The Next Chapters: Explore three business transition strategies for your operation at PDRmag.com/business-transition-strategies.
Selling an independent family business can be an emotional process, and it can become even more emotional when selling to an outside buyer. Learning where to find an outside buyer, how the acquisition process works and how to best handle all the challenges and hurdles will help the process go more smoothly and can temper some of the emotions of the transaction.
Paint & Decorating Retailer spoke with the previous owner of Cumberland Paint and Wallpaper, a family-owned company, and the president of Spectrum Paint, the outside operation that purchased them, to offer an up-close look at the process of selling and provide best practices for navigating an outside sale.
Travis Detter started Spectrum in 1986 after a single-store paint company he had been working for went out of business. Detter started selling industrial coatings out of a mini-storage building and the operation has steadily grown over the last four decades through acquisitions and new store openings, reaching 100 stores in 12 states.
In 1968 Claiborne Thomas, a paint salesman for a paint and chemical company, bought Cumberland Paint and Wallpaper in Fayetteville, North Carolina, from one of his clients. In 1971 Claiborne experienced a health scare that brought his son, Norman Thomas, back to the business. Thomas took over the business after his father’s passing in 2000 and sold the operation to Spectrum in December 2018.
All in the Family: Listen to Lanier Do it Best’s family business transition story on Episode 80 of NHPA’s “Taking Care of Business” podcast at YourNHPA.org/podcast.
The Lead Up
Like many other independent family-owned businesses, Thomas says he had no plans to sell the operation, especially to an outside buyer.
“I thought I would work at the store until I passed away,” Thomas says. “When you’re having fun and you’re making money, you don’t think about it.”
Thomas’ son was involved in the business for several years and assisted with most of the outside sales. In 2015, Thomas’ son ran into health problems and it became clear he would not be able to take over the business, which led Thomas to begin thinking more intentionally about the future of the operation, he says. Over the years, a few builders approached Thomas and expressed interest in purchasing the business, but Thomas was not ready.
“I also didn’t want to sell to a builder because I knew they wouldn’t take care of our customers as well and were mostly interested in buying a paint store to eliminate a step in the building process,” Thomas says. “I think as an independent retailer, you have to be selective in who you sell to. I didn’t want to sell to just anybody, and it was important to me that whoever I sold to would continue our traditions, provide high-quality service to our customers and have respect for the community.”
Thomas says he also had great relationships with his suppliers and had no interest in selling to somebody who would not treat the store’s suppliers well.
With this in mind, Thomas identified two customers he thought would be interested in buying the store. One wasn’t a viable lead but the other was interested, Thomas says.
“We went through the process, agreed on a price and had all of the details worked out,” Thomas says. “But the potential buyer had purchased a large welding and steel business in 2016 with his son, and when he approached the bank about financing, they did not want him to overextend himself. So they advised him not to buy the business and the deal fell through the cracks.”
Luckily, Thomas had close relationships with some of his salesmen, who discreetly spread the word that Thomas might be interested in selling the business to the right person for the right deal; that person was Detter.
“Travis’ parents were friends with my parents; they went on paint trips together and visited each other sometimes. Travis and I knew each other casually through our buying cooperative,” Thomas says. “I knew his family’s reputation and the type of business he did.”
When it comes to acquisitions, the first step for Detter and Spectrum Paint is making sure the location makes geographical sense and can be serviced by a distribution center, Detter says.
We also make sure the key employees from the operation are committed to working with us,” Detter says. “We believe people are the most important part of succeeding in a market.”
With plans in place for a warehouse in Knightdale, North Carolina, which is close to Cumberland Paint and Wallpaper, and awareness of Thomas’ interest in selling, Detter made the call.
“In late October 2018 I received a call from Travis saying he was going to be in the area,” Thomas says. “He asked if he could come by and see the store, and I said yes.”
Detter says many businesses looking to sell contact him or someone from his operation directly, but they also contact retailers in the right area to let them know they are interested. He says Spectrum Paint does not intentionally go into markets where there are other strong independent dealers.
“During Travis’ visit we talked about the business for a little while and once I assured him I was interested in selling my store he asked me three questions, assuring the answers would be kept confidential,” Thomas says. “He asked how many employees I had, what my gross sales were and what my gross margin was. Afterward, he got up and said he would email me a proposal to buy the store.”
When interested in an acquisition, Detter and his team take the company’s annual sales and build a financial statement, he says. Knowing sales, rent, payroll expenses and other fixed costs, the Spectrum Paint team builds a financial projection to make sure the acquisition makes fiscal sense for the company, Detter says.
When reviewing the proposal he received from Detter, Thomas relied on knowledge from seminars put on by his buying cooperative, consultations with his financial advisor and accountant and a valuation of his business conducted by an outside company in 2000 for tax purposes.
Cumberland Paint had an extremely strong reputation in its area and they felt confident they could go in and become profitable right away, Detter says.
“We make our offers based on a multiple of EBITDA, or net income with interest, taxes, depreciation and amortization added back, or the value of the assets of the company, whichever is greater,” he says.
For Thomas, the operations’ worth can be broken down into four categories: inventory, account receivable, fixtures and goodwill. While inventory is a fixed figure, accounts receivable left room for negotiation, since some accounts paid on time and others did not, Thomas says. Fixtures depreciate over time, he says, which also led to some negotiating. Lastly, there is goodwill or blue skies, which are the intangible aspects of the operations’ worth and the most negotiable aspect of a deal, Thomas says.
“While we had some negotiation, the initial offer was within a couple of percentage points of what I expected to get out of selling the business and the terms were beneficial to me,” Thomas says. “We financed part of the sale for two years after the purchase, which helped with taxes, and I rent the building to them.”
Draft the Right Docs: Learn the right documents you need for a smooth business transition experience at PDRmag.com/succession-documents.
Like any part of a business, the acquisition process has challenges. Selling or buying a business requires extra work for everyone involved in the process, and it’s important to expect bumps along the way and for the strong possibility that everything won’t go perfectly.
“A mistake a lot of retailers make is overestimating the worth of the business and not being realistic. We sometimes overvalue what we have because of the blood and sweat we put into it,” Thomas says. “Retailers have to be realistic about what someone’s willing to invest and what the payoff will be.”
While there were no surprises with the Cumberland Paint and Wallpaper acquisition and their reputation was exceptional, there have been surprises in past years with unknown reputation problems with previous owners, says Detter. If there is one thing he wishes he knew going into every acquisition, it is the reputation of the people in that location.
“Reputation, along with updated inventory and a clean store, is everything,” Detter says. “Retailers have to earn customers and employees; large customers and key employees cannot be taken for granted.”
After the Sale
Once the acquisition is complete, the work isn’t done yet.
“One of the things we do with every acquisition is ask the previous owner to write a letter to their customers,” Detter says. “We want to make sure customers know that taking care of them is our No. 1 priority.”
Detter also employed Thomas as a consultant for three years following the acquisition.
“Travis wanted the transition to be smooth and for me to visit the store and talk to the customers for a period of time after the purchase. I did that and attended the pro shows, grand opening and other events,” Thomas says. “My compensation was a percentage of the growth of the business, which I knew was going to be good because I knew what I had and what the possibilities were with the hiring of a full-time outside salesperson.”
The addition of an outside salesperson is one of Detter’s first steps after an acquisition if the operation didn’t have that position before.
“I knew Travis’s philosophy with outside selling and I told him during one of our conversations that there was no doubt in my mind store sales would increase sales by over $100,000 with an outside salesperson other than me,” Thomas says. “I think they interviewed somebody for that position before we even closed the deal.”
While Detter filled the sales person position externally, he took care of all of Thomas’ existing employees as well.
“I told my employees when my son left the business that I was not actively trying to sell but if somebody came along, I would make sure they were protected and whoever I sold to would be good to them,” Thomas says. “I had a conversation with Travis about taking care of my employees, and he lived up to that as I knew he would.”
One of the hardest parts of a business transition can be the culture change and going from a small operation to a large one.
“When I knew I was going to sell to Travis, I got my employees together and told them what was happening and explained how there would be more benefits, like a 401k, and they accepted it,” Thomas says.
While the employees were agreeable, it takes time to adjust. “We don’t change policies overnight,” Detter says. “We try to slowly transition things like dress codes and hours of operation, and we physically bring in operation leaders to newly acquired stores for a few weeks to teach our computer system and procedures. And when we bring on a new outside sales rep, our regional sales managers spend time in the market with them.”
Training is a large part of the culture change that occurs when Spectrum Paint acquires an operation. Detter says Spectrum Paint has a training manager for its Midwest division and in the eastern division, and in-person counter sales training and manager training courses.
“We also utilize a learning management system within our human resources portal to load additional training videos and documents, like the ones the North American Hardware and Paint Association has available to us,” Detter says.
Communication also plays an important role in Spectrum Paint’s culture. The company has a yearly national manager meeting where all store managers and account managers are brought together, Detter says, and there is also a mid-year in-person meeting with the regional management team.
“Video conferencing has been instrumental in communication,” Detter says. “Our executive team does a monthly Zoom call, and many of our regional teams also take part in monthly team video calls.”
The last piece of the puzzle is leadership.
“Our leadership and people spread the culture.
It’s something we talk about intentionally and frequently—their role is extremely important,” Detter says. “Social media is also a way we show and spread our culture, and it makes an impact.”
With these pieces in place, Detter and his team at Spectrum Paint strive to continuously improve the company and its culture simultaneously.
“I feel extremely blessed and lucky to have sold to who I did,” Thomas says. “My experience with Travis and Spectrum Paint has been fantastic. He went above and beyond in making the transition easy.”
And when it comes to the business transition journey, Thomas has one piece of advice.
“You cannot coast. You have to increase business every year or you cease to become profitable. When you get older, you slow down and struggle to stay aggressive enough to stay ahead of the competition,” Thomas says. “I think a person who has a profitable business should be thinking about what’s going to happen five years, 10 years down the road and on. So the biggest advice I could give to anybody else who’s looking at transition is to start planning as early as possible, unlike the course I took.”
All About Acquisitions
3 ACQUISITION BEST PRACTICES FROM SPECTRUM
- Let retailers in your area know that you’re interested in expanding and maintain good relationships with them.
- Make sure you look at the value of an operation closely and consider if it makes financial sense for your operation.
- Outside sales help maintain existing business and bring in new customers. Consider adding this revenue if the acquired operation is lacking it.
Visit the NHPA Retail Marketplace
NHPA frequently receives inquiries from retailers who are looking to sell their stores, those who are looking to acquire additional stores and those who are looking for key talent in a challenging employment landscape. NHPA created the Retail Marketplace to give operators a cost-effective way to advertise their businesses for sale, their interest in buying or open job positions. There is a high likelihood that a strong investment opportunity, potential buyer or the future leader of your business is already out there.
Visit YourNHPA.org/marketplace for more information.
Start Your Business Valuation Today
If you’re ready to sell but aren’t sure how to assess the value of your business, the North American Hardware and Paint Association (NHPA) has launched a new service to help. Gary Pittsford, partner and chief valuation officer of Castle Valuation, a division of Creative Planning, can help guide you through the valuation process.
NHPA’s Valuation + Seller Listing package will provide you with a business valuation and a seller listing on the NHPA Retail Marketplace where you can advertise your business to 40,000 independent home improvement retailers.
Visit YourNHPA.org/marketplace for more information.