Selling an engineering business is not an easy task. It takes time and effort to find the right buyer, negotiate the price and finalize the deal. It is important to understand that there is no one-size-fits-all approach when it comes to selling a business.
Preparing to sell a business involves more than putting a for-sale sign in the window. Your M&A Advisor will give you a buying-and-selling-a-business checklist with all the necessary due-diligence documents. Sellers use the documents to work on the business valuation, and buyers use the documents to decide if the business is worthy of their investment dollars.
Prep Your Business to Sell
When you’ve decided to sell your engineering business, you must ensure all current operations are ready to be moved over to new ownership. First and foremost, begin by preparing your business financial and operational details. This includes gathering all of your financial, insurance, operational, customer, employee, and equipment documents from the past three to five years. Business buyers want to see detailed financial statements, such as profit & loss and balance sheets, to verify that the asking price meets the value of the business. Engineering companies for sale need to be able to show potential investors their EBITDA details. These include the key add-backs and adjustments to the income statement. EBITDA means Earnings Before Interest, Taxes, Depreciation and Amortization.
Consider incorporating the skills of an experienced business valuation firm. Look into your accounts receivable, inventory cost, payroll, and ongoing project spending to see where you currently stand and what could possibly use some attention.
Equally as important, remember to check on the status of your insurance policies. Potential buyers will want to avoid any outstanding issues when looking into investment options, so securing the safety and coverage of the company will help generate positive attention. In that same train of thought, be sure to prepare customer service agreements and warranties for the sale. Inform any stakeholders on your decision to sell in advance to provide customers the same peace of mind.
The documents needed to sell a business could be housed in a data system. M&A Advisors can use secure data storage tools to protect these documents and only make them available once a buyer signs a Confidentiality Agreement or NDA. Documents to manage and protect and only show potential buyers how the engineering business for sale records vital information at the right time include recent financial statements, payroll registers, invoicing information, maintenance records, and customer lists.
Figure Out Your Bottom Line
Now that preparation is underway to sell your engineering company, you must determine your bottom line. Potential buyers will analyze your current value to better understand how worthy (or risky) of an investment your business is, and if they believe it can grow. Valuation Services can be used to determine the business’s EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), which investors will want to see to understand how profitable the company currently is.
Remember, don’t become deterred if your business isn’t currently at its peak performance. Your goal is to present possible buyers with your company’s current standing to help them better understand where they can grow it after the acquisition. Sharing your financials will also help buyers determine if the company is marketable and in the right position for any necessary improvements—even if it’s not ready to profit right out the gate.
Before listing your business for sale confidentially, you should have a reasonable idea of what your taxes and consequences will be after the sale. Your M&A Advisor can help you find opportunities to maximize your returns.
You do not want all the profits from the sale to go to the government, and your M&A Advisor can give you a financial due diligence checklist so you have a realistic understanding of how much money you will have after the expenses from the sale.
Determining the Value of Your Engineering Company
The M&A strategy for selling your business also includes a detailed valuation. Your M&A Advisor will look at engineering industry trends as well as engineering company valuation multiples. You can look closely at the numbers your M&A Advisor presents before deciding whether to sell your business.
Whether you are planning for succession or for listing your business confidentially, you need to know what your engineering business is worth. Your M&A Advisor has several tools to use when valuing the business. Having a realistic number gives you a better idea of what proceeds you can expect after the sale and fees.
Typically, there are three methods to value an engineering business:
After doing market research, valuation firms can efficiently figure engineering industry values. Your valuation firm will look at similar businesses that have recently sold to determine the value of your business. They use other businesses to have accurate multiples of sales as well as other necessary metrics.
The market-based approach can be difficult to do because many businesses are sold confidentially. This could leave your valuation firm without access to comparable businesses to use to determine your business’s valuation but there are private databases that sell this information that your valuation firm subscribes to get an accurate business valuation for you.
In the asset-based approach, your M&A mid-market Advisor will look at the Fair Market Value of the assets in your business. They must follow the engineering company valuation rules when assessing the value of assets.
For engineering companies with significant equipment and facilities, such as a highway contractor, the asset-based approach may yield the highest value in a transaction.
Using your company’s financial documents like the accounts receivable and unbilled contracts, your advisor will be able to figure the cash value of payments due. They will also look at the tangible assets, like equipment and your building. Your M&A advisor will look at the cost to replace or reconstruct the assets.
Then, the M&A advisor will deduct your business’s liabilities from the value of the assets. The resulting number is the adjusted book value.
The challenge with assessing assets is valuing the intangible assets, like the reputation of the business. Name recognition, loyal employees, and faithful customers can add to the business’s value, but it does not have a fixed value. Intangible assets are called “goodwill,” and your M&A advisor will value the goodwill by capitalizing the earnings.
Income-based Approaches value a business by looking to the future earnings or the cash flows expected to generate in the future.
Some Engineering industry businesses do not have many assets, so the Income-based approach may be a good option. This technique looks at future annual returns, which are converted into current-value cash flow by discounting the future cash flow with a set rate based on risk. Usually, valuators use a safe rate of return, with compensation for the buyer/investor.
Valuations can also look at the earnings and cash flow from previous years. Valuators will adjust and capitalize them, and then use EBITDA to measure earnings instead. No matter what, the cash flow needs to be set to a standard that shows the potential buyer their potential return on investment.
It is also necessary to normalize the business cash flow by looking at the owner’s draw and benefits as well as other related transactions and extraordinary line items. After determining the average annual earnings and EBITDA or SDE, your valuator will use a rate to show the risk and potential growth. They will also use an engineering industry valuation calculator when needed.
The process of valuing a business is complicated, which is why working with an experienced M&A Advisor and Business Valuation Firm is helpful for creating your business owner exit strategy.
Develop Your Exit Strategy
Once your business is prepped, and finances are aligned, you must develop an exit strategy that accounts for both current customers and employees. As you know, customer loyalty is an essential part of trade businesses. With a big shift in your ownership, inform long-term clients of your decision to sell and offer some sort of introductory incentives, such as service specials. This offer will significantly help the transition run smoother and forge a connection between existing customers and new management.
Likewise, consider the needs of new management. Don’t be stingy—grabbing the check and running may hurt the company in its early stages of new ownership and can leave your old team unhappy. Offer to stay around for three to six months to aid in the transition and help guide new management in the right direction. This enthusiasm not only creates a smooth exit but also promotes interest and ease of mind for potential buyers.
Remember to also remain considerate of your employees. Because the transition of management could be tough on them, consider training an existing top employee to take your place once the sale is complete. Investing in a trusted technician to helm the wheel gives potential buyers a confidence boost and helps maintain the original flow of operations and company culture for long-time employees.
Operating and attempting to sell a business simultaneously is almost impossible. To aid in the process of selling faster and getting a top price, you should consider finding an experienced M&A Advisor. An M&A Advisor helps you along all stages selling your engineering business, from appraising and marketing to communicating with investors about your business listing.
Without help in these various departments, you might be left with a weak selling price and unfit buyers. Not to mention, business brokers navigate all the essential paperwork and legal transfers necessary to finalize the sale once a buyer has been chosen. Instead of juggling everything on your own, find the help you’ll need in advance.
Are You Selling a Business?
Selling a business isn’t easy. In fact, it is compared to a marathon, not a sprint. Utilizing the services of a highly experienced M&A Services Company, like IAG, can help you focus on running your business while they focus on preparing and presenting to a qualified subset of interested buyers, confidentially. Get started in the process of selling your engineering business by scheduling a call or, use our free business valuation calculator to get a rough estimate of what your business could be worth.