Client Background
In 2009, the owner of a unique niche business and industry leader in the sale and service of emergency vehicles – fire trucks and ambulances – approached the IEPA to explore a possible exit from his business. During the initial meetings with Tim, the 54-year-old business owner shared that seeing obituaries of business owners he knew who were in their 50’s was prompting him to do some planning for an exit. The owner had come into full ownership of the business via a buyout of his original two partners over the prior ten (10) years. Since that time the owner had completed the buy-out and also managed to double the business revenue.
Like many business owners, Tim had invested excess cash into both a growth plan as well as buying out his partners leading to a “low” personal financial readiness for a sale – i.e. most of his wealth was locked inside of his illiquid business. Tim wanted to know how to plan an exit and, to answer this question, he engaged in a process of developing a full exit plan so he could learn about the complete suite of exit options, including the pros and cons of each one. The IEPA team was hired to create an exit plan that could satisfy the owner’s personal and business goals.
The exit planning process was comprehensive, including a 102-page deliverable that followed the 6-step exit planning process, outlining the client’s goal, taking a measurement of the owners’ readiness, and providing detailed pros and cons of each exit option. There was also analysis of the Company, including initial estimations of where and how the value of the business could be increased.
Client Issues
After multiple meetings with the client, several issues and client goals became evident. The owner wanted to diversify his wealth, pay down any outstanding debts and achieve financial independence. He also wanted to include his managers in the succession of the business, and he wanted to travel more for extended periods of time. While Tim had these goals in place, there were also a few management issues that had to be addressed.
The Company had two (2) primary functions, new fire truck and ambulance sales and the ongoing servicing of these expensive and complex vehicles. Over the years, the Company had actually grown in two separate buildings which were about ¼ mile away from each other. The ‘headquarters’ housed sales and administrative functions, with a second building for the service department. The unintended result of this physical separation of these different functions was the development of two (2) different cultures – one for operations and one for sales. To highlight the challenge, there were separate leaders of each department fostering some of this cultural divide.
The leader of the sales team was often at odds with the leader of the operations team, who both reported directly to the business owner. The operations manager had a finance background, so he also had responsibilities for watching over finances and cash flow for the business. The sales leader ran marketing and sales, managed the pipeline (for a long-lead-time sale process), and developed new products and services, including handling relationships with key suppliers. Both key employees were unwilling to work for the other if either employee became the successor. So, our owner had a challenge in that the selection of either option for a successor to the business would create a loss of the other key person. The owner struggled with this dynamic for a number of years, which also took most of the options for internal transfer off the table. The exit planning process brought this dynamic to light as the conversations around internal transfers continued to surface this issue.
Business Issue as a Foundation for the Exit Plan
The sales and servicing of emergency vehicles – fire trucks and ambulances – is a cottage industry. What this means is that our owner Tim developed the business model thirty years earlier and offered it to the fire truck manufacturers as an alternative to those companies selling the trucks themselves. Tim and a few dozen other individuals around the country set up these businesses as the manufacturers saw the benefit of separating the sales process from the manufacturing process. The business model chosen was very similar to car dealerships, except instead of selling thirty-thousand or fifty-thousand dollar automobiles, these dealers were selling $600,000 to $1mm town assets that had to be approved by the municipalities and required specialized service on an annual basis.
Most notably this industry had no professional investors. For the right investor, this could be an attractive opportunity to acquire a platform business and then add on with other businesses from owners who were facing similar exit issues. None of the founder-owners had grown into a national business and they, like Tim, were all Baby Boomers, getting closer to considering retirement.
Growth Planning & Exit Option Analysis
The IEPA team worked with the owner to craft an exit plan by following our six-step processes. After conducting an initial review of the owner’s financial and mental readiness it was clear the owner was a “stay and grow” owner. The client was able to eliminate the ESOP and Gifting options right away. There was discussion and meetings about a management buyout, but personality conflicts were making the conversation difficult.
Tim needed to achieve a significant amount of liquidity from the sale of the business to achieve his exit goals. To close the value gap, Tim worked on increasing the value over a period of years and positioned the business to attract an appropriate investor. Part of the growth plan to increase the overall value and attractiveness of the company, was to take on the second line of fire trucks. The thinking was that if Tim’s business could successfully sell the second line of fire trucks, then the service department revenues would increase, demonstrating a more scalable model.
Over the course of the next several years, the client achieved the growth goal, both improving the Company’s EBITDA as well as presenting a stronger growth story for investors. With the increase in earnings and improvements to the business overall, the Company’s estimated market value increased substantially, further closing the personal value gap that was measured in the exit plan many years prior. The client was finally ready and able to exit the business and it was time to find the right investor. In early 2015 the client declared that ‘this will be the year that I exit’, more than five years after the exit plan was developed.
Execution/ Transaction details
Again, without a natural, strategic (i.e. national) buyer, the marketing dynamic for this niche business was to position the company as a platform by showing not only a scalable business model but to also identify add-on acquisitions available in the space. By promoting the opportunity to be the first professional money to be coming into the industry, it was estimated that this deal would be attractive to certain buyers in the lower middle market who would value the upside potential to grow through acquisition. Being in a niche industry with high barriers to entry made the client’s company attractive to certain buyers.
Challenges with the Transaction
The 2009 exit plan had identified that a “first money in” private equity group investor as the ideal investor in this niche business. This type of outside investor would provide liquidity for the value that was created in the business. Also, an outside investor could help resolve the issues that existed between the key employees. However, there were some challenges to be overcome:
- Large swings in working capital, due to the seasonality of the company’s revenue.
- Low purchase multiple due to the riskiness of the business.
- Lack of a clear path to exit after investing and growing the business.
Outcome
In 2016 an offer was accepted from a private equity group to purchase 100% of the company. The private equity group saw the opportunity to be the first professional money in a profitable industry that was ripe for consolidation and expansion. The value that Tim built into the company was realized in the transaction, along with future rental income for the buildings that he continued to own post-close. As for the management team, the sales leader was chosen as the successor by the private equity group while the operations manager was offered severance for his service to the company. The investors replaced the finance and operations functions with two different leaders, each of whom was able to effectively report to and work underneath the sales leader. The sales leader was granted equity to incentivize him to grow the business. The exit planning process brought a number of challenges to light and provided Tim with a multi-year path to address the issues that could be acted upon and to allow an external sale transaction to address the remaining issues.