historically been a fragmented industry, comprised primarily of small family businesses. For many of us, restoration is not a job, it’s a calling. I know, I’m a second-generation restorer.
When Dad started ATI 30 years ago he operated a single office in Southern California. I watched – and later participated – as ATI grew from startup to America’s largest family-operated restoration company.
Could Dad duplicate that feat today?
Perhaps.
Since 2019 our industry has been steadily consolidating. That year, a handful of large restorers, backed by private equity, began buying up local and regional restorers. By summer of 2019, it had become clear to our family that our industry was changing. If we were to continue thriving for another 30 years, we needed to adjust course.
Our family gathers each summer for our annual vacation. That summer we happened to be in Montana. At the time, ATI was the largest family restoration company. Most of our competitors, ServPro, BELFOR, FirstOnSite, had partnered with private equity. Suddenly they had a lot of money behind them.
We found ourselves wondering what’s going to happen in ten years if we don’t do something now? Will our competitors have grown by 10X and suddenly no one will want to use ATI because we lack the size, scale, and capacity of the big guys?
My wife and I sat down with Mom and Dad, my two brothers and their wives to discuss our options. We asked ourselves, what did the family want? What was best for our employees? What was best for the legacy of the company? Over three hours we talked through countless issues. There were many different points of view. Ultimately we faced the same choices as you: stay the course, sell a stake to private equity, or pursue a strategic alliance with another restoration company.
Eventually we reached a unanimous decision to explore the pros and cons of inviting outside investors. Within a year we had partnered with private equity firm TSG. We’ve since acquired or partnered with more than a dozen exceptional restoration companies, doubling our headcount, geographic footprint, and annual revenue.
Every family-owned restoration company faces a similar decision today. The restoration industry will continue to consolidate, resulting in fewer than 10,000 companies by end of the decade, down from roughly 15,000 today. Even the BIG 8, including ATI, are not immune. We will eventually become the BIG 5, or the BIG 3, as the largest non-franchise restoration companies join forces.
Clearly the biggest companies are getting even bigger. So too are smaller regional companies. Successful restorers often expand their service offering and their territory to meet customer demand, opening a second, third, or even fourth location in their region. As they continue growing, these regional restorers often resort to merger or acquisition to accelerate their expansion.
The result? Fewer, bigger companies with broader geographic reach. Smaller restorers, especially those serving one market, will find it increasingly challenging to compete against their larger, well-funded competitors. Every restorer, regardless of size, specialty, or geography, must adapt to the new reality.
We all share a desire to ensure our legacy, not only for our sons and daughters, but their sons and daughters. Staying the course may well be the right decision for your company, for now. The benefits of remaining independent – control over decision making, keeping finances private, greater flexibility, less bureaucracy – are real. However, the calculus is evolving.
Each of us must continuously weigh the benefits of staying the course against the risks presented by changing industry dynamics. There’s no guarantee the same tried-and-true formula that has worked in the past will work in the future.
Remember, even the very best dinosaurs are still extinct.