Your business’s ability to serve customers efficiently in a safe, well-maintained environment is crucial to obtaining the best value in a sale. Business owners all too often neglect facilities management, but buyers will painstakingly analyze the state of your facilities during the due diligence process. Therefore, you need to prepare just as meticulously.
“Facilities” is an all-encompassing term for your land, buildings, equipment, machinery, and vehicles — basically, all your fixed assets. Documenting your maintenance practices, operating policies, safety procedures, and environmental reports is important for a buyer, as these records reveal the condition and needs of your business’s assets. Although it’s not exactly fun to keep up with maintenance and documentation on a regular schedule, the better records you keep, the more efficient the due diligence process will be — and efficiency means money.
So let’s explore a few key points on facilities maintenance and how to document it.
Do not defer maintenance before or during a sale process. Doing so would prompt potential buyers to lower their offer. You must have written policies that guide regularly scheduled maintenance and replacement of equipment, and you must keep reports that demonstrate completion of the maintenance. Keep records on all repairs to your buildings and equipment, too — especially expensive, significant repairs such as a new roof or a complete overhaul of your equipment — to show buyers that you’ve reduced their risk of facing an unexpected major repair. These well-documented maintenance processes will help build trust with the buyer, and trust equals value.
Closely related to maintenance are capital expenditures (known as “cap ex”): the funds your business uses to purchase and maintain your assets. Cap ex comes in two forms: replacement and growth. You should be able to explain the difference for buyers. Replacement cap ex is the substitution of a new or refurbished asset for an existing one — for example, replacing an old vehicle or truck. Replacement cap ex supports existing business but can improve efficiency as well. Growth cap ex, on the other hand, primarily serves to provide growth capacity — for example, purchasing a new truck for a new delivery route.
If you need to make a growth capital expenditure shortly before or during the sale process, ask the buyer to pay for this cap ex over and above the base purchase price. Otherwise, you won’t fully capture the economic value of the expenditure.
Safety in the workplace is crucial, and no business owner wants to create an unsafe working environment. Having an employee injured on the job is a terrible experience for both the injured party and the employer who cares about that person’s well-being — plus, it can stop or delay production and affect employee morale. No area of operations has a more critical need for documented policies, procedures, and reports, including documentation that shows your employees have been trained on safety procedures.
One universal measurement of safety is the Experience Modification Rating (EMR). If you have a rating of 1.0 or below, bravo! If you are on the other side of that number, you have work to do. The highest-valued companies have excellent safety records. If your company is like most, however, you have not paid enough attention to this area.
OSHA regulations are ever present in business operations, but some types of companies have a more urgent need than others to comply with rules surrounding record keeping and inspections. If your company happens to fall (no pun intended) into the high-scrutiny OSHA basket, then the preservation of OSHA reports and records will serve you well in due diligence discussions. Otherwise, when it’s time for a purchase agreement, you might find yourself with more restrictive representations and warranties.
Workers compensation insurance is another measurement of workplace safety — one that directly impacts expenses and thereby enterprise value, and not just in dollars and cents. As a business owner, you know that your company’s best attribute is your employees, and so will potential buyers. Earning their trust by creating a safe environment and retaining good employees will bring your company just as much value (or more) than any capital expenditure.
Workplace safety and environmental concerns go together. Once again, documentation of policies, procedures, and reporting is critical to protect both employees and the company from harm. How the company handles hazardous waste, such as chemical storage and disposal, will be scrutinized during the due diligence process. Key areas to review regularly (not just in the midst of a sale) include:
- Employee training and policies
- Phase 1 environmental reports on your physical facilities (land and buildings)
- Hazardous waste vendors and contracts
- Environmental reports
The representations and warranties you can make in the purchase agreement will be driven by your company’s documented environmental practices.
Owned Land and Buildings
You may ask, as many owners do, whether you should include the property owned by you or your company in the sale of the business. The quick answer is no, because you will probably receive more value (cash) by selling the business operations separately from the owned property. Why? Net income for real estate is valued higher than net income from business operations. The land and building are physical assets, whereas the business valuation is partly physical (fixed and current assets) and partly intangible (goodwill). Buying physical assets involves less capital risk, and thus requires a lower return on investment (ROI).
Your decision regarding whether to sell property along with the company operations will impact the overall value of the transaction. If you decide to keep the property and lease it to the buyer, then the lease payments will lower EBITDA and hence the company’s value. Making the property part of the sale transaction, on the other hand, will increase the business enterprise value. Furthermore, it is the most efficient way to divest from your company, as it will decrease any future costs associated with the friction of selling the property separately. But selling the business and property together will most likely result in less total cash for you than if you sell the property separately. So, if you want to maximize the value received from selling your company, then you need to create a lease at market value and sell the property separately.
This is the fourth article in our Value Driver series. Click below to explore the other topics.