Ownership Transfer - On The Numbers
Construction Equipment Distribution magazine is published by the Associated Equipment Distributors, a nonprofit trade association founded in 1919, whose membership is primarily comprised of the leading equipment dealerships and rental companies in the U.S. and Canada. AED membership also includes equipment manufacturers and industry-service firms. CED magazine has been published continuously since 1920. Associated Equipment Distributors
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SECTION: On The Numbers

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Ownership Transfer


Article Date: 03-01-2007
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.

A lesson from another industry.

Every year various associations and manufacturers conduct a dealer survey to determine the Top 10 Dealer Concerns. Besides the obvious responses related to market conditions, interest rates and the margin squeeze, one concern appears every year near the top of the list - ownership transition. Every year it's in the top five, and more often than not it's in the top three. It's no secret that we have a mature group of owners in this industry and programs to facilitate transfers are few and far between. Add in the changes in the marketplace, the intentional shrinkage of dealer networks, and the increasing size of the average dealer and it's no wonder transfers are tough to do.

Unless manufacturers put programs in place to stimulate and finance transfers, a lot of dealers will have to find ways to liquefy their investments in their companies in ways manufacturers may not like.

Taking this into account, you'd think there are high annual turnover rates. Not so. In fact, few actual transfers take place. It makes you wonder how ownership transition gets on the list.

Maybe it's because manufacturers don't offer programs to assist with the ownership transfer when a dealer decides to pull the plug. As an example, take a look at the material handling industry. Material handling dealers had a pretty good idea what they would have to pay for a dealer, how to finance it, and what they needed in equity to get into the deal. In addition, they knew what they would get for their investment when they decided to move on. The same formulas they used to buy-in were used to calculate the buyout. You could sleep well every night and calculate the dealership value on a daily basis.

What was great about these programs was how they worked the same for all industry executives. You may not have been able to do the deal on your own, but two or three of the key executives of any store could get approved to buy the store as long as they could come up with the equity.

The valuation formulas created an upside and a downside. They were conservative formulas with a minimum equity requirement and insured adequate cash flow using conservative business assumptions that would pay-off the acquisition debt in five to seven years. From the buyer's side, the formulas gave a lot of qualified people the opportunity to get into the equity game.

The formulas supported a continuous supply of buyers, giving dealers the ability to pick the time to get out. There were flaws in the system, but all things considered, it worked very well. And many of the dealers would not have been in a position to sell if they hadn't made use of the manufacturer's program that allowed them to buy-in.

Wouldn't it be great if the construction equipment industry had similar programs? There are a few available, but not to the extent that are available to material handling dealers.

Ownership transition is a big issue today because there are many dealers ready to retire who are unable to close a deal because of valuation issues, financing issues, vendor restraints, and a lack of equity money to help new owners take a lead role.

Dealers need to work with vendors to put transition programs in place, but there are some things a dealer has to do:

  • Evaluate management of a potential buyer group.
  • List other potential buyers
  • Establish a range of values for the company
  • Get help to take the deal to market
The tough part is arriving at a range of values that can be financed and produce reasonable returns. If you can prove you can fund your purchase price with the cash flow from the current operation over five to seven years, you're probably in the ball park. If you can't, your buyers and their banks will figure that out and you'll never close the deal.

If you can do the homework and compile your historical results, capital expenditures and debt service, it should be an easy task to determine the range of values and get someone to test the market. We have programs and members available to help you do this work, with appropriate confidentiality controls in place.

Your "helper" shouldn't cost you an arm and leg. You don't need a $50,000 offering memo or even a $25,000 offering memo. What you need is someone who knows the industry and can find prospective buyers to "do the deal." If they find two or three potential buyers, these buyers can be forwarded on to your major vendors for approval and you're on your way.

Believe it or not there are boutique "helpers" out there who know your business....it may cost you $10,000 to do the hands-on market testing, but it beats filling out the dealer survey every year saying "ownership transition" is an issue and not doing anything about it.

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Article Categories:  Financial