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The market for businesses for sale is as hot as the housing market in Colorado Springs, brokers say, and buyers are lining up to purchase them.

After more than four decades of working within corporate America, Tim Kanaly got tired of reporting to someone else.

“I wanted to report to myself,” said Kanaly, who bought the Colorado Springs metal fabricating business The Ornamental Man in April.

Kanaly started working as a busboy for VICORP Restaurants (later American Blue Ribbon Holdings), which operated the Village Inn chain, when he was just 13 years old. Over the next 49 years, he worked his way up to CEO of the company.

After leaving in 2018, he spent three years commuting to Connecticut as the CEO of a large bakery company.

But even as a top executive, he still was responsible to boards of directors, and he was weary of dealing with “people who were brought in from other trades who didn’t understand your business,” he said. “If I’ve been in management for 50 years, I should not have to have every expense verified by somebody. You run your head through the grinder like that for so many years, you just get to a point of, ‘Stop.’”

Kanaly, a Denver resident, wasn’t ready to retire and wanted to keep doing something of value. In mid-2021, he started looking for a business to buy.

He had spent many years while at VICORP supervising the construction and remodeling of restaurants across the country and had acted as general contractor when he built his own home. He also was an experienced woodworker with a respect for crafts- and tradespeople.

Kanaly investigated a couple of woodworking businesses but couldn’t find one with strong enough financials.

“I spent a good amount of time on the internet, looking at different businesses that were listed there,” he said. “After a while, I decided I needed to engage somebody to help me with this process.”

He hired a Denver broker, who worked with Rob Amerine, president of Colorado Springs business brokerage The FBB Group Ltd.

The Ornamental Man, a 25-year-old company with six employees that makes ornamental fences, gates, railings, spiral staircases and decorative products, fit the bill.

Kanaly did “a fair amount” of research on the company — learning that it had good cash flow in the past three years — as well as on the welding industry.

He used a process called a Rollover for Business Start-Up to fund a 15 percent down payment with his 401k without having to pay immediate taxes or penalties. He obtained an SBA loan through Live Oak Bank, a small business lender headquartered in Wilmington, North Carolina, recommended by his agent.

It took four months of paperwork and jumping through hoops, but Kanaly closed the deal in April.

“One of the first things I did when I got here was to raise the salaries for all the employees because I wanted them to know that I want to be competitive in the marketplace,” he said. “I’m not changing much of anything else. I cleaned up the break room and put in a big refrigerator for them — just some little things that go a long way toward telling people that you want to keep them here, continuing to do what we’re doing and be known for quality.”

SELLER’S MARKET

Had he waited until now to look at buying, he might have had second thoughts, Kanaly said — given the Ukraine war, inflation and other factors that weren’t present or were less threatening when he started the process.

Although COVID has taken a toll and shaken up the market, it’s still an excellent time to sell a business and a great time to buy one as well, Amerine said.

“There are a lot of transactions going on,” he said. “We’ve seen a very strong end of the year last year and a very strong first quarter this year.”

The same factors that made 2021 a good time to think about buying or selling — Colorado’s strong economy and recovery as well as ready capital — still exist, said Ron Chernak, who recently sold The FBB Group to Amerine but remains with the business in a transitional role.

“There is a lot of confidence in the recovery,” Chernak said. “There’s still a lot of capital — it costs a little bit more with the slight increase in the interest rate that we’ve had, but it’s still available, and you can lock in fixed-rate loans.”

Chernak said he talked recently to a potential client in the hospitality industry who was impacted by the pandemic, “but he was telling me that he’s ready to go to market again, because his 2021 was stronger than 2019, pre-COVID.”

The FBB Group sold a manufacturing business in the first quarter of this year “that hardly hit the market before it was under contract for full price,” he said, “and we had other buyers waiting in case the transaction did not go through.”

The company is seeing more and more older entrepreneurs who are burned out from the challenge of COVID and want to sell.

But businesses are like homes for sale in Colorado Springs — “they’re few and far between,” Amerine said. “When they’re prepared and priced correctly, they go very quickly on the market.”

The biggest challenge is finding sellers that are prepared and ready to go to market, Amerine said.

Being properly prepared means properly positioning the business for sale, Chernak said.

“You need to have your financials in appropriate order and to make sure your business is organized for somebody else to come in and take it over,” he said. “It’s still a type of investment, and people have investment choices.”

A business that is scalable and has proven cash flow, consistent earnings, recurring revenue and a diversified customer base is one that will be attractive to buyers, he said.

Sellers also need to be psychologically prepared, Amerine said — “making sure they have taken care of their employees and having a good culture in place for them to stay. We get asked by buyers all the time, ‘Who is going to stay and who’s going to leave, and how do I replace a key employee?’ A company with a strong employee base stands out.”

Buyers “are not looking to work the 80-hour week that maybe the owner is working right now,” Amerine said. “A lot of times we’re helping them either enable people internally or build processes and documenting the operations of the business, and really kind of separating themselves from the business. That becomes an emotional part of the process.”

Selling a business is complex and often the largest financial transaction a client will undertake, Chernak said.

“Having a good team in place is critical — a good accountant and tax accountant, a transaction attorney, and a good broker,” he said.

Certain kinds of businesses are always in demand, including industrial, manufacturing and wholesale distribution businesses that are primarily business-to-business.

The Ornamental Man, for example, was on the market for about a month before it found its ideal buyer in Kanaly. “In our world, a month is like a day for a real estate transaction,” Amerine said.

Recently, though, he is seeing a move back into hospitality, event planning and event venues, although he thinks banks and financiers “are still maybe a little bit hesitant of getting behind those.”

DUE DILIGENCE

Amerine said he is seeing a lot of first-time buyers like Kanaly, coming out of corporate America or the military, as well as clients looking for a second or additional business. A number of them have cash in hand.

The FBB Group is also seeing a lot of interest from private equity groups looking for businesses in Colorado.

“Colorado is still high on the radar screen for a lot of buyers, as far as a state where they can grow and prosper and is reasonably business-friendly,” Chernak said.

Interest rates are still relatively low, but increasing, so buyers are eager to get deals done, said Jerry Ledingham, business intermediary at Murphy Business Sales based in Longmont.

Businesses that have been detrimentally impacted by COVID may be selling at reduced prices, but buyers must balance that against the work that will be required to get them back up.

“If you are one of those businesses, your three-year financial performance is going to be down, and while there has been some forgiveness of buyers (we see some small increases to comparable sales multiples in certain sectors), you will most likely have a drop in the price your business sells for,” Ledingham said.

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B2B businesses for sale are the most popular, but buyers are seeing more hospitality listings.

Buyers should be looking for three years of consistently strong financial performance and positive trends in Seller’s Discretionary Earnings — the total financial benefit a full-time owner/operator will derive from the business, also referred to as adjusted cash flow or recast earnings.

“Businesses with SDE under $60,000 per year will have a difficult time selling,” Ledingham said. “Businesses over $120,000 in SDE are much more likely to sell.”

Overall, inventory remains scarce.

“Bizbuysell.com currently shows just under 1,400 listings total in Colorado, which is quite low compared to what I have seen over the years,” and demand is high, pushing prices up, he said.

However, given the volatility of the stock market, “potential buyers may rather have their risk associated with something they control, vs. the uncontrollable swings in the market. Good investments with solid returns are hard to find, so perhaps it is a good time to put money into a business.”

Buyers need to get their own financial paperwork together and decide what range of business is right for them, Ledingham said.

“If they will be borrowing to make the purchase — for example, an SBA loan, they will need to have their own personal balance sheet ready to go,” he said. “They will need good credit, hopefully a strong base of assets, and the business they buy will need to support a salary for them, service on the debt and a safety factor.”

Buyers also should research other possible ways of funding a purchase, such as restructuring a 401k.

“They should not count on friends and family funding,” Ledingham said, “unless they secure it ahead of time and have the intent in writing.”

Reporter

Jeanne Davant is a graduate of the University of North Carolina. She worked for daily newspapers in D.C., North Carolina and Colorado, and has taught journalism and creative writing. She joined the Business Journal in 2017.