# You Do the Math

April 25, 2007

About the author: Dan Cammack is president of TexSon Water, Ltd. Cammack is a member of the Editorial Advisory Board of Water Quality Products. He can be reached at 210.587.3456 or by e-mail at [email protected].

There comes a time in the lifespan of a dealership when the owners begin to think about an exit strategy. Whether passing a company onto the next family generation or selling the entire company, for most people this is uncharted territory. Through the development of recurring revenue, however, you can dramatically increase the value of your company.

Most business owners reach the point of retirement and begin to search for potential buyers; however, when they try to sell their company, they often cannot get the value they wanted or expected. In today’s market, I believe a shrewd business owner must think about an exit strategy years before he or she plans on selling or retiring.

## The Realities of Selling

The focus of any business is to be profitable and for most retail dealerships, this is accomplished with a combination of sales and service. Experienced business owners know, on average, their percentage of actual sales versus the number of cold calls or fliers that it took to obtain those contracts. For example, they know that if they send out 1,000 fliers they may get 50 calls. From these 50 calls they will likely close about 20%, selling 10 systems at \$1,500. They also know that on average they make 200 service calls per month that generate approximately \$150 per service call. This type of dealership brings in about \$45,000 per month with a net profit of \$10,000 per month. Therefore, the dealership will grow at an average of 2 to 5% per year depending on the economy and other factors. Let’s say the company has been very stable for the past 10 years and the dealer is now interested in selling this “half a million dollar a year company,” which makes \$120,000 in profit per year, only to find that prospective buyers are offering to pay \$250,000 to \$300,000 at best. Why would he or she sell a company that makes \$100,000-plus per year only to get two to three years worth of income? The better question is: Why should someone pay more for that company?

Let’s look at another example. A dealership only sells five units per month at the same average price of \$1,500 per unit, and it also averages about 200 service calls per month at the same \$150 per call average. The difference between this dealership and the above example is that this dealer sells a three-year service contract (\$15 per month) with each unit that covers salt and routine maintenance. In addition, this company concentrates on renting units as well as selling them. In contrast to the first example, this dealer rents out five units per month at an average of \$35 per month. Even though this dealership only makes \$37,750 per month (\$8,000 net) because they sell 50% fewer units, you will see that there are long term benefits to renting versus selling. If the dealer rented five units every month, at the end of 12 months the monthly revenue from rentals alone would exceed \$2,000. Monthly revenue from placing five rentals every month at \$35 per month after three years yields a total of \$6,300 per month. At that same pace over a 10-year period (factoring in a 30% loss of rentals), this dealer would still bring in almost \$15,000 per month on rentals alone.

## Recurring Revenue

Your company has a name and a reputation. There are no guarantees that the new owners will take care of the customer base as you have. Although you may average 10 new sales and 200 service calls per month, there is no guarantee that the new owners will perform as well. If you can show long-term, recurring income, the prospective buyers will be much more likely to pay more for your company. Another benefit to recurring revenue is lending institutions look very favorably on recurring revenue when evaluating loans for buyouts by the employees or family members.

Let’s look at the two examples when it comes time to sell the business: After 10 years in business let’s assume each will be offered an amount that is equivalent to three years of net profits as well as the value of current inventory. We will estimate the current inventory at \$50,000.

In this scenario, the first owner would receive \$410,000 for his or her company (\$10,000 net monthly sales x 12 months x 3 years plus \$50,000). The second owner would receive \$867,200 for his or her company (\$8,000 net monthly sales x 12 months x 3 years + \$50,000 plus \$14,700 net monthly rental income x 12 months x 3 years).

Most dealers have a number of used softeners, which were taken out when installing new equipment. Why have these systems sitting in a “graveyard” when they could be refurbished and used as rentals?

The best way to develop an exit strategy is to build recurring revenue into your business. This increases your monthly cash flow and pays big dividends when you decide to sell.

A real life example is relevant: A dealer (let’s call him James) ran a very successful dealership in the U.S. Upon his retirement, he gave the dealership to his employees, with each receiving a portion based on position and years with the company. All revenue from sales, rentals and service went to the company/employees with one exception: the new owners had to maintain the existing rental fleet and James would continue to receive the income from those rentals. The dealership continued to flourish and make money for the employees. James had more than 5,500 rentals from the previous 15 years in business, each averaging \$14 per month, so I leave it to you to calculate his success.

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