Selling a Multiple Location or Division Business

Jan 19, 2021

IBA based on its market leading knowledge, experience, and the superior skill set possessed by our deep, talented team of professional mergers & acquisitions intermediaries is often sought after by the Pacific Northwest entrepreneurial community to represent the sale of specialized companies and sophisticated transaction projects.  Two complicated deal projects IBA is commonly solicited to represent by corporate CPA’s, CFO’s, attorneys, and business owners are multiple location or division business models.

A multiple location or division representation project can take one of two forms, the sale of a division or location or the sale of the entire entity.  An engagement  to sell a division or location can occur for the following reasons:

  1. A decision has been made by ownership to sell a division or location because it is operating outside of the current business model. This can be based on the geographic location or the strategic direction of the company.
  2. A decision has been made to sell a division or location because a company has decided they do not wish to continue to provide time, energy, or resources to its operation.
  3. A decision has been made that the technical or executive ability does not exist at the company to develop the entity to its full potential.
  4. A determination has been made that the sale of a part will generate a larger market value than the location or division would warrant as part of a whole.

The first step in the sale process is to establish the value of the entity and the best strategy to maximize its value in the marketplace.  If a comprehensive exit strategy selling the entire entity is desired the first assessment to be made is whether a complete package sale, individual unit sales, or a hybrid where some divisions or locations are sold together and others are sold separately will generate the highest value in the marketplace.  This analysis requires accounting, finance, and market knowledge.  Accounting knowledge is required to correctly allocate administrative and overhead expenses between units both in the present operating form and in the scenario the business is operated as a stand-alone unit.  Finance knowledge is needed to be able the assess the probability of bank or investor support for a sale if expenses are allocated from a multiple location or division business out to individual units.  Market knowledge is beneficial for determining appropriate multiples of EBITDA based on industry and location.  It is commonly true that larger businesses sell at higher multiples of EBITDA, so there is a probability that a sale of the entire business may exceed the sum of its parts, but that is not always true.   Frequently individual locations or divisions (or a combination thereof) can sell at a premium versus other divisions, locations, or the entire entity resulting in a larger sale price if the business is broken up than sold as a whole.

The following are some examples of when unbundling elements of a business may be in the best interest of ownership:

  1. Different locations have different levels of desirability. Consider a dozen location chain of franchised restaurants in the Pacific Northwest, if six are located in Washington and six are in Oregon, a buyer for the whole entity may be identified, but there is also the possibility that a sale could be easier to facilitate by dividing the entity by state to allow for more localized executive management or growth by acquisition by a buyer desiring to increase market share or develop synergistic advantages in an area.  In addition, one geographic area may be more attractive than another in the marketplace resulting in higher prices being paid for businesses in a specific metropolitan area or county.
  2. Different locations have different levels of profitability. Using the Oregon & Washington example again, assuming both businesses have the same profitability, say $1 million of EBITDA.  The Washington company may be more attractive than the Oregon company and sell at a premium versus its southern corporate sibling because the state of Washington does not have a state income tax and greater net income is received by ownership after taxes in the Evergreen State versus the Beaver state.
  3. A division has significantly greater market demand than another. It is not uncommon for a company to have gems and coal in its portfolio of business assets.  Consider a company, that has both a brick & mortar location and an E-Commerce component.    The E-Commerce component may have a national customer base and lower fixed overhead expense versus the traditional retail component of the business with a local customer base. The virtual business model also has the ability to be relocated or merged into another entity with relative ease.  The two different business model dynamic may result in increased market demand and a premium price being paid for the business operating on the 21st century economic platform versus a lower multiple of EBITDA being paid for the 20th century retail business operation if the two divisions are sold separately. If the sum of the parts exceeds the value available in a package sale, then the business owner is well served by splitting up the entities into two different transactions.

The challenge provided for a mergers & acquisitions intermediary with executing the scenario described in the third example is what happens if the gem is sold and the coal does not find a taker.  In this situation, the sale of one component and the liquidation of the other often results in less value than the sale of an entire company in one package.  It is critical if parts are broken up, that a sales strategy is executed that mitigates risk of detrimental outcomes occurring.  This strategy can require staging sales of divisions on different time tables.  It is also common to require a profitable, high performing division to be bundled with a lower performing division in a sale package.  In situations where undesirable elements of a business exist (e.g., a long-term lease for a breakeven location), it is often prudent to keep the entity together as a package to mitigate risk of ownership being left with unsalable components.

A strategy developed for taking the business to market as either a package or component parts, the next critical requirement is to have a business broker on the team who can persuasively present the opportunity, justify the value, explain accounting procedures undertaken in positioning the business for sale, and facilitate the sale process to completion.  Most people can prepare a hamburger with potato chips and satisfy the recipient.  It takes greater skill to prepare a multiple course French meal utilizing organic components and please a food critic.  The same is true for selling a business.  Many business brokers can sell a straight forward, single location, or division business.  However, the ability to sell all or component parts of a privately held company requires a knowledgeable, experienced, highly skilled intermediary.  If you are looking to sell all or part of a sophisticated business model company in Washington, Oregon, or Alaska, IBA would welcome the opportunity to interview for the job.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, accounting, legal, wealth advisory, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.