As a business broker for more than three decades, I can say one thing with complete certainty: Every operator believes that their company is a premium acquisition. After years of hard work and careful attention to profitability, a high degree of pride and confidence from an operator is admirable and expected.
Here is the reality: Certain criteria must be met for a company to be in the elite M&A category, some of which are out of an operator’s control.
Location, location, location
The old real estate adage rings through. There is a direct correlation between the selling price and the location of an operator’s business — the market area they serve.
For example, Phoenix is one of the fastest-growing markets in the country. In the last year, I acted as the sell-side broker for Camelback Vending in Phoenix. I worked with them for a year to fine-tune the company, positioning it for a successful sale. That was helpful, but a major reason why the company commanded a particularly impressive selling price was its location. Multiple bidders were hungry for the market share that Camelback could deliver.
Compare that to another deal I was involved in last year, where I facilitated the sale of a multi-generational convenience services company. It was brilliantly run, but it was located in a market area that was somewhat rural, less populated and without the upside growth potential of a major market deal. Fortunately, that client understood the reality of their location. While the selling price for their company was excellent, the deal did not generate the frenzy among buyers we often see in some markets.
Location — you have no control over it, but it does make a difference.
The general economic disposition
Another important factor that can impact the selling price of a convenience services company is the overall economic climate. Are interest rates extremely high, is unemployment climbing, is money tight, is there a sense that a recession is around the corner, is the stock market strong?
Once again, as an operator, you can’t control these factors, but when the macro economy is favorable, selling prices tend to rise.
Gross profit margin
Let’s assume that you are operating in a booming market and the economy is good. The next key defining characteristic of a prime acquisition candidate is a strong gross profit margin.
Operators tend to overlook the importance of gross profit. There is a misconception that businesses are bought and sold on gross sales. That is not the case. That may be how the value is expressed — as in the price-to-sales ratio — but that is not how the actual values are arrived at.
Valuations look carefully at the net cash flow out of a business. The biggest part of that — the starting point — is your gross profit margin. In today’s world, with inflation so prevalent, gross profit is critical. Businesses that have a strong gross profit margin — and have shown the ability to maintain it against the headwinds of inflation — are positioned as a premium acquisition.
Technology investment
It goes almost without saying: The technology must be in place if you want your convenience services company to occupy a premium spot in the M&A landscape. Is it up to date? Do you have all the bells and whistles? In today’s M&A market, buyers expect it to be in place, and they discount businesses that do not have the latest technology.
I hear it all the time from buyers: “I want to make the deal, but if I have to invest thousands of dollars just to get this business up to speed, that is less money I can pay the seller.” It also is important to choose a major software provider: a leading VMS a product that will integrate easily into a buyer’s software platforms.
Quality accounts
A long client list of small accounts does not cut it for today’s buyer. The bigger players in convenience services will tell you that it does not pay to service small accounts. In many cases, they do not even want the accounts because the combination of labor costs, insurance, vehicles and general overhead, does not pencil out.
If selling your business is on your mind, fine-tune your account roster. Pull the small accounts, those post-COVID downsizers that never came back. Use that equipment to serve some bigger new accounts.
Growth potential
There is a reason why a buyer is interested in your convenience services company: They want to grow. Accordingly, if your company is in a growth mode, it is extremely attractive to a growth-minded buyer. Being able to demonstrate year-over-year growth in real terms — not just inflationary price-driven growth — puts your company in an elite category.
Chances are, if your company is growing, you have been successful with staffing as well — a big positive today. You cannot grow without drivers, techs and warehouse staff. Also, an operator that has a genuine sales team with a history of success in place will be coveted by serious buyers.
When the stars align
Are the stars aligned for your convenience services company? If you operate in a premium market area, maintain an excellent gross profit margin, are loaded up with technology, have a nice mix of quality accounts, can show consistent year-to-year growth and, of course, if the economy can stay intact, you are positioned to sell your company for a premium price when you are ready to do so.
If you are unable to check all the boxes, there is still plenty of good news for all convenience services operators. There is no shortage of buyers out there today who will be happy to explore the idea of buying your business. In this market, multiple offers are commonplace. It is a good time to be in the convenience services industry!
